SPEAKERS CONTENTS INSERTS
Page 1 TOP OF DOC55131 CC
REVIEW THE STATE OF THE AGRICULTURE ECONOMY
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FEBRUARY 15, 1999
GRAND ISLAND, NE
Serial No. 1064
Printed for the use of the Committee on Agriculture
Page 2 PREV PAGE TOP OF DOCCOMMITTEE ON AGRICULTURE
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
Page 3 PREV PAGE TOP OF DOCGREG WALDEN, Oregon
MICHAEL 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
Page 4 PREV PAGE TOP OF DOCCHRISTOPHER JOHN, Louisiana
LEONARD 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, opening statement
Combest, Hon. Larry, a Representative in Congress from the State of Texas, opening statement
Gutknecht, Hon. Gil, a Representative in Congress from the State of Minnesota, opening statement
Latham, Hon. Tom, a Representative in Congress from the State of Iowa, opening statement
Page 5 PREV PAGE TOP OF DOC Moran, Hon. Jerry, a Representative in Congress from the State of Kansas, opening statement
Terry, Hon. Lee, a Representative in Congress from the State of Nebraska, opening statement
Thune, Hon. John R., a Representative in Congress from the State of South Dakota
Buell, Homer, president, Nebraska Cattlemen's Association
Carlson, Merlyn, director, Nebraska Department of Agriculture
Collins, Keith, Chief Economist, U.S. Department of Agriculture
Cruea, Darrell, secretary, South Dakota Department of Agriculture
Cruise, Randy, Cruise Farms, Pleasanton, NE
Dubas, Annette, producer, Fullerton, NE
Frederick, Roy, professor of agriculture economics & extension policy, University of Nebraska
Hugoson, Gene, commissioner, Minnesota Department of Agriculture
Page 6 PREV PAGE TOP OF DOC Kehn, Louis, producer, Bonesteel, SD
Kepler, Mark W., vice-president, Nebraska Wheat Growers Association
Northey, Bill, past president, National Corn Growers Association
Peterson, Steve, wheat producer, Smith Center, KS
VanderWal, Scott, VanderWal Farms, Inc., Volga SD
Waldo, Max, Waldo Farms, DeWitt, NE
Bereuter, Hon. Doug, a Representative in Congress from the State of Nebraska, statement
McGuire, Daniel T., chairman, policy development committee, American Corn Growers Association, statement
Woollen, Ron, president, Nebraska Corn Growers Association
STATE OF THE AGRICULTURE ECONOMY
MONDAY, FEBRUARY 15, 1999
U.S. House of Representatives,
Committee on Agriculture,
Grand Island, NE.
Page 7 PREV PAGE TOP OF DOC The committee met, pursuant to call, at 9:03 a.m., in the Auditorium, College Park at Grand Island, Grand Island, NE, Hon. Larry Combest (chairman of the committee) presiding.
Present: Representatives Barrett, Moran, Thune, and Gutknecht.
Also present: Representatives Latham and Terry.
Staff present: Mike Neruda, Hunter Moorhead, Andy Johnson.
OPENING STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
The CHAIRMAN. The committee will come to order.
I am Larry Combest; my home is in Texas. I want to thank Bill Barrett for hosting in his district this official hearing of the House Agriculture Committee. We are going to be making an effortand there are others going on, subcommittees even as we speak, all across the country to have an opportunity to get out and to visit actually in the homes of people that do not have the opportunity to come to Washington a great deal, because those policies that we do work on and establish there obviously affect you more than it does most people in Washington.
It is very nice to be back in Nebraska, I waseven though my hometown university of Texas Tech was not treated too well year before last at the University of Nebraska homecoming, the people were very courteous and nice and we appreciated that and it was a nice drive over here this morning from Omaha. I always enjoy the chance to get out and look at other farm land and to look at the different kinds of diversity that we have in agriculture. And I felt very comfortable, Mr. Barrett, when I was driving into Grand Island when I crossed the Hall County line. Are we in Hall County?
Mr. BARRETT. We are.
Page 8 PREV PAGE TOP OF DOC The CHAIRMAN. I was born in Hall County. It happened to be in Texas, but any time I see that, I feel like I am getting fairly close to home.
We have a great contingent of members with us today and I think it is indicative of the interest and concern that people have. You all, of course, know your Congressman Bill Barrett, the vice chairman of the House Agriculture Committee.
We have Congressman Jerry Moran from Kansas, who is a very active and valued member of the House Agriculture Committee, has a very large district of agricultural concerns and interests in Kansas.
Congressman John Thune, who is also a member of the House Agriculture Committee, John may have won the prize this morning for coming the furthest, but we do appreciate John's coming.
We have in addition on the Agriculture Committee, Congressman Gil Gutknecht fromno, I guess Gil probably won the award this morning for coming the furthest.
Mr. GUTKNECHT. Thank you, Mr. Chairman.
The CHAIRMAN. I am not for sure what the prize is, but Gil does get the surprise. Gil is from Minnesota, is also on the House Agriculture Committee and we appreciate very much his coming.
Mr. Tom Latham, who is from Iowa. Tom was on the Agriculture Committee, is now on the Appropriations Committee, is on the Agriculture Subcommittee on Appropriations and, as I am sure all of that is where we get the funding for agriculture programs and we work very closely with Tom. Tom has a continued great interest in agriculture and we virtually are constant in that discussion about agriculture matters.
Congressman Lee Terry. I am not for sure what committees, Lee, that you serve on.
Mr. TERRY. I serve on Banking and Transportation. So a gentleman I was talking to about Highway 81, I actually may be able to help you on that one.
Page 9 PREV PAGE TOP OF DOC The CHAIRMAN. Well those transportation items are important, particularly when we start shipping all the corn and soybeans that you grow up here in Nebraska out into hopefully the rest of the world.
I would like to just mention a couple of housekeeping items. This is an official committee hearing. There is no open microphone, everyone who has an interest in submitting a statement for the record, it will be made a part of that record. That can be submittedI will volunteer Mr. Barrett's offices to take those, or they can be submitted to the House Agriculture Committee and will be made a part of the official record.
We have a very wide variety of interest in the panels this morning. Hopefully there will be a great deal of discussion about the current economic condition that we are in. As I mentioned to you, it is a pleasure to spend time with producers in this region. This is what I think is known as the bread basket of American agriculture.
I represent Lubbock, TX and surrounding farm and ranch area of Texas. I have been involved in agriculture for all of my life, growing up on a family farm, and through the years in more of a policy level, have maintained a very close relationship with agriculture, with producers and certainly with my constituents, both farmers and ranchers.
It is clear that the current farm economy is facing very weak demand for its products and subsequently very low market prices. Many producers are experiencing multi-year crop losses due to drought or floods. Gathering producers from the Midwest for this hearing today allows this committee to focus on agricultural problems which are unique to this region. I am bullish on agriculture as a whole and strongly believe that the farm economy can rebound. I certainly understand though and appreciate what farmers and ranchers have gone through this past year.
There was an article in Thursday's Wall Street Journal which continued the trend of sobering news reporting regarding agricultural economy. Anyone who was surprised by that has not been listening to what we have been saying since early last summer, that we had an agricultural crisis and it continues today. And frankly, for many Members of Congress, certainly those that are here today, we do not need the Wall Street Journal or the New York Times or anyone else to tell us about what the economy is like in the farming community.
Page 10 PREV PAGE TOP OF DOC What everyone involved in agriculture today knows is that farming and ranching are unique industries. They are more closely tied to weather and climate conditions than any other. This is not Wall Street. When we have excellent growing conditions around the world for grain and when the Midwest generally has excellent growing conditions, there is going to be a world surplus of stocks unless the world demand is strong.
The Agriculture Committee responded in the last Congress to rapidly falling market prices and natural disasters by providing $6 billion to producers. It was a much needed infusion into the agricultural sector, but if export markets remain weak, it will be increasingly difficult for Congress to pass additional large ticket aid packages. In my view, we need to find other ways in which we can help our producers. I believe strongly that we need to overhaul in a major way, Federal crop insurance and risk management programs that currently I think in today's agricultural economy are dramatically lacking.
Market prices have reached levels that are placing burdens on producers that many have never felt before. With current market prices, some farmers are being faced with the added difficulty of obtaining operating loans. Producers must be educated on their individual farm plans as they prepare to meet with a lender. If we lose the support of our agricultural lending institutions, family farmers will not survive.
I have asked the subcommittee chairmen to move out quickly on this and other key issues in this new Congress, as we review innovative ways to improve income for the producers. Mr. Barrett held a subcommittee hearing this past Friday on our most urgent priority, which is adequate or inadequate credit funding for this spring. The subcommittee grilled Under Secretary Gus Schumacher about the administration's plans for ensuring adequate credit. Our subcommittee members assured the administration that we would work with them, but we will not do their job for them. Frankly, the administration has been extremely slow in getting revised regulations out on many of our key credit problems. I believe that by working together, we can provide the credit tools farmers need to survive during this time of low commodity prices.
Page 11 PREV PAGE TOP OF DOC One other issue that must be visited is trade. I can fully appreciate that for producers that cannot cash flow right now, trade seems like an abstract issue talked about only in Washington. But the truth is that to improve our farm gate prices, we must move agricultural commodities into the world market. It is important that Congress open trade barriers that will allow commodities to move through a free market system. As commodities move into free trade markets, the price will increase.
Fast track became a very highly political issue in the last Congress. Regardless of one's politics, the ability to approve and move fast track negotiation for the President is critical to our ability to not only maintain, but to grow trade relations.
I look forward to the panels that we have to discuss these issues today, for the questions that members may be asking; and would recognize again, our host, and once again, my appreciation to Congressman Barrett for any comments you might wish to make.
OPENING STATEMENT OF HON. BILL BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
Mr. BARRETT. Thank you, Mr. Chairman, and thanks for holding this very important hearing here in Nebraska. We are honored to host you in our great State, we just apologize that this is not football season again. Larry and his wife Sharon joined us, as he said, for the Texas Tech-Nebraska game in 1997. We had a wonderful, wonderful time. Of course, this year's Huskers were not quite as successful as those in 1997, a little bit like the agriculture economy right now.
Mr. Chairman, with our fine Nebraska and other midwestern witnesses today, you and we will take back to Washington many excellent ideas for the next stage in the legislative process. For our friends here today, the Congressional hearing process is the early stage of the legislative process.
I want to thank each member of Congress, my colleagues, for traveling to Grand Island and for their participation in this hearing. It is not always easy to get to a field hearing of this kind and I am grateful.
Page 12 PREV PAGE TOP OF DOC I also want to thank each witness for his or her participation today. It is a real privilege to have each of you in Grand Island for this very timely agricultural hearing.
We are especially pleased to have the Chief Economist from the U.S. Department of Agriculture, Mr. Collins, with us today. He is the top agricultural economist in Washington and we are pleased to have the three agricultural officials from the three States, of course, with us, and a superb contingent of Midwest producers.
I also want to thank personally Richard Bringelson, the director of College Park, for allowing us to use this great facility again. We have had hearings here before and it is just an outstanding place and the conditions are perfect and the staff here is just unbelievable. Stephanie Oswald, the events coordinator at College Park for her attention to all of the details. I would also like to thank Alan Marquette, district director of the South Central Research & Extension Center; Jim Randall, U&L Telecommunications person who is in charge of the telecommunications here today.
There is no question that we do have a lot of problems in rural America. We are struggling with low market prices, adverse weather conditions. We are all aware of the problems that farmers are facing, and I think communications between our elected representatives and farmers is a most critical element as the Congress strives to address the farm economy in a fair manner.
Since passage of Freedom to Farm, there have been opportunities and challenges for agriculture, producers have enjoyed the planting flexibility that Freedom to Farm has provided. However, the farmers of Nebraska and other midwestern States are experiencing a number of hardships. For instance, the global market has become more important with each passing day, and that global market, especially in Asia, has not been kind to our midwestern producers because of the financial difficulties in that part of the world.
The downturn in the Asian financial picture, combined with excellent growing conditions around the world, has caused depressingly low farm gate prices here in this country. These increased stocks have caused much of the problem of low market prices. However, for many producers, the Freedom to Farm bill seemed less attractive in the past year because of the low prices and because of the lack of the traditional safety net, including target prices and deficiency payments.
Page 13 PREV PAGE TOP OF DOC I would like to express my support for the 1996 Freedom to Farm bill; however, even though Freedom to Farm has done an excellent job in providing farmers with more flexibility, we simply cannot continue to go through another year such as 1998 without additional income support. Of particular concern as we prepare for spring planting is the ability of producers to show an adequate cash flow as they meet with their lenders.
My subcommittee did hold an oversight hearing last Friday in Washington to review USDA's regulations on their loan programs. Chairman Combest and I hope to see some quick action down at the Department on these critical lending programs. Farm credit has been one of Larry Combest's primary interests since he has been a member of the United States House of Representatives, so we have that additional boost from the Chairman.
Increased trade will be an important factor that will raise commodity prices to profitable levels. We as a Congress need to move ahead on trade issues and not be affected by the administration's failure on a number of foreign policy directives.
Mr. Chairman, we need to take some steps in reducing trade barriers and re-invigorate stalled markets. There will always be times when producers must face low commodity prices. We need to all understand that these low prices will rebound, it is just a matter of when. I promise to work hard this Congress, as do all of the members of the committee, everyone here will work hard to provide a more adequate safety net for farmers as they face economic hardship.
Again, I want to thank you, Mr. Chairman, for holding this hearing. I look forward to working with my colleagues to assist our nation's farmers. Thank you very much.
The CHAIRMAN. Thank you, Mr. Barrett.
OPENING STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS
Page 14 PREV PAGE TOP OF DOC Mr. MORAN. Mr. Chairman, I just would like to express my appreciation to you for this field hearing. I think it is great that the Agriculture Committee is out among actual hands-on farmers and we are not requiring them to come to Washington to talk to us. I certainly appreciate Mr. Barrett hosting us in Nebraska and his district and I particularly want to commend both of you for the aggressive leadership you have provided to not only the full committee, but Mr. Barrett's subcommittee. I think this is going to be a great time for the Agriculture Committee, as we work hard with the struggle that farmers are having on the farm income.
So, Mr. Chairman, my only comments today are I am anxious to hear these producers in this area and hope they provide us some insight and potential solutions to the problems we face in agriculture.
The CHAIRMAN. Thank you, Mr. Moran.
OPENING STATEMENT OF HON. JOHN R. THUNE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF SOUTH DAKOTA
Mr. THUNE. Mr. Chairman, I too want to thank you for coming to the Husker State, it is nice to be back here. I had some experience here growing up. I have a sister and brother-in-law in the audience today who farm near Central City, and I remember coming down here in the summer while I was in high school and laying irrigation pipethat was a good amount of work. But it is nice to be back here.
Unfortunately, the topic that we are discussing is one that is a difficult one and a challenging one. There are a good number of people who are here today and across the Farm Belt. In my State of South Dakota, they are really struggling to make a living right now and I think in terms of what we can do to assist them, you have really got your eye on the ball and I hope that we can move to reform crop insurance and make it work for producers.
Page 15 PREV PAGE TOP OF DOC As you know, I have introduced mandatory price reporting legislation, which I think would be very helpful for our livestock producers. But I anxiously await the testimony that we will receive today and look forward to participating in this discussion in hopes that we can continue to build a record on some of the hearings that we held last week in Washington on pricing and concentration and credit, that will shed additional light on many of these subjects and hopefully give us a clear vision of where we need to go in trying to resolve and provide a better playing field for what has become a very, very difficult business and something that really strikes at the very heart and core of our way of life here in the Midwest.
So thank you for being here, Mr. Barrett, Mr. Chairman, for holding this meeting here in Grand Island and I look forward to what we will hear today.
The CHAIRMAN. Thank you, Mr. Thune.
OPENING STATEMENT OF HON. GIL GUTKNECHT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. GUTKNECHT. Thank you, Mr. Chairman. It is actually a Chinese curse, ''may you live in interesting times.'' These are very interesting and very difficult times, whether you raise corn or beans or wheat or hogs. It is a very, very difficult and challenging time for agriculture.
I want to thank you and Congressman Barrett for putting this hearing together. I think we have assembled really a stellar group of people to testify and present their ideas to us, and I think those who have come to listen to some of the testimony will be in for a real treat today.
Thank you so much.
The CHAIRMAN. Thank you, Mr. Gutknecht.
Page 16 PREV PAGE TOP OF DOCOPENING STATEMENT OF HON. TOM LATHAM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA
Mr. LATHAM. Thank you, Mr. Chairman. This is great to have you in the upper Midwest, and with your leadership, I think we can accomplish an awful lot in this next Congress.
I had the opportunity to be here in I think 1995 with the chairman of my then-subcommittee, Mr. BarrettI was on the Agriculture Committee at that time and served on his subcommittee and we had a hearing out here about the proposed farm bill or what to do. And just to let you folks know here what an outstanding representative you have in Washington, you know him as a person here who is very much involved in the community and an outstanding individual and obviously he is second only to Elsie, his wife. But it is an honor to serve in Congress with someone like Bill Barrett.
I would appreciate next time when Iowa State comes here that you treat them a little more kindly after this last weekend, but Mr. Chairman, just to give you an idea of what effect pricing has in a State like Iowa, we are No. 1 in hogs, by far. We are No. 1 in corn, we are No. 1 in soybeans. It has a dramatic impact on the economy of Iowa; more importantly, it has a dramatic effect on the individual farmers out there and the family farm operations that are trying to survive. And that is why we are all here today and why we have such an intense interest in agriculture.
To give you maybe a little background on myself, I live on a farm, I am a farmer, my two brothers and myself. I left the farm this morning to come over here and I live in the little town of Alexander, 158 people, I actually live a mile outside of town in the suburbs. [Laughter.]
I am directly involved in agriculture and understand, I think, first-hand what is going on. As an appropriatorto the people here on the Agriculture Committee, they would say I took a demotion to go on Appropriations, but I am very proud to serve on the Appropriations Committee's Subcommittee on Agriculture.
Page 17 PREV PAGE TOP OF DOC I would not be at all honest here to say that I am not deeply concerned about the proposed budget from the administration. While they came out in January, the Vice President came to Iowa and talked about giving $50 million to pork producers to help them over a tough time and then turned around in their budget and asked for $504 million of new user fees to be paid by pork producers in the form of new taxes. I mean a lot of the cuts as far as their export programs, as far as food for peace, things like that that are being proposed in the budget are things that we are going to have to deal with, unfortunately. You get a lot of double-speak in Washington, unfortunately that kind of double-speak really hurts us out here.
But Mr. Chairman, I look forward to the hearing, the testimony today, and I am sure that we will derive a lot of good information from this hearing and I look forward to it.
And last, I want to thank everybody who is here today. That is the important people, out here, and the people who took time and a lot of work to come and testify today. Thank you in advance.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Mr. Latham.
And Mr. Terry, we are glad you are with us today and I spent the night in your district last night.
OPENING STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
Mr. TERRY. Well, welcome. I appreciate that.
Mr. Chairman, I am also thankful that you are here in our great State and that Mr. Barrett has set this meeting up. As I was out introducing myself to some of the folks here, the most common feedback that I received is that I am the new guy, and when you have statesmen that have been around as long as Mr. Barrett in Congress, I can say that he has been a great mentor to me. [Laughter.]
Page 18 PREV PAGE TOP OF DOC And I mean that in the best way.
Even though I represent the Douglas and the Sarpy County district, I view that, first of all, my loyalties are to the State of Nebraska first. And even though there is always a perception that there is competition between that district and other parts of Nebraska, that really from my perspective is not true. We all belong to the same State and the health of the State, the health of our economy is what is most important to me.
I did not farm, but all of the people on my mother's side did, all the way from Glidden, IA to Oakland, IA; so just to have the familial ties as well as just a passion to make sure that everybody in this great State is able to survive in their fieldno pun intended, but certainly the strength of Nebraska is at stake here. And even in my office, the calls that I am receiving, the majority of which are discussing what can be done about the farm economy to strengthen our communities. And that is why I am here, to learn as much as the rest of the panel here, even though I do not serve on the Agriculture Committee.
So with that, Mr. Chairman, again, I appreciate the opportunity to sit here with you today.
The CHAIRMAN. Thank you, Mr. Terry. There are 51 members of the House Agriculture Committee. It takes 218 members of Congress to pass anything, so obviously we have to have a great deal of help from people whose interest and hearts are in agriculture, such as Mr. Terry and Mr. Latham and others of our colleagues who represent agricultural districts. It is vital that they are players in this process. We very much welcome them today on the panel as the House Agriculture Committee has this field hearing, because I assure you that there are many others that would like to serve on the committee, we do eventually run out of space and out of opportunities for the members to serve, but it does not lessen whatsoever their interest in the subject of agriculture and it is very comforting to know that we can depend upon them.
Page 19 PREV PAGE TOP OF DOC I would invite our first panel. The panels, as they come up will obviously use this podium. Dr. Keith Collins, who is the Chief Economist of the U.S. Department of Agriculture, who we also had an opportunity to visit with in our committee last week; Mr. Roy Frederick, who is professor of agricultural economics & extension policy from the University of Nebraska. We welcome both of you today.
To all of the witnesses, I would say your statements in their entirety and other supporting information or documentation without objection will be added as a part of the record.
And I would just state a quick comment to get this on the record now in response to a comment Mr. Thune made in regard to livestock; we did have a livestock pricing hearing in the full committee last week, we also had a consolidation hearing in full committee last week in addition to the credit subcommittee hearing that Mr. Barrett held. Two issuesone is on the price reporting issue that Mr. Thune had mentioned he had introduced a bill, the committee will be holding a hearing on that bill and on that topic in the very near future. And one of the things that I continually like to stress to people in my overall proposal of dramatically reforming the risk management, which I think is so lacking today in this current farm program, we are looking at the possibility of bringing livestock under risk management. I do not want to call it crop insurance because it would be somewhat different, but a crop insurance risk management program that would also include livestock we think is vital.
Again, gentlemen, thank you very much for attending today. Dr. Collins, we will begin with you and you may proceed as you wish.
STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE
Mr. COLLINS. Thank you very much, Mr. Chairman, members of the committee, Members of Congress and ladies and gentlemen. On behalf of the Department of Agriculture, I thank you for inviting us to participate in this hearing today and leading off on this very important issue on the state of the American farm economy. I thank Mr. Barrett in particular for inviting me. I know, Mr. Barrett, when I told my wife I was coming out here, she told me to be prepared for unusually harsh weather. She was only half right. It is unusual. So the weather has been one pleasurable experience so far, and I think the line up of expert witnesses you have today, and what I can learn and bring back to the Secretary of Agriculture and the Department on how we can better do our business will also be quite helpful.
Page 20 PREV PAGE TOP OF DOC During 1998, the outlook for American agriculture changed quite dramatically. Bad weather devastated some regions, such as yours, Mr. Chairman, in Texas; the Asian financial crisis; and rising world agricultural production dropped farm prices and lowered the value of farm exports. Thanks to the combined efforts of the executive branch and Congress, we were able to enact legislation providing nearly $6 billion for relief, and I think that is helping to maintain farm income and limiting financial hardship for many producers.
Unfortunately, as I am about to report over the next few minutes, exports and prices will probably be quite weak in 1999 causing increased farm financial stress, particularly I think in regions that up to now have weathered the downturn in the farm economy. Regions like the heartland of the United States, the Corn Belt, are going to be in for a much greater adverse impact.
But I also want to say that agriculture is a cyclical industry. I am not going to say that there is not light at the end of the tunnel, agriculture will not stay deep in the red forever. Over the next 2 to 4 years, economic recession in a number of countries should give way to economic recovery. I think that will increase the demand for U.S. farm products and ultimately raise prices and incomes. However, at this point, the economic recovery looks like it will be very gradual and not occur at a rapid pace at all.
I want to start by emphasizing how important the global economy is to U.S. agriculture. In 1996 and 1997, strong world economic growth and lowered trade barriers helped push our agricultural exports to a record high of $60 billion in 1996. Since then, growing world production and weakening world demand have hurt our exportsand you can look across the commodities that have been hurt. In particular, grain, oilseeds, cotton, beef, poultry have all been seriously affected.
In 1998, our economy, the U.S. economy, was very strong, but the foundation of world demand began to deteriorate. Listen to this list of countries that experienced recession in 1998Japan, South Korea, Malaysia, Philippines, Thailand, Indonesia, Russia, Saudi Arabia and Brazil, all saw recessions in 1998.
Page 21 PREV PAGE TOP OF DOC In the boom period of 1996 and 1997, the world economy, world GDP, grew 3.4 percent per year. In 1998, it fell to 1.9 percent. In 1999, we think it will fall again to 1.7 percent. As a result of this declining world economic growth and weak prices, our farm exports this year are expected to be only $50.5 billion. That is down $9.5 billion from the peak in 1996. And if you do not think Asia is important, consider thisover that period, our exports to Asia fell by $8 billion, $8 of the $9.5 billion, over 80 percent of our decline in export value occurred in Asia.
Well, given this pessimistic economic and trade environment, how can I quantify more specifically the overall picture of the farm economy? I think we can learn some things by looking at what you would look at for a farm or a firm, the balance sheet and the cash flow. For cash flow, when we look at agriculture as a whole, we look at market receipts, production costs, Government payments, and try and gauge what that means for overall net farm income. If you look at farm receipts, in 1998, they fell $10 billion to $198 billion. I think they are going to stay roughly at that level in 1999, although I think crop receipts will drop again and livestock receipts should come up a little bit.
In 1998 and I think so far in 1999, we have experienced low interest rates, low fuel prices, low feed costs and that has helped reduce farm production costs and has offset some of the decline in farm cash receipts. In fact, total production expenses were down 2 percent in 1998 and that is the first time we have seen a meaningful decline in production expenses in agriculture in 10 years. Direct Government payments in 1998 were $13 billion, I think in 1999, they will come down a little bit to about $11 billion. Both of those years would be the 2 of the 3 highest years in the 1990's.
Well, what do all these figures mean, if I try and put them together? I think it is very hard to characterize in a simple way the financial condition of an industry that is as diverse as American agriculture, but I think these figures portray an industry with significant regional problems that overall performed adequately as we entered 1999, thanks to higher Government payments and lower production costs. Net cash farm income for all of agriculture in 1998 was the second highest ever. We saw another increase in farm equity and maintained the farm debt-to-asset ratio at 15 percent, which is about stable for the last several years and down quite a bit from the 1980's.
Page 22 PREV PAGE TOP OF DOC But I think as we look out to 1999, the signs point to higher financial stress. Net cash farm income is projected to decline $3 to $4 billion, while we see farm real estate values stable to up slightly. In some areas of the country, we have started to see real estate values decline. The drop in income combined with the drop in asset values is going to mean that many producers will find difficulty obtaining credit and those who do find credit will be using up a larger portion of their debt repayment capacity. In addition, for many producers who struggled during 1998 because of adverse weather, low prices, I think their problems could get worse in 1999.
I want to very quickly just run through the key commodities to illustrate where the problem areas are. Starting with wheat, our season average price forecast for wheat this year is only $2.70 a bushel. That would be the lowest price in 8 years. Our carryover stock estimate for June 1 is nearly a billion bushels. If you compare that to use, that would be the highest since 1988. For the 1999 crop year, the world wheat situation will probably get a little tighter, but there is still going to be ample supply, so I am not looking for much of an increase in wheat price, maybe on the order of 10 to 15 percent.
For corn, our total supplies this season are up 10 percent, our carryover stocks on September 1 are projected to be 500 million bushels higher, that would be the highest level since 1993. Our current corn price forecast for this season is $1.95 a bushel and that is the lowest in more than a decade. For the 1999 crop, I think we will see a little less acreage, but even with trend yields, our supplies will be up. We could have a little bit better export market, but still that would leave total stocks about the same and prices about the same, at this year's fairly low level.
For soybeans, our supplies this season are record high. We face strong competition from Brazil and Argentina and our carryover stocks on September 1 we now think will exceed 400 million bushels and that will be the highest carryover stocks in more than a decade. Our price forecast we reduced last week to $5.20 a bushel for this season and that would be the lowest price since the 1986 crop year for soybeans. And I think prospects do not look good for the 1999 crop year. A further increase in carryover stocks and lower prices is likely. Soybeans are an attractive commodity, the marketing assistance loan relative to other crops, the herbicide resistant varieties that are being planted, soybeans' resilience in bad weather, all make it attractive to producers and I think we will see an increase in plantings and give us larger soybean supplies in 1999 than we had in 1998. Prices will be below $5, if that occurs, and in fact could be substantially below $5, and our loan deficiency payments alone on soybeans could be $2.5 billion.
Page 23 PREV PAGE TOP OF DOC As the last major crop, I just wanted to mention cotton, a crop from your district, Mr. Chairman, and I want to mention it because it has been particularly vulnerable to the world economic slowdown. Lower demand for textiles and apparel around the world because of the lower GDP growth has resulted in the second lowest level of cotton exports in two decades. We also have seen a 20 percent increase in imported textiles and apparel since the beginning of 1997. Today, when Americans go to the store and they buy textiles and apparel, 45 percent of their retail purchases, the cotton equivalent, is imported. And that has hurt the price of cotton this year, despite the drought reduced production last year. For 1999, I think we will see a rebound in production, but that is just going to raise stocks and keep prices under pressure.
Turning to livestock, we saw cattle prices erode in 1998, we had the lowest cattle prices of the 1990's. The continuing liquidation and heavier slaughter rates caused beef production to rise by 1 percent. As we look out to 1999, based on our survey released last week, we see beef production down 3 percent for the year, but much of that decline is not going to occur until the second half of the year. For the year as a whole, we have fed cattle prices averaging $65 to $66 a hundredweight compared with $61.50 last year. That is better, but it is still low.
Hogs have received a lot of attention this year, as mentioned in many opening comments of the committee memberswith a 10 percent increase in pork production in 1998, and an average price of $32 a hundredweight, the lowest for any year since 1972. We expect that large hog supplies are going to pressure prices for the first half of 1999, but as slaughter begins to recede in the second half of the year, we should see some stronger prices. But for all of 1999, our average price forecast is only $34 a hundredweight, which is up 7 percent. Again, a little better, but still low.
There are many other commodities that make up the aggregate of American agriculture and I certainly cannot profile them. I will mention broilers because of its impact on cattle and hogs. Broilers had good returns last year and for 1999 we expect a 6 percent increase in production. And as beef and pork production cuts back, we are going to see consumers fill the market basket with more poultry, with the 6 percent increase in production. That will keep total meat and poultry supplies record high in 1999, and keep pressure on meat prices across the board.
Page 24 PREV PAGE TOP OF DOC I will end my commodity review with milk. With respect to milk, we are now seeing the first sustained increase in production since 1995. During the last quarter of 1998, milk production was up 3 percent, and so prices are coming down from the record high of $15.40 a hundredweight of 1998. For all of 1999, we expect milk prices will be down about $1 per hundredweight and average between what they did in 1997 and 1998. But the price decline could be steeper if producers expand more than we expect.
Mr. Chairman, I can summarize this review by pointing out that many of the comments I just made to you were phrases like ''the highest supplies since'' or phrases like ''the lowest prices since''. Obviously that is not good news when you have an economist using those kinds of comparisons. I calculated the average net farm income over the past 5 years just for wheat, corn, soybeans, cotton and ricesector net income for those five crops for the last 5 years. And for the 199899 crop year, I estimate that net farm income will be 17 percent below the previous 5-year average. And if I look out to 1999 and use our current internal price forecasts, my projections would show net farm income for those five crops 27 percent below the previous 5-year average. Livestock markets get a little stronger except for milk, and there are a lot of uncertainties that could affect these projections.
Weather is always a key. Weather can help, weather can hurt. We have had good weather over the last couple of years. A second major factor is the world economy. If the Asian economies fail to stabilize or if the problems in Brazil expand to other countries in Latin America, our exports could drop further and our prices could drop further. If you look at the world economy right now, the engines of growth are the U.S. economy and the European Union. If either one of those regions fall into recession, I think that would mean a global recession and much lower exports and farm prices.
A final factor which I always have to mention is much depends on China. China has disappeared as a major wheat importer and they are now a competitor of ours in cotton and corn. Production and policy changes there pose great uncertainty for the U.S. farm economy.
Page 25 PREV PAGE TOP OF DOC Mr. Chairman, that concludes my testimony and I would be happy to respond to questions.
[The prepared statement of Mr. Collins appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you, Dr. Collins.
STATEMENT OF ROY FREDERICK, PROFESSOR OF AGRICULTURE ECONOMICS AND EXTENSION POLICY, UNIVERSITY OF NEBRASKA
Mr. FREDERICK. Thank you very much, Mr. Chairman. I am very pleased to testify here today, so I too want to welcome everyone on the committee. We are delighted to have you here.
Mr. Collins has done a very fine job of giving you an overview, I think, of what is happening in agriculture. I would like to be a little bit more specific to our State of Nebraska and I really think to all of the States that are represented here today, with the possible exception of Minnesota, Mr. Gutknecht, because I know that you have a heavy dependence on dairy in Minnesota and as Dr. Collins indicated, dairy has been doing well.
But one of the things I have been doing in the last few months is making a yearly, or I should say a year-to-year comparison of how prices of our major commodities compare to prices one year earlier. And it has been a rather dramatic sort of comparison during the last half of 1998 and the first 6 weeks or so of 1999. I updated those figures over the weekend and so I would just like to briefly run down where we are right now compared to a year ago at this time.
According to my calculations, corn is 21 percent below last year at this time; sorghum, 19 percent below; soybeans, 28 percent below; wheat, 16 percent below; hogs, 18 percent belowand I guess we would have to say that is good because at one point they were 65 percent below last year; feeder cattle down 6 percent, and then the really good news, and I say that somewhat tongue in cheek, is that fed cattle are now up 2 percent from this time last year. But if you look back over the last 6 or 7 months, this is the first time in virtually that entire time period when that has been the case.
Page 26 PREV PAGE TOP OF DOC Now the reason that I point all this out is to indicate to you that it does not take very much of a reduction in price to have a dramatic impact on farm income. And maybe a simple way to think about that is that typically there is about 80 cents of expense against every dollar of gross income that is generated. So if your expenses stay essentially the same, notwithstanding what Dr. Collins said about expenses being down slightly in 1998, I think most producers would find that they did not see a tremendous change there. But if your expenses stayed about the same and instead of getting a dollar versus 80 cents of expense, you got only 90 cents, you can see that immediately your income is cut in half. If you have a 20 percent reduction in price, assuming the same product is produced, you are very quickly at a position where you have no income at all.
So one of the things we constantly have to remind maybe those that are not real familiar with agriculture is that just a very small change in price can have a big impact on income.
I am familiar with some of the work that is being done through what we call our Nebraska Farm Business Association, which involves about 430 farmers around the State of Nebraska and as we look at the effect of prices on income in 1998, all those results are not in yet, but we are getting more each day, we think there is going to be a very substantial reduction in farm income in the State of Nebraska for 1998 simply because of those lower prices. To give you an idea, in 1997, which incidentally according to the National Agriculture Statistics Service was 40 percent below 1996, but compared to 1997, our estimate from the Farm Business Association farms is that we will go from about $45,000 average net farm income in 1997 to somewhere near zero in 1998. So again, trying to underscore to you just how important these lower prices are that we have been confronted with over the last 6 to 8 months.
I must say, in order to be fair and honest with you, that not every farmer is struggling to the extent that I just described in this overview for the State as a whole. We have some producers, frankly in 1998, who contracted maybe their grain in the early part of the year, they were able to take advantage of loan deficiency payments and direct payments made late in the year. I know of at least one farm in our Farm Business Association program that in fact netted $100,000 last year on $300,000 gross. That is good any year, no question about it.
Page 27 PREV PAGE TOP OF DOC But on average, most people did not contract ahead, most people in fact are suffering from the lower prices that I just shared with you.
Well, the question is why are prices low, and I do not think it is necessary to go into much more than you have already heard from Dr. Collins, but I will say this, that probably if you were to look at the single most important thing that affects prices, at least for grains and oilseeds, it is what is happening to carryover stocks. And if you look at 1997, this would be September 1, 1997, and compare that to the projection that we are looking at for September 1, 1999, essentially a 2-year period, we are talking about carryover stocks of the major commoditiescorn, wheat and soybeanseach one of those is doubling over that period of time. So that does not set a good stage for us in terms of our prices.
Also, there has been mention of exports here this morning and the international situation. It is a little bit simplistic, I would not want it to be said that there is a direct cause/effect here, but I think there is a very strong correlation nevertheless that if you look back, going all the way back to 1972 when the first big sale of grain was made to the Soviet Union and you study exports in this country since that period of time, we generally had increasing exports in the 1970's, decreasing exports from 1981 through 1985, they began increasing again in 1986 and more or less continued that upward path until 1996 and then have been down the last 3 years. Those of you that are students of farm prices and farm income I think will recognize what I am getting at here is that there seems to be a very strong correlation between a vibrant export sector and good prices, and on the other hand when things are sort of sagging, it is very difficult as far as farm incomes are concerned.
I would say to you that I do not think we are in any long-term excess capacity situation perhaps in the same sense that we were back in the 1950's and 1960's, but certainly we are encountering lots of instability in prices and income. It is dependent of course on these big crops that we have had in the last 3 years or so, also the poor export situation. I am certainly not here today to prescribe poor crops for us or anybody else around the world, but nevertheless frankly, it would be helpful to prices. More importantly, however, if somehow or another we can turn the export situation around as we look ahead over the next year or so, that would be very important to us.
Page 28 PREV PAGE TOP OF DOC The question is what can we do about it. It seems to me like if you study the history of farm programs and Government response to some of the challenges that we have in agriculture, going all the way back to the AAA Act of 1933, that we have always struggled on the horns of a dilemma with two problems. One of those is being equitable. We want to have farm programs that help those who need to be helped and on the other hand we want to not do anything with our farm programs that impedes, at least very much, on efficiency. And that has been very, very difficult for us to work out. Obviously not all commodities are supported, in fact I think it is only 11 or 12 when you get down to the actual count, but nevertheless when we look at the kinds of problems that we are having in American agriculture now, it is the kind of problem that extends, at least in our State, across virtually every producer. I did not mention, for example, earlier that people that sell hay, both alfalfa hay and prairie hay, have encountered much lower prices this year. And the point is that those are the kinds of commodities that are not directly supported by government.
Having said that, I guess I come down to thinking that there are two things that are rather important as far as government is concerned. Mr. Chairman, you mentioned it in your opening remarks. One of those is to provide a very effective crop insurance program. I am talking not only about protecting the product, the production, I should say, but also protecting price through a revenue sort of scheme, and perhaps extending the crop insurance kind of concept to the livestock sector. There are real questions here, of course, about what premiums should be, how much those premiums should be subsidized by the Federal Government, the administration of those programs, whether the insurance needs to be actuarially sound. There are a whole host of questions raised by insurance, but nevertheless, I think it is one of the things that if we can get more attention given to that, it would be in the best interest of agriculture, long term.
And then the other thing, and I cannot go beyond much of what has already been said, from members of the committee as well as Dr. Collins, and that is to say to you that we certainly do need to do everything that we can to expand markets for our product. We cannot unilaterally make the economy in southeast Asia better, I understand that. Nevertheless, that is a desirable end. I think at some point, the kind of currency relationships we are seeing will be self-correcting, but it is going to take awhile. It is obviously taking a longer period of time than occurred in Mexico when the devaluation of the peso occurred in 1994.
Page 29 PREV PAGE TOP OF DOC So all of those things I think are important. It is not easy to give a precise prescription for agriculture's ills and what can be done to solve the problem, but nevertheless, those are some of the things that are on my mind.
[The prepared statement of Mr. Frederick appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you, Mr. Frederick.
I assure you the crop insurance risk management issue is going to get a great deal of attention, it is going to be our major policy review and looking, even to the point of beginning to try to design a program that does, as you said, provide the risk management as well for livestock. And it is going to be a loss as well as a market-based program. And I do not believe that crop insurance can be actuarially sound. I think the Government has to have a major participating role in that.
And to point that out, if you look at what we have expended under this farm program, the first 3 years virtually twice what it would have been had we left the old program in place, and in addition to that, a $6 billion package that passed the Congress in the early fall. And we still have pretty tough conditions.
Dr. Collins mentioned that in soybeans alone, we are anticipating a $2.5 billion LDP next year. So when you look at what government is doing, I think there is a much larger role that government can play in risk management, but overall maybe a much better and wiser investment into a program than we currently are having.
And I wanted to ask you, Dr. Collins, if you have figures for other commodities, such as you did on soybeans, your anticipated LDP payments, so that we could get a basic idea for the commodities that you ran down in terms of your anticipated prices for the next year, of what those might be total?
Mr. COLLINS. I can certainly give you that total. These may differ a little bit from what was submitted in the President's budget because those were based on conditions as of last November. But forI will give you this on a crop year basis rather than a fiscal year, because that is what I happen to have in my head. For the 1998 crops, we expect to pay about $2.7 billion in loan deficiency payments. For the 1999 crops, our current estimate is about $4 billion in loan deficiency payments, with soybeans making up about $2.5 billion of that $4 billion.
Page 30 PREV PAGE TOP OF DOC The CHAIRMAN. Thank you very much.
And that does not include the transition payments that are in place?
Mr. COLLINS. No, it does not. This would be
The CHAIRMAN. For any potential disaster?
Mr. COLLINS. This would be a combination of loan deficiency payments and marketing loan gains.
The CHAIRMAN. Right. One other thing I wanted to ask you in terms of your testimony and your understanding of agriculture. Actually this could be for either one of you because you both have done studies. What is the current debt structure of agriculture, when we are looking at obviously a decrease in net farm income, what has happened to the debt of farmers over the pastwhat has the trend been over the past few years?
Mr. COLLINS. Well, back in the 1980's, to provide some perspective, farmers had debt of around $200 billion; and as the shakeout of the 1980's continuedand much of that problem in the 1980's was a financial crisis of high debt with collapsing collateral valuesas the adjustments took place to that, farm debt fell to something in the order of $140 billion in the early 1990's.
As agriculture started to grow and improve in the 1990's, farm confidence picked up, people started buying equipment again and buying land and farm debt started to rise and has risen up to the point where it is now about $170 billion.
This year, in 1999, we think we are going to see the first decline in farm debt in the 1990's. That is a result of the fact that producers now are pulling back. The low farm income causes people to forestall any purchases of new equipment and expansion, and as a result of that, they are going to probably take on less debt here in 1999.
The CHAIRMAN. Those estimates are the total amount owed by farmers?
Page 31 PREV PAGE TOP OF DOC Mr. COLLINS. Yes, sir.
The CHAIRMAN. All right, how do you factor into that the number of farmers? There may be, for example, a decrease in the overall debt with a reduction in the number of farmers, what does that do to the individual farmer, is that on the rise?
Mr. COLLINS. Unfortunately I cannot answer that question. I know from USDA's point of view what our own loan portfolio looks like, but our debt at USDAthis may surprise peopleonly accounts for 10 percent of all the debt held by farmers, we are a small-time lender. But we believe we are seeing a substantial increase, something in the order of 15 or 20 percent thus far this year of new borrowers coming to USDA. That is probably people who, because of low cash flow projections and loss of collateral value in many cases, have not been able to get credit at commercial lenders and are coming to us. For agriculture as a whole, for the non-USDA debtholders, I do not know, perhaps Mr. Frederick does.
Mr. FREDERICK. No, I do not have a precise answer to that question either. I would say to you that obviously the news that we have heard in the last week or so about increasing interest rates, and I heard more about it on the radio as I came out this morning, has to be a concern. It does not take very much of an increase in interest rates with variable interest being charged, to have an impact on agriculture, just like every other sector of the economy.
The CHAIRMAN. Thank you both very much.
Mr. BARRETT. Thank you, Mr. Chairman.
Mr. Collins, I think it was late January, you testified before the Senate Agriculture Committee and you stated, as I recall, that Government programs contribute to consolidations in agri-business. I guess the question is, are proposals like mandatory price reporting, country of origin, these types of things, are they more likely to contribute to this trend, reverse it, less likely? Embellish that a bit for us.
Page 32 PREV PAGE TOP OF DOC Mr. COLLINS. Yes, sir. It is interesting you found that one line in my Senate testimony. I tried to make that obscure, and I did not even mention what kinds of Government programs. But clearly over history, there has been great debate about Government programs in the role of consolidationjust to clarify that point. There are a number of people who have argued on both sides that farm programs have added to consolidation or deterred consolidationkept the people in farming and prevented the adjustment. But there certainly are other programs like passive loss investing tax laws which have contributed to consolidation and I do not think there is any question about that.
Specifically the couple of examples you just gave on mandatory price reporting and country of origin labeling, I think it is hard to know what the effect of those would be on consolidation. In the end, the forces of consolidation are driven principally by technical change, economies of scale. I think that mandatory price reporting would be a way to help get more data on the table, to help, in this case, cattle producers or hog producers negotiate contracts better or negotiate prices better in the spot market.
I think that we have a very good volunteer reporting program now in USDA, we spend $22 million a year in our voluntary reporting program. We have some problems with it, in that some of the surveys we conduct are thin, we do not get complete information. In some cases, the markets are changing so dramatically, contracting in hogs is a good example where 3 years ago, probably 20 percent of all hog trades took place through contracts and today it is probably closer to 60 percent. So there has been a dramatic transformation in a couple of years, with a huge array of different types of contracts out there. The idea behind the mandatory reporting would be to allow us to get complete access to not only prices paid for animals or prices at which products are sold, such as boxed beef, but also to get the specific contract provisions that might lead to prices being different for what otherwise might look like similar quality hogs or cattle.
And I think if we were able to get that information and if we were able to summarize it and present it to the public in an intelligible way, it could help people engage in contracting more efficiently and engage in fact in price negotiation better, if we could make this information available on a real time basis. If that occurs, then maybe that would equip the smaller producer better in dealing with a concentrated buyer. To that extent, it can help in the whole concentration issue.
Page 33 PREV PAGE TOP OF DOC Mr. BARRETT. Do you have any data on costs and benefits of programs of this kind yet?
Mr. COLLINS. Not yet, we do not. I can only tell you we have looked at what it would cost the Government. Most people are not too interested in what it would cost the USDA to run a mandatory price reporting program, but it would probably be somewhere between $1 million and $7 million, depending on the bill that is out there right now. But of course, it would impose a cost on the private industry as well, and that is why there is a great deal of concern among meatpackers and processors about such a proposal.
Mr. BARRETT. Is there any data right now to support the claim that country of origin labeling would in fact increase the demand for our agricultural products?
Mr. COLLINS. I have not seen any such data. As you know, there are two studies being done on country of origin labeling, both mandated, one is being done by GAO on fruits and vegetablesnot a livestock issue, but it might provide some information about how demand might respond. And USDA is also conducting a study which is to be reported within 180 days after enactment of our appropriations bill last fall, I do not remember the exact date that was enacted. This is on country of origin labeling.
Mr. BARRETT. Yeah.
Mr. COLLINS. And we have asked the Economic Research Service to take a look at that very question, what kind of a demand effect would we expect from mandatory country of origin labeling. But to my knowledge, I do not know of much in the way of studies that show much of an effect at this point.
Mr. BARRETT. Thank you.
Dr. Frederick, I had an interesting conversation in the hall, before the hearing began, about the prices of land. Give us some idea, at least in Nebraska and perhaps you have some evidence in some of our neighboring States about land prices. It is my understanding that they have held up very well. Do you concur?
Page 34 PREV PAGE TOP OF DOC Mr. FREDERICK. I believeyes, I believe that would be a fair summarization at this point. However, I think more and more people are looking ahead to the kind of economic situation that we may face in 1999, and I am not sure that as we go forward that we would expect to see land prices holding as well as they have.
As you know, Mr. Barrett, we have had situations in Nebraska where we have had people coming in to buy land for other than agricultural purposes and sometimes that has been a real factor in holding up land prices. But that too perhaps cannot continue forever.
Mr. BARRETT. What do you see in trends; for example, differences between irrigated land and dry land?
Mr. FREDERICK. Well, normally when things start going poorly in agriculture, we see the most weakness in the poorer quality land, which would be dry land. However, in 1998, we had excellent yields on dry land in the State; in fact, relatively speaking, much better on dry land than on irrigated acres in 1998. So I would not say at this point that there is any real difference that I can detect between those two qualities of land.
Mr. BARRETT. Do you anticipate that land values will remain pretty steady?
Mr. FREDERICK. Well, I think that we would start out the year in pretty decent shape. It will depend an awful lot on what prices are looking like as we go into the main part of the growing season, and of course, even closer to harvest.
Mr. BARRETT. Thank you.
Dr. Collins, the United States/Canada trade agreement that we reached, what, last December maybe? Calls for some quarterly estimates of our U.S. and Canadian grain supplies. Where are we now in that?
Mr. COLLINS. Specifically about that, that agreement, called the Record of Understanding, had a lot of different provisions in it, some of them related to market transparency just like the whole mandatory reporting issue we were just talking about. In particular, we have had trouble getting livestock data from the Canadians. You mentioned grain data, we have got pretty good grain data from the Canadians, although this agreement would require an exchange of quarterly supply and use data. To my knowledge, we are working with the Canadians on developing that. I do not think we will have a problem with grains. In the past, they have been reluctant to provide the livestock data because they do not take the kinds of surveys that we take. We taken monthly and quarterly surveys, they do not, and they have not wanted to spend the money to conduct such surveys. But we are continuing to work with them to try and get that data so we can make that kind of exchange available. When we get the Canadian data, it will be published by the National Agricultural Statistics Service.
Page 35 PREV PAGE TOP OF DOC Of course, the agreement went on and did a lot of other things, one of which I might mention, if I can take a minute to do so. And that was to essentially eliminate the quarantine that the Canadians had on hogs moving north. In addition to that, it continued to streamline the Northwest Pilot Project that allowed feeder cattle to move north and I might say that in 1998, we actually had about 150 percent increase in U.S. cattle moving north. We had about 160,000 or so cattle move north when in previous years, it was only something on the order of 50,000. So I think we are making some progress. Of course, that pales in comparison to the 1.3 or so million head of Canadian cattle that come to the United States.
But I think there are some good things hopefully that will come out of that Record of Understanding.
Mr. BARRETT. Thank you. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you very much.
Dr. Collins, what opportunities do we have to increase demand and thereby farm income by the elimination of trade barriers and sanctions? How big of a role does that issue play in depressed exports?
Mr. COLLINS. I think it plays a role. I have seen reports that state anywhere from 80 to 120 countries around the world have sanctions that are affecting our agricultural exports, but we did ask a couple of people at USDA to take a look at that. Essentially what they came up with was six countries where they thought sanctions were having an appreciable effect on agricultural exports. I am not sure I can remember the six, but it was North Korea, Sudan, Iran, Iraq, Cubathat is five, there is one more. And what we did is we looked at what their agricultural imports are. We assumed if there were no sanctions that we would get what had been our historical share in those markets and then we took some adjustment for us losing some markets in other places around the world where the product we displaced in those sanctioned markets would move into other markets. And when all was said and done, we estimated that about $500 million worth of agricultural sales were being lost by sanctions in those six countries. So as a percent of total exports, it is fairly small, but nevertheless, it is still an opportunity for American farmers.
Page 36 PREV PAGE TOP OF DOC Mr. MORAN. Was there any suggestion as to which countries we ought to focus, all six or equal? I think the sixth one being Libya.
Mr. COLLINS. Yes, correct, thank you.
No, I do not have such a suggestion, I do not know.
Mr. MORAN. And what is the impact of the European community's subsidization of agriculture and our ability to compete? How big of a role does that play in our export markets and what should our response be?
Mr. COLLINS. Well, that is a difficult question. The role depends on the commodity. They continue to have very large export subsidies, we are talking about a region of the world that continues to put something in the order of $50 billion into agriculture. The number has come down in the last couple of years because in 1996 and 1997, their export restitutions came down, but they still have immense internal subsidies for a wide range of commodities, including export subsidies for dairy, for cattle, for sheep, for grains. And all of these things help them maintain larger production than they would otherwise maintain and a larger presence on world markets.
The response for us is difficult. They have very deep pockets, we have limitations on what we can do as far as export subsidies. We have felt that it would be very difficult for us to take back market share from them through export subsidization. The main tool we have is the Export Enhancement Program where we have roughly half a billion dollars or $500 million in which to spend, and most of that would be for wheat because of our commitment under the Uruguay Round Agreement in agriculture. So we could use that for wheat. Most analysis would show that their pockets are deep enough, plus the Argentineans are competitive enough and the Australians are competitive enough and the Canadians are competitive enough, that our additional export sales would be quite minimal. Generally, estimates say if we used the whole amount available to us on our wheat, we might get 5 percent more exports. And I think because of that, what economists call low additionality, there has been a reluctance to use that money for the Export Enhancement Program. But, that is one thing that we could do.
Page 37 PREV PAGE TOP OF DOC The other thing that we could do is simply be more effective, either bilaterally or multilaterally in trade negotiations. And we have another opportunity coming up here late in 1999, where hopefully we can pick up where we left off with the Uruguay Round agreement.
Mr. MORAN. Thank you.
Professor Frederick, what would be the effect of lifting caps on loans rates and extending the term of the loan?
Mr. FREDERICK. Well, that is an excellent question and I am not sure I can give a precise answer to that. Obviously if you lift the cap on loan rates, you put some more money into farmers' pockets, that is the very direct impact of it, rather soon. So much depends on what we perceive to be the worldwide market situation. It is possible that loan caps could be increased if government was willing to pay for it by 10, 20, 30 cents a bushel, for example, for corn or wheat; not have very much impact at all in terms of the market out there. On the other hand, if it was increased a lot more than that, it could be really substantial, not only in the short term, but over the long term as well.
Mr. MORAN. When you say it could be substantial, what is it, the increase?
Mr. FREDERICK. Well, it is theif you had prices high enough, at some point it would make a difference, I believe, in how much product we could sell. I do not think you could increase the price indefinitely and not have it have an impact. And that is especially the case now when the world is sort of awash in grain. We have very large supplies around the world, so I think we need to look at that issue very, very carefully. If it is going to be increased, it needs to be looked at in terms of what the long-term demand situation might be, doing that.
Mr. MORAN. Thank you, Professor. My time has expired.
Page 38 PREV PAGE TOP OF DOC The CHAIRMAN. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman.
Mr. Collins, just a question on net cash income for farmers. Is there any appreciable difference between the States? For example, some of the States that are represented hereKansas, Iowa, Nebraska, South Dakota, Minnesota. Is any one of those States experiencing more of a loss than the others, percentage-wise? And do you have anyI am curious to know what your answer is first, but if there is, what might contribute to that?
Mr. COLLINS. In fact, people in the audience have already asked me about USDA's reporting of net farm income and net cash income. It is kind of a mysterious figure, it is one big number that represents the Nation as a whole. And I might point out that it can be very misleading for particular States and we do publish State farm income estimates. Unfortunately we do it with a fairly long lag and so we do not have our 1998 numbers compiled yet. But the aggregate number can be misleading for specific regions of the country or specific crop sectors, for a number of reasons. And let me give you one simple one and that is that there is a big base of income built for fruits, vegetables, greenhouse and nursery crops. Well, how important are they? Well, those three sectors alone had about $40 billion in sales last year, which would exceed the total value of all sales of cattle and calves in the United States last year. So, what happens in grains or cattle can be offset by positive things that might be happening in fruits and vegetables, greenhouse and nursery, sugar and so on, other such commodities.
Having said that, there are very big differences from region to region. We saw, for example, when we reported our 1997 State income data, we had a 90 percent drop in State income in North Dakota for 1997, while much of the Nation was in fact showing an increase for 1997.
As we look ahead to 1999, we have done some work regionally, not state-by-state, but we broke the United States up into 10 regions and looked at what net farm income would look like for 1999 in these 10 regions. And I might say that two regions stick out as the hardest hit for 1999, what might be called the heartland, an area that would extend from Ohio up to southern Minnesota, down to eastern Nebraska, as far south as Missouri, where we are showing that about one in every four farms in that region would have income below cash expenses. And the other region of the country would be right down the Mississippi River, right down to the Gulf, Arkansas, Louisiana, Mississippi, where we also show a very substantial decline in farm income for 1999.
Page 39 PREV PAGE TOP OF DOC So what we are seeing are some areas that were hurt in 1998, particularly the northern plains and the southern plains, we are now seeing those being joined by sort of the heartland of the United States and right down through the Mississippi gateway to the Gulf.
Mr. THUNE. You mention in your testimony thatand I am not talking net numbers here, not exports minus imports, but just the actual increase in imports coming into this country. I think cattle was about 11 percent increased over last year and by my calculation, hogs were about 28 percent increase.
Could part of what you are seeing in this part of the region be attributable to the fact that we are close to the Canadian border and we are seeing more of the product coming this way? I am just thinking if it comes from a packing plant in South Sioux City or in Rapid City, South Dakota, that you would see distortions based upon the fact that we are probably being hit harder.
Mr. COLLINS. I think that could be a factor, but I do not think it is a big factor. I think the imports can affect basis, but generally we are talking about commodities that are national markets and the prices are linked mainly by transportation costs. You can get local effects when we are close to Canada, when we see a lot of grain coming across the border or we see a lot of cattle coming across the border, we can certainly see logistical problems where Canadian grain might be occupying a warehouse that U.S. producers typically went to and now cannot, or Canadian hogs are being slaughtered at a slaughter facility under contract and U.S. producers are having trouble getting access to that slaughter facility. We can certainly see those kinds of problems, but nationally our prices tend to be linked because we are national markets. We found when we did a study of hog procurement in 1996 that hog producers were trucking their hogs, it was not uncommon in our study to show hog producers trucking their hogs 500 miles, 800 miles, 1000 miles, to get better prices. And so, that is why one of the prime concentration studies from the mid1990's concluded that the hog market was a national market.
Page 40 PREV PAGE TOP OF DOC And so yes, these imports are coming down, they can have effects on basis and they can certainly create logistical problems, but I do not think they are the dominant factor in driving prices.
Mr. THUNE. Regional difference.
One last question. Under Freedom to Farm, we got away from the target price deficiency payment to essentially these production flexibility contracts. Have you noticed substantialdo you have any evidence I guess that Freedom to Farm is producing changes in cropping decisions that might impact the supply situation? I mean, you noted in your testimony that we are at historic high levels in all major commodities, for the most part, and we have a farm bill which obviously encourages or allows flexibility that previously did not exist. Do you have any data that would
Mr. COLLINS. Yes, we do. One thing the farm bill did is it eliminated supply control programs, so right off the bat, it allowed our production capacity to expand, expanding at a time when we have seen some breakthroughs in technologies, some increases in yields, both in the United States and around the world. Argentina, in particular, has had big increases in yields. And so this has, following the high prices of 1996 and 1997, aggravated the situation because it has led to more production, both in the United States and around the world. But the flexibility provisions are in fact to some extent self-correcting. I mean, they allow producers to move out of the commodities that are in greater supply and lower in prices and move to other commodities. You, of course, get a problem when all prices are low and there is no place to move to.
But what we saw in 1996 and 1997, the first 2 years after the farm bill was enacted, was an immediate 17 million acre increase in planted acreage in the United States, and we saw some very different changes in cropping patterns. We saw an increase in corn in the 17 Southern States of 2 million acres above what we had historically seen. We have seen soybeans spread much further west and much further north than had typically been the pattern. We saw a lot of changes in crop rotations where many producers increased soybeans to the point that in the early to mid1990's, we were planting 63 or so million acres and now we are up to 72.5 million acres. So basically a 10 million acre increase in soybeans. We have seen a large increase in other oil seedscanola, flaxseed, sunflower seed. So yes, I would say that there is plenty of evidence that once producers were free from being locked into their old crop acreage base, or being perceived to being locked into old crop acreage base, they moved on to other commodities.
Page 41 PREV PAGE TOP OF DOC Mr. THUNE. That again I think makes the point that the production flexibility is going to have to be coupled with increased export opportunities. I mean, we are just
Mr. COLLINS. Oh, I think that is very important, yes.
Mr. THUNE. My time is expired and I yield back, Mr. Chairman.
The CHAIRMAN. Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman.
I want to pursue that basic line of questioning. Professor Frederick, let me thank you for being here today.
We can amend and repeal laws, but the ultimate law of supply and demand is a little more difficult. We hear from some of our producers and even some of our colleagues who believe that we really need to, pursuant to what Dr. Collins just talked about, go back to a supply management scheme.
Would you care to share your observations, both in the short and long term?
Mr. FREDERICK. Well, one of the things to always remember about supply management is that there is a lot of slippage that occurs when we attempt to do it. For example, if you attempt to do it by taking land out of production, we always have the worst land taken out. Some of the work that has been done over the years indicates if you have a 10 percent acreage reduction requirement, for example, you are lucky if you get 1.5 to 2 percent reduction in production. As a matter of fact, the difference in production from one year to the next is much more dependent on Mr. Weatherman than it is on the acreage reduction program that might be required by the Federal Government.
There is always the possibility of having some sort of storage program as another way of adjusting supplies. We do that to some limited extent with our current loan program, of course it is only 9 months, it is not a long-term loan program. There would be a possibility, I suppose, of going back to a grain reserve concept. Apparently at least a majority of members did not think that was a good idea in 1996 when the farm bill was passed.
Page 42 PREV PAGE TOP OF DOC The problem with the grain reserve long term is that if you have tremendous amounts in the grain reserve, why it does hang over the market and probably precludes some of the upside that you might otherwise get. So when you are attempting to have some sort of supply adjustment, it probably has a net positive effect on the market for at least a short period of time, but it is not very lasting. There are some problems that develop as you move through the succeeding months and years.
Mr. GUTKNECHT. Some people say that if we do that, it will only encourage more production in places like Argentina or Brazil. What is your read on that?
Mr. FREDERICK. Well, I think it is a very easy response to say something like that. So many things, of course, depend on their own domestic policy internally. Generally speaking if you have markets that can be felt on a worldwide basis and you do not have these internal export subsidies and other kinds of things that occur from one country to the next, then you would expect that the higher price that you have worldwide, the more production response that you would get. But I am not going to sit here today and say to you that if we were to increase price supports by 25 or 50 cents a bushel, whatever the case might be, that it would bring a definite amount of increased production, because there are so many things that enter into policy matters on a domestic basis as opposed to what happens internationally.
Mr. GUTKNECHT. Thank you.
I want to come back to Dr. Collins just for a minute. You talked briefly about the effect of trade sanctions in the six countries that we currently have sanctions against. And you seemed to say thatand I do not want to put words in your mouth, but that it was just a marginal impact. Frankly, let me just say that I think that the impact of various sanctions or embargoes is far more perverse. I frankly think that part of the reason some of our potential trading partners are willing to go to the lengths that they are to increase their production is because there is a genuine fear that at some point, they may do something politically which is unfavorable to whatever administration is in power here in Washington. And as a result, I think that there is a real sense around the world that the one thing most countries want to be self-sufficient on is the production of food, which leads me to a point, and I think it really is an issue that I hope this committee will begin to talk about and I have actually mentioned it in some meetings with the Germans that maybe it is time that the United States begin to promote a world food treaty whereby we say barring having a declaration of war against another country, we will never use food as a political weapon. I think that that can have a profound impact on the potential of opening up markets for the United States beyond what may even show up in any economic models. I think the basic notion that we will never use food as a political weapon is an idea that really this committee and hopefully other Members of the Congress will help to begin to promote.
Page 43 PREV PAGE TOP OF DOC I do not know if you have given any thought to that and if you have any response to it.
Mr. COLLINS. I think you have made a very thoughtful point. It is hard for me to know what the effect of our embargoes is on a range of countries around the world, but it is very clear that when, for example, the European Union put an export tax on wheat a year and a half ago and wheat prices were very high, we were among the first countries of the world to criticize the European Union for doing so because it would do exactly as you say, cause some major importers of the world to look inward and think about self-sufficiency, because here is one of the world's major wheat suppliers cutting off their supply.
An excellent case in point is what has happened with China since 1994. The Chinese were on their way to becoming a dominant importer in the world. They were importing 20 to 25 million tons of grain a year. This year, their net imports of grain are practically zero, they are a net exporter of corn and they are importing a few million tons of wheat. They made a conscious decision that they did not want to be dependent on other countries of the world. Why do countries make these decisions? Fear of embargoes may be a factor in this, I cannot quantify that, I do not know, but it is certainly I think a thoughtful point.
Mr. GUTKNECHT. Professor Frederick, would you like to comment on that?
Mr. FREDERICK. Well, embargoes are always a problem. They have been going back for 25 years now, but at the same time, there is a limit on what we can do in this country to control whatever policies may be taken by other countries. And everything that we can do I think to reduce trade impediments is desirable, but again, it is difficult to give any grand overview here of the exact way to do that, because it does require having to respond to the internal domestic policies of individual countries.
Mr. GUTKNECHT. Thank you very much. I will yield back the balance of my time.
Page 44 PREV PAGE TOP OF DOC The CHAIRMAN. Mr. Latham.
Mr. LATHAM. Thank you very much, Mr. Chairman.
Dr. Collins, you had earlier listed several countries that were in a recession and are having a difficult time being able to import food from the U.S. How important is credit to those countries for us to be able to export?
Mr. COLLINS. I think credit is very important to those countries. A couple of years ago, we were guaranteeing for export sales less than $3 billion worth of credit per year. This past year, I think we did somewhere around $4.3 billion worth, so we have had a substantial increase. Most of that increase has occurred in Asia. South Korea last year, we had a credit package of $1.5 billion. This year, we are working on a credit package of about $1 billion. Last year, for the first time ever, we had GSM credit packages to Thailand, Malaysia, Philippines. Now these are all countries that were in recession last year. So I think that what we see when we look at their purchase pattern, their total imports are down, but our market share in those countries I just mentioned, for the commodities for which we provided credit, our market share has maintained itself. So I think you could say that credit is very important in those countries.
Mr. LATHAM. And I agree. You said there has been some increase in the credit. The fact of the matter is while there was about $4 billion last year, under the provisions of the export credit guarantee program, it is supposed to be a minimum of $5.5 billion, that is for GSM102 credits and there has only been about a sixth of the dollars for GSM103 credits that have been used. And I think when youand you tell me where I am wrong here, but when we do not use all of the available tools, and that is supposed to be a minimum, there is no cap.
Mr. COLLINS. Right.
Mr. LATHAM. There is no cap on the amount of credit available, but the minimum set by Congress is $5.5 billion and the administration used $4 billion. The Export Enhancement Program in the past 3 years, we have made available $1.5 billion and only after the European Union dumped 30,000 metric tons of food grade barley in California, did we use I think $2 million of the export enhancement funds that had been available.
Page 45 PREV PAGE TOP OF DOC In the proposed budget this year, they are again wanting to cut export credit guarantees $215 million, reducing Food for Peace, Public Law 480, by $95 million; Food for Progress, to get rid of the surplus, by $42 million. And I just have a real problem with any kind of consistency in how these programs are administered. I had Secretary Glickman, last Wednesday in a hearing, trying to justify this and he was red-faced about it. I mean, you cannot do it and still say that you are supporting the farmers out here.
Mr. COLLINS. I sat next to Secretary Glickman when you made those points and I think they are good points and I am not sure I can respond to all of them. But a couple of things worth noting, I did comment on the EEP program already, which we have used only for barley. Generally, and I think there is quite a consensus among analysts around the nation, that the dollars of taxpayer money that would be spent for each additional bushel exported would be enormous, and I think that that has been the reason not to pull the trigger on the EEP program.
With respect to the GSM credit programs, we have long had a target, a minimum of $5.5 billion, it used to be $5.3 billion and then it went up to $5.5 billion and it was $5.7 billion at one point. We have never hit that target, never in my experience in government. I think we are making progress by going from less than $3 billion to over $4 billion this past year. One of the reasons we do not hit that target is this is not a giveaway program, it is a commercial sales program. These countries have to pass
Mr. LATHAM. Is there not adequate demand available out there for the use of the credits?
Mr. COLLINS. I am saying that countries have to pass creditworthiness tests to be able to be eligible to use the credits. We just do not offer them to any country that asks for them, there has to be a demand for them and they have to pass proper risk management tests that we impose on these countries.
I cannot tell you at the moment if there is a backlog of countries wanting GSM credit or not. It has been my experience, however, that we have generally provided GSM credit to those countries that meet the criteria for GSM credit. Now maybe our criteria are too high. That is a question I cannot answer.
Page 46 PREV PAGE TOP OF DOC Regarding the Public Law 480, I agree with you, there is a slight decline in Public Law 480. Public Law 480 has been declining for some time, that is a choice that the administration has made to meet their budget targets. One thing I would probably say is that the volume of product that would move on concessional terms under Public Law 480 probably has not changed very much over the last couple of years because of the lower commodity prices, even though the dollar value of Public Law 480 has gone down.
So those are a couple of responses, but I think your general points are certainly worth us paying close attention to and seeing if we cannot manage these programs in a way that makes them even more effective than they are now.
Mr. LATHAM. I will just tell you that it is very frustrating to go through the whole process and appropriate funds to promote exports, to do everything possible to move this surplus and then see the tools that we are providing not being used. It is extraordinarily frustrating, to say the least. And I think something has got to be done about it.
I should have brought my staffer to run the time clock probably. [Laughter.]
The CHAIRMAN. Well, in a way you paid for these microphones.
Mr. LATHAM. Thank you. Could I ask Mr. Frederick one question?
The CHAIRMAN. Yes.
Mr. LATHAM. I would just ask have you done any study or work to see what the effect of the consolidation of Cargill and Continental Grain would have in Nebraska?
Mr. FREDERICK. No, I have not. The presumption that I have, and it is based on conversation with other agricultural economists in my department, is that it might result in the closure of a few local elevators in the State. Obviously there are questions on up the marketing chain well beyond what happens at the local elevator level. But that is the best response I can give to you.
Page 47 PREV PAGE TOP OF DOC Mr. LATHAM. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Terry.
Mr. TERRY. I will yield my time back to the Chair.
The CHAIRMAN. I appreciate it.
Gentlemen, thank you very much for your testimony and, Mr. Frederick, I apologize for the fact that actually Bill Barrett meant for that trick water pitcher to be here. [Laughter.]
And you got it, so you can take that up with Bill. We appreciate it, thank you both very much again for testifying.
Our second panel of witnesses today; Mr. Merlyn Carlson, who is the director of the Department of Agriculture of the State of Nebraska; The Honorable Darrell Cruea, who is the secretary of the Department of Agriculture of South Dakota; and Mr. Gene Hugoson, who is the commissioner of the Department of Agriculture of the State of Minnesota.
We would invite you to come and join us, please.
Mr. Carlson, we will start with you on that end and just move this way. Please proceed.
STATEMENT OF MERLYN CARLSON, DIRECTOR, DEPARTMENT OF AGRICULTURE, STATE OF NEBRASKA
Mr. CARLSON. Thank you, Chairman Combest, Congressman Barrett and other members of the Agriculture Committee, along with Congressman Latham and Terry. For the record, I am Merlyn Carlson, the Director of the Nebraska Department of Agriculture.
I thank you for the opportunity to present the views and concerns of the agricultural producers of Nebraska and Nebraska Governor Mike Johanns concerning the state of the agricultural economy. I would like to thank you for raising the awareness of issues that are being discussed at today's hearing by virtue of your decision to bring the House Agriculture Committee to Grand Island, Nebraska.
Page 48 PREV PAGE TOP OF DOC Nebraska is very proud of its wealth of resources, its natural resources, its innovative people resources and its vital resources which link and render services to adding value to its many commodities.
Nebraska can also take its rightful leadership role in the world, second to none, in the vibrant but competitive global food market.
However, there is no doubt that the current commodity price levels pose a formidable challenge to the nation's agricultural producers to maintain their operations while they wait for better times. And the drop in gross cash value of Nebraska's four leading commodities is near $1.2 billion in 1998 alone. Considering the widely accepted estimate that most dollars flow through the economy 2.5 times, the low commodity prices result in a loss of nearly $3 billion to Nebraska's economy.
With this kind of total economic impact, it becomes obvious that steps need to be taken to shore up the commodity prices and in turn our nation's farmers and ranchers, especially the family operations that are the backbone of our nation's agriculture industry. Many of these operations do not have much time for lengthy debate and while Congress passed much needed relief last year, more positive action is necessary.
First, Congress should take steps to help the livestock industry by rescinding the availability of the USDA quality grade shields to imported carcasses, instituting country of origin labeling and establishing a method for price reporting that will allow producers market information to ensure that competitive market forces exist. While several States, including Nebraska, are currently debating proposed legislation concerning these issues, I would challenge Congress to adopt a national umbrella of legislation to address these areas and provide uniformity among States.
As we search further for solutions, it becomes necessary to consider the effect of the 1996 farm bill. While Congress responded to producer requests for increased planting flexibility to make planting decisions based on global market signals, it needs to do more to ensure that our nation's producers have equal, fair and open access to world markets. Exports and export programs are vital to the future prosperity of American agriculture and to the entire U.S. economy. Export programs provide U.S. agriculture with the tools to maintain and expand the sale of commodities in the global marketplace. Action to expand investment in export programs, and utilization of such programs, including: Export Enhancement Program (EEP); the Market Access Program (MAP); the Export Guarantee Program (GSM 102 and 103); and the Emerging Markets Program, as well as others is needed. Programs such as these are essential to re-establishing a level playing field for U.S. producers as compared to agricultural producers in Europe and in South America. And without aggressive U.S. programs, it is difficult, if not virtually impossible, for U.S. producers to compete with the treasuries of Europe. It is also essential that the President be granted fast track authority and the U.S. Trade Representative be empowered to take aggressive action, including retaliatory action against countries that are not abiding by trade agreements.
Page 49 PREV PAGE TOP OF DOC We applaud Senator Chuck Hagel's recent efforts to remove food and medicine from sanctions and embargo actions taken against other countries. And this is a continuation of efforts in previous congresses by Senator Hagel, Congressman Barrett, Congressman Doug Bereuter and other members. The use of food and medicine as foreign policy tools has effectively eliminated more than half of the world's population in 35 different countries as consumers of Nebraska's agricultural products.
Last year was marked by low commodity prices and reduced exports. Unfortunately, 1999 is projected and we just heard Dr. Collinsby the USDA's own estimate, to even be worse.
As many farmers and ranchers struggle to survive during this difficult period, it is also time to re-examine the current Federal Crop Insurance Program. Effort should also be made to provide opportunities and incentives for producers to manage additional risk by increasing their coverage levels. Increasing the subsidy for higher coverage levels would provide greater opportunities for producers to manage potential risk. Consideration could also be given to expansion of Federal insurance programs to include livestock insurance products. A key to all crop and revenue insurance programs is making them user friendly in simplicity and in pricing.
So in summary, Mr. Chairman, Congress needs to pass legislation such as contained in your H.R. 222 and the Senate three bills, S. 241, S. 242 and S. 251 and others, which address the immediate concerns in the livestock industry.
The other major area of need is an aggressive approach to retain and expand export opportunities for U.S. agricultural products. This will require full and expanded funding of the previously mentioned export programs. Nebraska farmers and ranchers need your assistance. I am confident that you will answer their call.
So thank you very much for this opportunity, Mr. Chairman.
[The prepared statement of Mr. Carlson appears at the conclusion of the hearing.]
Page 50 PREV PAGE TOP OF DOC The CHAIRMAN. Thank you very much.
Mr. Hugoson, please.
STATEMENT OF GENE HUGOSON, COMMISSIONER, MINNESOTA DEPARTMENT OF AGRICULTURE
Mr. HUGOSON. Chairman Combest and Vice Chairman Barrett, I appreciate the opportunity to share some thoughts here today.
The state of agriculture in Minnesota during the past 12 months has been a case of one step forward, two steps back. While we have seen record corn and soybean yields, our farmers have suffered from crippling price drops and lingering crop disease. Our record yields, combined with the Federal assistance passed by Congress last falland Mr. Chairman, we do thank you for thathelped lessen the effects of these low prices. However, as these low prices continue into 1999, many people are concerned about the prospects of a long-term farm problem.
The cure for this economic malaise must come from a number of directions, including Federal, State and local governments. Congress has already taken positive action by passing significant farm relief last fall. However, I suggest it would be wiser in the long run for the Federal Government to break the bailout cycle and instead give farmers the tools they need to help themselves.
Risk management and market access are two of the most valuable economic tools for farmers. Unfortunately, they are also areas that need improvement at the Federal level. Both areas represent unfinished business remaining in the wake of the 1996 farm bill and the longer this business remains unfinished the worse it is for farmers.
Risk management is undoubtedly a crucial part of the 21st century farmer's tool case. Unfortunately, the Federal Government has not given farmers the highest quality tools for managing risk. To illustrate, let me describe the situation that exists in northwestern Minnesota.
Page 51 PREV PAGE TOP OF DOC During the past 5 years, wheat scab and poor growing conditions have devastated the average yield per acre in the seven counties in the northwest corner of our State. While yields have decreased, grain prices have stayed fairly constant. This led to a loss of about one-third of the total income per acre between 1993 and 1998. As a result, many farmers are dropping out of business. And I understand a similar situation exists in North Dakota.
Congress helped out by earmarking millions of dollars to help farmers suffering from multiple year crop losses, but we need you to go one step further. We need you to permanently fix the Federal Crop Insurance Program to solve a number of lingering problems. For example, as the program is presently constructed, the amount of coverage a farmer can get is determined by crop history going back only a few years. As a result, farmers who suffer several consecutive years of bad crops like those in northwestern Minnesota, cannot get affordable crop insurance coverage at a level they need to cover their production costs.
In fact, the Federal crop insurance system has so grievously failed our farmers that the State of Minnesota was forced this last year to pick up the slack by funding a Federal crop insurance premium reimbursement program. States cannot afford to pick up the slack forever. By providing farmers with better risk management tools, Congress can do its part to break the vicious cycle of boon-bust-bailout. Grain farmers are not the only ones who need stronger risk management tools. With fluctuating hog prices and sinking dairy prices that are existent even now, this is the time to provide all farmers with the high quality risk management revenue assurance tools that they need.
A second broad area in which we see room for improvement is market access. The rules of supply and demand tell us that in an era of increasing crop production and stable domestic consumption, the key to ensuring decent prices is to keep demand strong by finding new uses and markets for our products. That is best done by increasing our value-added efforts and expanding our international marketing. These two goals continue to be major priorities for Minnesota, but there are many areas in which the Federal Government could do more than it has. This lack of action at the Federal level is especially troublesome, given the low commodity prices of recent months.
Page 52 PREV PAGE TOP OF DOC The Federal Government let agriculture down in a number of ways. Despite its importance to the U.S. economy as a net exporter, the needs of U.S. agriculture community have largely ignored at recent international trade negotiations. To rectify this oversight, agriculture must be given center stage at the next round of World Trade Organization talks. We need to focus the efforts of our trade officials upon removing the many unwarranted barriers other nations have erected against U.S. agricultural exports.
For example, one particular trade irritant could be resolved by pushing for fair trading practices with Europeans regarding genetically modified organisms. According to Farm Bureau, corn shipments to Europe exceeding 2 million metric tons are still being blocked by unfair European trade policies in this area.
Another helpful step would be for the Federal Government to leave agricultural commodities out of retaliatory trade actions. For decades, we have been imposing trade sanctions on nations whose policies we dislike, but there has been little attention paid to how these actions hurt our farmers back home. Agriculture exports are blocked from too many countries in this way, sacrificing potentially solid markets to our competitors.
Another issue related to market access is the lingering U.S. Department of Agriculture ban on interstate shipments of State-inspected meat. Despite strong indications that this ban will be lifted, no action has yet been taken. As a result, it is still easier for some foreign countries to ship their locally-inspected meat into this country than it is for Minnesota to ship State-inspected meat to Wisconsin or any other State. USDA's failure to lift this ban is particularly troubling to Minnesota since we recently implemented a new State meat inspection program that is designed to help small and medium sized producers market their identity-preserved products directly to Minnesota consumers and surrounding States.
Risk management and market access aside, there are a number of other pressing issues facing Minnesota agriculture. For example, the relationship between agriculture and the environment continues to be a prominent issue for us. We are presently conducting an in-depth study of the economic, environmental and social impacts of the livestock industry in the State of Minnesota. Our hope is that by taking a scientific approach to this issue, we can construct the most effective policies and regulations that not only protect the environment, but also allow our farmers to operate in an efficient and cost-effective manner.
Page 53 PREV PAGE TOP OF DOC Unfortunately, our scientific approach is not shared by everyone. Facing mounting pressure to address some of the nation's feedlot issues, the Environmental Protection Agency is implementing confined animal feedlot regulations that are not based on sound science, but rather seem to be designed primarily to give outsiders the impression that something is being done.
Unlike Minnesota, the EPA approach is to add regulations without regard for the impact or cost that they have on farmers. We would much rather see EPA set environmental protection standards for States to meet and then allow the States to work with their farmers and environmental experts to determine how best to reach those standards. From the perspective of a State like Minnesota, which has often been a leader on environmental issues, it is unfair for EPA to add nationwide regulations that do nothing more than add another layer of bureaucracy.
Before I finish, I would like to briefly touch on agricultural research. Congress has wisely invested in a number of research efforts such as the work being done by the University of Minnesota to find a cure for wheat scab. However, given the enormous economic devastation caused by crop pests and diseases, and given the amazing biotechnology discoveries being made around the world, I would argue that few investments could promise a higher rate of return than agricultural research.
Thank you, Mr. Chairman and committee members for the opportunity to share with you today.
[The prepared statement of Mr. Hugoson appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you, sir.
STATEMENT OF DARRELL CRUEA, SECRETARY, SOUTH DAKOTA DEPARTMENT OF AGRICULTURE
Page 54 PREV PAGE TOP OF DOC Mr. CRUEA. Thank you, Mr. Chairman. I am suffering a little bit from a laryngitis situation, so bear with me, if you will. I appreciate the opportunity to address the committee this morning on agricultural economics.
Recent trends have shown a declining price structure. Friday's agriculture statistics showed crop values in South Dakota to be down 8 percent from 1997 and 20 percent from 1996, even with the record yields that we reported during 1998. Our livestock returns appear to follow a similar trend. We have a major concern about the economic domino effect for the reduced income of our producers in our rural communities.
I have three areas of concern that I feel are critical for the survival of farmers and ranchers, particularly the small operations that make up a greater percentage of our producers in the United States today.
Is the competitive and supportive credit. New and flexible financial products should include incentives from the private sector to cooperate with local lenders, State and Federal agencies to aggressively provide capital suited for producers with the diverse needs of production, processing, marketing and other kinds of risk management costs. It is appropriate to include in these considerations I feel the educational tools regarding total management and market planning.
Recommendations that I would make to this area:
Continue to expand the low documentation guaranteed loan applications and lender eligibility for the PLP programs. The announcement this week of the new USDA policies for guaranteed farm ownership and operating loan procedures is a tremendous great start.
Consider reinstating the leaseback/buyback provisions as a method to provide relief for some borrowers and provide a buyback option to borrowers with maturing FSA share depreciation agreements.
We need to revise the Debt Collection Act to ensure that Government agencies honor pre-existing assignments prior to offset of Federal payments.
Page 55 PREV PAGE TOP OF DOC Consider revising the prompt corrective action provision of the FDIC Improvement Act of 1991 prohibiting loan making based on specific capital reserves. These limitations may be too restrictive for our small rural community-based agricultural banks and could cause premature closure in the event of numerous, possibly temporary loan classifications.
The second item that I feel is necessary for our producers is economic sustainability. This can be achieved through management and marketing practices and strategies. Risk management planning both in production and market access is critical to economic sustainability.
I have some recommendations:
Develop a safety net that is affordable and would function in emergency situations. Many of the previous witnesses have already addressed the crop insurance and livestock, I will not dwell on that.
I feel that we need to develop market strategies to enhance producers access to both traditional and new markets. Create further economic incentives that would encourage our producers to participate in value-added processing and marketing and management techniques. An example, the Rural Development Agency currently has an incentive in the form of a guarantee loan program for stock-share participation in cooperative value-added processing programs. This program needs to be expanded to include biological processing and marketing cooperatives.
Background knowledge of product quality and market signals are important in the planning process. Other witnesses again have already addressed marketing strategies and the development of price transparency and country of origin labeling. It is already being addressed with your one-year pilot program, and this is very commendable.
Review our export programs with an emphasis on maintaining, reviving and expanding our international programs.
Page 56 PREV PAGE TOP OF DOC The third critical issue facing our producers is how to convey the accumulated assets to their heirs without loss of financial security during the process.
Recommendations I would make:
To establish Federal tax incentives for producers selling assets to beginning farmers.
To establish Federal income tax exemptions or scaled tax schedules for beginning farmers.
To alter the FSA beginning farmer definitions to allow for the greater flexibility and non-farm income levels without disqualification.
To further capital gains and estate tax reform to provide the mechanism for retention and enhancement of our agricultural producers.
Gentlemen, I thank you for your time.
[The prepared statement of Mr. Cruea appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you very much.
Mr. BARRETT. Thank you, Mr. Chairman.
Mr. Carlson, I did not hear a part of your testimony, but as I returned, I believe you were saying that you support mandatory price reporting.
Mr. CARLSON. Yes, that is correct.
Mr. BARRETT. And country of origin and so forth. Can you tell meand I do not know the answer to thisdid the cattlemen just within the last few days pass a resolution involving these things in their convention? Can you share?
Mr. CARLSON. Yes, they did. It was a highly debatedand I think there is going to be others on the program that can come before you here later that can address this in more detail, but it was debated, voted, obviously with dissenting votes, but it passed quite clearly in support of the mandatory price reporting.
Page 57 PREV PAGE TOP OF DOC Mr. BARRETT. Perhaps a loaded question, but in your new position and your new responsibility, will Nebraska be left with only concentrated hog operations 5 years from now?
Mr. CARLSON. Tough question. No, I think there is great opportunity for the family farm, the independent producers to compete in the world that is fair and free of markets in their markets, level playing fields. Yes, I think there is room for all sizes. We need to be sure that we are not passing laws and regulations that favor that concentration, that favor that lessening of competition. And those are the things we are addressing here in our testimony.
Mr. BARRETT. Would you other two gentlemen pretty much agree with that answer regarding the status in about 5 years from now?
Mr. HUGOSON. Congressman Barrett, I think I would say that things are going to have to be changed for all sized operations in order to compete with what is going on. In other words, with what we see happening over the economy as a whole, there is concentration happening in every segment of the economic community, whether we are talking banks, whether we are talking department stores, grocery stores, everything. Agriculture is facing some of those same challenges as well.
I think in order for the small to medium sized agricultural units to be able to compete, they have to adapt some of the abilities to go after some of the more niche market types of possibilities than what they have been doing in the past. In other words, we have to be able to change to compete with what is happening. If in fact they do not make any changes or are not willing to make changes or do not know how to make changes, I am afraid they will run the risk of becoming extinct.
Mr. BARRETT. Mr. Cruea, would you agree?
Mr. CRUEA. I have very strong feelings about the ability for the small producer to utilize network alliances and conglomerations, not only in the marketing aspect but in the production aspect, to be a very heavy competitor with the larger operations. I feel our small people are going to be there, as Gene says, in the aspect that they are willing to do so and willing to step up to utilize those tools.
Page 58 PREV PAGE TOP OF DOC Mr. BARRETT. Thank you.
Merlyn, going back to you for a moment, I noticed that Senator Derks, I believe, introduced a package of four bills in the State legislature involving price reporting and country of origin, et cetera. If those were passed and our neighboring states, those around us today, did not pass similar legislation, what would the effect be?
Mr. CARLSON. I would like to say that it would be an influence for an umbrella-kind of legislation back in Washington, DC The effect short-term could set up a difficulty in Congress.
Mr. BARRETT. Do you know whether or not other neighboring State legislatures are introducing similar bills?
Mr. CARLSON. Yes.
Mr. BARRETT. They are?
Mr. CARLSON. Yes, they are, four to five States.
Mr. BARRETT. OK, thank you.
Mr. Hugoson, by the way, you served under Governor Carlson, I believe, initially and you have been re-appointed.
Mr. HUGOSON. That is correct.
Mr. BARRETT. So you work for Jesse.
Mr. HUGOSON. Yes, I do.
Mr. BARRETT. OK. Tell me about the impact of the administration's trade policy on your dairy people.
Mr. HUGOSON. Mr. Chairman, Congressman Barrett, I firmly believe and we have taken a position in the Department of Agriculture that fast track is an essential component that needs to take place for the good of agriculture. We run a little bit different situation, much like North Dakota, South Dakota and Montana being near the Canadian border, so we are dealing with those issues all the time as well. We have a number of people that do not like the idea of fast track because they feel that they have had disparities in the international trade before, why should we want to perpetuate that with some new type of legislation. I would argue that in fact fast track would help us to be able to compete with some of those problems that exist right now. As it is, we are literally being taken to the cleaners by some of these dual nation agreements that are happening, that unless we are able to access at some point down the road, are going to leave us shut out of some of the international commerce that is going on.
Page 59 PREV PAGE TOP OF DOC I am a firm believer that unless we have more access to international trade, whether it be through reducing some of the trade barriers, whether it be reducing some of the monetary problems that some of these countries have. American agriculture is going to face a long period of some very deficient pricing going on simply because we produce too much for our consumers to consume in any way imaginable. And so the only chance we have for marketing that product is to do it in other countries around the world.
Mr. BARRETT. Thank you. I see my time is up, and I am sorry, Mr. Chairman, but I am glad to hear you make the statement you did about the importance of fast track. That is going to be a very key issue in the Congress this year. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Moran.
Mr. MORAN. Thank you, Mr. Chairman.
Do any of you gentlemen have strong suggestions, when you talk about fast track and trade sanctions? One of the things that Dr. Collins talked about was the Export Enhancement Program, the administration's belief that its use is not very beneficial. Any suggestions about export enhancements? It has always been troublesome to me that we continue to appropriate money to increase exports, but it is not used. And my message has always been to the administration, if they are not going to use it, tell us what we can do. France sold wheat to Egypt last August and the estimated subsidy was $1 a bushel. Yet, we do not respond. I do not understand how we can keep markets, pursue markets without a reaction.
Any thoughts about how to increase our exports?
Mr. HUGOSON. Mr. Chairman, Congressman Moran, I would say I think the Federal Government is a lot like the individual American farmer. We would rather produce than market. In fact, it is easier to produce than to market. I am a farmer and all too often I have made judgment calls that I have lived to regret, at least until the next marketing year, and as a result, I think all of us that are involved with marketing decisions dread those to a degree. Certainly we enter them with some trepidation.
Page 60 PREV PAGE TOP OF DOC I am convinced that really at the Federal level we have had some of those same problems, that it is a lot more difficult to look at marketing a product than it is to concentrate on production. And so I wish I could give you an answer as to how to change that attitude. I am working with the same thoughthow do we change it for individual farmers as well, to put more emphasis on how we market our product as opposed to necessarily just growing it, because I am absolutely convinced when you look at what other countries are doing out there, they are marketers first and producers second. At least those countries that are very key people in agriculture and some of those things we need to pick up on in order for our people to succeed.
Mr. CARLSON. Mr. Moran, may I comment and go back to Mr. Latham's comment that the credit guarantees and the credit programs are not being used to their fullest. I can fully agree with that and I think perhaps that should be pursued.
Just last summer in South Korea, as was mentioned, we are down some 70 percent in trade with Korea because of their struggling financial and currency crisis. And it would be even greater depressed than that if it had not been for the GSM credits that we allowed them as it related to the meats. Those credits were used up in a short period, almost days, in the first one, and an even shorter period, half that, the second time, the next GSM. So the test must be tough and perhaps needs to be looked at.
Mr. MORAN. For a long time in trying to increase on-the-farm income, at least in Kansas, the magic words were value-added. Have you all seen success in your States that others ought to be using as an example in bringing the value-added industries to the area of the State where agriculture commodities are produced?
Mr. CARLSON. Again, I will lead off. I feel like the new kid on the block, just appointed Director of Agriculture. That is our focus, our eye is on the ball on added value, attempting to get more of the consumer dollars back in the producer's pocket. And that is through some aggressive value-added programs. And I am sure these gentlemen can talk about much greater experience than I can.
Page 61 PREV PAGE TOP OF DOC But we are going to put a great deal of emphasis and focus on value adding and think of all the meats and all the grains that we need to be putting a great deal more emphasis on the value adding, and as we enter into the food safety areas, as we enter into the convenience areas, that just fits it right into the areas that it needs to be accomplished in the State.
Mr. MORAN. If any of you have great stories of success, if you would share them with Kansas, we would be grateful.
Mr. Secretary, you mentioned something that I wanted to followup on, and that is the implementation of HACCP in your States. What is the prognosis, how is it working, how many businesses are we losinghow are you doing?
Mr. CARLSON. I do not have figures on that again, sir. However, as you know, that the second tier of 100 and less employees was implemented just in January and that has seemed to be smooth. There is some dropout we understand but as we view food safety and the need for safe wholesome food, I think we are all prepared for those kinds of investments. But it is tough on the smaller companies to adhere to these strict regulations and perhaps such things as Secretary Glickman just announced here last Thursday, radiation possibilities are going to add a great deal of opportunity. It is high-priced, we are in the rulemaking steps but it takes the debate even further now as we talk about the food safety, hoping we can find ways to aid more competition and not less. And HACCP has heretofore been such an expensive program, it is almost forcing less competition.
Mr. MORAN. My time has expired. That is an interesting point because we in Government often complain about the increasing concentration, the fewer competitors out there in the real world, but we probably ought to recognize that the policies that are adopted have a great impact upon small producers' ability to stay in business. So when we cry wolf, sometimes we are the wolf, I think.
Page 62 PREV PAGE TOP OF DOC Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman. I want to welcome this panel and welcome the Secretary of Agriculture in our State, Mr. Darrell Cruea, and thank him for making the trip down here today, and also want to recognize his wife Cindy, who is here and is the National Second Vice President of Women involved in Farm Economics. Glad to have you here. And Mr. Ron Cody and his wife Melba, who is the Assistant Secretary for Agriculture in our State.
One of the big concerns in our State is the fact that we are seeing an increasing trend toward consolidation, concentration in agriculture, and unless something changes, the small independent producer is going to go the way of the dinosaur here before long. And that is a grave concern for a lot of us.
One of the things that has been suggested in terms ofand we have had some discussion already of value-added agriculture, but how do you achieve that, and in our State, like in most States, we are looking at ways that we can do that through farmer-owned cooperatives. And I would be curious to know what limitations there are with respect to loan guarantees or tax incentives that might prevent further development of value-added agriculture enterprises through the form of farmer-owned cooperatives.
Mr. CRUEA. If I may address that for starters. As you know, in South Dakota, one of the things that I think Merlyn and Gene will agree, is that restricted value-added development has been the inability for us to recognize what I refer to as biological processing. Let me give you a quick example.
If I take corn and I process it into feed, that is eligible for guarantees and assistance through various stock guarantee programs for producers and for the construction and the operation itself. If I take that corn and do what I call biological processing through dairies, through pork processing, through poultry, through feedlots; those types of cooperatives which are in fact even more value-added oriented than the others, are not eligible under the IRS tax code for assistance through the Government programs. I guess I would urge that if we could change that and allow what I call biological processing and marketing co-ops who are the same getting together and looking at these niche markets that Gene addressed, we would enhance our ability for value-added development greatly.
Page 63 PREV PAGE TOP OF DOC Mr. HUGOSON. Congressman Thune, I would echo that and again just reiterate how essential it is forin Minnesota for instance, we have very strict anti-corporate farm laws. We literally cannot farm in Minnesota unless it is some kind of a family farm operation. But what we have done as a means of trying to compete with what goes on elsewhere in the country is to ban together, to do co-op types of arrangements. And Minnesota has a slug of these different types of co-ops in every different shape and form. We have over 7000 farmers that own stock in ethanol plants in Minnesota, we are involved with co-ops that cross over into South Dakota and into North Dakota. We haveif you can co-op it, we have tried it. And when we have these restrictions, whether it be having to do with financing, whether it be having to do with the ability, even some of our own State law problems that enable these people to compete with what is going on elsewhere in the country, frankly what it does is it hastens consolidation, which is the very thing we are trying to stop.
Mr. THUNE. Just as a follow-up, and Secretary Cruea, it might take a small change then in Federal law, some sort of statutory change that would allow for these biological processing operations to be considered value-added agriculture; is that essentially what it would take?
Mr. CRUEA. It is my understanding, Congressman, that a simple addition or amendment to the IRS statutes and definitions would allow this to take place, yes, sir.
Mr. THUNE. Just another question. One of the things I am very interested in, and I appreciate the Chairman's interest in this as well, as part of the crop insurance discussion, some sort of a comprehensive livestock insurance program that would help protect and hedge against income loss in the livestock industry as well. I noticed that Secretary Cruea, and I am not sure if the others mentioned that in testimony, are there any particular points that you think such a program should encompass? Is there anything in terms of the way you might see such a program working?
Page 64 PREV PAGE TOP OF DOC Mr. CARLSON. As I understand, Congressman, there is one proposal that was debated this last week at the cattle industry's meeting that has been put forward, and it is, as you know, a complicated formula, one that seems to pass the risk management back to the futures contracts and the options contractsvery complicated one. But it doesthe key is the reinsurance programs, it would need to be broad-based, it would need to be used very widely for a cheap source of reinsurance. Congress would need to look at administrative costs, as it does with the present crop insurance program. And it would need to look at premium support and at what level. Those would be some criteria and we areas you fully realize, we do have risk management capability in the meats area; however, it is not very widely used and it is not very user friendly. And so this kind of a program could provide that and fill those kind of voids.
Mr. HUGOSON. Congressman, I would just add that it needs to be designed in such a way that it encourages farmers to participate. One of my concerns now is that it is difficult for farmers, myself included, to necessarily think outside the box of the way we have done things in the past. And if in fact, the Federal Government is going to be moving away from deficiency type payment structures that we have all been used to and instead put the burden on farmers for being involved with their own risk management plans, it needs to be done in such a way that it is understandable, that there is that incentive to get involved. And I would only use as an example the Dairy Options Pilot Program that was put in place, which is I think an excellent opportunity for people to move in this direction. The timing, however, was unfortunate, in that dairy prices were high and the interest in that program was not like it should be.
We are going into a time now where that should be looked at more favorably than it really is. And we are scrambling to get people to take part in a program that really does get at the heart of risk management for the dairy industry. So that is one of my concerns, even as we look at any kind of revenue assurance program as well.
Page 65 PREV PAGE TOP OF DOC Mr. THUNE. I appreciate that. If it is complicated, it would probably go over well in Washington, but I would welcome your input in working with you to try to fashion a program that is simple and fairly easily understood and would encourage participation. And I know that is a concern of most of the people on the committee and one that is shared very strongly by our Chairman. So we look forward to that.
The CHAIRMAN. Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman. And thanks to all of you for being here today. We admire you more than you may imagine, it is a very difficult job right now to be in your respective positions at this very difficult time for agriculture. So we admire what you do and we appreciate your coming down to share your opinions with us.
First of all, Mr. Carlson, you made the point and used the term radiation. I have found that electronic or electromagnetic pasteurization sounds a whole lot nicer to consumers, so I share that with you and perhaps Dr. Collins can take that back to the USDA. [Laughter.]
I support the notion, we have got to figure out a different way to say it.
You also mentioned that your State, and I am not sure if it was legislatively or by executive order or what, had taken positions on mandatory reporting. Can you share a little bit about that? How did that happen?
Mr. CARLSON. As you know, our chairman of our Agriculture Committee in our State of Nebraska, as well as many of the members of the Agriculture Committee, introduced four bills encompassing price reporting, country of origin, packer feeding and some other differentials, but those are in committee now and I understand that the country of origin perhaps might be left out of that package and refined as a separate package. But those are areas that, as I answered to Congressman Barrett, that we hope those will help influence national legislation, because we do need more transparency into the price reporting area. We have some thinness as Dr. Collins and Dr. Frederick alluded to, and those are areas that we do need to address because those areas perhaps are even getting thinner as we go ahead in our ability to discover price and discover value.
Page 66 PREV PAGE TOP OF DOC Mr. GUTKNECHT. Any other commissioners or secretariesI am not sure which terms they useI am not even sure, Gene, if we have taken a position in the State of Minnesota on mandatory reporting. Is there a bill or has the Governor taken a position, or you?
Mr. HUGOSON. Congressman, there has been no position taken by the administration. There is interest at the legislative level, of course, of doing this. The comments that I have made publicly on this would be that the idea sounds good and I think we all would look at this as a way of perhaps providing more information. It gets to the point though where at what point does government or anyone else have the right to know what is going on between two individuals that are negotiating some contracts.
The one thing I would also say though is that if we are going to do something, it needs to be done at the Federal level rather than at the State level in the sense that for one State to try to do it, it creates the island effect that really makes it difficult when we are looking at interstate commerce such as we have going on. So I think from our perspective in Minnesota, that we would watch with interest what goes on in Congress, but I would be reluctant to support it at the State level.
Mr. CRUEA. We also have some legislation at the State level. I share Gene's concerns about do we become an island, or the other side of that, does someone have to take the lead in order to bring everything forward. I would hope that the Federal Government will take the lead and develop that program.
Mr. GUTKNECHT. On the whole issue of concentration, and I am happy to report that the Chairman had a hearing in Washington last week where we talked a lot about concentration, and it really is an issue that I think deserves Congressional attention. I am not sure what the right answer is yet, but it is a concern. And I just wonder if you would talk a little bit about concentration, and then secondly, whether or not you have taken a position on the Cargill/Continental merger.
Page 67 PREV PAGE TOP OF DOC Mr. CRUEA. Personally?
Mr. GUTKNECHT. Well, yeah, that is fine. Do you run for election back there? Maybe we should not make you answer questions that will get you in trouble.
Mr. CRUEA. The boss appoints me. I have major concerns over this particular merger. And I am back to the cooperatives and I am the champion of the cooperative and value-added I guess. If we can look at cooperatives that are out there that could provide that same kind of merging, where we do not take the number 1, 2 and 3 and combine them into a mega situation. Niche marketing is going to be very difficult. I am in favor of that kind of an operation rather than the merger of these particular units.
Mr. HUGOSON. I would add the concentration issue is obviously something that needs to be looked at and explored. We talk about the grain companies mergers, I think perhaps even a bigger factor down the road is going to be the concentration of the grocery store chains and their ability to control what is actually on the shelves of the chains of food markets. We literally could have half a dozen food chain companies that will control the majority of what is on the shelves of the various grocery stores around the country. Now how do you stop something like that? The Justice Department has been reluctant to do those sorts of things in the past. Certainly that sort of thing needs to be examined.
I think one real key that will be there is how do people have the ability to access these concentrations that do develop, recognizing that competition is very strong. The Cargill/Continental situation, Cargill is not in a position where it is going to go under if they do not merge, Continental may. So it is kind of an issue that affects one more than the other perhaps. This is not an issue that is going to perhaps send huge shock waves through the industry at this point, but maybe the next step of the mergers might. Even if these two do merge, it is still a very relatively small percentage of the total market; however, what happens in the next round and the round after that. And certainly that has implications for what goes on.
Page 68 PREV PAGE TOP OF DOC I can look in my own neighborhood, the number of elevators that existed at one point. Yet the farmers' co-op elevators are merging together just as rapidly as Cargill is. So it is not unique to one company.
Mr. GUTKNECHT. And before we go to Mr. Carlson, I want to follow up. I do not want to make it sound like it is just that particular merger, but that is the one that I think has captured a lot of attention and all of a sudden it has caused a lot of us to look and say what is happening in the farm chemical business, what is happening in all of the rest of the things that are related to agriculture. And to follow up your comment about grocery stores, I was recently at a meeting where I was told that 30 years ago in Albert Lea, Minnesota there were 24 grocery stores; now there are 4. And chances are it may even get to less than that. So there is a lot of concentration happening in a lot of areas relative to food.
I am sorry, Mr. Carlson, maybe you want to just talk about Continental and Cargill.
Mr. CARLSON. I think that concentration is on the forefront minds of every producer in the State as well as the nation. It is big time. And we are concerned where we are going and where it is leading us. And I think we will also agree that we do not need less competition, we need more competition. And so whatever we do, we have got to be careful as we go forward.
So I think our eyes need to be on how we help others enter and merge into the markets. How we get the entry level folks that will be willing to put some leverage funds and some margin funds up and how we can get more competition in this area. But concentration is very concerning and as you indicate, the chemical companies, the seed companies are now wanting to tie up with marketing companies and that has us concerned. So we need to be keeping an eye on ways to help our individual family-sized independent producers to form co-ops, to form partnerships, to enter into agreements to risk manage and to operate their operation, both in production as well as marketing.
Page 69 PREV PAGE TOP OF DOC Mr. GUTKNECHT. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Latham.
Mr. LATHAM. Thank you, Mr. Chairman.
I was interested, Mr. Hugoson, in your testimony, you talked about the need and necessity of Federal research and you mentioned wheat and how important the research is there. And I do not know if you are aware of it or not, in the President's budget proposal, there is a dramatic reduction in funding for basic research and with those dollars being diverted into basically enacting the Kyoto Treaty, even though it has not been ratified. But a tremendous amount of those dollars going into global climate change and ecosystems and things like that.
I would just like to hear your opinion, and maybe the other two secretaries also, as to what you think about diverting dollars away from basic agricultural research into programs like that.
Mr. HUGOSON. First of all, Mr. Latham, I am very disappointed to see that that research money is taken away, and even more disappointed to see where it is going. I am also disappointed to see the lack of funding being looked at for crop insurance or revenue assurance, that we really desperately need to have the support of the administration included on that as well.
I spent 9 years in the Minnesota legislature, so I am well aware of the debate over research, and it is oftentimes something people even in agriculture do not support as fully as they should. Yet you look at what has happened and the technology advances that have happened. Those advances are going to happen someplace, those things are going to happen. If we do not have access to it for our people, and certainly as companies consolidate and have their own research available, those types of things, some of those things that they can do internally, but what can be done through the universities are things that have become accessible to the family farmer, for everyone. And to have those funding sources eliminated really probably again will hasten that consolidation that we are all trying to fight against.
Page 70 PREV PAGE TOP OF DOC Mr. CARLSON. I would only mention, Congressman Latham, that as we view research, that is more long-term in nature and I think probably more than ever we need research now, we need answers, we need ways to reduce costs and we heard Dr. Frederick indicate that 80 percent of the revenue dollars are expressed in expenses. We need to find ways to reduce costs, we need to find ways to produce a safer, wholesome food at a reduced cost, as we move in these tighter margin eras that we are going to have to go forward, so I would just say we need research more than we ever have needed research for that long term pull.
Mr. CRUEA. I would add also that I think we maybe need to take a better look at research that is devoted toward food safety, toward market development as well as to the basic research at least to a point where we can balance the two. We do need to have the institutions working on genetic research so that it does not all belong to the proprietary types also.
Mr. LATHAM. I thank you. I concur with your opinions very strongly.
There was a bill submitted I believe in the Senate last year which was going to basically have the Federal Government take over regulation of livestock facilities frombasically no limitation on numbers on the facility, basically the first calf, if you had a 4H project, basically you could be subject to the EPA coming into your place, first hog, first chicken, whatever.
I just would like to know what your feelings are on a State basis, and one reason I ran for Congress was because of some of the outrageous regulations that we as farmers had to put up with, and I just wonder what your feelings are. Are you capable of regulating at the State level or do we need the EPA on every farm? That is not a leading question at all. [Laughter.]
Mr. HUGOSON. That was part of the reason I ran for the Minnesota legislature in the first place, was that I thought we had too many regulations. Over the last 6 months or so, I have been involved through the NASDA, the National Association of State Departments of Agriculture, where we have been looking at, together with the National Governors Association, what the EPA is in fact proposing or looking at doing relative to the livestock industry. One of the, I think, most disappointing aspects of their approach wasand I am paraphrasing here now and I apologize if it is too generalizedbut it was sort of like this: As EPA, they were getting too many complaints from too many people about livestock, so they decided they had to do something. And their something was well, if we can issue more citations, then that will demonstrate that we are doing something. So their approach was let us get out on the farms and we will start issuing citations and really muddy up the water, is what it amounted to. But from our perspective at the State level and working through the Governors Association was why not instead have EPA or the Federal Government set some standards, minimum standards, if in fact they feel that is what is appropriate, and then leave it up to the States to implement those standards. And I think in most cases, we will find out the States are already doing it and certainly what we do not need is another level of bureaucracy that would be adding further costs.
Page 71 PREV PAGE TOP OF DOC Mr. LATHAM. For you other gentlemen also, what do you think it does or who does it hurt when you have first cow, first chicken, first pig regulations from the EPA, who is that going to most affect, the big people who already have computerized systems in place who can write out a report tomorrow, or the farmer out there who is trying to make a living with his family and does not have access to those types of abilities?
Mr. HUGOSON. I would argue it is the small person that it would be most detrimental to because they have less resources with which to make those changes. And I know this large versus small issue was behind a lot of what they were proposing to do. When they came out with some statements last year or the year before and made the comments that it is important to look at these large operations because certainly we want a clean environment, there was some small print underneath that said we are also going to look at anyone that potentially is a problem. Well that potentially is everyone that is within a quarter of a mile of a creek, river, and I do not know about Iowa, but Minnesota, that is where most of our farmsteads were because they were built close to water in the first place. And so it really runs the risk of accelerating the decline of the small operation and again, forcing consolidation.
Mr. CARLSON. Congressman, I might respond too, it seems like in the limited exposure I have had with the Department here in Nebraska, that we are dealing so often in these areas in what I call a world of political science rather than sound science. We need to be involved more in really what it is that we ought to be doing from an economical, practical, balanced way, rather than over-reacting on the ways. And again, as we wrap all of our issues here in Nebraska together, it is almost that small/big issue that we have been talking about here. That encompasses the livestock waste issue which encompasses the zoning issues that get right into the environmental issue and it encompasses the concentration issue and the competition issue and the pricing issue. It is all wrapped up in this small versus big.
Mr. CRUEA. We asked the industry to step up to the podium to develop these rules and regulations. They have done so and they have done a beautiful job. To be very brief, we would hope that EPA would, as they come into South Dakota, would be no less stringent and no less restrictive than our State regulations, because we know that ours work.
Page 72 PREV PAGE TOP OF DOC Mr. LATHAM. My time has expired, but I will just tell youand again, I am going to bring my own staffer next time. [Laughter.]
Barrett gets by with it, but
I have lived on a farm, still live on a farm, all my life. I have yet to meet the first farmer who wants to pollute the water. I mean, I drink out of the Oglala aquifer where our well is on our family farm. And the idea somehow that we do not care about the environmentunderstand that we drink the water, we make a living off the soil and the environment is our biggest asset. And for some people in Washington and elsewhere who believe that we do not care about that is simply outrageous and to me is just the largest insult I could think of.
Thank you very much.
The CHAIRMAN. Mr. Terry.
Mr. TERRY. Thank you, Mr. Chairman. I just have one question for each of the panelists here.
It is the same theme as Congressman Latham, and that is States rights and States empowerment. And I am going to take it from the regulation level to the trade level. Of course, we have discussed Federal policies, trade barriers, sanctions, fast track, but I have to wonder if there is not a way that we should be empowering each State in the trade area. So my question to you, a talk radio show has fill in the blank Monday, so I am going to continue that theme. The question basically is if it was not for the Federal Government doing this, we could do this or if they would just allow us to do this, we could expand our State agricultural trade overseas. Let us start with Nebraska.
Mr. CARLSON. OK, thank you, Congressman. Again, I must say new on the block. But each of our States have had aggressive marketing programs overseas and we like to think in Nebraska, we have had an aggressive program. But I can witness first-hand as being a producer and being what I would hope to be a leader in the State as well as now a director, that government-to-government is very important in maintaining and strengthening and gaining access to new markets overseas. There is a lot to be said.
Page 73 PREV PAGE TOP OF DOC Obviously orders have to be written by industry, so industry-to-industry is very important as well, but government-to-government to keep that rapport, keep that respect, keep that confidence level, and I have to underline confidence, because you do not do business in a country, as you well know, without a confidence level that you can produce and you can deliver what you say you can deliver. And so each of us I am sure are going to say that is a big focus for us, it is mighty important to us and we want to be sure those doors are left open and that we can work with USDA and USTR and the Commerce and the Treasury in our efforts to keep those doors open, because the overseas market is the growth market, it is the engine that drives our marketing structure and that is very important to us. Even though the Asian market has slowed down, we anticipate it will be coming back and we will regain the market share there.
Mr. HUGOSON. Congressman Terry, I think what we have seen in Minnesota is that as even Federal dollars have declined in some of the areas with marketing or the use of Federal dollars have declined, we have actually picked up and added some money into some efforts to try to help our people be involved with some type of export activities.
The one thing as it relates to our ability to negotiate trade agreements is probably a bit far-fetched. Of course, the way the law is right now, that is the responsibility of the Federal Government, but going back to the comments that were made earlier about the six countries that we do not do business with, Minnesota produces quite a bit of wheat, like Nebraska, South Dakota, Kansas, North Dakota also. And if I am not mistaken, the countries that are currently off limits represent something like about 14 percent of our ability to market wheat in those areas.
Now we live right next door to Canada, Canada laughs all the way to the negotiating table with those kinds of policies because our disability to take part in that marketing arena of course frees up their people to have access, better access or non-restricted access from the American perspective in terms of trying to sell product to those countries. So definitely that is a disadvantage.
Page 74 PREV PAGE TOP OF DOC Mr. CRUEA. Congressman Terry, what I would like to address is a very specific situation that happened in South Dakota where I signed a letter of intent for several thousand metric tons of wheat. Because of various aspects, and we have already talked about GSM and the EEP where we have been unable to address that and negotiate that trade aspect. I would suggest if the Congress were to give the States that aspect, I might declare Aberdeen, SD as the port of Aberdeen and direct EEP payments from that site and access a number of different things.
We have done some of this with our organic aspect. We have gone from less than $1 million in 3 years in organic trade to over $8 million in organic trade. Now that is small potatoes, but for our producers in the organic area, addressing a niche market, I think there are a number of things that the States can in fact implement that would utilize what we are not doing with some of the GSM and the EEP type things to access more markets for our producers.
Mr. TERRY. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you very much. I do not have a question, I would like to make just a couple of comments though.
I found your presentations extremely intriguing and obviously you represent different commodities and different kinds of farmers. Having been looking now for about a year at how do we, I almost hate to say, revise crop insurance or reform it because that gives a tendency that there is something there that is good, it is kind of like the car that is just completely wrecked, you have just finally got to junk it and start over. I think the incentive to participate in crop insurance is created when you have a good program. And I think it is possible to do that and everyone continues to mention that, that makes me feel very good, that we may be on the right track, both in terms of loss protection as well as revenue protection and the expansion to a livestock insurance program.
One of the things you will recall during the debate on Freedom to Farm was that there was also going to be a major reform of regulations that are imposed upon farmers. That has not occurred. They have only in fact gotten worse, and as well, there was going to be major tax reform. We have gotten some of that through, we have been less successful with a lot more of it, even though we were successful specifically in the emergency bill to create about a billion dollar tax relief package specifically for farmers, which we think is going to be very helpful to them. But the regulatory aspect of it has concerned me for a long time and continues to, and particularly environmental regulations. And I am kind of like Tom Latham, farmers are the best conservationists and environmentalists that I know. That is just historic, we breathe the air, we drink the water, we live in those areas and we are very concerned about it. It is not the realistic ones that concern my constituents, it is the ones that do not pass the stupid test, and unfortunately there is a pretty long list. There is no stupid test before something becomes a regulation in Washington.
Page 75 PREV PAGE TOP OF DOC If we can just begin to deal with some of those, I think it is going to be very helpful, but the scientific argument you made, if you are basing regulations on sound science, it is something you can live with. When you start basing regulations strictly on policy and sound science does not matter, it is awfully hard to fight that and we are seeing that in the proposed clean air standard reduction from 10 to 2.5 particulate matter. We have had a hearing on that issue. My hometown happened to be declared non-attainment under the 1990 Act because the dust blows. I am not for sure how we totally going to stop that from occasionally happening, but it does create some problems and if you go to 2.5, which literally the scientific community tells us that you cannot do, I am concerned about what happens when you harvest a crop or when you just pull a combine into a field or a tractor. And agriculture to me seems to be one of the most specifically that is going to be targeted under that and the confined feeding operations that also Mr. Latham was referring to, was mentioned earlier, are regulations the EPA is looking at, we have no idea where they are going with that.
Now a little side note I may add to that, one of the things we have tried to do is to bring USDA through natural resources into this as a partner because they have, we think, a better understanding of the operations on farms, but one of the concerns we expressed then was we do not want them to have to end up paying for implementing EPA regulations, and they are about to do that.
Mr. Latham is going to be right in the middle of that discussion on the Appropriations side because they are going to take very limited resources away from programs that we have put into place and move them to something that EPA is imposing on them. And it concerns me a great deal.
Two other quick issues: Trade is critical and I agree with whoever it was that suggested we needed a higher profile. I have proposed that we have an agriculture trade ambassador who not only focuses on and pushes agriculture trade, but understands it, and what it is that it takes to get it. And we have got to have retaliatory action because to me, the biggest fear we have in trade policy is that all of the people who support it today lose confidence in the policy because we do not adhere to the agreement once it is reached. Every administration should have the same tenacity to enforce the agreement as they do to try to get the power to get the agreement in the first place. And we are in some very critical situations right now on bananas and beef hormones that we have won in every ruling and there is no foul because there is nothing that can be done to the people that continue to violate that. And as we move toward biotechnology, as we move to genetic engineering and all of those things in agriculture that I strongly support, and research, those questions even become more and more critical. But we have got to in the 2000 round of WTO, as we renegotiate our agriculture trade policy, we have to get the ability to impose penalty and we have to have rapid approvalrapid discussion of and someone making the decision about whether an agreement has been violated. And once that has been decided, then we have got to go on with business. We cannot let these things continue to hang around for 7 years or 8 years before they are ever settled.
Page 76 PREV PAGE TOP OF DOC I appreciate very much again your coming down here today and your participation in this.
Mr. BARRETT [PRESIDING]. I too want to thank the panel for the excellent information disseminated.
I would like to invite the third panel to join us now, the livestock panel, involving Mr. Homer Buell, President of the Nebraska Cattlemen Association from Rose, Nebraska; Scott VanderWal of VanderWal Farms, Inc., a custom feeding operation from Volga, South Dakota; Annette Dubas, a cattle and grain producer from Fullerton, Nebraska; Max Waldo of Waldo Farms, hog producer, from DeWitt, Nebraska; and Steve Peterson, a livestock and wheat producer from Smith Center, Kansas.
I would urge the members of the panel to be aware of the red light in front of you and limit your comments if at all possible to 5 minutes, summarize your comments in the interest of time.
Mr. Buell, we will start with you.
STATEMENT OF HOMER BUELL, PRESIDENT, NEBRASKA CATTLEMEN ASSOCIATION, ROSE, NEBRASKA
Mr. BUELL. Chairman Combest, Vice Chairman Barrett, members of the committee, my name is Homer Buell. I have been elected to serve as President of the Nebraska Cattlemen, the State association for Nebraska's largest agricultural industry. Along with my brother Larry and our families, I own and operate a cow-calf stocker operation near Rose in north central Nebraska.
I have had the privilege to testify before Representative Barrett's subcommittee last fall in Washington. Unfortunately things have changed little since then. Many producers see little in the way of Government policy being done to directly help them on their ranches. Will mandatory price and volume reporting legislation be passed into law? Will country of origin labeling become law and will the use of the USDA grade shield on imported meat products and carcasses from imported animals be stopped? Will any of the added value that beef may receive from the policy changes be passed down to the cow-calf producer? Many producers that I talk to going around Nebraska feel helpless and do not think so.
Page 77 PREV PAGE TOP OF DOC If you look at the different segments of the beef industry, other than producers, most are margin operators. Certainly the packers, the wholesalers, purveyors and retailers are margin operators. These segments are able to set their price rather than be forced to be price takers like people like myself. In most cases, producers are not in a position to pass our costs through the production chain.
Conversely, if someone in the steel industry has to increase expenses to comply with new laws and regulations, they can pass that cost up the production chain by increasing price. Beef producers do not have that luxury, but rather are forced to take lower prices and many times remain unprofitable. However, complaining about the state of our industry does not solve many problems. I would rather focus on what can be done to help cattle producers in this legislative session.
My written statement for the hearing record includes an attachment that elaborates some of the points that I will touch on very briefly today.
Significant discussion has been given today as well as when I was at the NCBA convention this last week in Charlotte on country of origin labeling for imported beef products. I would like to maybe take a little time now to talk about the use of the USDA grade shield on those imported products.
Live cattle or beef imported into this country undergo significant transformation and then are eligible to receive the USDA grade shield. This grading nomenclature is recognized as a standard of quality around the world, providing brand equity for U.S. beef producers in foreign markets. The Nebraska Cattlemen urge the House Agriculture Committee to immediately pass country of origin labeling legislation as well as revoking the use of the USDA grade shield on imported animals or imported products.
The adage that information is power is certainly true in the case of the beef industry. Producers must have access to timely market information in order to make sound marketing and risk management decisions. For these reasons, NC has long advocated the need for mandatory price and volume reporting of fed cattle transactions by packers. Our association also supports the advancement of the proposed USDA rulemaking that would make it a violation of the Packers & Stockyards Act for buyers to request nonreporting of price as a condition of the sale of live cattle.
Page 78 PREV PAGE TOP OF DOC The Justice Department should investigate the various segments of the industry to ensure that true competition is taking place. And that has been discussed earlier today. When we see packing plants in Nebraska being shut down resulting in an increase in market concentration among those companies that remain, then the time may be right for another investigation to make sure that anti-trust laws are not being broken. Investigations need to be made into all segments to assure that anti-trust laws are not being broken. It seems that when an investigation is done, findings always say that there have been no laws broken. Maybe the House Agriculture Committee should take a look at the structure of the laws themselves and determine if changes need to be made.
As I mentioned earlier, beef producers cannot pass costs on down the chain. Therefore, the cost of regulatory compliance can be especially burdensome when the industry has been drained of tremendous amounts of equity, like we have seen in recent years. Congress should make more money available to producers for cost-sharing programs such as the Environmental Quality Incentive Program, in order to comply with environmental programs. Society demands that all industries should protect natural resources and cattle regulations agree. If society demands certain levels of natural resource protection, they can help share in the cost of this protection by making more cost-sharing funds available to producers and by broadening the eligibility requirements for these funds.
I also wanted to take just a few minutes to just discuss very quickly some of the things that we did in the Convention in Charlotte this last week. Nebraska Cattlemen supported the various things that I am going to mention, as well as I think various States that are represented on the committee today, their States supported these as well.
Mandatory prices reported by packers with 5 percent or more slaughter, and that the terms of these contracts be reported within 24 hours.
Also require that price of all cattle sold on a grid or formula basis be negotiated prior to sale.
Page 79 PREV PAGE TOP OF DOC Revocation of the USDA grade shield for cattle imported for immediate slaughter and for imported hanging beef.
The National Cattlemen Beef Association has, for a couple of years, supported country of origin labeling.
Direct USDA Packers & Stockyards Administration to initiate a rulemaking considering nonreporting as a condition of sale to be illegal.
Require that NCBA seek assurances that international trade agreements are being enforced and that the U.S. beef has full access to foreign markets.
And strongly oppose direct cash payments to any segment of the livestock industry to offset low prices, except payments for natural disasters or development of revenue insurance programs in lieu of disaster programs.
In the end, I think we in this industry must do things for ourselves that need to be done to make us more profitable. Government can only play a limited role in providing solutions. That is the way it has been and I think that is the way it needs to remain. Suggestions like what I have made today maybe can help determine what some of that role might be.
Chairman Combest and Barrett, members of the committee, thank you for giving me the opportunity to testify here today.
[The prepared statement of Mr. Buell appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you.
STATEMENT OF SCOTT VANDERWAL, VANDERWAL FARMS, INC., VOLGA, SD
Mr. VANDERWAL. Thank you, Mr. Chairman, members of the committee.
Page 80 PREV PAGE TOP OF DOC My name is Scott VanderWal. I farm with my father and uncle in a family farming corporation at Volga, South Dakota, that is in the eastern part of the State. We run a custom cattle feeding operation and raise corn and soybeans. I serve as a school board member in our local school, I am a past director of the East Central Cattlemen's Association in South Dakota and also serve as a member of the South Dakota Farm Bureau Federation Board of Directors. I sincerely appreciate the opportunity to visit with you today.
I will mainly focus my remarks on the livestock segment and discuss several specific items that I feel would be helpful to improve the economic situation for us as producers.
First of all, concentration. The meatpackers and meat industries in general are going through unprecedented change. I do not believe in government interference in private industry, but any proposed mergers or acquisitions need careful scrutiny. The Packers & Stockyards Administration must use its authority to make sure that discriminatory or deceptive marketing practices are not being used.
Price Reporting. We as producers absolutely need the most accurate, timely pricing information we can obtain. We believe that packers who process more than 5 percent of the national daily slaughter should report all cash and contract prices and terms of sale. This should be voluntary, but we will support mandatory price reporting if voluntary efforts are ineffective.
I also feel that the captive supply issue should be studied further as some packers can be out of the market for days or weeks at a time due to their captive supplies. This makes it very difficult for a small independent producer like myself to sell livestock in a timely manner and at a fair current price.
Country of origin labeling. It only makes sense for imported meat products to be labeled so our consumers know where it is produced. Almost every other product we buy is labeledwhy not food? Now this is not meant to downgrade foreign countries' products, but it will allow our consumers who want to support our domestic industries to do so.
Page 81 PREV PAGE TOP OF DOC Just a quick word on State-inspected meat. One way for Congress to help out small and mid-sized meat processors would be to allow interstate distribution of State-inspected meat. These products, by law, must already provide for a food safety level at least equal to a federally-inspected facility.
Foreign trade. We, as American farmers, have been accused of causing our own problems in regard to low priceswe are just too good at production. Part of the answer to our challenge is to sell it to other countries. Our future depends on expansion of foreign trade and development of new markets. The administration must be given negotiating authority of fast track, so we can be involved in international trade deals.
One key item here is sanctions reform. Food and agricultural products should not be used as a foreign policy tool. In just 4 years, the United States has imposed 61 unilateral sanctions on 35 countries. These countries contain 40 percent of the world's population. This is a huge market loss for us as farm producers. Currently, there are about 120 of these economic sanctions in place. According to Farm Journal editor Sonja Hilgren, more than half of the United States' unilateral foreign policy sanctions since World War I have been imposed since the current administration took office in 1993. Now I do not place all of the blame on this, but it certainly has not helped.
There is no record of unilateral sanctions ever producing positive results, either economic or political. The only results we get from these sanctions is that other suppliers are only too happy to sell their products to these countries and we get the reputation of being an unreliable supplier.
If I may, just a few words on the Fair Act because feed grains cross over into the livestock sector as well. I do not believe that the act should be reopened, let me start with that. The big rap on the Fair Act at this time seems to be the so-called lack of a safety net. I would suggest to you that there is a safety net and it may be even better than the previous farm bill.
Page 82 PREV PAGE TOP OF DOC There are four aspects to my statement: First we have the AMTA payments, which are not much lower than the old program.
Second, LDP payments added to our price protection. There are some issues in regard to posted county prices and their relationship to actual cash prices that need to be remedied, however, and I have been in contact with Congressman Thune's office about this.
Third, we have the market loss assistance payments, which I believe should continue until trade negotiating authority is again granted to the administration.
And fourth, we have Government subsidized crop insurance available. We do support changing the crop insurance program to make it more friendly and more effective for the producers.
To help make my point, please think back with me to 1995 and compare the current program to the one in effect at that time. We had very poor crops and fairly high prices that year. However, high prices do not help when you have nothing to sell. And then to top it off, we had to pay back the advance deficiency payments. I submit that this is a very poor safety net.
Although we have historically low prices now, this farm bill has been better than what we had before and we certainly do not want to go back to supply management and set-asides. What we need to do is get the rest of the promises that were made with the Fair Act going, which is increased exports, reduced regulatory and improved risk management tools.
Having said that, we do not want to set the safety net too high. Government support sounds nice, but in my view if we take away the opportunity to fail, we also lose the opportunity to do our best.
I would like to leave you with the statement that if the Government is big enough to do everything for us, it is also big enough to take everything we have.
I very much look forward to working with you on these issues and appreciate the honor and opportunity to participate here today. Thank you very much.
Page 83 PREV PAGE TOP OF DOC [The prepared statement of Mr. VanderWal appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you.
STATEMENT OF ANNETTE DUBAS, CATTLE AND GRAIN PRODUCER, FULLERTON, NE
Ms. DUBAS. My name is Annette Dubas. Thank you for the opportunity to appear before the House Agriculture Committee today. We very much appreciate the Agriculture Committee coming to Nebraska.
There is a dark cloud hanging over production agriculture and unless Congress responds to the growing crisis facing agriculture, thousands of families will be forced out of the business that they love in 1999.
I am a member of the Nebraska Farmers Union. We are the second largest general farm organization in our State, and today, I represent the thousands of farm families in that organization. Five minutes goes by quickly, so I will get to the point.
My husband and I farm 40 miles northeast of Grand Island in western Nance County. We run a diversified grain and cattle operation, raising corn, soybeans, oats, and alfalfa. We have 160 head of cows and run around 300 yearling feeder calves a year. We have four children. Our youngest son's dream is to return home after college and become the 5th generation to farm and ranch in Nance County. But after doing our year-end financials and our 1999 cash flow last week, I feel farm and trade policies must be re-examined if the dreams and the aspirations of the Dubas family are to come true.
Like most cow/calf operations, we struggle to break even. No profit means no earned income to pay for family labor and management, which mean no dollars for family living expenses. I ask you, how would you like to work all year for nothing, because that is what we are doing right now.
Page 84 PREV PAGE TOP OF DOC Two weeks ago, 250 livestock producers went to Lincoln to support four bills before our legislature's agriculture committee to outlaw packer feeding, force mandatory price reporting by packers, outlaw discriminatory packer contracts and require country of origin labeling. Many livestock producers have given up hope that Congress will do what needs to be done at the national level. I hope you prove them wrong.
Congress needs to give clear and strong authority to the Packers & Stockyards Division of the USDA to outlaw packer feeding. Packers & Stockyards should be given the necessary financial resources to carry out their mission and Congress needs to make sure their mission is being accomplished.
Congress should force mandatory price reporting for meatpackers, retailers and everyone else in between, to make sure we know what is going on in our meat markets.
Congress should authorize Packers & Stockyards to review and approve all packer contracts. If packer contracts contribute to captive supply, discriminate against small- and medium-sized livestock producers or lessen competition in the marketplace, the contracts should be outlawed. We have contract oversight in the commodity market, but not in our meat or grain markets. Why?
Our goal should be to provide total and immediate transparency in the marketplace. When we sell our livestock at the livestock barn, we know who bought and who sold, we know the price, the weight and the quality. Transparency is like sunshine, it is a disinfectant and our non-competitive markets need a healthy dose of transparency.
Congress should authorize country of origin labeling of meats. Consumers and livestock producers both want it. Consumers have the right to know what they are buying. We produce a quality product and we are not afraid of fair, transparent competition.
Is the 1996 farm bill working on the grain side? Well, if the goal of the farm bill was to let the grain trade buy more grain for less money, it seems to be working. Ron and I were married 23 years ago. A quick comparison between grain prices in 1975 and 1998 tells the story of our farm income.
Page 85 PREV PAGE TOP OF DOC In 1975, the average national price for corn was $2.54 a bushel and we exported 1.711 billion bushels of corn. In 1998, the USDA's mid-year projections say our average national price for corn is $1.95 a bushel, which is 6 cents higher than our current local market bid. Our corn exports are projected to be 1.725 billion bushels.
In 1975, wheat was $3.56 a bushel and we exported 1.173 billion bushels. The 199899 projections are that wheat will average $2.70 a bushel and exports will be 1.025 billion bushels.
In 1975, soybean prices were down to $4.92 per bushel. They had been $6.64 in 1974. 1975 exports were 551.1 million bushels. In 1998, the USDA projects 810 million bushels of exports and an average national price of $5.20.
When we take our 1998 income to town, we buy family living items, college educations and farm supplies at 1999 prices. I ask you, who is subsidizing whom? The cost of the 1975 farm bill was $5.749 billion. The USDA's January/February Agriculture Outlook projects the cost of the 1998 farm program at $9.323 billion. When we spend twice as much money on farm programs but do not increase farm exports and yet reduce net farm income, something is wrong.
The ERS data shows that the average farm operator household income received from the farm in 1998 is forecast to be $5757, and that 89 percent of the total household income comes from off-farm jobs. It is impossible to know how many farmers will be forced out of the business in 1999, but we know it will be thousands. Every five farm failures means one less small town business.
It is very frustrating for me to think that my farm is responsible for feeding 120 people in this country, but yet I have a difficult time feeding and supporting my own family. My net farm income puts me at the poverty level. We are good, efficient producers, we are good resource managers, we are good financial managers, and most of all, we are hard workers. Something is terribly wrong.
Page 86 PREV PAGE TOP OF DOC I thank you for the opportunity to share my views with you today. I truly want to believe that there is a future for family farm agriculture and I will work and fight with everything I have to make it happen, but we need your support and your help to see that future agriculture policy takes us in that direction.
Thank you. [Applause.]
[The prepared statement of Ms. Dubas appears at the conclusion of the hearing.]
Mr. BARRETT. Mr. Waldo.
STATEMENT OF MAX WALDO, WALDO FARMS, DEWITT, NE
Mr. WALDO. Thank you very much, Mr. Chairman, members of the committee. My name is Max Waldo from Nebraska.
I have titled my paper here ''Trickle-down will not prevent a rural America Meltdown''. I will try to be as brief as I can. I did take notes that of all the people participating, I am the one pig farmer, several grain farmers, so I might run over by a minute or two, if I could impose.
My ancestors immigrated from England to the Jamestown Colony in 1608. Skipping on, my family began raising Duroc breeding stock in 1895. It has been a very good decision up until the last few years. My father registered his first pigs in 1919, was also a County Extension Agent during the depression of the 1930's and remains active in our family farm yet today. He unquestionably considers this to be the most difficult time for agriculture that he has ever seen, and he did help hand out CCC checks during the 1930's. For several years, our family has been the largest recorder of pure bred pigs in the United States. Some consider our Duroc herd to be the best in the world. We have marketed into 49 States and 28 countries. In spite of this, some ask why we stay in such a speculative business with structural changes causing extreme uncertainties.
Page 87 PREV PAGE TOP OF DOC While the capital intensive, low return, independent farmer strives to increase productivity and efficiency, the marketplace as well as those providing technologies confiscate an ever-growing percent of the food dollar. The trickle-down to pork producers in December was less than 10 percent of the retail pricean historic low. It is probable that this year, Monsanto may net more on a farmer's bean field than he will.
In 1998, a modest-sized 300 sow farm would have lost an average of about $250,000. With losses projected to continue for most of 1999, numerous producers will not survive. Quickly obtained FSA low-interest loans would give many an opportunity to work out of their economic plights.
Reasons for over-production, just very briefly:
There was production for an assumed export market that while there, was not to the extent they had hoped.
Many large entities produced an increase, were expecting special market advantages.
Another reason is there was many people accelerated their expansion, trying to get ahead of the EPA and other Government and community regulations.
In spite of this, I think we must look beyond this current disaster and focus on the dynamics attributing to the meltdown of the American agriculture.
The world has always had the ability to produce more than paying customers could afford to buy. Freedom to Farm, without a safety net in a commodity surplus world is a failed concept. A workable solution must be found and has been addressed here.
Some lawmakers expected individual farmers to deal with income protection by utilizing market risk management. It is reported that only 20 percent of the professional speculators are profitable and only 20 percent of the hedgers improve their position, hardly good odds for the average farmer who must devote his time and talent to numerous other areas than marketing.
Page 88 PREV PAGE TOP OF DOC A Sparks commodity marketer stated that the individual simply does not have access to adequate and timely information. This is undoubtedly true as individuals attempt to compete against multi-national and integrated companies who have their own trading groups. Insider trading, short selling, captive supply and market manipulation constantly siphon untold wealth into corporate coffers. This money, extracted from the system, provides capital for further corporate growth, which compounds the problem of income disparity. There is money enough in the food sector, it is just not necessarily distributed very well.
Retired Iowa Congressman Neal Smith was passionately concerned about these areas of unfair trade and market practices. Dr. John Helmuth served as Congressman Smith's economist and market advisor. Dr. Helmuth's in-depth marketing studies and trading analysis led him to understand the methods packers and grain traders are able to utilize in abusing the power of captive supply and private market information. Apparently this is not readily discovered by GIPSA within the normal scope of their investigations.
Dr. Joe Coffey, previously an economist with the Commodity Futures Trading Commission, refers to an old saying, ''Manipulation schemes are only limited by the imagination of mankind.'' He calls for government to upgrade its expertise and technology to detect manipulations and enforce laws that are now on the books. Dr. Coffey comments, ''the police are miles behind those who seek illegal gains from agricultural markets.''
Concentration in the meat sector is accelerating. This concentration includes wealth, power, environmental challenges, risk of food contamination and market information. At a time when pork producers have suffered unprecedented losses and are questioning if there is a future for them, business expansion continues by some of these regional co-ops and other large producers. Most of those expanding today have packer ties and are continuing the march toward integration. They are contributing to the demise of the individual and rural communities. Since Christmas, acquisitions and announced building plans by one packer alone could give them an additional 110,000 sows. Another $2.6 billion project with 250,000 sows is apparently in the planning stages in Idaho.
Page 89 PREV PAGE TOP OF DOC As individual producers consider whether to remain in the business or prudently exit, the response from packers such as Farmland Cooperative is to further integrate. Some packers have said they understand the need for a transparent market and prefer not to own their own livestock. However, they also say that they must do whatever is necessary to match competition from other packers. This scenario of packer control, whether by ownership, improper contracts or formula buying must be curtailed to create a more level playing field for packers as well as producers.
Efficient independent producers can be very competitive, but not against integrators in a non-competitive market. Neither will trickle-down capital allow farmers to compete against well-financed, large companies or co-ops that have inordinate purchasing power and other unearned advantages, particularly when they are driven to take over the market.
I have had visitors to our farm from Indonesia, Malaysia, East Germany and Russia, who each have asked nearly identical questions: Why is the United States so determined to go the way of big business? We have tried that and it did not work.
I think most of us sense that the direction our economy is heading is not sustainable. Pope John Paul II writes, ''There is a crisis of confidence in the power of reason.'' We do hope that in Washington, there will be reason.
Ultimately, we must develop a vision as to what we desire our society to look like, how dominant we want a few multi-national companies to be, and to what extent opportunity and wealth should be distributed for the best interest of our country and for the world.
Niche markets will not create success for many. Farmers should have the opportunity to prosper in a commodity enterprise.
Contract productionin the words of a USDA officialhas been a financial disaster for most poultry producers. Contract production likely will lead to similar results for other commodities.
Page 90 PREV PAGE TOP OF DOC I have exported to nearly 30 countries and from my experience, consider exporting to have limitations, and is not the ultimate answer.
Farmers are becoming a cost center to the overall food production system.
Authorize mandatory price reporting that will lead to a fair, honest, competitive market with similar payments for animals of similar measured quality. H.R. 693 may be a good start.
Eliminate captive supply that enables market manipulation.
Limit mergers which reduced competition, price discovery and opportunity.
Nurture horizontal integration rather than vertical integration.
Determine the Secretary of Agriculture's authority and responsibility under Section 202 of the Packers & Stockyards Act. Revise the Act as necessary to effectively prohibit anti-competitive activities in the market industry. GAO, I understand, is looking at that and there is great differences as to what the Section 202 will or will not permit, and needs to be defined.
Make penalties for anti-trust crimes more than just another cost of doing business.
Review the effect of tax advantages and economic development funds. I talked to Clayton Yeutter about that 15 to 20 years ago and it has become a greater problem as years pass.
Provide opportunity for producers to retain ownership and capture more of the product's added value.
Limit regulatory costs such as you mentioned, HACCP, that cause loss of alternative markets in small regional packing plants.
Fund FSA, implement their paperwork reduction regulation and provide them with adequate staff and direction so that they might be of meaningful assistance to their farm patrons. And as I understand, there is quite a ways to go in this area as well.
Page 91 PREV PAGE TOP OF DOC Regulate insider trading and other fraudulent activities in the agriculture futures markets similar to the laws the SEC enforces in the securities market.
Adopt meaningful campaign finance reform.
I emphasize that we are only requesting fairness, honesty, equity and broad-based opportunity. You might question the motives of anyone who has opposition to that.
On behalf of independent livestock producers and farmers, I want to stress the urgency for action. This backbone segment of rural America is rapidly, but unnecessarily, being displaceda tragic meltdown.
Thank you. [Applause.]
[The prepared statement of Mr. Waldo appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you.
STATEMENT OF STEVE PETERSON, LIVESTOCK AND WHEAT PRODUCER, SMITH CENTER, KS
Mr. PETERSON. Gentlemen, I do appreciate the opportunity to come and testify in front of you today. My name is Steve Peterson, I am from Smith Center, Kansas. I am a diversified livestock and grain producer and I do have a swine operation, so Max, I am here with you also.
Mr. WALDO. Thank you.
Mr. PETERSON. I believe that the agricultural economy does have a lot of problems that do need to be addressed and dealt with as quickly as possible. As many of you guys are awareand galsthe prices have hit 30-year lows in swine and grain prices have been below the cost of production. In our area, as well as many other places, many producers have been forced to go out of business or restructure if they have the equity, or have gone out of business.
Page 92 PREV PAGE TOP OF DOC Swine producers have probably been the hardest hit this last year, with prices in the single digits. It is hard for us producers to understand how the price that we receive for a product at one time can be 75 percent below the cost of production and the retail price of pork has declined less than 5 percent in the supermarket. When hog prices were in the single digits, I heard on the radio that the Secretary of Agriculture announced that he was launching an investigation on the spread between the price that we receive for hogs and the price consumers were paying in the supermarket. Ironically those prices, the live prices vaulted to approximately $20 a hundredweight or $48 per head in 20 days. Lean hog contracts went from a mid-December low of 26 cents to 43 in mid-January. It appears that these prices are not driven by supply and demand. What do you think? It is to the point in the swine industry if you are not a contract producer, you cannot survive. The independent producer is going to be a thing of the past.
The $50 million hog bailout to me was an insult. A maximum of $5 per head is being offered to qualified producers. Just a quick note, I did not qualify because my productions limitations were too high. This hardly offsets the $40 to $70 per head that a lot of producers were losing. I heard an Extension Agent on the radio the other day urging producers to get signed up for the deadline, if you wanted the $5 per head, and he also urged that any of the 4H members that had projects, you are a swine producer also, you know, get in and get the $5 a head. And I questioned myself, I said I wonder was this to subsidize the hobbies also. If we were going to offer assistance to swine producers, is it not also fair that we offer something to beef producers also? It does not seem fair.
The beef packing industry in general needs to be looked at more carefully. As we all know, four major packers control 70 percent more of the processing and that creates a monopoly on pricing. We as producers have lost our bargaining power, period.
The crop insurance system, the program needs to be made more affordable based on the margins that we as producers are forced to operate on. It needs to be more producer friendly as well as provider friendly. It needs to be a tool that we as producers can present to our lenders as a reliable cash flow tool. I do believe the 30 percent subsidy is a step in the right direction.
Page 93 PREV PAGE TOP OF DOC With the cash price for wheat last year and the government AMTA program and the special appropriations made in October, I was able to realize about $3.40 per bushel for my wheat. My breakeven over 10 years of historical data is approximately $4.50 per bushel. We have been blessed in our area with just excellent crops the last 2 years, but you do not have to go very far either direction to find people that had sub-par production. And it made it really tough.
I have got a son in college that wants to come back to farm. In fact, if I would snap my fingers now, he would come back, but I want him to for sure go his 4 years. But if something is not done, his dreams and the family farm could be a thing of the past. I do not have the answers, but I know we have to have some change.
I applaud the Agriculture Committee for holding these hearings right here to hear the views of producers from the Midwest. I think it is a step in the right direction, and gentlemen, I urge you to act on these issues as soon as possible.
Thank you very much. [Applause.]
[The prepared statement of Mr. Peterson appears at the conclusion of the hearing.]
The CHAIRMAN [presiding]. One of the things that we are looking at in trying to address the issue of mandatory pricing and import labeling on meat, some of those things that we are looking at are just questions that I have got about how do we do this. We are going to be having hearings on both of those subjects in the very near future in the committee.
But from your perspective, any one or all of you that would like to chime in on this, please do, but how is the best way, from your all's opinion, that we do that? And at what point does an animal that was born in another country become an American animal for labeling purposes? Where is that differentiation? What I am getting at is like, for example, if a person buys a calf, brings it into this country, feeds it, puts it through the entire system, should that be a labeled animal? These are just some of the things we are wrestling with. And then how do we also keep the identity of that product, particularlyin major cuts that is not as difficult, but when you start talking about hamburger or other kinds of meat products, how do we identify that, how do you all think is the best way for us to go about that?
Page 94 PREV PAGE TOP OF DOC Mr. BUELL. I will start this. We have passed policy in the Nebraska Cattlemen and this would be in regard to the use of the USDA grade shield, and in that policy, we said that something should be here in the United States, fed in a lot, for at least 100 days before it would be eligible to be able to use that USDA grade shield. I have seen differentpardon?
The CHAIRMAN. A hundred days?
Mr. BUELL. A hundred days. I have seen some stuff where they saidand I think maybe it was in the bills introduced in the Nebraska legislature, that it should be at least 10 days. I would think it would need to be longer than that. But if somebody brings in a 500-pound calf, has it here, grows it, feeds it out, then it should be ableit has been here long enough, it should be able to be country of origin labeled U.S. beef, I would certainly think.
In regards to mandatory price reporting and where that needs to come from, when you have the concentration that you do have in the packing industry, it just seems to make a lot more sense that that reporting should come from there. To ask the large number of producers, feeders to have to report that price could be almost impossible to do that.
The CHAIRMAN. Is the amount that the animal is sold for and who is buying the animal necessary, in your opinion, both of thosewho bought it and how much they paid for it?
Mr. BUELL. I would say price and who bought it, all that should be there. On our ranch, we are involved with a business called Management Information Systems and what we use them for is to provide us with information to make decisions. The more information the feeder can haveand we have heard some of this earlier todayon price, volume, what contracts are out there, what is being done in contracts to export cattle. It just gives better information to make decisions. Any information we can have on our ranch to help make decisions, we make better ones. The same thing should happen on mandatory price reporting and volume.
Page 95 PREV PAGE TOP OF DOC The CHAIRMAN. Anybody else have a suggestion?
Ms. DUBAS. It is very difficult to determine how long the ownership should be when do you label it. I know just in discussions with consumers, consumers who really do not have any connection with the farm, they are automatically assuming that if their meat has USDA on it
The CHAIRMAN. If it has a USDA grade.
Ms. DUBAS. Right. They are assuming that it is a United States product, so it is very important that we address that issue. If it has been imported into the countryright now we are not producing enough beef in our own country to meet our own consumption demands. So when we are importing whether we are importing, those imports are holding down the prices that those of us who are producing in our country are receiving. So we need to help our consumers understand that as beef producers, we have good quality products, we want them to know if they are buying something, that it was born and raised in the United States and we are proud of that fact. And if they choose not to buy a United States product, then that is on our shoulders and we had better be finding out why.
We really need to address what are we bringing into the country, what quality are we bringing into the country and can our quality meet the quality. These are just some real key issues that we have got to address.
The CHAIRMAN. Well, they are, and I agree with you and that is why again, I think we are taking more of an interest than anyone I think ever has in looking at these issues, because they are real.
And that is why I was simply asking, because obviously if we do move forward and yet we do not do it in such a way that people feel satisfied, then we haven't accomplished anything. And that is kind of what I am asking you, because we will have to write that exactly how does an animal qualify to be under our system and graded under our system, and inspected. And, the grading question is one that is of interest because I totally concur with what you are saying, that if the consumer who does not really understand the market out there, the cattle market or hog market or whatever, goes in and buys a USDA grade choice, they assume that iswe need to make for sure that the grading system is still uniform, but in terms of the label of origin, exactly when we make that definition is just something we are wrestling with and part of the questions that we have got on how we actually set this up.
Page 96 PREV PAGE TOP OF DOC In our consolidation hearing that we had last week, a lot of the discussion was on mandatory price reporting. And as Mr. Thune had mentioned, he has a bill in that addresses that issue. Some of the concerns that were raisedand again what we would like to try to do is to notis to create the least amount of more government that everybody has to live under and at the same time, if we can address the problem. And one of the concerns by one of the witnesses was the number of different products that they had thousands of different products that they had, they were concerned about proprietary information in regards to how much they were paying. And that is the reason that I would ask the question of does simply knowing what the pricing iswas that sufficient or was it in fact necessary to also list who was buying it. And those then begin to open up other doors and other questions that at some point we have to deal with. And that is just one of the reasons I was kind of wanting to see what your opinion was on that.
I think my time has expired.
Mr. MORAN. Mr. Chairman, thank you.
Mr. Buell, I think you were the one that mentioned about State-inspected meat and increasing the jurisdiction so that meat could be sold elsewhere across State lines. Am I correct, or was that Mr. VanderWal?
Mr. VanderWal, would you expound upon that?
Mr. VANDERWAL. At this time, meat that is processed in a given State at a State-inspected facility is ineligible to be sold over State lines. And we do not see any reason for this to be happening because the regulations are at least as stringent on that State-inspected facility as they are on the federally-inspected facility, whether it be an IBP plant or whatever. So we feel that this would be a good way to help out small and medium-sized enterprises processing meat. Many of those are in niche markets and if they could transport that meat over State lines and do business in the entire United States instead of one State, we feel it would really help them out.
Page 97 PREV PAGE TOP OF DOC Mr. MORAN. Thank you. And then would each or any of you describe to me kind of the marketing decisions, the marketing process you go through each week on the farm when it comes time to sell cattle? My producers talk about a 5-minute window in which they have an opportunity to sell and if they do not sell at that point in time, they may not have an opportunity for some period of time again. Is that typical across Nebraska and South Dakota? And how do you explain why that is the case?
Ms. DUBAS. I think it is very typical in Nebraska. The open market is just becoming more and more closed all the time. When I watch reports on TV at night, when they report the prices, and more often than notI wish I would have kept track for how long it has been, but it has said no report. So there is not enough livestock on the open market to give me a report as to what I can get for my product. That is very scary to me, it is frustrating, it is infuriating in fact. And, I should be able to have a good idea when I call up some buyers, which I am having a more difficult time getting buyers to come to my farm. If I have a pen of 50 maybe ready to go, 10 years ago, I could get three or four or five buyers to come out to my farm and now if I get one, who tells me maybe next week I will be out, I have to feel pretty fortunate about that. So I would like to know why this happening. But I am being closed out of that competitive market more and more all the time.
Mr. MORAN. Is there evidence that all buyers offer the same price?
Ms. DUBAS. I guess I am not really sure about that. I mean
Mr. MORAN. If you only have one option, I guess you cannot compare.
Ms. DUBAS. Yes, my options have gotten so much smaller, I do not have a lot to compare to.
Page 98 PREV PAGE TOP OF DOC Mr. MORAN. Anyone else?
Mr. PETERSON. Yes, I would like to respond to that. I know when I go to sell fat cattle, normally between what the buyer is wanting to give and what we are asking, we are this far apart on Monday. If you were going to take $4 below the market, they would definitely jump on it right away. Actually, honestly, they know what they are going to give by the middle of the week, whether it is Wednesday, Thursday, Friday, the time that they do buy. But there is just like you said, a small period of time. I have got three packers that come out and they drive through my lots, when I have got cattle ready, and I price them and they say well, we are here now. Then when I turn on the radio at 3:30 on Wednesday and I wait to hear if there is any trade, well you had better be getting on the phone if you want to get those cattle gone, especially when the numbers are like they are now. Or you are forced to wait until the next week or else take a reduced price.
And what I have seen, the trade starts usually in Texas, it starts south of here, the cattle start moving and however they get their needs met determines what they give and how long you have to sell cattle.
Mr. MORAN. But you have three options, Steve?
Mr. PETERSON. Yeah, I do, I have got three packers that have been good to come in and look. I find it is a lot easier to sell cattle on the 3rd or 4th week of the month, just for the simple reason that the captive supplies are not as much available as they are the first 2 weeks.
Mr. MORAN. Do the three different packers offer a different price?
Mr. PETERSON. Normally, yeah. They are usually all within a dollar. I mean, that is the normal case.
Mr. MORAN. Anyone else?
Page 99 PREV PAGE TOP OF DOC Mr. VANDERWAL. As I mentioned earlier, we are in the custom feeding business now, but up until early 1998, we owned all our cattle and I did all the marketing with those and I can echo Steve's experience there where you have like you said 10 to 15 minutes in a given week when you might be able to sell.
We started calling packers 2 weeks or so ahead of the time when we figured the cattle were ready to go and have them come out so they have seen the cattle. Otherwise, if you wait until they are ready and call them up, they say well, maybe I can be there 3 days from now. So you have got to do your homework ahead of time there.
Then once they have seen the cattle, then you try to pick out the certain time when it is the best time to sell. We had one packer in particular, the buyer was very good about calling me when he had the money we were asking or if he got to the point where he did not see it going any higher, he would call and ask if we wanted to sell. The other packers, we would have to call and see what they had. The dilemma was if you have your 10 to 15 minutes to sell in a given week and one buyer calls me and says I have got this much, that does not leave me much time to call the other packers to see if their prices are any different. By the time I leave a message on his cell phone recorder, it takes him 15 minutes to get back to me and it really gets to be a time crunch.
Mr. MORAN. Mr. Waldo, anything different in pork?
Mr. WALDO. Well, unfortunately in the pork sector, I try to do business with about all the packers, and I was going to say something about Texas farms that we are dealing with and Seaboard who we would like to sell something to. Good people in all those organizations and yet there is difficulty in dealing with many of them, for various reasons.
I might on the cattle side mention that Englert with Cactus Feedlots mentioned 2 or 3 years ago in a Kerry hearing, talked to me on the side and said that he helped write the formula buying system. It worked for him very well, but he was not sure that it was totally fair. But when you say the prices start down south, they sometimes start at his lot and move north.
Page 100 PREV PAGE TOP OF DOC John Helmuth, who worked with Neal Smith as an economist, explained in a Sioux City meeting a couple of weeks ago how the packers are able to not necessarily collude, but they know very readily how each one of them are going to bid on cattle, without any collusion, just by the methodology of their bidding system. So if that is what you are trying to get at, you need to talk to someone of that abilities to explain the method to you as you write these type of laws.
Market reporting has been discussed, we would just like to think that integrity might perhaps be placed in the system a little bit more so if in fact everyone did have to disclose the prices given, in the case of the packing plant at Guyman, Oklahoma, they have hopes to produce half of their production contract, a fourth, with one or two individuals and then buy a small amount of the balance on the spot market. It is certainly a disadvantage for anyone trying to be the residual supplier if they do not in fact know what the other people are getting paid. If it is appreciably less, they do not stand a chance long term of staying in the business. And they need to know that so they can exit now.
Contracts, we work with some here on the packing plants in Nebraska. There was a time in November when there was probably $12 per head difference between hogs of the same quality from different packing plants. Some of that can be explained, some cannot. In one case, I think it would be fairly evident to suggest that the one packer had basically all of his hog needs procured and so that allowed him not to bid in the open market.
These things happen very similarly now in the hog business that did happen all the time in the cattle business.
Mr. MORAN. Thank you very much. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman. I want to thank the panel for the excellent testimony too, and just a couple of things.
Page 101 PREV PAGE TOP OF DOC Mr. Waldo, you mentioned House Bill 693, which is the mandatory price reporting legislation that I have introduced. And just by way I think of clarification, a question was asked as to volume, price, those things are required. The buyer, I think it would be left up to USDA as to whether or not they would disclose. There is not a direct requirement that the buyer be identified, but it certainly would be at the discretion of USDA if they chose to do that.
One other thing too, and I guess with respect to interstate shipment of State-inspected meats, I introduced a bill on that last session of Congress which we will be reintroducing again this year, which is another change that I think makes a lot of sense. In fact, most of these suggestions to me make a lot of sense and last week we had Cargill and Farmland Industries in front of the House Agriculture Committee and both spoke against mandatory price reporting legislation, but to me, none of their reasons were very convincing. And I just happen to think that the producers have to have confidence that the market is working.
And the question I posed to them is, what, as a percentage of your total purchase, is now some sort of supply chain arrangement contract or captive supply, and it is getting increasingly larger in both hogs and cattle, and with the spot market getting thinner and thinner, it is becoming increasingly difficult for the small independent producers. And I think we are going to have to figure out a way to give themto see that there is accountability or transparency in the marketplace or we are going to continue to have the problems that we are experiencing today.
Just one question, I guess some of you have already answered that, and Scott, I am just curious. We had this conversation earlier today a little bit too, but what options do you have in marketing cattle? We heard from Mr. Peterson about his. What options do you have in South Dakota?
Mr. VANDERWAL. Well, we have got access to one packer which is in Dakota City, Nebraska here, which is the best option as far as transportation, and then we have got two or three others that will come out if we call them. So the opportunities are very limited there. Does that answer your question, Congressman?
Page 102 PREV PAGE TOP OF DOC Mr. THUNE. Right. Yeah, I just am curious to know, I guess, what in the various sections of the region that are represented here at the table today, what some of those marketing options are. Does anybody else care to comment on that?
Ms. DUBAS. Our option is the sale barn because I cannot get packers that want to come out and look, so I have to take advantage of the sale barn. They do not have as many buyers coming there either.
Mr. THUNE. Right.
Mr. BUELL. In regards to our ranch, we do take cattle that weigh 800 to 900 pounds, sell them through sale barns and do some risk management, just in the last year. But we do not sell fat cattle, so we are not really involved in that. Primarily years ago, we used to sell privately primarily, now we sell almost exclusively through sale barns.
Mr. THUNE. If there was some sort of a crop revenue insurance program, in this case it would be livestock revenue insurance, I suppose, is that something that all of you would be interested in participating in? Do you see pros and cons to that?
Mr. PETERSON. I think whether it is crop revenue or livestock revenue insurance, basically I think what the people I talked to are looking for is a safety net. You know, not something that you are not going to live off the insurance because that is not what the program is designed to do. What it needs to be designed to do is the years that, say 1 out of 5, that you have a drought, hail, low prices. Just for instance, we had a purge hit our swine herd 2 years ago, we lost 1500 head of pigs in 7 months and that was when hogs were in the 50 to 60 cents, so you can imagine the impact that had. But we had no control over that, but that is just a for instance.
Something to develop a safety net. It is not something, like I say, that we need that you canI have seen a handful of farmers in the past that have tried to live off multi-peril crop insurance. And to me, that is not fair, but that is just a handful of people that do that. But more and more, the agriculture land is getting to the point it is in their hands, you do not see those people any more, because they cannot survive.
Page 103 PREV PAGE TOP OF DOC Mr. VANDERWAL. I think we need some kind of farm revenue coverage type of thing. The caution I would have there, and I visited with some of my neighbors about this, is there is a product out there called gross revenue insurance. The only problem there is if you have a bad year in your livestock enterprise, but you have a good year in crops such as we did with excellent yields in our area, one kind of offsets the other and your insurance would not kick in. What I would like to see is the crop insurance on one side and you can get livestock on the other, to cover your livestock, and then if you have a bad year in one or the other, it would still pay off, giving you the opportunity to do a little better risk management that way.
Mr. THUNE. Are there any other current risk management tools that you use. In livestock there is not a Government program obviously. Is there anything?
Mr. VANDERWAL. We have futures and options for one thing. We can take care of our price risk that way. There are lots of different combinations and opportunities there.
Mr. BUELL. On our ranch, for years we never did anything, we would take the cattle to the sale barn, sell them and did no risk management. My brothers and I felt, in a lot of discussions, things that have happened in the last few years, we need to get involved, do some things with the Chicago Mercantile Exchange to some way cover our risk, so we have done some things with some advice from some people in the last 2 months and hope to maybe do more of that in the future.
Mr. THUNE. I see my time has expired and in the absence of the Chairman, I guess I will exercise the prerogative and yield to Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman or whomever.
I just want to thank you all for coming here because I think the testimony has been excellent. On behalf of the entire committee, I think we need to hear more from real producers about problems.
Page 104 PREV PAGE TOP OF DOC I want to come back to these risk management tools. We have had a problemI represent a lot of dairy producers in the eastern part of my district, in southeastern Minnesota dairy has been big. And if you were here, you may have heard that we did get a dairy options pilot program started, but I have been discouraged. Maybe it is because we have had relatively high dairy prices in the last 4 or 5 months, but it has been very, very difficult to get my dairy producers to even look at that and in fact, these options cost them almost nothing. I mean we have underwritten the cost of the option to the tune of about 80 percent.
I am just curious, particularly Mr. Buell and Mr. VanderWal, if you could talk a little bit about what you are doing and how you got started. What can we do to get more farmers to participate in these things?
Mr. BUELL. I think a lot of it has to do with lack of knowledge. We have never had the knowledge and did not feel comfortable with getting into that area and doing anything. I have been involved in our ranch for the last 10 years in a small group of 10 producers and we talk about how we can use our resources and be more profitable. We had a meeting about a year and a half ago and sat around for half a day and talked about what can we do in the cow-calf part of the industry to be more profitable. One of the things that came up again and again was risk management. And I think to get more people like myself doing that, more people in cow-calf, we just need to have more knowledge of how that works and so education in any way that government or whatever can be involved in helping teach us those things. But to be able to do it and feel comfortable with it, we have just got to know more about it and I think that comes. We have got to do that, it has got to be our initiative.
Mr. VANDERWAL. I have been in charge of doing the risk management for our operation for several years, especially in the cattle and I agree totally that it is knowledge of the program and how to use futures and options. It takes a long time, a lot of study, it takes experience by doing and a lot of times that costs you a lot of money.
Page 105 PREV PAGE TOP OF DOC Mr. GUTKNECHT. An expensive education.
Mr. VANDERWAL. Yes, sir, it is. I could spend almost every morning at least in the office just watching the markets and keeping myself updated. And a lot of people do not have that option. There are two other guys, my father and my uncle in our operation. So it does take an awful lot of time.
I think one thing that keeps people out of the markets, in options particularly, for swine and cattle and crops, is the cost of the options is very high. And when you mention that dairy options are being subsidized, I think that would probably entice more people in the livestock industry to look into that type of thing.
Mr. GUTKNECHT. So if we could come up with a similar program for beef and hogs, you think we might get more people to at least explore it and take a little bit of the cost of the education out of it?
Mr. VANDERWAL. It would take a lot of the upfront cost away from the options, yes.
Mr. GUTKNECHT. I want to talk a little bit, because many of you mentioned the issue of concentration and we had a hearing last week, the full committee, and we talked a lot about it. I do not know, maybe it is sort of an open-ended question, what do you think we can or should do about it? Maybe we will start at one end and work your way down.
Mr. PETERSON. Well, I do not know if I have all the answers or any of the answers.
Mr. GUTKNECHT. Well, do not feel bad, we do not either.
Mr. PETERSON. Yes. I think one thing, as far aswhen I look at fat cattle, I look back 2030 years ago when they used to have auctions to determine the price of your fat cattle. You took them to Omaha or you took them to Kansas City and the better cattle brought the top dollar and there was competitiveness there. Of course, back then there was several packers bidding for your product too. And something in that line. I know NCBA and several of the video auctions are looking into different avenues of things to try, I do not know if they are going to be able to get that done. But they need to come up with something just to put the competitiveness back into it, not so you are tied to saying either yes or no to one or two guys.
Page 106 PREV PAGE TOP OF DOC Mr. GUTKNECHT. Did you hear my testimony last week? That is essentially what I talked about. I am also an auctioneer and it bothers me that we really do not have the competitive markets we had. Five years ago, 80 percent of the hogs in the United States were sold either at auction, finished hogs were either auctioned or some kind of a spot market basis where there was a more competitive environment. Today, that situation is almost gone and the people who are left without contracts are really left to the mercy of a very, very concentrated buying power by certain packers.
But anyway, Max, maybe you want towhat specificallyand I know you probably do not have all the answers either, but do you have any good ideas that we might take back to Washington in terms of what we can do relative to concentration?
Mr. WALDO. I surely wish I did. It is a tremendous problem when you think about trying to fund risk management for protection, there is hardly enough money in Washington to cover the risk management that the vertical integrated people can accomplish just by virtue of their nature of business. So in that light, until you are able to curb that type of vertical integration, whether it be divesting of animals from ownership or control by packers immediately, over time period, restricting that they cannot add any further. There is little question that the expansion even today in the production of livestock is going on because they have advantages that the average person does not have.
Mr. GUTKNECHT. Specifically what advantages do they have? Capital or
Mr. WALDO. Well, capital for one. If you are a packer-producer both, you certainly have had the profits from your packer side in this last cycle to put further into the production side. It is very hard to prove in all the GSPA evaluations that they have looked at, that there is a lot of market disparity and yet I have run into many out in the field that would suggest that there is and has been at least a subtle amount of price differences paid.
Page 107 PREV PAGE TOP OF DOC Mr. PETERSON. If I could just add one thing. I have got a lot of friends that do a lot of risk management as far as futures and options and one of the things that has been a detriment to it is the basis. What I mean by the basis is the difference in price that you will have from your local elevator to the terminal elevator. I have seen that as low a 5 and 6 cents and as far as 60 and 70 cents. So you have a crop hedged in for a profit, if that basis widens, you have lost everything you gained. So there needs to be more of a handle on the basis, in my opinion. That is one thing that limits my ability, in our operation, to maybe do more pricing.
Mr. GUTKNECHT. And that is something Washington might be able to do something about.
Mr. PETERSON. Yeah, I think so, sure.
Mr. GUTKNECHT. Annette.
Ms. DUBAS. I think I believe in the sale barn, I think that is about the truest form of open competition and everybody knows everything and then some. I just believe when we lose that out of our options, it really takes a lot away from it. But not only does the sale barn help the farmer, I mean it brings everything into the community too, it keeps things alive and going there.
I also think we have a lot of things in place. I am by no means an expert on Packers & Stockyards, but I believe there are a lot of things already in place, through Packers & Stockyards, that could be addressing concentration issues and pricing and contract issues that, for whatever reason, just are not being used to their full potential right now. I think to me that would be a starting point.
Mr. GUTKNECHT. Thank you. [Applause.]
Mr. VANDERWAL. I agree with that statement basically. Short of breaking up the big packers, I do not know that we have any real answers other than the sale barns and that kind of thing. I personally feel that there are some things going on, but we cannot seem to lay our finger on it. That is where the Packers & Stockyards Act really needs to come into play, make sure those people are really digging into these things and make sure there are not any illegal activities going on.
Page 108 PREV PAGE TOP OF DOC Mr. BUELL. It has been real frustrating for me, when you look back over the last 15 years when the Packers & Stockyards, P&S, have done investigations. It seems like they always come back and say there is no problem there. So the question, and I mentioned it in my testimony, maybe the laws need to be looked at. Because when we see things happen at the producer level, the prices going down and then we do not see any response at the retailer, then it seems there has to be not true competition. So maybe the laws need to be looked at to see if they can be effective. And if they do not, change the laws.
Mr. GUTKNECHT. My time has expired. I will yield to my friend from Iowa, Mr. Latham.
Mr. LATHAM. We have a fight up here to see who is substituting as Chairman for the time being while Mr. Combest is gone.
I really appreciate this panel very much. I think Annette has really expressed the feelings that I have. Looking at my hometown, 158 people, back in 1962, we reorganized with two other towns and my class of 20 kids went up to 50 kids. When my last daughter graduated there were 17 kids in her class, going to what has changed in rural America.
About two weeks ago, I sat down with our local county plat book and looked at the four townships around my house on the farm. And I could not find anyone who had come back to farm in the last 10 years. I found two people who had come back in the last 20 years. And this is different than western Nebraska, at least, in that every section had, when I grew up, had four families living on that section, every quarter. And now about half of those sections are barren with nothing on it. There are problems that we are experiencing now but it is not something that has just happened overnight. I mean this has been a long term situation and just in the last 20 years, we have gone from 7 million down to less than 2 million farmers in this country. So I am not sure our previous agriculture policies have been all that successful, when you see the loss of 5 million farmers. And I do not know what can be done in many regards.
Page 109 PREV PAGE TOP OF DOC I will tell youand you are preaching to the choir here, and that is probably unfortunate. I have got a fraternity brother sitting here, Mr. Waldo, I see that, but can each of you maybe in 25 words or lessthat would be impossible in Congress. [Laughter.]
I mean, we sit in the House of Representatives and even I would say at least a third of the people on the Agriculture Committee do not care or know anything about production agriculture, who are only there because of the food stamps and welfare programs, which is about 70 percent of the USDA budget, by the way. They could care less about agriculture, and the majority in the House of Representatives only care about cheap food for their constituency at home and really do not care whether it comes from a big corporate feedlot or comes from a family farm producer.
Make the argument for us to go back to Washington, to our urban friendswhat difference does it make, because we have got to pass this legislation, you know that.
Mr. PETERSON. I think that we as Americans are probably kind of spoiled as far as the quality of food, the abundance of food that we have. You do not have to look around very far, go to too many countries, to see people that are less fortunate. Now that would be one thing that I would try to drive the issue home. They say well, we have never had a problem and we are over-produced, we have got stockpiles of grain, we never will. I do not know how you get that point across exactly, but that isI think they take a lot of this for granted. Look at the percentage of the income that is spent on food now compared to what it was several years ago.
Mr. LATHAM. Eight percent of the budget goes for food now.
Mr. PETERSON. Yeah, look where entertainment is, people base entertainment more than they do on their livelihood or to eat.
Mr. LATHAM. But why should someone in New York City give a damn about you rather than have their food come from a corporate. I mean, they think the food comes off the shelf and that is all they know. Milk comes out of a carton. Tell me why it makes a difference to that person in Manhattan that Steve Peterson produces their beef or pork rather than Continental Grain.
Page 110 PREV PAGE TOP OF DOC Mr. PETERSON. You have a good point. That would be hard to drive to somebody and tell them that.
Mr. VANDERWAL. If I may, I think it has to come down to a food quality and food pricing issue to them. That is the only thing they are going to understand. They are not going to care about me or Steve Peterson or anybody else, it does not matter. I think what needs to be pointed out to them is we as family farmers care about the quality of the food that we are raising. And if you get your crystal ball out and carry this current trend to the ultimate end where maybe there is two big corporations raising all the food and marketing all the food and putting it on the grocery store shelves, then you have a monopoly, at which time the price goes up and the quality probably goes down because they do not have the people out here like us that care about raising it and watching the quality. [Applause.]
Ms. DUBAS. The point was brought up I think by Mr. Waldo that we have foreign countries who are looking at us and saying why are you guys headed in the direction that you are headed because it surely did not work for us. We want to go where you guys have been and you are trying to get where we were. What has brought America to where it is today is open competition, good quality products. You put them on the market and if they are good, you pay for them; if they are not, you do not. I think part of my responsibility as a producer is I need to educate my consumer, I need to let him know that the product that I produce is a good quality product and when he buys that, that is what he is buying. And when we lose our competition, when we lose our markets, when we are down toand I think this was mentioned before too, it is not just in the agriculture sector, it is in every sector across our economywhen we are down to monopolies, then they are going to want to know what happened, why were we not paying more attention to this a few years ago. So it is an issue to them and we as producers need to make them aware that they have got cheap food now, but if this process keeps continuing, it is not going to be. They are going to be as much at the mercy of mega corporations as we are right now. [Applause.]
Page 111 PREV PAGE TOP OF DOC Mr. LATHAM. We have all got to be sales people when we go back there. And people really say what are we worried about. Why are we putting billions more dollars into production agriculture out here when it does not matter, we have cheap food.
Mr. BUELL. I would echo a little bit what Scott said as well as Annette. Our family has been there for four generations and we want to see that our ranch remains environmentallywe do not want to hurt the resources, we would like to have another four generations there. We will go out in the middle of the night and check those cows. When you have a large corporate entity, they do not care as much, they do not look at that animalwhen we see a good animal, that means a lot to us. When we can produce safe beef, that means a lot to us, that is our livelihood. When you have somebody there who just works on a time schedule, you do not find the caring, the want to produce a good product for the end product.
Then you can talk about the markets too, having free competition, having a lot of us out there, not having that concentration. But the things they said, I agree with 100 percent.
Mr. LATHAM. Nobody else?
Mr. LATHAM. Come on, you are salesmen. I used to sell soybean seed.
Ms. DUBAS. I might add if they do not worry about me and I cannot make it on the farm, I will be in town after their job. [Laughter.]
Mr. LATHAM. Now they are probably all looking for help too.
Ms. DUBAS. This is true.
Mr. LATHAM. Everything is going along so well outside of the agriculture economy, that they could care less.
Ms. DUBAS. This is true.
Page 112 PREV PAGE TOP OF DOC Mr. LATHAM. And I would hope someone in the media here somehow could get news to New York City and the big cities that if you want an early sign of this economy in the United States self-destructing, it is in agriculturealways has been and always will be.
Ms. DUBAS. Agriculture has led us into every downturn.
Mr. LATHAM. Every downturn or upturn, it starts in agriculture, or mining or timber. I mean, that is where it happens.
Mr. WALDO. I do not think that we would want to wage the war of discrepancy in income between the rich and the poor necessarily on the environmental front, and yet a couple of weak arguments you might consider is that when you do concentrate large numbers of animals, you do concentrate challenges to the environment.
Coming out here this morning, we were looking at some other data relating to food safety. Hudson Foods alone puts out enough hamburger in a day that if it was contaminated could affect a third of the population of the United States if they ate a hamburger.
There are some of these types of things that are not necessarily desirable. People have brought up the issue if you want to sabotage this country, just think what you could do if you could subtly go into some of these types of places. There are some security issues that could be played into this if in fact you want to use that type of imagination.
Mr. LATHAM. Thank you very much.
Mr. MORAN [presiding]. Thank you, Mr. Latham.
Panel, thank you very much for your testimony and your time today.
Mr. LATHAM. Mr. Terry.
Mr. TERRY. No, I already told him in advance I had no questions.
Page 113 PREV PAGE TOP OF DOC Mr. MORAN. We have determined that I am chairing, but as you can see, they do not trust my abilities.
Mr. LATHAM. It is a committee.
Mr. MORAN. We are very grateful for your time and your presentation, we appreciate you being here today and we take back to Washington what you told us. [Applause.]
Mr. MORAN. We will ask the fourth panel to come forward. Mark Kepler, vice-president of the Nebraska Wheat Growers Association from Chappell, NE; Bill Northey, past president of the National Corn Growers Association, Spirit Lake, IA; Louis Kehn, corn and soybean and wheat producer from Bonesteel, SD and Randy Cruise of Cruise Farms, Pleasanton, NE.
Mr. MORAN. I would say good morning, I guess it is afternoon now.
Mr. Kepler, we will begin with you. Welcome and we are pleased to hear your remarks.
STATEMENT OF MARK W. KEPLER, VICE-PRESIDENT, NEBRASKA WHEAT GROWERS ASSOCIATION, CHAPPELL, NE
Mr. KEPLER. Mr. Chairman, on behalf of agriculture producers, we are pleased to thank the committee for their concerns regarding the state of the agriculture community, and the opportunity they have embraced in coming to the great State of Nebraska.
I am a dryland wheat and corn farmer in the panhandle of Nebraska. I was not born and raised on a farm, but growing up in a rural community did not offer much diversity in employment. I soon realized the importance of agriculture combined with the satisfaction of producing a commodity consumed around the world. Today my wife and I farm approximately 1,600 acres. Without the additional opportunity to be a full-time farm manager, we could not raise our three children with the proper wholesome values so often associated with rural America. In the 14 years we have been farming in Deuel County, this year's yields broke all records. In July, we harvested our worst two wheat fields, they averaged 56 and 59 bushels. Our Deuel County average is only 37 bushels per acre. As rented crop ground with traditional crop share, both of these individual fields were slated to lose money. Thanks to the assistance of the market-loss payments, we will at least cover cost of production. Every other industry in the world has an opportunity to turn a profit. Only in agriculture is the base producer asked to do more with less. Under these rules family driven agriculture will not survive.
Page 114 PREV PAGE TOP OF DOC The present agriculture economy is less than desirable due in part to the economic and financial hardships faced around the world and the inadequacies of the current farm program to provide a proper safety net for American producers. Agriculture has just completed a record production year, celebrated by the lowest crop revenues in decades. The agriculture producers of this great country are by far the hardest working people you will ever meet, yet their livelihood is a destiny they have limited control of. Mother nature and world economics coupled with a lack of foreign trade direction has placed all U.S. producers in jeopardy of financial ruin. The recent market loss payments, tied with the added disaster assistance have and will provide much needed infusion to producers' current cash flow crisis. The above listed legislation is true testament to the necessity of a flexible farm program in years of low prices.
From this point forward, we must forgive our failures to proceed forward with positive change. An improved crop insurance program will stand as a firm foundation for future USDA farm policy. Farm producers must be able to guarantee returns of at least cost of production. Current MPCI and crop revenue coverage programs continue to fail in years of favorable crops followed by low prices. As American farmers, we greatly need an economical insurance policy that will be tied with lost income as well as lost production. I strongly encourage you to develop a viable revenue assurance program capable to allow policyholders reasonable and economical premiums up to the 85 percent APH protection level. For active participation however, Federal funding needs to escalate as levels of coverage increase. Many producers view CAT policies as providing too little coverage, while at the same time, hail prone areas of the Great Plains suffer from insurance policies with phenomenal premiums for limited coverage.
The Clinton administration can no longer view world trade as a reactionary program. U.S. trade officials must develop and implement sound policy long before we, the producers, feel the heat from the economical agriculture meltdown. As a wheat producer, one-half of every bushel I produce must flow through export channels. Why has the United States become the residual supplier while our competitors continue to increase market share at our expense? U.S. producers provide an abundant supply of cheap food to the American people. In years of large excess, we must have an aggressive trade policy to expand agriculture's future growth in sales and income.
Page 115 PREV PAGE TOP OF DOC In closing, I would reiterated the importance of effective risk management to provide a sound and secure safety net. Crop insurance must cover all risks for a farm program to be successful. Everyone understands there is no easy answer. The fact that you are here today provides reassurance that Congress is willing to understand the downfalls in agriculture. With this tremendous opportunity, I encourage all Members of Congress to study the complexity of the U.S. food policy and draft effective legislation to steer agriculture into the next century. The producers in the United States are your partners. Let us work together to assure farmers an economical future that encourages the next generation to return to the land rather than leave the land we all love so much.
[The prepared statement of Mr. Kepler appears at the conclusion of the hearing.]
Mr. BARRETT [presiding]. Thank you.
STATEMENT OF BILL NORTHEY, PAST PRESIDENT, NATIONAL CORN GROWERS ASSOCIATION, SPIRIT LAKE, IA
Mr. NORTHEY. I am a corn and soybean farmer from Spirit Lake, Iowa, in Mr. Latham's district, which I think, along with Mr. Barrett's are the two largest corn growing districts of any of the congressional districts. My wife Cindy and I have three daughters. In 1995 and 1996, I was president of the National Corn Growers. In 1997, I was appointed to the Commission on 21st Century Production Agriculture. I certainly thank you for having this hearing here and for your attendance at it, and the attention and the questions that have come from the panel. It shows the interest in agriculture and helping producers.
What is the state of the agricultural economy? I think we have heard it very well today, it is very, very serious, and it is serious across the board. It is not always that way, but this time it is very serious across the board. In some cases there is some variation. In corn and soybeans there are some producers that had very good production years, so with the low prices, they just had a slightly below average year, even with that great production that they had. But certainly those producers that had average production, or lower than average production, had a very, very tough year. It has been very easy to use up 2 or 3 good years worth of profits that we have had just in one poor year. So I think that is certainly a concern for this next year. Even if many producers go ahead and get financing right now, it does not indicate that these conditions are OK, because if we repeat these conditions again, we do not have the financing or the incomes from these last 2 or 3 years. We have just used it up this year. We will have more serious problems next year as we look at financing and land prices and all those kinds of things that are affected by farm profitability.
Page 116 PREV PAGE TOP OF DOC There was a time certainly that folks that had been through 20 years of farming and had worked hard, had been successful enough to pay down some of their bills and be able to look to the future, felt like once they got to 40 years old they were looking at farming for the rest of their time. They looked at farming until they retire and starting to prepare for bringing kids back. Certainly a lot of the friends that I have that came back the same time I did, back in the early 1980's, went through some very tough times and survived those, are very good producers, very efficient, but are now questioning whether they will still be farming 5 years from now, let alone whether they will be able to get their kinds into agriculture. I know you appreciate that. It certainly reinforces the tough times that we're in.
Why do we have these problems? Certainly it is easy to blame farm policy. I was in Britain recently and they certainly think that it is all due to Freedom to Farm. Of course, they have a very different farm policy than we do. Canadians do, the Australians do, the Argentines do, yet agriculture in all of those places is in a very serious financial situation, all with different policies. It was not Freedom to Farm that caused all of those countries to have problems. We heard it earlier, there was increased production, lower demand, so we have increased supplies.
There is some talk as far as trying to control our production here. What do we look at? Do we need to go back to set-asides to control that? One of the concerns certainly about set-asides is that would not increase demand in Russia. It would not increase demand in Asia. It would not increase demand by the livestock producers going through their really tough times right now, and it certainly would not decrease production in other countries, which are competitors, that are also producing too much for the world. In fact, it might even increase their production as they look at potential better prices in the future. So that is not an easy way out of the current concern.
What should we do? The first thing is, I want to thank you for the payments last fall. Those were very important, and I appreciate that support. That was needed at the time. Who knows what we will need in the future. The way those were done were important. As I talked to some of the Europeans and they look at WTO talks, they wonder about the green box, red box, amber box, all those kinds ofthat trade language. I assured them that there was no problem with any of that, with the way those payments were done. The loan rate is very important. In 1996 it looked way too low. It looked like it was insignificant, that it did not matter. Sadly, we are there and it is very important to us right now. In 1996, for corn growers, we wanted to cap off the loan rate so we would have a little bit higher loan rate, still below the cost of production, still not creating an incentive for producers to over-produce, but being able to have a little bit more of a safety net. We, at the very least, need it now at least as good as it is. There is some concern about the way it works in some cases. There is some concern about seed corn in other cases.
Page 117 PREV PAGE TOP OF DOC Crop insurance. You have heard a lot about that today. It is very important and it needs work.
Concentration is a concern among many producers, both in the grain and especially on the livestock side. That needs to be addressed.
As we look to the future we know trade is important. We know that is one of the reasons we have the problems we have right now. It is certainly important to corn and soybean producers. I appreciate the effort that Congress and the administration have made to be able to try and break down some of those walls. They have been very, very tough to get through. We need fast track trade negotiating authority. It is not going to be easy and we cannot over-promise what is going to happen. It is not going to be quick. We are still going to have trade problems. In London last week this was a headline as they are concerned about GMOs. They are talking about Frankenstein foods and the concerns that they have about GMOs, and that is going to be a continuing battle. They have had other concerns about food safety and are going about certifying crops and those could be future barriers to trade that we have to work through.
Agriculture research is very important. Thank you again for the efforts to increase agriculture research, especially the genome mapping and the look to the future that we have there.
I think it is important to finish up with some things that we do not want to do. One of those is in our effort to make changes, not just have change for change sake. We need to make sure that we are doing the right thing and not flip policies quick. Producers have a long decision-making horizon and we do not want to change policies too quick. We want to make sure that we are doing the right thing when we do it. We do not want to over-promise a few extra dollars. They help soften the blow but they are not going to turn around billions lost in agriculture and a whole world agricultural economy.
Then lastly, Mr. Barrett, you mentioned, in 1996, the farm bill that was passed, planting flexibility was very important. That is something that we almost all take for granted now. Certainly, we do not want to do anything that takes that planning flexibility away.
Page 118 PREV PAGE TOP OF DOC Again, thank you for having the hearing here. Thank you for your attention and the future efforts that you all will put forth.
Mr. BARRETT. Thank you, sir.
STATEMENT OF LOUIS KEHN, CORN, SOYBEAN AND WHEAT PRODUCER, BONESTEEL, SD
Mr. KEHN. Mr. Chairman, members of the committee, my name is Louis Kehn. Along with my wife, we operate a 6,000-acre livestock and grain operation in Gregory County near Bonesteel, SD. Our operation consists of about 3,200 acres of land we own and we rent about 2,800 acres. Of that, we farm about 1,100 acres on a rotational basis between corn, beans, small grain and alfalfa crops and we do work some with some native grasses. I work closely with one son who farms and ranches, and a second son who has a trucking operation.
In the past, I served as a Gregory county commissioner, have been a Production Credit Association regional and association director and a member of the local school board. I am here today presenting testimony on behalf of the South Dakota Farmers Union.
I have been asked to focus my remarks on the current status of the agricultural economy for grain growers. I have a difficult time with that because historically South Dakota is really a diversified State. I think about two-thirds of our farms include cattle operations. So I believe it would be fair to assume that it holds true with farmers who maintain these operations right along with that. A substantial portion of them still do and we hope they continue. Livestock producers, especially cattle and sheep producers, have been dealing with what we view as disaster-level prices for more than 5 years. That circumstance, combined with the losses suffered in the terrible blizzards of 1996 and 1997 left many producers in a desperate situation and highly vulnerable to the severe drop in grain prices that we suffered last year.
In 1998 most farmers had record or near record yields and it should have been a time when we could have expected to gain a little ground or help recover from the losses suffered through poor livestock prices and to build maybe a better reserve to carry us through future years, much like savings. But instead, we saw a collapse of market prices for most of the small grain and feed grains produced here in South Dakota. Instead of allowing for economic recovery, we had to settle for simply not losing additional ground.
Page 119 PREV PAGE TOP OF DOC The South Dakota Department of Revenue operates an Internet website which includes data on sales tax collections over the past 3 years. Those statistics do not really reflect the whole trauma that we are facing on the farm or ranch, but they do clearly show that some of the increased economic activity has been in a few large cities, not necessarily in the smaller towns. For example, Harold was down 36 percent, Hosmer down 35 percent. It can go on and on, although there was a few bright spots also. Most had losses on small grains.
In 1999 we are looking at a continued low price, but we are unlikely to see the same bumper crops that we had last year. Writing in Ag Weeknow that is a weekly publication from Grand Forks, ND, the Herald thereit says last week one market expert urged producers to cut back on any production costs they can and reported that prices are likely to be half of what they were 2 years ago. Well that is definitely not good news. It is also important for you to understand that South Dakota routinely experiences the lowest grain prices anywhere in the United States. This is because of the distance we have to travel to terminals. In January, for example, the average wheat price in South Dakota was $2.96 per bushel. That was 12 cents less than the average in North Dakota, 34 cents less than the average in Minnesota and 44 cents less than the average in Montana.
I also hope that you are aware that the prices we are receiving for grain is lower today than it was 50 years ago. The situation is even worse if you consider the inflation. What segment of our economy has had to endure this kind of economics? It should come as no surprise to anyone that we have lost tens of thousands of family farmers and ranchers in South Dakota.
Several large grain corporations and farmer-owned cooperatives are involved in building a few large loading facilities which are capable of loading 110 rail cars in one day. That sounds like good news, but it also means that a lot of smaller elevators will be lost and that has a definite economic consequence for our small town main streets.
Page 120 PREV PAGE TOP OF DOC This week also saw a release of statistics uncovered during the U.S. Department of Agriculture's 1997 Census of Agriculture. That census shows us losing 2,773 farms and ranches and the number of farms reporting a net loss for the yearnow remember this is just in 1997, not last yearincreased from 6,001 to 11,397. That is more than one-third of the farms in our State showing no net income or losing money. We simply cannot go on like this. Continued low prices mean that operators will not be able to replace old equipment. Livestock producers' herds are growing older because they are unable to keep replacements to meet their ongoing financial responsibilities. Low prices for both livestock and grain have opened our land up to outside investors. Farm and ranch families are unable to compete because of their weakened financial condition.
Lack of income also means that our youth are leaving. Now this is really important. They want to have some degree of security in raising their families. They look at the struggles their parents are experiencing and they decide there must be something better. Often the parents would love to have their children continue on the farm or ranch, but how do you offer encouragement? In our country in a large majority of the farm and ranch families both husband and wife have to hold down off-farm jobs just merely to support the family.
The loss of young people has already been a devastating impact on our rural infrastructure. It is collapsing. It means the loss of more and more main street businesses, it means dwindling church congregations, it means schools closings and having to have further consolidations. This often means pressure to build new schools and it means higher taxes on the few surviving farmers and ranchers.
I believe that we will ultimately have a day of reckoning. We are well on the road to losing a full generation of young farmers and ranchers. If you do not believe me, visit your high school FFA classroom and ask the students how many intend to farm or ranch. You will be lucky to get the hand of one or 2, and if you do, it is in agriculture business, not on the farm or ranch. It is not easy to train a farmer or rancher, this comes with experience. Young people who have grown up on many family farms and ranches ought to be considered a national resource just like teachers or any other needed professional. Instead, farm and ranch people often get little respect or appreciation and minimal economic returns.
Page 121 PREV PAGE TOP OF DOC Any farmer or rancher will tell you, you give me a price for my production, I can take care of myself. I will not need any additional help from the Government. We know that an increasing urban Congress does not much like spending money on farm programs. We sincerely appreciate the farm relief package approved by Congress last fall. This economic assistance allowed many farmers to hang on just a bit longer.
I have two important suggestions. Number 1, if you do not want to continue having to provide economic relief, do something concrete about the trend towards concentration in agribusiness. We are often told that we ought to let the free market establish our prices, but are they really free when a handful of giant corporations can exert complete control over those markets? We need a Congress to require mandatory price reporting. We need Congress to require country of origin labeling on imported foods. Most of all, we need you and the administration to enforce anti-trust laws, and where necessary develop new legislation to assure that we can have access to fair and competitive markets.
I do have a second suggestion. Go back to the drawing board on the farm policy. It is clear to most producers that the so-called Freedom to Farm or Federal Agricultural Improvement and Reform Act is not working. Even its strongest supporters have to admit that it was based on the assumption that export sales and market prices would continue to rise from their 1996 levels. That assumption was based on strong economics in Russia, Asia and Latin America. Those economies are in deep trouble and most observers recognize that things will take some time to turn around. You need to take another look at farm policy, but please remember that an effective farm policy does not have to be complicated and it does not have to be expensive. In fact, we did have an effective, uncomplicated farm policy from 1933 through almost the 1960's.
Immediately you should act to remove the caps from commodity loan rates. Then you should begin to carefully examine how an effective and affordable Federal crop insurance can be combined with a market loan program that will provide a real safety net for family farm and ranch producers. You also need to consider how livestock producers can also be provided with some stability and a safety net of our own.
Page 122 PREV PAGE TOP OF DOC I have one final thought, and I guess I am a bit frustrated. I have to ask, in what other business besides agriculture do you have to ask when you go to the market, what will you give me?
Thank you. [Applause.]
[The prepared statement of Mr. Kehn appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you.
STATEMENT OF RANDY CRUISE, CRUISE FARMS, PLEASANTON, NE
Mr. CRUISE. Chairman Combest, Vice Chairman Barrett and distinguished members of the House Agriculture Committee, thank you for letting me testify here today. I am Randy Cruise, husband, father and businessman. I am here representing my family, the five generations that makes up the backbone of our family operation, Cruise Farms.
We currently farm mainly corn and soybeans, with most of those acres under center pivot irrigation. Our business, which is a diversified cash grain operation, raises and markets around 400,000 bushels of grain annually. In an effort to diversify and increase our cash flow over the entire year, we began raising hydroponic produce in greenhouses that were built in 1995. These plants are grown in a non-soil material on top of the ground. We produce beefsteak tomatoes, cucumbers and peppers. We then sell that produce to grocery stories within our State.
I have had the pleasure as the past president of the National Corn Growers Association to give testimony at several Congressional committees, including both the House and Agriculture Senate Committees in the past. But as a representative of an organization, you speak as the majority speaks. Let me assure you today that the message I carry from my family comes not only from my heart but from the gut.
Page 123 PREV PAGE TOP OF DOC For the past several years, the industry has experienced an erosion of natural and earned advantages. Changes in politics, demographics, technology, economics, environmentalism and trade policy, here and around the globe, have put the future profitability of every level of our industry in question.
The difficult times of the 1980's and 1990's have taken a toll on the family farms across this nation. What I fear most is what I am hearing from today's generation of farmers, the 20, 30 and 40-year- olds who are carrying the majority of the workload and debt load today. That is a different attitude towards fighting the uphill battle of survival. Manyand I do mean manyof the families are asking should we continue or should we look to the cities for opportunities for the future. Farming is very demanding and physical work. It wears and tears on the body and the mind. Maybe there is an easier road out there to take. With many of the agricultural assets held by people over 65 years old, it makes me wonder who will be tilling, harvesting those fields in the future. The next generation, my generation, is being pushed away by the fear of continually low farm income prices. This scenario has really hurt our rural areas. With these thoughts in mind, it is with a heavy heart that we are advising our children not to continue the tradition of the past generations of our farm and to try to make their living somewhere else where the environment is more secure.
We are told every day that we must run our farms and ranches like a business. We must become better marketers. We are told that we must have off-farm income by our lenders. We then become part-time operators of a farming business which is already a full-time job.
Ladies and gentlemen of the committee, I would like to share with you some of the personal thoughts on those statements. How to run a business. The 1980's have already removed those who did not run their operations like a business. In our operation, we have used a computer since 1979 to help analyze and reduce the cost of production on each individual enterprise. We have put a yearly cash flow together since 1981 to reflect actual cost of production, cost of equipment and living expenses. We have used a team which includes the accountant, the attorney, the financial advisor to help prepare us for today and into the future. We use market advisors to help forecast the grain market trends.
Page 124 PREV PAGE TOP OF DOC We have off-farm income with our wives working in town as well as on the farm. My brother and I both sell seed corn for additional revenue and discounts on that seed. While you may think this operation is special, actually it is the norm for most farm operations today.
In Nebraska, I have had the opportunity to serve with the farmers, ranchers, businessmen and women on the Nebraska Farm Policy Task Force which was formed in 1998. The purpose of the Task Force is to meet, study and make recommendations that will help agriculture with the transitions and changes we face with the end of the current farm bill in the year 2002. I have included in my testimony issues that we have discussed from the two co-chairmen, Clayton Lukow of Holstein and Dick Mercer of Kearney. I hope that you will take time to review this summary analysis. When our report is complete, I hope that we have time to share that and our recommendations with your committee at that time.
As one of our standard business practices for reducing financial risks on our farm we have purchased Federal crop insurance for the past 15 years. It provides some protection from loss but falls short in providing support and year-to-year stability. On our farm, the coverage of the yield guarantee does not reflect advanced technologies and yields that we are producing today. An example of this from our farm would be on pivot 21, where our program yield is currently 136 bushels per acre. This low yield record was caused from a July hailstorm which required us to put in a zero yield for that year, which pulled down our 10-year average. Our records prove that for the last 5 years on this field we have averaged 178 bushels per acre. With utilizing the 65 percent level of Federal crop insurance at that 136 bushel yield, the program only guarantees us 88 bushels per acre, which is less than half the farm's potential income. In an operation such as ours, we also find fault that individual fields cannot be considered by themselves but are grouped together as far as total production or total losses.
Another area of concern concerning Federal crop insurance is the need for more flexibility in the type of coverage we can sign up for. An example on our farm, we would like to use CRC on some fields but not on others. Today's programs require that we designate the same coverage on all acres. I think Federal Crop could be one of the most important tools for agriculture in the years ahead. In the bad years, it could make the difference between being able to cover your crop expenses or not. The coverage at 65 percent and 75 percent, which at this time are not computed at the same rates, needs to be changed to make them more equally affordable for the producer. I also believe there needs to be an 85 percent level established with the tight margins and low market prices we are seeing today.
Page 125 PREV PAGE TOP OF DOC Marketing will be one of the keys for the next decade. We must continue to look at better tools to be used. The system in place today needs to be refined so it can help farmers become better marketers. We need massive education not only to our farmers but also to our lenders who are trying to determine better marketing strategies along with us. Why after we spend millions of dollars on market advisory services from experts is 80 percent of all the grain sold at the low of the market every year? Think of the difference in net income if we could just sell half of that crop at the average price. On our farm, we sell our grain mainly by forward contract and cash sales.
We do not use futures and hedge accounts as much today because of the amount of capital required to cover the margin accounts. Today farmers are working to set up a line of credit for their operation and have little left to secure for a marketing line of credit to cover margin calls. Well options were put into that place just for that reason, to have a controlled amount of capital required. Another example; today I could buy a 2.50 December option put. It costs me 16 cents to buy that, minus my local basis of 25 cents which nets me $2.09. If I implemented that strategy on 100,000 bushels it would cost me $16,000 to guarantee a loss of $36,000 from my break-even level of our cash flow.
The cost of most options are too expensive, especially when statistics show that 95 percent of them expire worthless. Do farmers need to become better marketers? Yes, but maybe some better tools would help us to take advantage of some of those profit-guaranteeing market strategies.
As I stated earlier, we must run our operations like a business. I would like to explore two different scenarios with you. This is our business and we have had a great production year, breaking all records, but the demand for our product has dropped and has caused the price of our product to fall way below the cost of production. What should we do?
Scenario 1. As managers of this business, we could implement a policy that states that we want our factories to continue running at full capacity producing as much as possible.
Page 126 PREV PAGE TOP OF DOC Scenario 2. As managers of this business, we could implement a policy that states we should slow down our factories, cut some production to reduce our inventory product and bring prices about the cost of production and to keep the company from having huge losses for a second year in a row.
Ladies and gentlemen on the committee, you are the board of directors for agriculture. The decisions you make on this and other issues that I have raisedcrop insurance reform, implementing key marketing strategies, using the tools available to recover lost trade and expand new trades areas and bring production stability to the futurewill help to assure the next generation stays on the farms and ranches. I hope by sharing some of our farm's personal experiences, it will allow you to make some of those tough decisions.
Thank you. [Applause.]
[The prepared statement of Mr. Cruise appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you, Randy, and thank you gentlemen for your patience and forbearance in sticking with us and sharing some of your thoughts with us as well. It is apparent that the last two panels, this one and the one previously certainly have highlighted some of the huge problems that have impacted production agriculture and have brought it down to a more personal level. So we thank you for those comments.
I was reminded as you talked about the credit hearing which I had in Washington last week. Some of you have described the monetary, the financial problems that you are undergoing right now. It occurred to me thatare the lending markets that you deal with adequately taking care of you? I am thinking about the commercial banks, I am talking about the farm credit system, I am talking about the USDA lending programs. Is this basically good, bad or indifferent? Share with me. Let us start with you, Mark.
Mr. KEPLER. We have no problems with securing operating loans or land loans in our area.
Page 127 PREV PAGE TOP OF DOC Mr. BARRETT. Bill.
Mr. NORTHEY. I think they reflect concern of profitability. It is very easy when agriculture is profitable. There are people that are interested in loaning money. They do not feel the risk to loan to producers. I do think that they have had very good margins over these last few years and there has been a lot of new banks built and actually new banks created in some of the communities. But for the most part, producers are still in my area, with the good crops that they have had, theyas far as I understand right now, they are getting loans again. Now the question is, if we go through another one of these years when equities go down like they do and the risks are understood what can happen to producers, I am concerned that they will not be able to. And these are good producers that havethat are doing a very good job and they are marketing all methods of their business as Randy pointed out.
Mr. BARRETT. South Dakota.
Mr. KEHN. I think basically the loans that werethey have operators that are in their mid 40's, 50's, early 60's, they have had an opportunity to build up quite a little equity, so naturally they are not as vulnerable as the younger people. It hurts usthe prices are drastically hurting our operations too, but the young farmer and rancher out there, when he has had not only to purchase land at the higher prices, he has had to buy high priced equipment, he turns around and he absolutely has got no way of showing any profit. How do we keep these young guys out there? I mean, the banks, you can see their point. If your corn is only worth $1.50 a bushel, when you go to renew, that is all the value he is going to place on it, or less, and the same holds true with livestock.
Mr. BARRETT. You feel more of a strain perhaps than others.
Mr. KEHN. Well, I know that is only thing that the farmers and ranchers basically are talking about.
Mr. BARRETT. Yes. Randy.
Page 128 PREV PAGE TOP OF DOC Mr. CRUISE. My banker is in the audience and he does a great job. [Laughter.]
Basically I think that overall the lending institutions are trying really hard this year to come up with financing for a lot of producers. I think we have seen certain pockets within our State that are having a lot more difficulty. Those pockets probably were generated because of past problems, frost, hail storms, growing conditions, and have had a couple of years that have not been very successful in their operations. Those particular pockets, I think, are having a lot more difficulty in trying to figure out cash flows and what it is going to take to make an operating line of credit for next year. But overall, I think most of the lending institutions in our State understands the scenario, are allowing producers to use maybe $2.30 on corn as part of that cash flow instead of the $2.00 or $1.90 where the market is today. If that is positive, I am not sure, but it does help.
Mr. BARRETT. From the hearing back there, it was apparent that our banks are in better shape today to go through a situation like this than they have been in the recent past, certainly in the 1980's, much better shape.
In all of the conversation today, all of the witnessesnot all, but the majority have in one way or another touched on crop insurance, reforming crop insurance, revenue insurance and so on and so forth and others as well. I want to just go through the panel and give me your ideas, your evaluations on three or four things that I have marked down. Have I got time, Hunter? [Laughter.]
OK, crop insurance, Mark.
Mr. KEPLER. We are firm believers that CRC is a good concept and we take out the CRC insurance. On our particular situation here, this field that had 56 bushels, it was suffered by frost damage. Well in reporting the yield production to the Federal crop office, they took it as only being 56 bushels onexcuse me, let me back up here. We had an 80-acre field and another 80 on the same section of land, which they get lumped together at that office. When we reported the production, they took that as being across the whole production, the whole 160 acres. It was actually only 80. So they said we had a payable loss. I said no, we had 56 bushels per acre, we do not have a payable loss. So you take 56 divided by 2, we would have had to get down to 28 bushels and we would have received a little bit of payment, even with the CRC coverage. We believe in the CRC. We just wish we could get a higher level of production.
Page 129 PREV PAGE TOP OF DOC Mr. BARRETT. The present system is not working for you?
Mr. KEPLER. Correct, yes.
Mr. BARRETT. Okay.
Mr. KEPLER. It was mentioned earlier that 60 to 65 percent of our production will not cover our cost.
Mr. BARRETT. OK, thank you.
Mr. NORTHEY. I have taken crop insurance since I started farming. It has been very important to me just to have that security there. Certainly up until 1993, it seemed like it was a waste of money and then we had 1993 and we just got deluged with water and lost our crops based on too much water. So it was very, very important that time to be able to have that. I got my premiums back before that. So it is not a paying prospect over the long term, but it gets you to be able to survive those times when you have disasters, but that is not true in everybody's situation. There are districts that are different. I think in our area, the vast majority of the producers take out crop insurance and it has worked reasonably well. Our guarantees are less than what they ought to be, but when you factor in some 10-year-old production and a problem in production, that pulls the average down. But in other areas there are 10 and 20 percent of the producers taking that out and that exposure to having all those producers not take it out means they do not have it when there is a disaster and the economic impact on the whole area then is substantial as well, besides the impact to those individual producers.
Mr. BARRETT. My time is running out, but let me finish up with the other two panelists on the next point I had. Should we lift the cap on marketing loans?
Mr. KEHN. Yes, I definitely think we should, because I think that actually sets the basis of the price that these farmers and ranchers are naturally receiving for their products, especially the grain farmers, and it could be for the livestock. We always say that well gee, can the Government afford to lift the cap on grain prices because gee, we cannot afford it. Well, that is really not true because once that priceonce you get a halfway reasonable price out there, this money filters through our whole economy our here in the Midwest. It goes through the small towns, it goes through everywhere. I think it is important that that cap be raised at least to a reasonable level.
Page 130 PREV PAGE TOP OF DOC Mr. BARRETT. Should we extend the term of the loans?
Mr. KEHN. I do not know how to really answer that.
Mr. BARRETT. Randy, on both subjects.
Mr. CRUISE. First of all, on the cap, I believe that yes, we should raise the cap, take the cap and remove it and raise the loan rates up still under the cost of production. Lengthen the term of the loan. There is some advantage to that as far as a marketing strategy, where we can take advantage of some August/September time periods in this particular area where we can market that corn prior to the area. So, yes, there is I think a need for both.
Mr. BARRETT. Thank you.
The red light is on. Mr. Thune.
Mr. THUNE. I just want to say if he had said no when you asked for more time, he probably would not have been manning the light for very much longer. [Laughter.]
Mr. THUNE. Thank you, Mr. Chairman.
I want to thank this panel as well for what are some excellent suggestions. I think we all are very concerned.
I come from a small town in South Dakota of about 650 people and were it not for the fact that it happens to be on a thoroughfare and has some tourism trade, I mean the town would dry up. I think all the small towns in South Dakotareally what we are talking about here is the livelihood of the producers themselves but also every main street essentially in my State of South Dakota, as well as in the States that are represented on the panel here today.
One of the things that have been raisedand Louie, both you and Secretary Cruea alluded to the fact that we need to provide more and better incentives to encourage young people to enter the farming and ranching business and that we are seeing more and more barriers to entry for young people today, and they are pretty obvious. I am just wonderingand I direct this to anybody on the paneldo you have any particular suggestions on what those types of incentives should be? Any thoughts on that, trying to encourage young people, to give them incentives to get into the business of agriculture? We were talking on the way down here, more and more peoplethe average age is really going up.
Page 131 PREV PAGE TOP OF DOC Mr. CRUISE. I will take a stab at it here to start with a little bit. I think the incentive is there. I think the willpower is there from the young people to want to get back into agriculture. The problem that we have is strictly economics. It does not make sense for them to do it in today's society. I think that is where they have got to really sit down themselves and evaluate what their life's structure wants to be, taking their parents as an example. Looking back at the income that has been generated from their operations and the income that they can generate in a different lifestyle. It is a hard struggle. I have four sons right now in our family and one has graduated from college and wants to participate on the farm desperately. He is helping us in the hydroponic business today because there is more opportunity there than there would be in the other side of it. But his love is still out there on the tractor and driving up and down the corn rows. So the motivation is there. We have just got to deal with the economics of it.
Mr. NORTHEY. I think profitability is the most important thing, and expectations of good profitability. Certainly I think there is more interest by young folks 3 years ago than there might be now. The other concern is the structure of agriculture and again back to that issue of concentration. There is a concern I think by young people as they get involved that they cannot get big enough fast enough to matter, or that the markets are not going to be even as open as they are today 5 years from now or 10 years from now. So their concern is if that is true, what is my chance at being able to compete in that market? So for them, there is a great amount of expectation that goes into their decision because they are not looking about going 1 more year like many producers are. They are looking at is this going to be a good decision for the next 10, 20, 40 years, and how is agriculture changing. Is it changing in a way I want to be involved, or changing in a way that I am concerned I am not going to be able to find my place in it, at least on the farm?
Mr. KEPLER. I think the appeal and the draw is there for the young people to come back to the farm, but why would they want to take that long-term risk knowing the state of agriculture? How could I convince you to come invest in a hog operation today? In our county, small county that it is, our average farmer is 58 years old. There are not very many young people. The economical society that farming participates in will not allow it.
Page 132 PREV PAGE TOP OF DOC Mr. KEHN. I guess I feel that mother and father have pretty much spent all of their money already. It is tough to have to support the son to get him started or a daughter, whichever it may be. The economics has tore down our net worth so bad, what are you going to do, risk the rest of the farm to get your son going again, or your daughter? Back when I started in farming, we hadFHA was going pretty hot and heavy then. There was a program for beginning young farmers, you might say. But most of these banks advertising, they say, yeah, we have beginning young programs to set up these farmers and ranchers. But when it takes a quarter to half a million dollars to get started, I mean, there has got to be some light at the end of the tunnel or yeah, it looks very dismal for a young family to come out here and start in agriculture today.
Mr. NORTHEY. I think maybe as part of a couple of concrete things. There are some good beginning-farmer loan programs that do help out. The other thing that is happening in some places, and is certainly happening in Minnesota, is the chance for producers to ban together to get a little more size. If they can do that from the beginning and be able to have some market influence and be able to produce together to standards, that has some opportunity. At the same time, if those were investment based, the last thing that young people have is an extra $20,000, $50,000 setting around to invest in an operation. If it can be production based, the things that they are bringing to it, those things could help young people get into and encourage them that they can find their place.
Mr. THUNE. Thank you. I see my time has expired. I just want to say as a matter of summarizing, again, I want to thank you, Mr. Chairman, for calling this hearing. Hopefully this will give us a foundation on which to build for some legislative efforts that I think we all are in agreement on. We have got a big job ahead of us. I would say to everybody out here today too, in reference to what my good friend from Iowa said earlier today, that you have to help us when you have ideas that we can help make the case out there. It is very difficult in an institution that is based on population. There are 435 Members in the House, 52 of them come from California, 31 of them come from New York, South Dakota gets one. When I have a meeting with my delegation I have it in the john. [Laughter.]
Page 133 PREV PAGE TOP OF DOC And the closest thing I have to a delegation is Bill Barrett and Tom Latham. So, we have our work cut out for us. I want you to know thatand Tom mentioned earlier, even on the Agriculture Committee itself, I mean this is notthis is no easy sell. I think there is a very strong commitment to doing our best to try and address as best as government can in terms of policy some of the issues and the problems that are out there. So we appreciate your interest in being here today and look forward to working with you. I thank you, Mr. Chairman, for giving us the opportunity.
Mr. BARRETT. Thank you, John. Well said, well said.
The gentleman from Iowa, Mr. Latham.
Mr. LATHAM. Thank you, Mr. Chairman. I hope I am never invited to a South Dakota House delegation meeting to be the speaker. [Laughter.]
Anyway, I want to make special note of Bill Northey here from Spirit Lake and the outstanding job he has done, his commitment to agriculture and to family farms for a long, long time, and the insight he has given a lot of people in very difficult situations. Thank you, Bill, for being here. And thank you, the rest of the panel.
Like Bill Barrett had mentioned, I think everyone agrees we have got to do something on crop insurance or revenue assurance. Somehow change it, make it work so that we take care of these yield problems which you go up to North Dakota where they have had disasters for 3 or 4 years, or South Dakota in some spots, it is absolutely worthless because you cannot buy enough insurance, and it is so expensive that it simply does not work. Last week, the Secretary offered to work very closely with the CongressSecretary Glickman in his budget proposal to the Appropriations Committee and then in the next breath said but we do not have any money in our budget to do it. They did not put any money in the budget this year to fix crop insurance, which is very, very disheartening, I will have to say at the least.
I think one of the concernsand I live in an area in Iowa that is the epicenter of the confinement livestock area in Wright County, Pocahontas, Humboldt, through that area. That is where the huge concentration is, Hardin County, Franklin County. I would like to hear your thoughts. I think one of the reasons that some of this has happened is going back to the mid-1980's, the change in the credit structure, the requirement by the regulators in our financial institutions that anyone now coming in and asking for a loan for agriculture has got to prove somehow that they have got a cash flow. The only way to do that is to goif you are producing livestock is go and sign up with a contract with a packer, or have someone else own the hogs and you are making your $6 a hog for feeding and taking care of it. What are your thoughts? I mean do you relate that back to the change in the credit policies we had in the mid to late 1980's into what we are seeing today in the concentration?
Page 134 PREV PAGE TOP OF DOC Mr. NORTHEY. I think that also gets back to the last question about entry into agriculture. Hogs, at least in Iowa, was a wonderful entry into agriculture.
Mr. LATHAM. It was the mortgage lifter.
Mr. NORTHEY. It was the mortgage lifter, and it wasit could be done in any kind of building. It could be done with sweat equity. That is what bought the first farmstead and bought the first 40 and then finally bought the quarter. So that is a real loss to not have that available to new potential farmers. It is amazing to me that at the time there were 50 percent equity requirements for buying land, in some cases there was zero equity requirements for putting up a contract finish building for somebody else, because you had no risk. All you had to do was prove cash flow. Now is that part of the reason we had such expansion? It surely seems like it could have been. In some cases, it was found out there was some risk, depending on who you were contracting with and what the arrangement was and how they delivered pigs. There is not a lot of room for loss in those situations. So I think that hasthat over-focus on cash flow and the assumption that those contracts were such that there was no risk caused investment that would not normally have been made and caused such a quick change in the structure of the hog industry that it is hard to think exactly how to go back to some of the other ways. Once you lose producers, whether they are grain farmers or hog farmers, it is hard to replace them again. Many times they are lost forever.
Mr. LATHAM. Mr. Kehn.
Mr. KEHN. I have a little problem. You are talking about buying future contracts. I happen to be a cow-calf operator too.
Mr. LATHAM. I am not talking about on the Merc. I am talking about contracts with the packers.
Mr. KEHN. Oh.
Mr. LATHAM. Basically it was a risk management tool for a lot of people, to contract. As an example, I have had 20 town meetings since the first of the year at home and we talk a lot about this issue of the concentration. At just about every meeting I have, you have one producer that raises his hand and says listen, I understand. I was still getting $38 a hundred for my hogs when the market was $8, but also when hogs were $55 a hundred, I was getting $40. I mean, I made that decision as a risk management tool at that time. I did not get to experience the highs, I did not experience the lows, but do notI am just saying what I am told. Do not come after me because I manage my risk and somebody else did not. What do you say to that person?
Page 135 PREV PAGE TOP OF DOC Mr. NORTHEY. I think you have potential for a captive supply concern that has to be looked at. They do probably re-sign a contract at some point. If the structure of the industry has changed so much that the number of hogs out there that are actually setting the price has created a substantially lower price, they will be writing that contract for a lot lower price than what they thought. It was a good decision at the time. Whether there are different ways that packers have gone about trying to get out of some of those contracts as well in either selling or doing different kinds of things to be able to get out of those contracts.
Mr. LATHAM. My time has expired here, Mr. Chairman. If sometime, Mr. Kehn, youtalking about a policy that is not expensive that will do the job, I wish could write it all down for us and submit it, we would be more than happy to enact it and certainly look at it. But with my time being expired, thank you all very, very much. Thank you folks for being here.
Thank you, Mr. Chairman.
Mr. BARRETT. Thank you, Mr. Latham.
Mr. LATHAM. It is an honor and a privilege. I was supposed to leave two hours and 45 minutes ago.
Mr. BARRETT. I will be eternally grateful.
Mr. LATHAM. You bet your life you will be. [Laughter.]
Mr. BARRETT. He meant to say you bet your bippy you will.
Mr. LATHAM. I will remember it, too. [Laughter.]
Mr. BARRETT. Our cleanup hitter, the genial gentleman from Minnesota, Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman.
As Mr. Latham has mentioned, he is on the Appropriations Committee. I also serve on the Budget Committee and the Budget Committee iswe at least think is one of the toughest committees to serve on because we are the people that have to say no to everybody. I mean, everybody wants to balance the budget, but they want to do it on somebody else's chunk of that budget. We are deeply concernedMr. Latham and others have mentioned that when you look at the President's budget, it is going to make it very, very difficult for us because in many respects, just from a macro standpoint, the original readingand we are getting deeper into it nowhe is in effect under-funding veterans' benefits. He is underfunding the NIH, the National Institute of Health and health research. He is under-funding a number of agriculture programs. There is a $500 million new fee for meat inspection. The meatpackers told us at our hearing last week, we asked them what they thought would probably happen to that $500 million and they said well, we will try to shift part of it back on the producers and part of it on the consumers, but they did not seem too eager to eat much of that $500 million.
Page 136 PREV PAGE TOP OF DOC The problem we are going to confront this year, and it is compounded I think by the President's budget, but it is the problem that was also discussed in trying to sell to our urban colleagues, the importance of maintaining some leveland I personally do not like the term safety net. I think that has a bad implication, at least from my perspective, and it is tough to sell. But I do think there is a desperate need for the Federal Government to maintain some level of what I would call shock absorbers, because there are market things that happen that we cannot predict. We did not see what was going to happen in Asia. There are so many things that producers do not see coming, the Federal Government does not see coming. Keith Collins is one of the brightest guys I have ever met, but even Keith is wrong once in a while, although he hates to admit it.
But I do think there is a role for us to play. But even for exampleand I want to ask you about the FSA offices. I do not believe that has been discussed. But as we looked at the budget, it looks for example, at first blush, in the State of Minnesota, we are going to see staffing cuts in the FSA offices of as much as 22 percent. Now those are pretty big cuts. I am curious as to what impact that has to you folks in Nebraska or South Dakota. Do you deal much with FSA offices? How important are they and adequate staffing, is than an important thing? Can we go back and say no, they can live with the 22 percent cut?
Mr. CRUISE. I think when you look at the requirements that we are going to have today and into the future of agriculture, FSA is one of those damned if you do and damned if you do not. You have got to participate in that system that is there today. We are going to expand that system I think into the future. I think 22 percent cuts are something that we need to address. I would rather see those cuts not take place for the FSA. I think we are going to need expanded opportunities in those offices to be able to deal with the programs in the future.
Mr. KEHN. I agree with that.
Page 137 PREV PAGE TOP OF DOC Mr. NORTHEY. As long as we know that we are going to have prices well above loan rates and no need for LDPs, the need to all happen at the same time, then we will not have a huge problem in those offices. But certainly, we had tremendous problems this last fall with delays in those offices of over a month, then having to pay interest on the LDP payments, but being ableand had that budgeted, but not being able to use some of that money for staffing and be able to turn those around quicker, which is what the producers needed and would have been good to be able to get it out of the offices. So if we can get prices well above this, that demand will not be on their time, but right now our prices are very close to that in corn and definitely below that in beans. Who knows what prices will be.
Mr. KEPLER. I would agree that presently our FSA office is adequately staffed. With the programs we have, the LDPs, the market loans, the disaster assistance that is coming up, it would really put a hardship on our producers to have to drive 30, 40, 50 miles to take care of that business. It seems to me a lot of the times we go to those offices, they do not know how the program is to be implemented yet. That is probably the biggest concern we have right now with FSA staffing.
Mr. GUTKNECHT. Can I ask another question abouttalking about LDPs, there has got to be a simpler way. I mean, we had a problem in Minnesota in terms of how they are going to be calculated and then supposedly there was a fear that farmers in Latham's district were bringing their corn into my district so that they could get higher prices and LDPs. Have the commodity groupsis there any chance you are going to come forward with any suggestions in terms of how we could do that, because it sounds like we may be back into that cycle yet this fall. If that is the case, maybe we could come up with a simpler formula before then.
Mr. NORTHEY. Obviously the best thing would be to have better prices and not have to have LDPs, but those are better than not having anything. And to try to get to that side, I think there is some talk about either having weekly LDPs or monthly LDPs. Have them set. Maybe have them over a broader area. The concern you still run is that you can cite an LDP at the beginning of the week and it can be 40 cents off by the weekend. But it is not exactly easy the way it is right now either. You have got to keep track of it every single day. If you are in the marketing mode, you need to keep track of it every single day. You need to be able to get into the office by 3:00 or by 3:30 the next dayor that day if the price went up. It really complicatesI mean it is a good idea, but it complicates decision making, and it is confusing with county lines and State lines sometimes being big jumps in LDPs. It would be nice to find a better way.
Page 138 PREV PAGE TOP OF DOC Mr. GUTKNECHT. Well we need some help from the commodity groups in terms of coming up with a simpler and fairer system than we have today because we do get some complaints from some of our constituents about those lines and what it means to producers.
Mr. CRUISE. When you look at the LDPs and you start to determine how we used them this last year, some of the difficulties that we had with the LDPs this past year is, our soybean crops were harvested later because of green stems and late plant production, which did not allow us to take advantage of some of the LDPs that were earlier in that cycle. The price structure varying 20 to 30 cents on beans on a daily basis sometimes. We see a lot of fluctuation, a lot of variability in that industry. I think if we could at least lock in the LDPs in a certain 2- or 3-month period during that harvesting time without having the grain harvested, lock in your LDP, set your bushels at a later date, would give the producer a little more flexibility, a little less in the hassle of trying to determine exactly that day that he is locking it in. Did it go across the elevator two hours before I got the SCS called and got a notification and clarification that I could go ahead and take it across the elevator. There is just a lot of small mechanics of it that I think leads to a lot of hardship. I think it does not need a lot of tweaking but it could stand some.
Mr. GUTKNECHT. Well, I certainly agree. We would just as soon we never get back into that particular mode, but on the other hand, based on what we have heard today, it may well be that we are going to be there next fall. I hope we are not. We are going to try and take some actions that see that we do not.
My time has expired, but I again want to thank all of you and I want to thank all of the people of this region who came out. We are listening and we are very concerned about what is happening. I found that the most effective argument with some of my other members of the Budget Committee and other colleagues from different parts of the country is that argument, sort of a modified, when mamma is not happy, nobody is happy. When farmers are making money it is good for the economy. When farmers do not make money, it quickly backs up in the balance of our economy. I think that has been the most effective argument that we can make. I do believe that in the long light of history, what we obviously have to do since we cannot eat all that we can grow, we have to find ways to make it easier for you to market what you grow in other parts of the world. There are a lot of hungry people out there and we can provide low interest loans and export enhancements. We simply have got to move more of this surplus that we have here in the United States to other parts of the world. I think that is a Federal Government responsibility. Again, thank you so much and God bless you.
Page 139 PREV PAGE TOP OF DOC Mr. BARRETT. Thank you, Gil.
I again want to thank you folks. This fourth panel has been very generous with comments and suggestions, as well as our previous panels. I was thinking a moment ago, it is very rare, if at all, that a Congressional panel will sit for five and a half hours and listen to the concerns of constituents. In fact, I do not recall in my memory that this has happened. [Applause.]
So I am grateful to my colleagues who have weathered this hearing, and again to those of you who participated and to those of you who have listened so silently through this hearing. It has been a pleasure for us to be here. My colleagues, to the person, have expressed their thanks for this hearing and the fun that they have had at this hearing, in addition to the excellent, excellent information that has been disseminated by our witnesses.
So having said that, the Chair will seek unanimous consent to allow the record of today's hearing to remain open for 10 days to receive any additional material and supplementary written responses from witnesses to any question posed by a member of the panel. Without objection, so ordered.
This hearing on the Committee on Agriculture is adjourned. [Whereupon, at 2:26 p.m., the committee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Prepared Statement of the Hon. Doug Bereuter, a Representative in Congress from the State of Nebraska
Chairman Combest, Vice Chairman Barrett, and Members of the Committee: I would like to begin by thanking you for holding this hearing in Nebraska and allowing farmers and others involved in agriculture the opportunity to highlight the enormous challenges facing the industry. I also appreciate being able to comment on the many problems confronting the agricultural community as well as possible solutions.
Page 140 PREV PAGE TOP OF DOC Over the past several months I have talked with many Nebraska producers who are concerned about the future of agriculture. Although the U.S. economy is generally healthy, it is clear that the agricultural sector is hurting. I believe that farmers and their families should be able to enjoy an adequate standard of living. Congress must take a pro-active approach to helping ensure that farmers receive a fair price for their crops and livestock.
In recent months Congress and the administration have taken some actions to improve the current situation. For instance, I was pleased that the Omnibus Appropriations Act signed into law last year included an emergency agriculture relief package with nearly $6 billion in aid for farmers. Half of this amount was in the form of market loss assistance and represents a 52 percent increase in the Agricultural Market Transition Act payments received by producers in FY98. The FY99 Omnibus Appropriations Act also included significant tax changes designed to provide some long-term help to farmers.
However, it is clear that more must be done for our nation's farmers. One of the areas which must receive additional attention is agricultural trade. It is important to keep in mind that about 40 percent of U.S. farm production is exported. As a result, it is vital to promote commodity sales to foreign nations. As a member of the International Economic Policy and Trade Subcommittee and a member of the Export Task Force, I have worked hard to increase access to key foreign markets.
An important means of promoting agricultural trade would be enactment of fast-track trade legislation. I voted for this legislation on September 25, 1998, as I always have in the past, because I am fully convinced it is necessary to enable the United States Trade Representative to commence, conclude, and implement trade agreements with foreign nations. Nevertheless, this legislation failed on a 180243 vote. I believe fast-track is critically important to the health of the U.S. economy, so I will continue to push for its passage in the House of Representatives.
Page 141 PREV PAGE TOP OF DOC I also believe it is important to eliminate harmful and ineffective agricultural sanctions and selective agricultural embargoes. As a result, I will continue to support legislative efforts such as H. R. 17, the Selective Agricultural Embargoes Act. I am an original cosponsor of this bill which requires the President to report to Congress on any selective embargo on agricultural commodities, to provide a termination date for any embargo, and to provide greater assurances for contract sanctity. During the 105th Congress I was also one of the principal supporters of the Enhancement of Trade, Security, and Human Rights through Sanctions Reform Act. This process reform legislation would have placed speed bumps before the Congress and the Executive Branch so both branches could not easily, without serious consideration, implement more unilateral sanctions.
I realize there are many other issues which make it difficult for farmers to enjoy an adequate standard of living. For instance, I believe it is vital that we reform and strengthen the crop insurance program. To be effective, crop insurance must be affordable and offer better protection. We can also assist producers by promoting alternative uses for agricultural products. We must also continue to fight against diverse, inappropriate regulatory actions or proposals which threaten to greatly burden our farmers and rural communities.
While the agricultural economy in general has been suffering, it is clear that the livestock industry has been especially hard hit in recent months. Pork and cattle producers have been receiving disastrously low prices. We must pursue efforts designed to strengthen the immediate as well as long-term health of the livestock industry.
Although, of course, there is no single solution to the current crisis, there are a number of steps which can be taken to stem the downward slide and work toward re-establishing profitability for producers. I certainly realize that this is a very time-sensitive problem which requires immediate actions. I also believe it is important to keep in mind that everyone has an important part to play in addressing the problemCongress, the administration, producers, packers, retailers and consumers must all work together. Indeed, there have been some encouraging examples, but obviously much more must be done.
Page 142 PREV PAGE TOP OF DOC On December 17, 1998, I wrote to Secretary of Agriculture Dan Glickman urging him to consider a number of suggestions for immediate action which would aid pork producers and do not require additional legislative action. I am pleased that the U.S. Department of Agriculture (USDA)has begun to act on several of these recommendations.
Another area in which I have taken an active role involves the use of Farm Service Agency (FSA)guaranteed loans. It is vitally important that producers have access to sufficient credit in order to survive this financial calamity. I believe Congress must act quickly to ensure that these loan programs have adequate funding. On January 4, 1999, I wrote to Representative C.W. (Bill) Young, chairman of the House Appropriations Committee, urging him to include such funding in an expected emergency supplemental appropriations bill.
I believe that another important goal is to develop more timely, accurate and transparent price reporting requirements for the livestock industry. This would help remove much of the uncertainty which currently exists and allow producers to have a clearer picture of the situation. On January 23, 1999, I held a meeting with leaders of the Nebraska pork and beef industry, who were accompanied by producers throughout the region, and two representatives of the U.S. Department of Agriculture's Grain Inspection, Packers and Stockyards Administration, including Deputy Administrator Harold Davis.
This meeting further convinced me of the necessity of mandatory purchase/price reporting. Price and volume reporting must be available and able to be audited, and could even be done by the private sector under government supervision. It is essential for producers to have this information. I supported legislation implementing mandatory price reporting in the 105th Congress, but regrettably the provision was dropped by a conference committee during the last few days of the session. The 106th Congress cannot delay action on thiswe need it as soon as possible.
I also came away from the meeting particularly concerned about certain types of contracts that processors are requiring hog producers to sign. With low market prices, ledger contracts can compel an operator to incur an unpredictable amount of debt. Unfortunately, when confronted with a very limited choice of processors for their hogs, many family-owned hog operations really feel they have no choice but to sign such contracts.
Page 143 PREV PAGE TOP OF DOC I think ledger contracts constitute a bad business practice on the part of the processor, and I suspect that some bankers, when a producer comes in to obtain an operating loan, frequently are not aware of the pitfalls of ledger contracts. While I am generally reluctant to resort to government regulation, a commercial lender would be prohibited by law from requiring such a contract, and we may need Federal or State regulation to forbid use of ledger contracts.
I would also like to bring to the committee's attention an issue of great concern to small producers. Over the past 3 years the number of hogs being sold on the open or spot market has declined from nearly 80 percent to about 20 percent. Perhaps as much as 60 to 75 percent are marketed under some sort of contract or special marketing arrangement which relies upon the reported spot market price.
I would like to conclude by stating that as a native and long-term resident of the small agricultural-service community of Utica, I am deeply concerned about the rural economy and viability of farming in Nebraska. Now I live near another small farm communityCedar Bluffs. Therefore, I am in close contact with the conditions of the farm community around me.
I would like to commend the House Agriculture Committee for focusing on the challenges facing America's agricultural producers and seeking solutions. I offer my assistance as you continue to pursue initiatives on behalf of our Nation's farmers.
Statement of Keith Collins
Mr. Chairman and members of the committee, I welcome the opportunity to discuss the economic outlook for U.S. agriculture. Over the past year, the near-term outlook changed dramatically as adverse weather reduced farm income in some regions, and the Asian financial crisis and large global commodity production caused a sharp drop in farm prices and the value of agricultural exports. With crop yields at trend levels in 1999, major crop prices will likely remain at low levels over the next year, and record total meat and poultry production is likely to prevent a strong rebound in livestock prices. Increased government assistance enacted in 1998, of nearly $6 billion, is helping to maintain farm income and limiting financial hardship in the near term. But with weak exports and prices in 1999, farm financial stress is likely to rise. Over a 24 year horizon, economic recession in a number of countries should give way to economic recovery, increased demand for U.S. agricultural products, and a gradual improvement in farm prices and incomes.
Page 144 PREV PAGE TOP OF DOCMACROECONOMIC OVERVIEW
In 1996 and 1997, positive economic growth in the United States, near record indicators of consumer confidence, and the lowest unemployment rate since 1973 bolstered domestic demand for agricultural products, while an expanding world economy and declining barriers to trade supported expansion in U.S. agricultural exports. In 1998, the U.S. economy remained strong, but the foundation for world food demand deteriorated, as Japan, South Korea, Malaysia, Philippines, Thailand, Indonesia, Russia, Saudi Arabia, and Brazil all saw their economies contract. After rising an estimated 3.4 percent in 1997, the world economy grew only 1.9 percent in 1998, the lowest rate of growth in 5 years.
World economic growth is likely to slip a little more in 1999, growing only about 1.7 percent. The U.S. economy may slow as a strengthening dollar further increases the U.S. trade deficit, but inflation, interest rates, and unemployment remain at low levels. Most analysts do not expect Southeast Asia's economies to turn around until 2000, but recessionary pressures are expected to weaken in 1999, with Japan's economy bottoming out and South Korea poised for recovery. However, economic growth will likely slow in Latin America, pulled down by Brazil's currency crisis. And, the Russian economy could decline sharply in 1999.
OUTLOOK FOR U.S. AGRICULTURAL EXPORTS
Lower world market prices and export volume reduced U.S. agricultural exports to $53.6 billion in fiscal year 1998, 10 percent below fiscal year 1996's record-high $59.8 billion. For fiscal year 1999, the U.S. Department of Agriculture (USDA) forecasts exports to drop to $50.5 billion, as lower export prices more than offset increased volume. Lower world prices will likely reduce the value of oilseed and product exports by nearly $2 billion. In addition, low supplies and reduced competitiveness will lower cotton exports, and the Russian financial crisis is forecast to lower poultry exports. Reduced exports to Japan, Taiwan, South Korea, and Southeast Asia account for 80 percent of the drop in the value of U.S. agricultural exports during fiscal year 199699.
Page 145 PREV PAGE TOP OF DOC Pacific Asia, including Japan, South Korea, and Taiwan, is the most important market for U.S. agricultural products, accounting for 37 percent of total U.S. agricultural export sales this past year. Over the coming decade, rapid income growth in Pacific Asia will stimulate expansion in demand for U.S. farm products. Other important growth markets include our North American Free Trade Agreement (NAFTA) partners, Canada and Mexico. In fiscal year 1998, these two countries imported nearly $13 billion in U.S. agricultural products accounting for nearly one-quarter of all U.S. agricultural exports.
Generally, USDA does not expect Brazil's economic problems, if contained, to lower greatly U.S. agricultural exports. In fiscal year 1998, Brazil was the 21st largest market for U.S. agricultural exports, importing $0.6 billion in U.S. agricultural products or only about 1 percent of total U.S. agricultural exports to all destinations. However, for some commodities, such as rice, Brazil is a very important market. In fiscal year 1998, rice exports to Brazil amounted to nearly one-fifth of total U.S. rice exports. USDA forecasts a drop in U.S. agricultural exports to Brazil to $0.5 billion in fiscal year 1999.
Brazil is slightly more important as a source of U.S. agricultural imports, ranking as the 8th largest U.S. agricultural import supplier. Brazil accounts for over one-half of U.S. orange juice imports. Other agricultural imports from Brazil include prepared and preserved beef or veal, sugar, coffee and tobacco. In addition, Brazil is a major U.S. competitor in the soybean market.
AN OVERALL ASSESSMENT FROM THE FARM INCOME AND FINANCE PERSPECTIVE
Cash Receipts and Expenses. With strong demand and record or near-record market prices for several crops, farm crop cash receipts reached a record $112 billion in 1997. Lower crop prices caused crop cash receipts to fall to less than $105 billion last year. For 1999, USDA projects cash receipts for crops will decline to $102 billion, $10 billion below the record and the lowest level in 4 years, as crop prices retreat further. Compared with 1997, corn cash receipts may be down by over $4 billion, wheat cash receipts down by over $2 billion, and soybean cash receipts down by nearly $4 billion in 1999.
Page 146 PREV PAGE TOP OF DOC Livestock receipts reached nearly $97 billion in 1997. Livestock receipts declined by about $3 billion last year, as record high prices and receipts for milk were more than offset by sharply lower prices and reduced receipts for cattle and hogs. This year, lower red meat production will likely lead to higher prices and receipts for cattle and hogs, while poultry receipts remain about the same and more milk production reduces prices and receipts for milk. Total livestock receipts will likely improve in 1999, as the increase in cattle and hog receipts more than offset lower milk receipts.
Declining interest rates, fuel prices, and feed costs have helped farmers reduce their production costs, offsetting some of the decline in cash receipts. Total production expenses declined 2 percent from 1997 to 1998, the first significant drop in more than a decade. In 1999, USDA forecasts total farm expenses to be $186 billion, up only slightly from last year.
Government Payments. Legislation passed last year along with provisions of the Federal Agriculture Improvement and Reform Act of 1996 (the 1996 Act) are helping to offset much of the loss in farm income resulting from crop losses and lower crop prices. USDA's Economic Research Service (ERS) estimates direct government payments, which do not include net indemnity payments under the Federal crop insurance program, to farmers reached nearly $13 billion in calendar 1998 and will total about $11 billion in 1999, up from $7.5 billion in 1997. For the 1990's, government payments exceeded these levels only in 1993, when payments reached $13.4 billion.
In October, Congress passed and the President signed legislation providing about $5.7 billion in additional direct payments to farmers. Nearly $2.9 billion of these payments were paid out as additional Production Flexibility Contract (PFC) payments in late 1998. USDA will distribute the remaining payments during the first half of 1999, with the bulk going to crop producers who suffered 1998 and prior-year crop losses. Congress also passed legislation last year enabling producers to receive 100 percent of their fiscal year 1999 PFC contract payments before January 1, 1999, rather than receiving half in mid-December or mid-January and the rest by September 30, 1999. This legislation increased calendar 1998 PFC payments by about $0.6 billion and reduced calendar 1999 PFC payments by the same amount.
Page 147 PREV PAGE TOP OF DOC Under the 1996 farm bill, crop producers received PFC payments of $5.7 billion in fiscal year 1998 and will receive $5.5 billion in fiscal year 1999. Other direct payments provided under the 1996 farm bill include loan deficiency payments, which are paid to producers when crop prices fall below the announced loan rate, and payments to producers participating in conservation programs. In 1998, loan deficiency payments were record high with producers receiving about $1.8 billion in loan deficiency payments.
Farmers and ranchers receive about $2 billion in direct payments annually under USDA's conservation programs. The largest of these programs is the Conservation Reserve Program (CRP). Under this program, farmers receive an annual rental payment and partial payment for establishing appropriate cover as compensation for taking fragile land out of crop production. Currently, over 30 million acres are enrolled in the CRP helping to enhance wildlife habitat, reduce soil erosion, and improve water and air quality. Under the Environmental Quality Incentives Program (EQIP), USDA provides cost-share payments to farmers and ranchers who adopt sound conservation and manure management practices. This and other conservation programs are helping producers reduce soil erosion, enrich soil productivity, and improve water quality and wildlife habitat.
Financial Situation. It is hard to characterize simply the financial condition of so diverse an industry as U.S. agriculture. Aggregate financial indicators portray a sector with problems in some areas but generally performing adequately entering 1999, due in part to higher government payments authorized last year. Net farm incomegross cash income less gross cash expensesin 1998 of $59 billion was down only slightly from the record of nearly $61 billion in 1997. Farm debt has risen 23 percent per year in recent years, but the value of farm assets has grown faster. Consequently, farm equity has steadily increased and the debt-to-asset ratio has remained steady at about 15 percent, down from over 20 percent in the mid1980's.
Page 148 PREV PAGE TOP OF DOC In 1999, however, aggregate indicators suggest increasing financial stress. USDA forecasts net cash farm income will fall to $55.5 billion in 1999. U.S. average farm real estate values may rise slightly, reflecting low inflation and borrowing costs, but land values will decline in some regions. Meanwhile, farm debt could decline as farmers reduce their borrowing in response to added government payments, low prices, and reduced spending on equipment and other production inputs. However, if farm income declines as projected, farm operators will have less income available in 1999 to meet principal and interest payments.
Farmers will likely use a larger proportion of their debt repayment capacitythe level of debt that could be supported by current incomesin 1999, since the reduction in debt is not anticipated to be sufficient to offset lower net cash income. USDA estimates that farm debt repayment capacity could increase to 57 percent in 1999, up from 55 percent in 1998 and 51 percent in 1996. In addition, many producers struggled with cash flow in 1998 resulting from low prices and adverse weather, and these problems will worsen if low prices linger, as USDA now expects.
Looking ahead at individual commodities reveals an unsettling picture. Continued low hog, cattle, and crop prices will place additional financial pressures on producers who specialize in the production of these commodities and are already highly leveraged. Hog prices could continue to remain below break-even levels for most producers for much of 1999, and cattle prices, which have been low for quite some time, may still not be strong enough to return a profit for some producers for much of the year. For principal crops, net cash income could fall sharply. In 19992000, the net cash income (production value plus government payments minus total cash expenses) from wheat, corn, soybean, upland cotton and rice production could drop to $17 billion, compared with over $19 billion in 199899 and the average of $22.7 billion for the previous 5 years.
OUTLOOK FOR MAJOR CROPS
Page 149 PREV PAGE TOP OF DOC Wheat and Rice. The story of the U.S. wheat market over the past 2 years has been rising production, weak exports, rising stocks and declining prices after successive years of strong prices in the mid1990's. In 199899, U.S. wheat production reached 2.6 billion bushels, as record yields more than offset a 6 percent drop in planted acres from a year earlier. Total wheat suppliesthe sum of carryin stocks and productionincreased 12 percent in 199899, compared with the prior year, providing the largest supply of wheat in more than a decade. The strong increase in supplies has pressured wheat prices, which USDA forecasts will average $2.65$2.75 per bushel for the 199899 season, down from $3.38 last year and will likely end up being the lowest season-average price in 8 years.
Total domestic use is likely to increase about 8 percent in 199899, as lower wheat prices this past summer increased feed use. In contrast, weak global demand and strong overseas competition could lower U.S. wheat exports, despite increased donations to Russia and several other needy countries. Exports of soft red winter wheat may be less than half of the 199798 level due to larger supplies of similar wheat in several importing and in competing exporting countries. Hard wheats, especially those with higher proteins, have fared better because of strong demand by several countries for blending with their lower quality crops and reduced supplies in Canada. Even with the expanding total use of U.S. wheat, USDA estimates that carryover stocks at the end of the 199899 season, compared with total use, will be the highest since 198788.
On the world front this season, global wheat production is down 4 percent from 199798's record, as area and yield each declined around 2 percent. The European Union (EU) harvested a record-large crop in 199899 because of record yields. Australia is expecting a larger crop as favorable planting conditions led to expanded area. Argentine producers, however, cut plantings in response to low prices. Canadian producers also cut plantings, but production was about unchanged from 199798 due to higher yields. With production down and world consumption up modestly, world wheat carryover stocks for 199899 will decline, a positive development for U.S. producers.
Page 150 PREV PAGE TOP OF DOC Unfortunately, global import demand may be down 9 percent this season because of bigger crops in several key importing countries, such as Pakistan and North Africa. China will again remain a small importer because of another large crop and huge stocks, while large production and Government stocks are sharply reducing India's import needs. For Indonesia, the financial crisis and the elimination of the consumer flour subsidy has sharply reduced wheat imports. Latin America may see limited demand growth, but little year-to-year change is likely for East Asia.
For 19992000, U.S. fall winter wheat plantings were down 7 percent from a year earlier and the lowest since 197273. If spring wheat acres are similar to last year and yields remain near the historical trend, USDA expects a 19992000 crop of around 2.2 billion bushels. However, large carryin stocks will be partially offsetting and supplies may still be the second largest since 199091. World stocks may decline again as consumption exceeds production. A tighter but ample U.S. and global stocks situation should raise U.S. prices but only moderatelyon the order of 1015 percentin 19992000, and USDA does not expect substantial price improvement unless adverse weather lowers global wheat production.
The U.S. rice market has performed surprisingly well compared with expectations prior to enactment of the 1996 Act that generally foresaw declining U.S. rice production. In 199899, U.S. rice production exceeded 188 million hundredweight (cwt.), up 3 percent from last year and the second largest crop on record. All States produced larger rice crops in 1998, except California because of adverse weather there in 1998. Supporting the increase in plantings has been strong domestic demand and exports over the past two seasons and firm prices. In 199899, USDA estimates the farm price will average $8.25$8.75 per cwt., down from $9.70 last year.
Domestic use of rice is likely to remain strong in 19992000, but exports will face strong competition. Rough rice sales to Latin America are likely to be affected by economic problems there, and the global long-grain milled market will be very competitive, particularly with lower-priced rice from Thailand and Vietnam. Currently, U.S. long-grain rice is selling at about a $70-$80 premium to similar grade Thai rice, compared with a typical premium of $25-$40 in many of the high-quality markets in the Middle East, Africa, and Europe. The U.S. price premium could return to more a normal level in 19992000, pushing the average U.S. farm price of rice below this season's level.
Page 151 PREV PAGE TOP OF DOC Corn and Other Feed Grains. U.S. feed grain production in 199899 exceeded more than 271 million metric tons, up 4 percent from last year and the second highest on record. The corn crop rose 6 percent to the second highest level in history, while grain sorghum production dropped 18 percent and barley and oats production were little changed from 199798. Drought reduced corn production in Texas and across several Southern States. However, these production losses were more than offset by gains elsewhere, especially in the northern and western edges of the Corn Belt. Minnesota, Kansas, Nebraska and the Dakotas all had record corn crops in 1998.
Corn supplies in 199899 are up 10 percent from last year, because of the larger crop and bigger carryin stocks. The strong increase in supplies has dampened feed grain prices and sharply increased projected carryover levels. While USDA forecasts total use of corn to be the second highest level on record, total use will not approach 1998 production. U.S. ending stocks of corn on September 1, 1999, are likely to be up nearly 500 million bushels from last year to their highest level since 199293. As a result, USDA's corn price forecast of $1.80-$2.10 per bushel for 199899 is down from $2.43 last year, and this year's season-average price will likely be the lowest in more than a decade.
USDA expects gains in feed use and expanding use for ethanol and high fructose corn syrup production will push domestic use of corn to a new record in 199899. U.S. corn exports are likely to rebound from 199798's low level as Argentina's crop declines, but stagnant global demand and continued strong competition from South Africa and China will limit the increase in exports. Also, low-priced foreign supplies of other coarse grains, especially barley, are limiting import demand for corn.
Global coarse grain production fell slightly during 199899, as smaller crops in the former Soviet Union, Eastern Europe, and Argentina offset higher U.S. production and a rebound in China's corn crop from the drought-reduced 1997 level. Corn production declined in Eastern Europe as yields dropped from last year's high level. USDA expects Argentina's crop to decline as early dry conditions and more favorable prices caused farmers to shift some area to later-planted soybeans. China's corn production rebounded in 1998 and stocks are rising, but low world prices are likely to keep its exports below the 199798 pace.
Page 152 PREV PAGE TOP OF DOC USDA projects global corn imports to be down slightly from last year, despite expanding demand in North Africa, the Middle East, and Latin America, excluding Mexico. A larger crop could reduce slightly Mexico's corn imports and Asian demand continues to shrink. Indonesia's imports will be minimal as domestic production is sufficient to meet the needs of its sharply reduced poultry industry. Mixed feed production is dropping in South Korea as the financial crisis cuts meat demand.
Assuming trend yields, U.S. corn supplies could be up again in 19992000 as sharply higher beginning stocks more than offset a smaller crop. Domestic use will continue to expand, but the year-to-year gains will be less than in recent years because of reduced livestock production. U.S. corn exports are likely to rise in 19992000 as import demand continues to rise in North Africa, the Middle East, and Latin America and demand begins to recover in Mexico and parts of Asia. However, U.S. export gains could be limited by stronger Argentine production and exports in 1999. Thus, in the absence of adverse weather, corn production and total use may about balance, leaving U.S. corn carryover stocks at high levels in 19992000 and the price outlook for feed grains about unchanged.
Soybeans and Other Oilseeds. Producers have responded to the planting flexibility provisions of the 1996 Act by expanding soybean acreage and production. In 1998, U.S. producers planted 72.4 million acres to soybeans, up from 70.0 million acres last year and from 64.2 million acres in 1996. U.S. soybean production was record high both in 1997 and 1998.
In 199899, total U.S. soybean supplies are record high, approaching 3 billion bushels and up 5 percent from the previous season. However, total soybean use is likely to fall about 3 percent in 199899, as domestic use stagnates and U.S. exports face strong competition from Brazil and Argentina. As a result, USDA now expects 199899 U.S. carryover stocks to increase to 410 million bushels, more than double last year's level and the highest carryover in more than a decade. The increase in ending stocks is pressuring farm soybean prices which are expected to decline from an average of $6.47 per bushel last season to $5$5.40 in 199899. This season's average price could end up being the lowest since 198687.
Page 153 PREV PAGE TOP OF DOC Other than China and Mexico, there are few foreign markets that will likely import more soybeans this season. For 199899, USDA projects a 3 percent decline in global soybean imports. EU crushers have run down supplies of rapeseed and sunflowerseed. Given the comparatively large stocks remaining in South America, U.S. export commitments continue to trail last year's pace. But, the size of the South American soybean crop depends on weather in the critical months of January and February. Conditions at the moment are generally favorable but rainfall has been slightly short of normal in Argentina and Southern Brazil.
The recent devaluation of the Brazilian real could lead to more pressure on soybean prices this spring and summer as Brazil markets this year's crop more quickly than normal. This would further reduce 199899 U.S. exports and add to U.S. carryover. On the other hand, larger Brazilian exports in 199899 could help U.S. exports in 19992000 by reducing the South American carryin. In addition, lower world prices in 199899 may cause South American growers to reduce oilseed plantings in 1999, reducing competitor supplies.
U.S. soybean planted acreage in 1999 is likely to increase slightly from last year's record and foreign competition will likely remain intense. Returns from planting soybeans continues to remain strong relative to other crops. The marketing assistance loan rate for soybeans relative to other crops and greater use of herbicide-resistant soybeans, which has cut costs, may encourage some producers to expand soybean plantings. In addition, yield potential has risen sharply in recent years, as producers have expanded plant population counts and used improved soybean varieties adapted to their area. Yields also have been resilient to adverse weather. With trend yields, U.S. soybean production in 1999 could exceed last year's record.
The demand for soybeans and soybean products both the U.S. and the rest of the world will expand in 19992000 but below the growth rates of recent years. Use in Asian countries may at least stabilize and a few may actually show some recovery. China's consumption of both protein feeds and vegetable oils should rise 24 percent but well below growth in recent years. In both the U.S. and the EU, protein use should expand by 13 percent helped by lower protein prices and a small increase in red meat and poultry production. However, the increase in demand is not likely to be enough to avoid a further increase in U.S. soybean carryover and even lower soybean prices in 19992000, which could average below $5 per bushel.
Page 154 PREV PAGE TOP OF DOC Cotton. Cotton plantings fell 3 percent in 1998, resulting in the lowest cotton planted area since 1992. However, U.S. cotton production in 199899 fell by over 25 percent from last year, resulting in the smallest crop in 9 years, as adverse weather affected all four cotton-producing regions. Drought was especially severe in Texas, where farmers abandoned a record 42 percent of planted acres. Due to the drop in cotton production, total U.S. cotton supplies in 199899 are down by over 20 percent, compared with last season. Despite tighter supplies and ending stocks, cotton prices so far this season have averaged below last year as demand has softened.
USDA projects domestic mill use at 10.4 million bales, down 8 percent from last year. The decline in domestic mill use primarily reflects rising cotton textile and apparel imports, which are amply available at low prices because of the drop in Asian demand. U.S. imports have risen at an annual rate of 20 percent since the beginning of calendar 1997 and are projected to reach about 14.0 million-bale equivalents this season. The cotton textile trade deficit of approximately 9.5 million-bale equivalents is equal to 4550 percent of estimated total U.S. end-use consumption of cotton.
Tight U.S. supplies and the loss of step 2 payments have reduced the ability of U.S. cotton to compete in world markets and increased the prospects for substantial cotton imports later this year. U.S. cotton exports could drop to only 4.2 million bales, down from 7.5 million bales last year and the lowest since 198586. USDA forecasts U.S. raw cotton imports of 350,000 bales during 199899, down slightly from 2 years ago but up sharply from last season. Imports will probably surge after the step 3 quotas trigger in late February.
Both world cotton production and consumption are down in 199899. World production is down 7 percent from last season, due mainly to production declines in China and the United States. China's crop is estimated to be down 6 percent from last year. World consumption is projected down 2 percent from last year, the largest year-to-year decline since 197475. Reasons for falling consumption include the Asian economic crisis, increased competition with polyester due to surplus synthetic fiber production capacity in Asia, economic problems in Russia and Brazil and increased competition from textile exports from countries such as Indonesia and Thailand.
Page 155 PREV PAGE TOP OF DOC Lower prices for alternative crops could keep U.S. cotton plantings in 1999 at near last year's level. While plantings may be about unchanged in 1999, U.S. cotton production could be up about 25 percent with a return to trend yields. A much larger crop would improve U.S. cotton's competitiveness in world markets, thereby reducing imports and increasing exports from this season's projected levels. However, weak world demand could limit export growth and U.S. ending stocks could rise in 19992000, further pressuring cotton prices. Textile imports are likely to remain strong in 19992000 and limit growth in domestic mill use.
OUTLOOK FOR LIVESTOCK
Cattle. The average price received for all beef cattle fell 6 percent in 1998. USDA had expected cattle prices to strengthen during the second half of 1998 following steady herd liquidation since late 1995. However, low cattle prices and drought in southern States caused producers to continue to reduce their herds, increasing cattle available for placement into feedlots. In addition, with good northern forage supplies and producers trying to keep animals on grass longer with the hope of receiving higher prices, ranchers placed heavier animals into feedlots raising average dressed slaughter weights from 699 pounds in 1997 to 723 pounds this year. The continuing liquidation and heavier slaughter weights caused beef production to increase by 1 percent in 1998.
The economic problems in Asia and Russia as well as herd reductions in many major beef exporting countries caused the U.S. beef trade balance to worsen in 1998. U.S. beef imports increased about 11 percent, as world trade slowed and more product was moved into the strong U.S. economy. In comparison, U.S. beef exports rose 1 percent with reduced exports of higher value cuts to Asian countries only partially offset by higher exports to Mexico. On a weight basis, however, net imports equal less than 2 percent of U.S. beef production.
Beef production will likely decline in 1999 as slaughter levels and weights fall, and lower production should bolster cattle prices in 1999. Cattle inventories have declined since 1996, and the 1998 calf crop was the lowest since 1952. USDA expects the combination of fewer slaughter cattle and lower dressed weights to reduce beef production in 1999 by about 3 percent to 25.0 billion pounds.
Page 156 PREV PAGE TOP OF DOC Much of the year-to-year decline in beef production will not occur until the second half of the year. During early January, producers indicated that the number of heifers over 500 pounds that they are retaining for beef cow replacement was 4 percent below a year earlier. This will make almost the same number of heifers available for placement into feedlots through the first half of 1999 as last year. In the second half of the year, USDA expects producers' increased retention of heifers for the breeding herd and lower slaughter weights will reduce year-over-year beef production by 5 percent. For all of 1999, USDA expects cattle prices to average $63-$68 per cwt. in 1999, compared with $61.48 last year and $66.32 two years ago.
U.S. beef trade is likely to be more in balance in 1999 as import growth slows and U.S. government donations of beef increase. Largely due to food aid to Russia, U.S. beef exports are projected to increase about 8 percent. In comparison, declining beef supplies in Canada and Oceania are expected to reduce the growth in U.S. beef imports to about 4 percent in 1999.
Hogs. Hog production increased by 10 percent in 1998, reflecting strong returns the previous 2 years and expansion of large hog operations. Producers expanded inventories to the point that by September 1, 1998, there were 63.5 million hogs on farms, the highest since 1980. Large productivity increases and structural change also fueled the inventory expansion. Increases in pigs per litter, litters per sow per year, and weight per animal slaughtered have combined to raise pork produced per breeding animal by 20 percent since 1988.
The abnormally large year-to-year increase in pork production caused hog prices to tumble from year ago levels. For all of 1998, slaughter hog prices averaged $31.67 per cwt., down from over $51 in 1997 and the lowest since 1972. In December, hog supplies strained processing capacity causing hog prices to drop to the $10 per cwt. range. Weekly hog slaughter frequently reached 2.2 million head during the fourth quarter of the year, with weekday kills of over 400,000 head and Saturday kills of 200,000. Total fourth quarter slaughter reached 27.6 million head, 1 million more than the fourth quarter of 1994, the last time hog prices plunged.
Page 157 PREV PAGE TOP OF DOC Larger hog imports were a factor in overall price declines in 1998, but not a major factor. The strong U.S. dollar rate of exchange with the Canadian dollar, large hog production, low prices in Canada, and labor problems at Canadian hog packing plants led to U.S. imports of Canadian hogs of 4.1 million head in 1998, about 4 percent of U.S. pork production, and up from 3.2 million head in 1997. Canadian hog imports reached a higher level in late 1997 and early 1998, and they maintained that level so that weekly imports during the low-priced fourth quarter were not much different than during the third quarter.
Despite the weak world economy and the strong U.S. dollar, U.S. pork exports actually increased sharply in 1998. Through November, the United States exported more than 1 billion pounds of pork, up almost 20 percent from the same period in 1997. In contrast, pork imports totaled 635 million pounds through November, up 11 percent for the same period in 1997. The United States continued to be a major market for pork from Canada and Denmark in 1998, while the major U.S. export markets included Japan, Russia, Mexico and Canada.
USDA expects continued large hog supplies to pressure processing capacity and prices during the first half of 1999. The market hog inventory on December 1, 1998, was 2 percent above a year earlier. However, pork production could be up about 5 percent during the first half of 1999, as continued low prices provide a further incentive for producers to reduce the breeding herd. In addition, low prices could cause producers to market hogs at heavier weights. Hogs prices will likely average in the $25$35 per cwt. range during the first half of 1999, which would be below breakeven for most producers.
As hog slaughter begins to decline in the second half of 1999, prices should rise above last year's level, particularly in the fourth quarter. Producers have already responded to the exceptionally low prices in the last half of 1998 by reducing the breeding herd which on December 1 was 4 percent below a year earlier. In addition, producers have indicated intentions to farrow 7 percent fewer sows during March-May compared with a year earlier. This implies a fractional decline in third quarter pork production but a 10-percent drop for the fourth quarter. For all of 1999, USDA forecasts hog prices to average $33-$35 per cwt., 410 percent higher than last year.
Page 158 PREV PAGE TOP OF DOC U.S. pork exports are likely to increase about 10 percent in 1999, while imports remain steady. Increased pork exports to Mexico, Japan, and other markets are likely to more than offset lower exports to Canada and Russia. The economic crisis could limit U.S. pork exports to Russia to donations under food aid programs, causing exports to Russia to fall below the level achieved in 1998. Exports to Canada may also trend downward, as restructuring and expansion of the Canadian pork industry reduces the demand for U.S. pork products.
Continued low hog and pork prices for much of 1999 is likely to limit the growth in pork imports, and U.S. live hog imports could fall below last year. Slaughter capacity increases in Manitoba, the settlement of labor disputes in Canadian hog slaughter plants, and Ontario hogs increasingly moving to slaughter in Quebec under buying agreements may lower U.S. hog imports from Canada in 1999 but only slightly.
Broilers. The rate of growth in broiler production was only 2 percent in 1998, as production was negatively affected by below-normal egg hatching rates. Consequently, broiler prices for all of 1998 averaged 7 percent above 1997, weakening during the fourth quarter with the loss of the Russian market and higher U.S. production. In response to higher prices and a return to more normal hatching rates, USDA expects broiler production will be up nearly 6 percent in 1999. The increase in production could lower the price of broilers from over $0.63 per pound last year to $0.57-$0.61 per pound in 1999.
Broiler meat exports will probably remain weak through much of 1999. The loss of the Russian market is unlikely to be offset by gains in other markets, and first-half exports could be 2025 percent lower than in 1998. Exports in the second-half of 1999 may increase relative to 1998, especially if sales opportunities with Russia reappear.
Dairy. Farm-level milk prices were record-high in 1998, averaging $15.38 per cwt., compared with $13.34 in 1997. The sharp increase in farm-level milk prices reflected modest growth in milk production and strong demand for milk products. In 1998, milk production was adversely affected by weather in California, Texas, and the Southeast. In addition to high milk prices, lower feed prices boosted dairy producers' incomes in 1998.
Page 159 PREV PAGE TOP OF DOC Dairy farmers appear to be reacting to the record-high milk prices and low feed costs over the past year by expanding milk production, which is projected to average about 2 percent higher in 1999. After being up only fractionally for most of the year, milk production increased by nearly 3 percent during the last 2 months of 1998. In response to the increase in milk production, which supported higher cheese production, wholesale cheese prices fell sharply in January dropping by about $0.60 per pound. The sharp decline in the price of cheese will lead to a steep drop in farm-level milk prices over the next few months. For all of 1999, USDA expects farm-level milk prices to average about $1 per cwt. lower than last yearputting them about halfway between the 1997 and 1998 levelsbut the decline could be even steeper if recent monthly year-over-year increases in milk production are maintained through much of 1999.
OUTLOOK FOR RETAIL FOOD PRICES
The Consumer Price Index (CPI) for food increased by 2.2 percent in 1998, while the CPI for all items increased by 1.6 percent in. Last year, lower retail prices for beef, pork, eggs, and nonalcoholic beverages were more than offset by higher prices for dairy products, fish and seafood, fats and oils, fruits and vegetables, cereal and bakery products, and sugar and sweets. Retail dairy product prices increased by 3.6 percent in 1998, reflecting the sharp increase in farm-level prices. Strong vegetable oil prices caused the CPI for fats and oils to increase by 3.7 percent and weather problems in California, Florida, Texas, and in some importing countries pushed up retail prices for fresh fruits and vegetables by more than 7 percent last year.
USDA expects the CPI for food will increase by 22.5 percent in 1999. Retail prices for fruits and vegetables should be up only modestly in 1999, assuming there are fewer weather problems in the major fruit and vegetable growing areas this year. In addition, continued large supplies of red meat and poultry will likely prevent retail prices for meat and poultry from increasing much in 1999.
Page 160 PREV PAGE TOP OF DOCKEY UNCERTAINTIES IN THE OUTLOOK
There are many uncertainties that could affect markets and the well-being of market participants over the next 1 to 2 years. Three key factors follow:
Weather and agricultural production. Last year's heavy rain and flooding in California and drier than normal conditions in the Southern Plains and South highlighted the role of weather in crop production and farm financial conditions. The current La Nina weather event is having a limited effect on U.S. agriculture, with the possible exception of the December freeze in California that severely reduced citrus production. La Nina is not expected to be a major factor affecting global or U.S. crop production this year. However, weather forecasting remains imprecise and the possibility remains that adverse weather could cause a major shortfall in world crop production and a strong increase in prices from current levels.
Macroeonomic Performance in Asia and Latin America. A number of very important markets for U.S. agricultural products fell into recession in 1998, including Southeast Asia, South Korea, and Japan, which account of about one-quarter of the value of U.S. agricultural export sales. Moreover, the Russian economy is expected to sink dramatically in 1999. The current economic problems in Brazil will lead that country into recession in 1999 and could cause major problems for other Latin American countries. If the Asian economies fail to stabilize or the economic problems in Brazil spread to other Latin America counties, which account for one-fifth of U.S. agricultural export sales, U.S. agricultural exports could drop further, placing additional pressure on farm commodity prices over the next two years. The engines of growth in the world economy right now are the U.S. and the EU. Should either of these two countries fall into recession there would be a global recession that would further erode world food and fiber demand and U.S. farm exports.
China. The outlook for U.S. agriculture is very much linked to what happens in China, home to one-fifth of the world's population. USDA expects China's economy will maintain the strongest growth in Asia over the next several years with per capita GDP growth of 7 percent or more per year. As incomes grow, the demand for food is expected to outpace increases in production causing China to expand agricultural imports. However, China's emphasis on self-sufficiency has raised their grain and cotton production, stocks, and exports this year. Although cotton production incentives appear to be coming down, continued emphasis on grain production and maintenance of trade barriers could dampen future growth in world grain trade and grain prices. In addition, the pace of economic growth may be overly optimistic, given the economic problems in China and in several neighboring countries. Alternatively, if the pace of economic and trade liberalization could quicken, China could be integrated in into the world economy more rapidly than anticipated, which would further strengthen world grain markets.
Page 161 PREV PAGE TOP OF DOC Mr. Chairman that concludes my testimony and I will be happy to respond to any questions.
Statement of Roy Frederick
Mr. Chairman and members of the committee: My name is Roy Frederick. I am an agricultural economist at the University of Nebraska, with a speciality in public policy as it relates to agriculture.
Let me begin by saying that, generally speaking, the state of the agricultural economy in Nebraska-and I presume many other midwestern Statesis not good. I expect that when final totals become available, 1998 net farm income in Nebraska will have been the lowest since the 198384 period. And, unfortunately, conditions have not improved much in the early weeks of 1999.
As you know, the major problem is low commodity prices. Prices for most commodities produced in our State-corn, soybeans, wheat, sorghum, hay, feeder cattle and hogs-have been below year-earlier levels since about July 1, 1998. Only prices for milk and some specialty crops, such as dry edible beans, have been consistently higher than a year ago. Within the past few days, fed cattle prices also have inched above year-earlier levels. Lower prices in recent months have special impact because Nebraska net farm income in 1997 was down 40 percent from the previous year (as reported by the Nebraska Agricultural Statistics Service). In other words, I am not comparing recent prices and incomes to outrageously high 1997 levels.
It's important to acknowledge that individual situations can vary widely from the overview that I just described. For example, a producer who forward contracted much of his or her 1998 crop production early in the year generally did better than one who waited until harvest to sell. In fact, the combination of forward contracting, loan deficiency payments and additional direct payments from the Federal Government late in the year allowed some producers to do very well. Higher-than-normal yields, especially for dryland crops, also helped. Certainly, one could find Nebraska producers who netted $100,000 on $300,000 gross income in 1998.
Page 162 PREV PAGE TOP OF DOC On the other hand, we had lots of producers who lost moneysometimes substantial amountsdepending on the combination of enterprises, marketing decisions and other factors. In general, those who had hog or cow-calf operations and did little or no forward contracting on their crops appear to have had the lowest net incomes.
I'll not spend much time on the factors that have contributed to lower commodity prices. But, in brief, two items may be worth singling out:
Red meat supplies have been large. For example, U.S. commercial red meat slaughter (measured in million pounds) during December, 1998 was up 6 percent from the previous year. More importantly, total red meats in cold storage at the end of that month were 14 percent higher than on the same date one year earlier. Pork supplies alone were up 46 percent.
Big crops were harvested in the U.S. and around the world in 1996, 1997 and 1998. At the same time, economic conditions deteriorated in regions or countries that have been significant importers in the past, including southeast Asia, Russia and Brazil. Bottom line: U.S. agricultural exports are projected at just over $50 billion for FY 1999. This will be the third consecutive year of falling exports, after peaking near $60 billion in fiscal year 1996. As exports have sagged, U.S. carryover stocks of corn, wheat and soybeans are projected to more than double over the 199799 period. Stocks of red meats and other livestock products also have been impacted by the poor export situation.
I emphasize the foreign market situation, because for most of the past 25 years, there seems to have been a strong correlation between exports and U.S. commodity prices. Notwithstanding that our own production can vary from year to year because of weather, livestock production cycles and other factors, the fact is that American agriculture seems to have done well when the export market is vibrant and not so well when foreign sales sag. (For the record, exports increased dramatically from 1972 through 1980, declined from 1981 through 1985, increased from 1986 through 1996, before falling the past 3 years.)
Page 163 PREV PAGE TOP OF DOC It should be noted that exports typically account for only about 25 percent of gross farm income nationally. However, we economists spend much of our time trying to understand what happens ''at the margin.'' We know that sometimes it doesn't take much change in demand to lead to much larger relative changes in commodity prices and farm income. We also observe that, in relative terms, exports tend to shift more dramatically year-to-year than changes in domestic demand.
Though it is normal and natural for all of us to offer policy solutions to our current price predicament, it may be worth pausing first to briefly discuss the nature of the problem.
Through most of the 1950's and 1960's, excess capacity was probably the biggest problem of American agriculture. Simply stated, farmers and ranchers produced more than the market could absorb. And did so year in and year out. Most analysts thought there wasn't much hope of improving agriculture's economic status unless significant amounts of land were retired from production or large amounts of grain and oilseeds were stored indefinitely.
However, beginning with the first big grain sale to the Soviet Union in 1972, the overriding problem changed to one of instability. What this suggests is that while ups and downs occur in commodity prices and incomes, there is no real indication that we are permanently and chronically overproducing for the market. It's just that in certain years, or even periods of years, we don't have a good balance between production and (international) demand for agricultural products. This imbalance occurs for a variety of reasons: weather conditions, business cycles, currency relationships, political instability, and changes in tastes and preferences.
Moreover, the instability problem is made worse because each producer knows that independently changing his or her production will have no influence on what happens in the sector as a whole. In short, it's difficult to get out of a rut unless one of the factors I just mentioned changes or government steps in to offer something to individual producers.
Page 164 PREV PAGE TOP OF DOC Some producers, of course, are much better able to withstand the ups and downs of the marketplace than others. The amount of equity in the farm business is key. Of almost equal importance, off-farm income for the farmer or spouse matters a great deal.
When economic conditions deteriorate, we're always especially concerned about what we call middle-size farms. This group of farms is neither the small, hobby-type where most of the family income is earned off the farm nor large operations that gross $500,000 a year or more. It's somewhere in the middle. It often includes beginning farmers or, alternatively, farmers who are still relatively early in their careers and trying to expand their operations.
Notwithstanding the difficulties Nebraska agriculture has encountered since mid-year, 1998, it seems appropriate to make a couple of comparisons from the recently-released 1997 Census of Agriculture. In Nebraska, the overall number of farms and ranches declined from 52,923 to 51,454 between 1992 and 1997. However, the number of large farms (gross sales of $500,000 or more and accounting for 55 percent of gross sales in 1997) increased from 1,768 to 2,521 during the period. Meanwhile, hobby-type farms (gross sales of $10,000 or less) increased from 10,651 to l1,549. This left the number of middle-size farms down by 3,120 or 8 percent. In short, it appears there were reasons for middle-size farms to either grow larger or leave production agriculture, even before economic conditions worsened in recent months.
Nowhere has the changing structure of Nebraska agriculture been more obvious than in the swine sector. Again using census data, the number of farms marketing hogs dropped from 11,559 in 1992 to 6,296 in 1997. In relative terms, that's a 46 percent decline. Meanwhile, total hogs marketed dropped only 10 percent over the 5 years, from 8.4 million to 7.6 million head. This left the size of remaining operations significantly larger. Data from other sources, including USDA's Agricultural Marketing Service, indicate that the 1990's have also been a period of much more forward contracting and less dependence on spot (cash) markets. As you know, there are many questions about whether small and mid-size hog operations can survive in such an environment. Prices below the cost of production in the second half of 1998 and early 1999 have added to that uncertainty.
Page 165 PREV PAGE TOP OF DOC Given the current state of the agricultural economy, it is perhaps appropriate to offer a few personal thoughts about the role of government in addressing some of the challenges before agriculture.
First, it always has been (and probably always be) difficult for government to design price and income support programs that promote both equity and efficiency. Farm operations simply vary too much by size, locality, enterprise combination, debt status, management ability and other factors. With all due respect to congressional efforts to be fair, the fact is that government support is never enough for some operations and more than needed for others.
Traditional support programs also have limitations in that they cover only a relative handful of agricultural commodities. Moreover, to the extent these programs have been linked with production adjustments, they haven't been very effective. Too much slippage occurs, primarily because the poorest land on the farm is always retired from production. It's for these reasons that I would like to see the government safety net of the future focus mostly on insurance-type programs.
Government-subsidized crop insurance can take into account different levels of risk by locality and by crop. It can protect prices as well as production. The concept probably could be extended to livestock production. But there are still overarching questions about how much risk the government should underwrite and how much should be the responsibility of producers. Should insurance premiums be actuarially sound for every region and every enterprise within a region? This, in turn, spawns other questions relating to individual equity and overall efficiency.
Congressional efforts to move toward a fairer system of international trade for agricultural products are important. I recognize that's easier said than done. For one thing, the definition of ''fairness'' as it applies to trade varies widely within in this country, to say nothing of the rest of the world. We currently have problems on both the import and export sides of the market. Realistically, maybe the best that can be hoped for is to make progress in bi-lateral trade situations. With respect to agricultural products, fairer trade with Canada and the European Union deserves special diligence.
Page 166 PREV PAGE TOP OF DOC Finally, Congress' efforts going back to the 1985 farm bill to promote natural resource conservation should be applauded. Most producers agree with the goals that have been established. Primary efforts thus far have been directed to reducing soil erosion, improving water quality and maintaining wildlife habitat. However, one other intriguing possibility should be examined. While the issue of global warming has been controversial in many farm circles, farmers can help reduce carbon dioxide emissions by farming in such a way as to increase carbon sequestration. If society as a whole is concerned about global warming, shouldn't farmers be paid for making special efforts to reduce emissions? Moreover, such payments could be made to virtually every producer, not just those whose land is erodible or with soil types that endangers the underground water supply.
Testimony of Merlyn Carlson
Chairman Combest, Congressman Barrett. For the record, I am Merlyn Carlson, director of the Nebraska Department of Agriculture.
Thank you for the opportunity to present the views and concerns of the agricultural producers of Nebraska and Nebraska Governor Mike Johanns concerning the state of the agricultural economy. I would like to thank you for raising the awareness of the issues that are being discussed at today's hearing by virtue of your decision to bring the House Agriculture Committee to Grand Island, Nebraska.
Nebraska is very proud of its wealth of resources, its natural resources, its innovative people resources, and its vital resources which link and render services to adding value to its many commodities.
Nebraska can also take its rightful leadership role in the world, second to none, in the vibrant but competitive global food market.
However, there is no doubt that the current commodity price levels pose a formidable challenge to the Nation's agricultural producers to maintain their operations while they wait for better times. The drop in gross cash value of Nebraska's four leading commodities is near $1.2 billion in 1998. Considering the widely accepted estimate that most dollars flow through the economy 2.5 times, the low commodity prices result in a loss of nearly $3 billion to Nebraska's economy.
Page 167 PREV PAGE TOP OF DOC With this kind of total economic impact, it becomes obvious that steps need to be taken to shore up the commodity prices, and, in turn, our Nation's farmers and ranchers, especially the family operations that are the backbone of our Nation's agricultural industry. Many of these operations do not have much time for a lengthy debate, and while Congress passed much needed relief last year, more positive action is necessary.
First, Congress should take steps to help the livestock industry by rescinding the availability of the USDA quality grade shields to imported carcasses, instituting country of origin labeling, and establishing a method for price reporting that will allow producers market information to ensure that competitive market forces exist. While several States, including Nebraska, are currently debating proposed legislation concerning these issues, I would challenge Congress to adopt a national umbrella of legislation to address these areas and provide uniformity among the States.
As we search further for solutions, it becomes necessary to consider the effect of the 1996 farm bill. While Congress responded to producer request for increased planting flexibility to make planting decisions based on global market signals, it needs to do more to ensure that our Nation's producers have equal, fair, and open access to world markets. Exports and export programs are vital to the future prosperity of American agriculture and the entire U.S. economy. Export programs provide U.S. agriculture with the tools to maintain and expand the sale of commodities in the global marketplace. Action to expand investment in export programs, and utilization of such programs, including: (1) Export Enhancement Program (EEP); (2) the Market Access Program (MAP); (3) the Export Guarantee Program (GSM 102/103); (4) the Emerging Markets Program, as well as others is needed. Programs such as these are essential to re-establishing a level playing field for U.S. producers as compared to agricultural producers in Europe and South America. Without aggressive U.S. export programs, it is difficult, if not virtually impossible for U.S. producers to compete with the treasuries of Europe. It is also essential that the President be granted fast track authority and the U.S. Trade Representative be empowered to take aggressive action, including retaliatory action, against countries that are not abiding by trade agreements.
Page 168 PREV PAGE TOP OF DOC We applaud Senator Chuck Hagel's recent efforts to remove food and medicine from sanctions and embargo actions taken against other countries. This is a continuation of efforts in previous congresses by Senator Hagel, Congressman Barrett, Congressman Doug Bereuter, and other members. The use of food and medicine as foreign policy tools has effectively eliminated more than half of the world's population in 35 different countries as consumers of Nebraska's agricultural products.
Last year was marked by low commodity prices and reduced exports. Unfortunately, 1999 is projected, by USDA's own estimates, to be even worse.
As many farmers and ranchers struggle to survive during this difficult period, it is also time to re-examine the current Federal Crop Insurance programs. Effort should also be made to provide opportunities and incentives for producers to manage additional risk by increasing their coverage levels. Increasing the subsidy for higher coverage levels would provide greater opportunities for producers to manage potential risk. Consideration should also be given to expansion of Federal insurance programs to include livestock insurance products. A key to all crop and revenue insurance programs is making them user friendly in simplicity and pricing.
In summary, Congress needs to pass legislation such as H.R. 222, S. 241, S. 242, and S. 251, which address the immediate concerns in the livestock industry. The other major area of need in an aggressive approach to regain and expand export opportunities for U.S. agricultural products. This will require full or expanded funding of the previously mentioned export programs. Nebraska farmers and ranchers need your assistance. I am confident you will answer their call.
Statement of Darrell D. Cruea
Mr. Chairman and members of the committee, my name is Darrell Cruea and I am the Secretary of Agriculture for the State of South Dakota. I also serve on the Rural Development Committee of the National Association of State Departments of Agriculture and head the sub-committee on Agricultural Credit and Financial Security. I appreciate the opportunity to address you today on my perceived views of the agricultural economy, and to present some possible tools to assist in long-term corrections.
Page 169 PREV PAGE TOP OF DOC During this past decade there has been a fluctuating market base for commodities and livestock. Recent trends have shown a declining price structure. Friday's Ag-Statistics show crop values for the State of South Dakota to be down 8 percent from 1997, and 20 percent below the 1996 crops, even with record yields reported for 1998. Livestock returns appear to follow a similar trend. The economic ''domino effect'' of reduced expendable income by our producers in the rural communities of South Dakota expands the scope of our concerns.
I have three areas of concern that I feel are critical to the survival of farmers and ranchers, particularly the smaller operations that make up the greater percentage of our producers.
COMPETITIVE AND SUPPORTIVE CREDIT
Providing a sound financial system is important to producers who work with unpredictable environmental conditions and fluctuating market resources. New and flexible financial products should include incentives for the private sector to cooperate with local ag-lenders, State and Federal agencies to aggressively provide capital suited for the producers diverse needs of production, processing, marketing and other risk management costs. It is appropriate to include educational tools regarding total business management and market planning.
Recommendations and issues
Develop a private/Federal partnership for interim guarantee financing of approved government guaranteed loans.
Continue to expand the adoption of low documentation guaranteed loan applications and lender eligibility for PLP.
The announcement of the new USDA policies for guaranteed farm ownership and operating loan procedures is a great start.
Consider reinstating the leaseback/buyback provisions as a method to provide relief for borrowers with maturing FSA Shared Appreciation Agreements.
Page 170 PREV PAGE TOP OF DOC Revise the Debt Collection Act to ensure that government agencies (FSA, etc.) honors pre-existing assignments prior to offset of Federal payments.
Consider revising the ''Prompt Corrective Action'' provision of the FDIC
Improvement Act of 1991 prohibiting loan making based on specific capital reserves. These limits may be too restrictive for small rural community based agricultural/agri-business banks and could cause premature closure in the event of numerous, possibly temporary loan classifications.
The second critical issue for our producers is economic sustainability. This can be achieved through management and marketing strategies. Risk management planning both in production and market access is critical to economic sustainability.
RECOMMENDATIONS AND ISSUES
Development of a ''Safety Net'' that is affordable and would function in emergency situations.
Cost effective crop insurance that will cover alternative-type crops and protect the producer from increased premiums resulting from multi-year disasters.
Assist livestock producers by developing a comprehensive coverage for forage and livestock.
Develop market strategies to enhance producers access to both traditional and new market. Create further economic incentives encouraging producer participation in value-added processing and marketing/management techniques.
The Rural Development agency currently has an incentive in the form of a guarantee loan program for stock-share participation in cooperative value added processing programs. This guarantee program should be expanded to include biological processing and marketing cooperatives.
Page 171 PREV PAGE TOP OF DOC Background knowledge of product quality and market signals are important in planning market access.
Address livestock marketing strategies through developing price transparencies and country of origin labeling. This is already being partially addressed in the packer pilot price-reporting program.
Review of our export programs with an emphasis on maintaining, reviving and expanding our international markets for agricultural products.
The third critical issue facing all our producers is how to convey the accumulated assets to their heirs without loss of financial security during the process.
RECOMMENDATIONS AND ISSUES.
Establish Federal tax incentives for producers selling assets to beginning farmers.
Establish Federal income tax exemptions or scaled tax schedules for beginning farmers.
Alter the FSA beginning farmer ''definitions'' to allow for greater flexibility and non-farmer levels without disqualification during start-up.
Further capital gains and estate tax reform to provide a mechanism for retention and enhancement of our agriculture operations.
Testimony of Annette Dubas
My name is Annette Dubas. Thank you for this opportunity to appear before the House Agriculture Committee. We appreciate the committee coming to Nebraska. There is a dark cloud hanging over production agriculture, and unless Congress responds to the growing crisis facing agriculture, thousands of families will be forced out of the business they love in 1999.
Page 172 PREV PAGE TOP OF DOC I am a member of Nebraska Farmers Union. We are the second largest general farm organization in our State, and I represent the thousands of farm families in our organization today. Five minutes goes by quickly, so I will be to the point.
My husband and I farm 40 miles northeast of Grand Island in western Nance County. We run a diversified grain and cattle operation, raising corn, soybeans, oats, alfalfa, 160 head of cows, and run around 300 yearling feeder calves a year. We have four children. Our youngest son's dream is to return home after college and become the fifth generation to farm and ranch in Nance County, but after doing our year-end financials and 1999 cash flows last week, farm and trade policies must be reexamined if the dreams and aspirations of the Dubas family are to come true.
Like most cow-calf livestock operations, we struggle to break even. No profit means no earned income to pay for family labor and management, which means no dollars to pay for family living expenses. How would you like to work all year for nothing?
Two weeks ago, 250 livestock producers went to Lincoln to support four bills before the Legislature's Agriculture Committee to outlaw packer feeding, force mandatory price reporting by packers, outlaw discriminatory packer contracts, and require country of origin labeling. Many livestock producers have given up hope that Congress will do what needs to be done at the national level. I hope you prove them wrong.
Congress needs to give clear and strong authority to the Packers and Stockyards division of USDA to outlaw packer feeding. Packers and Stockyards should be given the necessary financial resources to carry out their mission, and Congress needs to make sure their mission is being accomplished.
Congress should force mandatory price reporting for meat packers, retailers, and everyone else in between, to make sure we know what is going on in our meat markets.
Page 173 PREV PAGE TOP OF DOC Congress should authorize Packers and Stockyards to review and approve all packer contracts. If packer contracts contribute to captive supply, discriminate against small and medium sized livestock producers, or lessen competition in the marketplace, the contracts should be outlawed. We have contract oversight in the commodity markets, but not in meat or grain contracts. Why?
Our goal should be to provide total and immediate transparency in the marketplace. When we sell our livestock at the livestock barn, we know who bought and who sold. We know the price, the weight, and the quality. Transparency, like sunshine, is a disinfectant. Our noncompetitive markets need a healthy dose of transparency.
Congress should authorize Country of Origin labeling of meats. Consumers and livestock producers both want it. Consumers have the right to know what they are buying. We produce a quality product, we are not afraid of fair, transparent competition.
Is the 1996 farm bill working on the grain side? If the goal of the farm bill was to let the grain trade buy more grain for less money, it is working. Ron and I were married 23 years ago. A quick comparison between grain prices in 1975 and 1998 tells the story of farm income.
In 1975, the average national price for corn was $2.54 per bushel, and we exported 1.711 billion bushels of corn. In 1998, the USDA's mid-year projections say our average national price for corn is $1.95 per bushel, which is six cents higher than our current local market bid, our corn exports are projected to be 1.725 billion bushels.
In 1975, wheat was $3.56 per bushel, and we exported 1.173 billion bushels. The 199899 projections are that wheat will average $2.70 per bushel, and exports will be 1.025 billion bushels.
In 1975, soybeans prices were down to $4.92 per bushel, they had been $6.64 in 1974. 1975 exports were 555.1 million bushels. In 1998, USDA projects 810 million bushels of exports and an average national price of $5.20 per bushel.
Page 174 PREV PAGE TOP OF DOC When we take our 1998 income to town, we buy family living items, college educations, and farm supplies at 1999 prices. I ask you, who is subsidizing whom? The cost of the 1975 farm bill was $5.749 billion. The USDA'S January/February Agricultural Outlook projects the cost of the 1998 farm program at $9.323 billion. When we spend twice as much money on farm programs, do not increase farm exports, and yet reduce net farm income, something is wrong!
The ERS data shows that the average farm operator household income received from the farm in 1998 is forecast to be $5,757, and that 89 percent of the total household income comes from off farm jobs. It is impossible to know how many farmers will be forced out of business in 1999, but we know it will be thousands. Every five farm failures means one less small town business.
It's very frustrating for me to think that my farm feeds 120 people in our country, but yet I have a difficult time feeding and supporting my own family. My net farm income puts me at the poverty level. Yet, we are efficient producers, good resource managers, good financial managers, and hard workers. Something is terribly wrong.
Thank you for the opportunity to share my views with you today. I want to believe there is a future for family farm agriculture, and I will work and fight to make it happen. We need your support and help to see that future ag policy will take us in that direction.
Statement of Max Waldo
Mr. Chairman, Members of the Agriculture Committee, thank you for the opportunity to speak with you today.
TRICKLE-DOWN WILL NOT PREVENT A RURAL AMERICA MELTDOWN
My ancestors immigrated from England to the Jamestown Colony in 1608, eventually moved to Lincoln, Nebraska in 1868, and settled near DeWitt in 1882. My family began raising Duroc breeding swine in 1895. My father registered his first pigs in 1919, was also a County Extension Agent during the depression of the 30's, and remains active in our family business today. He unquestionably considers this to be the most difficult time for agriculture that he has ever seen.
Page 175 PREV PAGE TOP OF DOC For several years our family has been the largest recorder of purebred pigs in the U.S. Some consider our Duroc herd to be the best in the world. We have marketed into 49 States and 28 countries. In spite of this, some ask why we stay in such a speculative business, with structural changes causing extreme uncertainty.
There has been an exodus from most of rural America since the turn of the century, altered only occasionally during periods of war. The free enterprise efficiencies of ever increasing food production have been both a blessing and a curse. With abundant, inexpensive food, much of society can pursue creating wealth in other areas. While the capital intensive, low return independent farmer strives to increase productivity and efficiency, the market place, as well as those providing technology, confiscate an ever growing percent of the food dollar. The trickle-down to pork producers in December was less than 10 percent of the retail price. An historic low. It is probable that this year Monsanto may net more on a farmer's bean field than the farmer will.
It is estimated that in recent years, equity has been lost from the cattle sector at about 1 billion dollars per year. The hog sector lost $2 1/2 billion in 1998, with nearly $1 billion of that in the month of December alone. In 1998 a modest sized 300 sow hog farm would have lost an average of about $250,000. With losses projected to continue for most of 1999, numerous producers will not survive. Quickly obtainable FSA low interest loans would give many an opportunity to work out of their economic plight.
Overproduction in 1998 occurred for a number of reasons including:
Hog producers increased production for an assumed export market.
Packer and production contracts, which distorted market signals.
Production increases by several large entities who were literally banking on special market price advantages.
Accelerating expansion ahead of EPA and other restrictions.
Page 176 PREV PAGE TOP OF DOC We must look beyond this current disaster and focus on the dynamics attributing to the meltdown of American agriculture.
The world has always had the ability to produce more than paying customers could afford to buy. This is particularly true in the U.S., trapping producers in an economically vulnerable position. Acreage control programs with price supports tended to raise world prices, while shifting food production to other countries. Freedom to farm, without a safety net in a commodity surplus world, is a failed concept. A workable solution must be found.
Some lawmakers expect individual farmers to deal with income protection by utilizing market risk management. It is reported that only 20 percent of the professional speculators are profitable and only 20 percent of the hedgers improve their position. Hardly good odds for the average farmer who must devote his time and talent to numerous areas other than marketing.
A Sparks commodity market analysts stated that the individual simply does not have access to adequate and timely information. This is undoubtedly true as individuals attempt to compete against multi-national and integrated companies who have their own trading groups. Insider trading, short selling, captive supply and market manipulations constantly siphon untold wealth into corporate coffers. This money, extracted from the system, provides capital for further corporate growth, which compounds the problem of income disparity.
Retired Iowa Congressman Neal Smith was passionately concerned about these areas of unfair trading and marketing practices. Dr. John Helmuth served as Congressman Smith's economist and market advisor. Dr. Helmuth's in depth marketing studies and trading analysis led him to understand the methods packers and grain traders are able to utilize in abusing the power of captive supply and private market information. Apparently, this is not readily discovered by GIPSA within the normal scope of their investigation. Both Neal Smith and Dr. John Helmuth would be valuable resources.
Page 177 PREV PAGE TOP OF DOC Dr. Joe Coffey, previously an economist with the Commodity Futures Trading Commission, refers to an old saying: Manipulation schemes are only limited by the imagination of mankind. He calls for the government to upgrade its expertise and technology to detect manipulations and enforce laws that are now on the books. Dr. Coffey comments, ''the police are miles behind those who seek illegal gains from agricultural markets.''
Concentration in the meat sector is accelerating. This concentration includes wealth, power, environmental challenges, risk of food contamination and market information. At a time when pork producers have suffered unprecedented losses and are questioning if there is a future for them, business expansion continues by some of the regional coops and other large producers. Most of those expanding today have packer ties and are continuing the march toward integration. They are contributing to the demise of individuals and rural communities. Since Christmas, acquisitions and announced building plans by one packer alone could give them an additional 110,000 sows. Another $2.6 billion 250,000 sow project is apparently in the planning stage in Idaho.
As individual producers consider whether to remain in the business or prudently exit, the response from packers such as the Farmland Cooperative is to further integrate. Some packers have said they understand the need for a transparent market and prefer not to own or feed livestock. However, they also say that they must do whatever is necessary to match competition from other packers. This scenario of packer control whether by ownership, improper contracts or formula buying must be curtailed to create a more level playing field for packers as well as producers.
Efficient independent producers can be very competitive, but not against integrators in a non-competitive market. Neither will trickle-down capital allow farmers to compete against well financed, large companies or coops that have inordinate purchasing power and other unearned advantages, particularly when they are driven to take over the industry.
Page 178 PREV PAGE TOP OF DOC I have had visitors to our farm from Indonesia, Malaysia, East Germany and Russia who each asked nearly identical questions, Why is the U.S. so determined to go the way of big business? We have tried that and it didn't work. I think most of us sense that the direction our economy is headed is not sustainable. Pope John Paul II writes, ''There is a crisis of confidence in the power of reason.''
Ultimately, we must develop a vision as to what we desire our society to look like, how dominate we want a few multi-national companies to be, and to what extent opportunity and wealth should be distributed for the best interest of our country and the world.
Niche markets will not create success for many. Farmers should have an opportunity to prosper in a commodity enterprise.
Contract production (in the words of a USDA official) has been a financial disaster for most poultry contractors. Contract production likely will lead to similar results for other commodities.
I have exported to nearly 30 countries and from my experience consider exporting to have limitations and is not the ultimate solution.
While corporations position themselves for expected large profits, farmers become the cost center to the overall food production system.
Competitive markets require a large number of buyers and sellers.
Market capitalism and resource utilization are ultimately impeded by concentrated decision making.
Authorize mandatory price reporting that will lead to a fair, honest, competitive market with similar packer payments for animals of similar measured quality. HR 693 should be a good start.
Page 179 PREV PAGE TOP OF DOC Eliminate captive supply that enables market manipulation.
Limit mergers which reduce competition, price discovery and opportunity for producers.
Nurture horizontal integration rather than vertical integration.
Determine the Secretary of Agriculture's authority and responsibility under Section 202 of the Packers and Stockyards Act. Revise the Act as necessary to effectively prohibit anti-competitive activities in the meat packing industry.
Make penalties for anti-trust crimes more then just another cost of doing business.
Review the effect of tax advantages and economic development funds.
Provide opportunity for producers to retain ownership and capture more of the products added value.
Limit regulatory costs that cause loss of alternative markets such as smaller regional packing plants.
Fund FSA, implement their paperwork reduction regulation and provide them with adequate staff and directors so they might be of meaningful assistance to their farm patrons.
Regulate Insider trading and other fraudulent activities in the agriculture futures markets similar to laws the SEC enforces in the securities market.
Adopt meaningful campaign finance reform.
I emphasize that we are only requesting fairness, honesty, equity and broad based opportunity.
On behalf of independent livestock producers and farmers I want to stress the urgency for action. This backbone segment of rural America is rapidly, but unnecessarily being displaced. A tragic meltdown.
Page 180 PREV PAGE TOP OF DOC Statement of Mark Kepler
On behalf of all agriculture producers, we are pleased to thank the committee for their concerns regarding the State of the Agriculture Economy, and the opportunity they have embraced in coming to the Great State of Nebraska.
I am a dryland wheat and corn farmer in the panhandle of Nebraska. I was not born and raised on the farm, but growing up in a rural community didn't offer much diversity in employment. I soon realized the importance of agriculture combined with the satisfaction of producing a commodity consumed around the world. Today my wife and I farm approximately 1,600 acres. Without the additional opportunity to be a full time farm manager, we could not raise our three children with proper wholesome values so often associated with rural America. In the 14 years we have been farming in Deuel County, this years yields broke all records. In July we harvested our worst two wheat fields averaging 56 and 59 bushels. Deuel County long term average is approximately 37 bushels per acre. As rented ground with traditional crop share rent, both of these individual fields were projected to lose money. Thanks to the assistance of the market loss payments, we will at least cover cost of production. Every other industry in the world has an opportunity to turn a profit. Only in agriculture is the base producer ask to do more for less. Under these rules family driven agriculture will not survive.
The present agriculture economy is less than desirable due in part, to the economic and financial hardships faced around the world and the inadequacies of the current farm program to provide a proper safety net for American producers. Agriculture has just completed a record production year, celebrated by the lowest crop revenues in decades. The agriculture producer of this great country are by far the hardest working people you will ever meet, yet their livelihood is a destiny they have limited control of. Mother nature and world economics coupled with a lack of foreign trade direction has place all U.S. producers in jeopardy of financial ruin. The recent market loss payments, tied with the added disaster assistance have and will provide a much needed infusion to producers current cashflow crisis. The above list legislation is true testament to the necessity of a flexible farm program in years of low prices.
Page 181 PREV PAGE TOP OF DOC From this point forward we must forgive our failures to proceed forward with positive change. An improved crop insurance program will stand as a firm foundation for future USDA farm policy. Farm producers must be able to guarantee returns of at least cost of production. Current MPCI and Crop Revenue Coverage programs continue to fail in years of favorable crops followed by low prices. As American farmers we greatly need an economical insurance policy that will be tied to lost income as well as lost production. I strongly encourage you to develop a viable revenue assurance program capable to allow policyholders reasonable and economical premiums up to an 85 percent APH protection level. For active participation, Federal funding needs to escalate as levels of coverage increase. Many producers view CAT policies as providing too little coverage, while at the same time, hail prone areas of the Great Plains suffer from insurance policies with phenomenal premiums for limited coverage.
Federal loan programs should become a more viable risk management tool. Producers wish to see a marketing loan period extension together with increased loan rates. Farmers support a non-recourse marketing loan established at 100 percent of the 5-year simple average, without any rate caps. The marketing loan should have an 18 month maturity in order to provide producers adequate marketing flexibility.
Farmer held reserves programs would also help bolster on farm income. Implementation of such a program should include a cap on total bushels allowed into reserve as well as establish a trigger release price of $4 per bushel for wheat. Such a program would be beneficial to farmers who maintain on farm storage to realize future price appreciation. A reserve program will also lessen the need for direct production subsidies to producers.
Set aside programs have faded away with the past farm bill, but perhaps a short term CRP program consisting of 2- to 5-year paid diversion to reduce acreage under production, will be in order if the present crisis is not seen as subsiding in the near term outlook.
Page 182 PREV PAGE TOP OF DOC The Clinton administration can no longer view world trade as a reactionary program. U.S. trade officials must develop and implement sound policy long before we, the producers, feel the heat from an economical agriculture meltdown. As a wheat producer, half of every bushel I produce must flow through export channels. Why has the United States become the residual supplier, while our competitors continue to increase market share at our expense? U.S. producers provide an abundant supply of cheap food to the American people. In years of large excess we must have an aggressive trade policy to expand agriculture's future growth in sales and income.
Fast track trade authority is a necessity to combat restrictive trade tactics, high foreign tariffs and global trade inequities in the future World Trade negotiations. The U.S. needs to be at the table with full negotiating powers, or producers will continue to see U.S. portions of world trade diminish to lower levels.
Unilateral trade sanctions have repeatedly closed the doors on agricultural exports. Time and time again sanctions have proven to be ineffective. Our world competitors relish the opportunity to take over these markets we so easily cast aside. Eliminating food and medical products from sanctions is a first step, however, all sanctions will need to be eliminated in order for American businesses to complete in a true global trade economy.
In closing, I will reiterate the importance of effective risk management to provide a sound and secure safety net. Crop insurance must cover all risks for a Farm Program to be successful. Everyone understands there is no easy answer, however, the fact that you are here today provides reassurance that Congress is willing to understand the downfalls in agriculture. With this tremendous opportunity, I urge all members of Congress to study the complexity to the U.S. food policy and draft effective legislation to steer American agriculture into the next century. The producers in the United States are your partners, let's work together to assure farmers an economical future that encourages the next generation to return to the land, rather than leave the land we love so much.
Page 183 PREV PAGE TOP OF DOC
Testimony of Louis Kehn
Mr. Chairman, members of the committee, my name is Louis Kehn. My wife and I operate a 6,000-acre livestock and grain operation in Gregory County near Bonesteel, South Dakota. Our operation currently consists of 3,200 acres that we own and 2,800 of rented land. I run approximately 325 head of cows and farm 1,100 acres of row crops and alfalfa. We currently rotate corn, beans and small grains on 500 acres and raise about 600 acres of alfalfa. We also put up some native grasses. I work closely with one son who farms and ranches (a second son has a trucking business). He has approximately 170 head of cows and farms about 500 acres
In the past I have served as a Gregory County Commissioner. I have also been a member of the Farm Credit Regional board for western South Dakota, a director of our local Production Credit Association and a member of the local school board. I am presenting testimony here today on behalf of the South Dakota Farmers Union.
I have been asked to focus my remarks on the current status of the agricultural economy for grain growers. I have to say that the separation is a difficult one for most South Dakota operators. Historically almost two-thirds of South Dakota farms and ranches included cattle in their operation. I believe it is fair to assume that most grain farmers also maintained a cow/calf operation. A substantial portion of them still does.
Livestock producersespecially cattle and sheep producershave been dealing with what we view as disaster level prices for more than five years. That circumstance, combined with losses suffered in the terrible blizzards of the winter of 1996 and 1997, left many producers in an economically desperate situation and highly vulnerable to the severe drop in grain prices we experienced last year.
In 1998 most South Dakota farmers had record or near record yields. It should have been a time when we could expect to gain a little groundto help recover from losses suffered through poor livestock prices and to build a bit of a reserve to carry us through future years when crops probably won't be so good. Instead we saw the collapse of market prices for most of the small grains and feed grains produced here in South Dakota. Instead of allowing for economic recovery, we had to settle for simply not losing any additional ground.
Page 184 PREV PAGE TOP OF DOC The South Dakota Department of Revenue operates an Internet Website that includes comparative data on sales tax collections over the past three years. Those statistics do not fully reflect the economic trauma we are facing on the farm and ranch. But they do clearly show that most of the increased economic activity has been in a few large cities. In contrast, for example, sales tax collections for a number of rural communities were off sharply. Harold was down 36 percent. Hosmer was down 35 percent. Philip was down 23 percent. Wessington was down 16 percent. Most others had losses or small gains.
In 1999 we are looking at continued low prices, but we are unlikely to see the same bumper crops we had last year. Writing in Ag Week (a weekly publication of the Grand Forks, ND Herald) last week one market expert urged producers to ''cut back on any production costs they can'' and reported that prices are likely to be half of what they were two years ago.
That is definitely not good news. It is also important for you to understand that South Dakota routinely experiences the lowest grain prices anywhere in the United States. This is because of the distance from terminal markets and our inadequate rail transportation when compared to other States. In January, for example, the average wheat price in South Dakota was $2.96 per bushel. That was 12 cents less than the average in North Dakota, 34 cents less than the average in Minnesota and 44 cents less than the average in Montana.
I also hope that you are aware that the price we are receiving for grain is lower today than it was 50 years ago. The situation is even worse when you adjust for inflation. What other segment of our economy has had to endure this kind of economics? It should come as no surprise to anyone that we have lost tens of thousands of family farmers and ranchers here in South Dakota.
Several large grain corporations and farmer-owned cooperatives are involved in building a few large, fast-loading facilities that will be capable of loading 110 rail cars in less than a day. That sounds like it should be good news. But it also means that farmers are going to have to truck their grain more miles. It also means that a lot of smaller elevators will be lost and that has definite economic consequences for our small town mainstreets.
Page 185 PREV PAGE TOP OF DOC At a time when producers are under heavy pressure to reduce costs, we are also faced with negative attitudes in our own State legislature. For example legislators are considering much more stringent penalties for overweight vehicles. This is definitely not helpful when so many farmers and ranchers are fighting to keep their heads above water.
This week also saw release of statistics uncovered during the U.S. Department of Agriculture's 1997 Census of Agriculture. The Census shows us losing 2,773 farms and ranches. And the number of farms reporting a net loss for the year (remember this was for 1997not last year) increased from 6,001 to 11,367. That is more than one-third of the farms in our State showing no net income or losing money.
We simply cannot go on like this. Continued low prices mean that operators will not be able to replace old equipment. And livestock producer's herds are growing older because they must sell replacements to meet their ongoing financial responsibilities.
Low prices for both livestock and grain have opened our land up to outside investors. Farm and ranch families are unable to compete because of their weakened financial condition.
Lack of income also means that our youth are leaving. They want to have some degree of security in raising their families. They look at the struggles their parents are experiencing and they decide there must be something better. Oftentimes parents would love to have their children continue the farm or ranch operation, but they can't offer much encouragement. In our county, in a large majority of the farm and ranch families both the husband and the wife must hold down off the farm jobs to help support the family.
The loss of young people has already had a devastating impact on our rural infrastructure. It is collapsing. It means the loss of more and more mainstreet businesses. It means dwindling church congregations. It means schools closing and the need to consider further consolidations. This often means pressure to build new schools and that means higher taxes on the fewer surviving farmers and ranchers.
Page 186 PREV PAGE TOP OF DOC I believe that we will ultimately have a day of reckoning. We are well on the road to losing a generation of young farmers and ranchers. If you don't believe me, visit any High School FFA Classroom. Ask the students how many intend to farm or ranch. You will be lucky to get two or three hands raised. These young people who are being lost cannot easily be replaced. It's easy enough to train someone to drive a tractor or milk cows. It is not easy to train a farmer or rancher. Young people who have grown up on family farms and ranches ought to be considered a national resourcejust like teachers or any other much needed professionals. Instead farm and ranch people often get little respect or appreciation and minimal economic returns.
Any farmer or rancher will tell you: if you give me a price for my productionI can take care of myself. I won't need any additional help from the government. We know that an increasing urban Congress doesn't much like spending money on farm programs. We sincerely appreciated the farm relief package approved by Congress last fall. The economic assistance provided through that package has allowed many farmers to hang on a bit longer.
I have two important suggestions for you. Number oneIf you don't want to continue having to provide economic relief, do something concrete about the continual trend toward concentration in agribusiness. We are often told that we ought to let the free market establish our prices. But there really is no free market when a handful of giant corporations can exert complete control over those markets. We need Congress to require mandatory price reporting. We need Congress to require country-of-origin labeling on imported foods. Most of all, we need you and the Administration to enforce anti-trust law and where necessary develop new legislation to assure that we can have access to fair and competitive markets.
I have a second suggestion. Go back to the drawing board on farm policy. It is clear to most producers that the so-called Freedom to Farm or Federal Agricultural Improvement and Reform Act is not working. Even it's strongest supporters would have to admit that it was based on the assumption that export sales and market prices would continue rising from their 1996 levels. That assumption was based on strong economies in Asia, Russia and Latin America. Those economies are in deep trouble and most observers recognize that things will take some time to turn around. You need to take another look at farm policy. Please remember that an effective farm policy doesn't have to be complicated and it doesn't have to be expensive. In fact we had effective, uncomplicated and inexpensive farm policies in place from 1933 through at least the 1960's.
Page 187 PREV PAGE TOP OF DOC Immediately you should act to remove the caps from commodity loan rates. Then you should begin a careful examination of how an effective and affordable Federal crop insurance program can be combined with a market loan program that will provide a real safety net for family farm and ranch producers. You also need to consider how livestock producers can also be provided with some stability and a safety net of our own.
I have one final thought. I guess I am a bit frustrated. I have to ask: in what other business, besides agriculture, do you have to ask, what will you give me?
Testimony of Scott VanderWal
My name is Scott VanderWal. I farm with my father and uncle in a family farm corperation at Volga in eastern South Dakota. We run a custom cattle feeding operation and raise corn and soybeans. I am a member of the South Dakota Farm Bureau Federation Board of Directors, and I appreciate the opportunity to appear before you.
I will focus my remarks mostly on the livestock segment and disuss several specific items that I feel would be helpful to improve the economic situation for us as producers. I would like to note that my oral comments will be somewhat different than what I submitted earlier. The content has not changed much, but I have added some more personal remarks and localized the issues to some extent.
Concentration. The meat packers and meat industries in general are going through unprecedented change. I do not believe in government interference in private industry, but any proposed mergers or acquistions need careful scrutiny. The Packers and Stockyards Administration must use its authority to make sure that discriminatory or deceptive marketing practices are not being used.
Price Reporting We as producers absolutely need the most accurate, timely pricing information we can get. We believe that packers who process more than 5 percent of the national daily slaughter should report all cash and contract prices and terms of sale. This should be voluntary, but we will support mandatory price reporting if voluntary efforts are ineffective. I also feel that the captive supply issue should be studied further, as some packers can be out of the market for days or weeks at a time due to their captive supplies. This makes it very difficult for a small, independent producer like myself to sell livestock in a timely manner and at a fair, current price.
Page 188 PREV PAGE TOP OF DOC Country of Origin Labeling It only makes sense for imported meat products to be labeled so our consumers know where it was produced. Almost every other product we buy is labeled. Why not food? This is not meant to downgrade foreign countries' products, but will allow our consumers who want to support our domestic industries to do so.
State Inspected Meat One way for Congress to help out small and mid-sized meat processors would be to allow interstate distribution of State inspected meat. These products, by law, must already provide for a food safety level at least equal to a federally inspected facility.
Trade We as American farmers have been accused of causing our own problems in regard to low prices. We are too good at production. Part of the answer to our challenge is to sell it to other countries. Our future depends on expansion of foreign trade and development of new makets The administration must be given negociating authority (formerly fast track), so we can be involved in international trade deals. One key item here is sanctions reform. Food and agricultural products should not be used as a foreign policy tool. In just four years, the United States has imposed 61 unilateral sanctions on 35 countries. These countries contain 40 percent of the world's population. This is a huge market loss for us. Currently there are about 120 of these economic sanctions in place. According to Farm Journal editor Sonya Hillgren, more than half of the U.S. unilateral foreign policy sanctions since World War I have been imposed since the current administration took office in 1993. I do not place all of the blame for our cuurent economic situation on this, but it certainly has not helped! There is no record of unilateral sanctions ever producing positive results, either economic or political. The only results we get from these sanctions is that other suppliers are only too happy to sell these countries their products and we get the reputation of being an unreliable supplier.
FAIR Act I would also like to voice my opionion on the farm bill. I do not believe that the Act should be reopened. The big rap on the FAIR Act at this time seems to be the so-called lack of a safety net. I would suggest to you that there is a sefety net, and it may be even better than the previous farm bill. There are four aspects to my statement. First, we have the AMTA payments, which are not much lower than the old program. Second, LDP payments added to our price protection. There are some issues in regard to Posted County Prices and their relationship to actual cash prices that need to be remedied, however. I have been in contact with Congressman Thune's office about this. Third, we have the Market Loss Assisstance payments, which I believe should continue until trade negociating authority is again granted to the Administration. And fourth, we have government subsidized crop insurance available. To help make my point, please think back with me to 1995, and compare the current program to the one in effect at that time. We had very poor crops and fairly high prices that year. However, high prices do not help when you have nothing to sell. And then to top it off, we had to pay back the advance deficiency payments I submit that this was a very poor safety net. Although we have historically low prices now, this farm bill has been better than what we had before, and we certainly do not want to go back to supply management and setasides. Government support sounds nice, but in my view, if we take away the opportunity to fail, we also lose the opportunity to do our best. I would like to leave you with the statement that if the government is big enough to do everything for us, it is also big enough to take everything we have.
Page 189 PREV PAGE TOP OF DOC I very much look forward to working with you on these issues, and appreciate the honor and opportunity to participate here today. Thank you.
Testimony of Gene Hugoson
The state of agriculture in Minnesota during the last 12 months has been a case of one step forward, two steps back. While we have seen record corn and soybean yields, our farmers have suffered from crippling price drops and lingering crop disease. Our record yields, combined with the Federal assistance passed by Congress last fall, helped lessen the effects of these low prices. However, as these low prices continue into 1999, many people are concerned about the prospects of a long-term farm crisis.
The cure for this economic malaise must come from a number of directions, including Federal, State and local governments. Congress has already taken positive action by passing significant farm relief last fall. However, I suggest it would be wiser in the long run for the Federal Government to break the bailout cycle and instead give farmers the tools they need to help themselves.
Risk management and market access are two of the most valuable economic tools for farmers. Unfortunately, they are also areas that need improvement at the Federal level. Both areas represent unfinished business remaining in the wake of the 1996 farm bill, and the longer this business remains unfinished the worse it is for farmers. Risk management is undoubtedly a crucial part of the 21st century farmer's toolcase. Unfortunately, the Federal Government has not given farmers the highest-quality tools for managing risk. To illustrate, let me describe the situation in northwestern Minnesota.
During the past five years, wheat scab and poor growing conditions have devastated the average yield per acre in the seven counties in the northwest corner of our State. While yields have decreased, grain prices have stayed fairly constant. This led to a loss of about one-third of the total income per acre between 1993 and 1998. As a result, many farmers are dropping out of business. I understand the situation is equally grim in North Dakota. Congress helped out by earmarking millions of dollars to help farmers suffering from multiple-year crop losses, but we need you to go one step further. We need you to permanently fix the Federal crop insurance program to solve a number of lingering problems. For example, as the program is presently constructed, the amount of coverage
Page 190 PREV PAGE TOP OF DOCa farmer can get is determined by crop history going back only a few years. As a result, farmers who suffer several consecutive years of bad crops, like those in northwestern Minnesota, cannot get affordable crop insurance coverage at a level they need to cover their production costs.
In fact, the Federal crop insurance system has so grievously failed our farmers that the State of Minnesota was forced to pick up the slack by funding a Federal crop insurance premium reimbursement program. States cannot afford to pick up the slack forever. By providing farmers with better risk management tools, Congress can do its part to break the vicious cycle of boon-bust-bailout. Grain farmers are not the only ones who need stronger risk management tools. With fluctuating hog prices and sinking dairy prices, now is the time to provide all farmers with the high-quality risk management revenue assurance tools they need.
A second broad area in which we see room for improvement is market access. The rules of supply and demand tell us that in an era of increasing crop production and stable domestic consumption, the key to ensuring decent prices is to keep demand strong by finding new uses and markets for our products. That is best done by increasing our value-added efforts and expanding our international marketing. These two goals continue to be major priorities for Minnesota, but there are many areas in which the Federal Government could do more than it has. This lack of action at the Federal level is especially troublesome given the low commodity prices of recent months.
The Federal Government let agriculture down in a number of ways. Despite its importance to the U.S. economy as a net exporter, the needs of the U.S. agriculture community have been largely ignored at recent international trade negotiations. To rectify this oversight, agriculture must be given center stage at the next round of World Trade Organization talks. We need to focus the efforts of our trade officials upon removing the many unwarranted barriers other nations have erected against U.S. agricultural exports.
For example, one particular trade irritant could be resolved by pushing for fair trading practices with Europeans regarding genetically modified organisms. According to Farm Bureau, corn shipments to Europe exceeding 2 million metric tons are still being blocked by unfair European trade policies in this area.
Page 191 PREV PAGE TOP OF DOC Another helpful step would be for the Federal Government to leave agricultural commodities out of retaliatory trade actions. For decades we have been imposing trade sanctions on nations whose policies we dislike, but there has been little attention paid to how these actions hurt our farmers back home. Ag exports are blocked from too many countries in this way, sacrificing potentially solid markets to our competitors.
Another issue related to market access is the lingering U.S. Department of Agriculture ban on interstate shipments of State-inspected meat. Despite strong indications that this ban will be lifted, no action has been taken. As a result, it is still easier for some foreign countries to ship locally-inspected meat into the country than it is for Minnesota to ship State-inspected meat to Wisconsin. USDA's failure to lift this ban is particularly troubling to Minnesota, since we recently implemented a new State meat inspection program that is designed to help small and medium-sized producers market their identity preserved products directly to consumers in Minnesota and surrounding States.
Risk management and market access aside, there are a number of other pressing issues facing Minnesota agriculture. For example, the relationship between agriculture and the environment continues to be a prominent issue for us. We are presently conducting an in-depth study of the economic, environmental and social impacts of the livestock industry in Minnesota. Our hope is that by taking a scientific approach to the issue, we can construct the most effective policies and regulations that not only will protect the environment, but also allow farmers to operate in an efficient and cost-effective manner.
Unfortunately, our scientific approach is not shared by everyone. Facing mounting pressure to address some of the nation's feedlot issues, the Environmental Protection Agency is implementing confined animal feedlot regulations that are not based on sound science, but rather seem to be designed primarily to give outsiders the impression that something is being done. Unlike Minnesota, the EPA approach is to add regulations without regard for the impact or cost they have for farmers. We would much rather see EPA set environmental protection standards for States to meet and then allow States to work with their farmers and environmental experts to determine how best to reach those standards. From the perspective of a State like Minnesota, which has often been a leader on environmental issues, it is unfair for EPA to add nationwide regulations that do nothing more than add another layer of bureaucracy.
Page 192 PREV PAGE TOP OF DOC Before I go, I'd like to briefly touch on agricultural research. Congress has wisely invested in a number of research efforts, such as the work being performed in part by the University of Minnesota to find a cure for wheat scab. However, given the enormous economic devastation caused by crop pests and diseases, and given the amazing biotechnology discoveries being made around the world, I would argue that few investments could promise a higher rate of return than ag research.
Thank you for the opportunity to share my observations with you. I would welcome your questions or further discussion on these issues.
Testimony of Steve Peterson
I believe the Ag Economy has a lot of problems that need to be addressed and dealt with as quickly as possible. As many of you are will aware of most small to midsize producers have been hit hard with 30-year low livestock prices and grain prices below the cost of production. Many producers have been forced to restructure (if they had the equity) or have gone out of business.
Swine Producers have been the hardest hit with prices in the single digits. It is hard for us producers to understand how the price we receive for our product can be over 75 percent below the cost of production and the retail price of pork has declined less than 5 percent. When hog prices were in the single digits the Secretary of Agriculture started talking about launching an investigation of the spread between the price producers received for hogs vs. the price paid by consumers in the supermarket. Ironically live prices vaulted approximately $20 per cwt. or $48 per head in 20 days. Lean Hog contracts went from mid-December low of 26.075 to 43.25 in mid-Jan. It appears to me that the prices are not driven by supply and demand, what do you think? It is to the point in the swine industry if you are not a contract producer the Independent producer cannot survive.
Page 193 PREV PAGE TOP OF DOC The $50 million bail out to swine producers was an insult. A maximum of $5 per head is being offered to q-g producers. Note: I didn't qualify for the $5 per head because of production limitations. This hardly offsets the $40 to $70 per head that a lot of producers were losing. Note: My cost of production is approximately $90 per finished hog I received as low as $30 per head. I heard and Extension agent on the radio urging producers to get signed up before the deadline and if you had any pigs for a 4-H project you may also be eligible for a payment (was this intended to subsidize hobbies also). If we are going to offer assistance to Swine producers isn't it only fair that beef producers get the same opportunities.
The Beef Packing industry in general needs to be looked at more carefully. Four major packers control 70 percent of the processing creating a monopoly on pricing. Producers have lost most of our bargaining power.
The Crop Insurance program needs to be made affordable and based on the margins that we as producers are forced to operate on. It needs to be Producer friendly as well as Provider friendly. It needs to be a tool that we as Producers can present to our lenders and use as a reliable cash flow tool. The 30 percent subsidy is a step in the right direction.
With the cash price for wheat last year, the government AMTA program, and the special appropriations made available in October 1998, I was able to realize $3.40 per bushel for my wheat. My break even on 10 years of historical data on 40 bushels per acre total production costs is $4.50 per bushel.
I have a son in college who wants to come back to the farm. If something isn't done his dreams and the family farm could be a thing of the past. I don't have the answers but one thing is for sure there has to be some change.
I applaud the Agriculture Committee for holding these hearings to hear the views of producers from the Midwest. I urge you to act on these issues as soon as possible.
Thank you for listening
Page 194 PREV PAGE TOP OF DOC
Testimony of Ron Woollen
Thank you, Mr. Chairman, for bringing the House Agriculture Committee to Nebraska today. I would like to submit the following written comments to become part of the official record of this Public Field Hearing to review the state of the agricultural economy.
My name is Ron Woollen and I farm near Wilcox in south central Nebraska. I am currently president of the Nebraska Corn Growers Association and I present this testimony on their behalf.
We represent 2,500 corn producers across the State of Nebraska.
I believe that agriculture is truly at a crossroads in Nebraska. The 1996 farm bill, commonly referred to as Freedom to Farm, was intended to be a transition period to a new era of farm policy. I am here to tell you that the transition is not going well. NeCGA supported Freedom to Farm at it's inception and continue to support it today. I must say, however, the weaknesses with this legislation have become very apparent. Many producers in my area have left the farm this
year, some of their own choosing, others forced to do so. Refinancing, restructuring of loans, and seeking government guaranteed loans are very common this year. Fear is rising that the Farm Credit system will not have adequate funds to meet the demand for direct and guaranteed loans. Input costs continue to rise. Farmers, in an effort to become more efficient, have relied more and more on rented acres. This has caused rental rates to soar, and landowners have been very uncooperative in negotiating those rates down to more reasonable levels. Many producers market their grain through livestock. As you know, that was not a good option this year. The combination of very low grain prices and poor livestock prices has been devastating to the ag sector in Nebraska. Never in my lifetime, and I'm 52 years old, have I seen morale on the farm as low as it is today. I sincerely believe, if we do nothing, and we have a normal crop production year, Nebraska could lose as many as 25 percent of it farmers, a severe blow to agriculture and to our rural communities. The real frustrating thing to me is that, for the most part, these are very good farmersfarmers we cannot afford to lose.
Page 195 PREV PAGE TOP OF DOC Why isn't Freedom to Farm working as well as intended? I believe Congress must accept part of the blame for not following through with additional, needed legislation First, and foremost, is trade. Freedom to Farm cannot and will not work without free and fair trade and access to all markets, wherever they may be. Fast track negotiating authority must be given to this administration as soon as possible. Sanctions reform is also necessary because, as you know, agriculture commodities are the most export reliant sector of the U.S. economy. Markets that we have worked very hard to get can be lost in an instant and turned over to our competitors. It also diminishes our reputation as a reliable supplier. Access to all markets must include the European Union, and pressure must continue to be applied, at all levels, to assure our genetically enhanced products are accepted throughout the world. Spending must be increased in the areas of foreign market development and export enhancement. Research is vital to the future of the corn industry. Funding for corn and plant genome research must be preserved and enhanced.
Implementing the things I've just described will go a long way in realizing the long-term goals of Freedom to Farm. However, if we do not act now to bring some stability back to production agriculture, it will no longer matter. On January 27 of this year, NeCGA held its annual policy development meeting. I would like to share with the Committee a few of the NeCGA resolutions, as they relate to farm policy. It is generally agreed that the provisions of the previous farm programs were not working in the best interests of U.S. producers, and I share that view. However, I do not believe this means that every element of the old farm programs was bad policy. My hope is that the Committee will keep an open mind to exploring all available options and how they might fit into the Freedom to Farm framework.
The Commodity Loan Program is a very valuable tool for production agriculture. We believe it can be improved to bring more stability to the commodity markets. It is my understanding that Freedom to Farm originally called for a loan rate to be established at 85 percent of the five year, national average price, excluding the high and low years, but was capped at the old farm program rate of $1.89 because of budget considerations. With budget surpluses now a reality, doesn't it make sense to remove those caps and raise the loan rate? For many years, the U.S. loan rate provided a floor for world grain prices. This made a very good argument for keeping the loan rates low to discourage world production. With corn prices under $1.50 per bushel in some areas in the last few months, and looking to the future, seeing very few prospects for anything much better, I believe that argument is no longer valid. With Freedom to Farm, the U.S. loan rate is not a floor for the market.
Page 196 PREV PAGE TOP OF DOC Another area of concern to NeCGA is the Loan Deficiency Program or LDP. This provision allows producers to receive a payment of the difference between the county loan rate and the posted county price. Once taken, this grain is then no longer eligible to be placed under loan. Our concern is that this grain does not have to be marketed to receive the LDP, and then these bushels are held over the market like a hammer ready to fall at anytime, or worse held to the last possible moment, right before the new crop harvest begins. Also, once the LDP is taken, all down side protection is gone. Currently, an LDP can only be taken after the grain is harvested which is very unfair to many producers. Typically, LDP's will be highest early in the marketing year. This gives early, southern producers a tremendous advantage, just because of geography. Wet grain harvested early for livestock, also has an advantage. Many producers harvest more fragile crops first, letting their corn dry down naturally in the field, reducing their opportunities for the maximum LDP benefit. Having two different types of LDP's has also caused problems because one is based on the posted county price (PCP) in the county in which the crop was grown, and the other is based on the PCP in the county in which the crop was delivered. Again this is unfair to many producers. PCP's, and the manner in which they are determined, also frustrate and confuse producers. They are calculated using various terminal prices, less a basis or differential, to reflect local cash prices. PCP's change daily and, ideally, would follow the daily CBOT close. However, differentials can also be changed at any time, adding to the frustration and confusion. I live in the comer of Harlan County in Nebraska and farm in four different counties which join not far from my home. I have four different PCP rates even though all my grain is delivered to one local elevator. They can vary several cents on any given day. Even more unfair is the producer who farms near a State line, farms two parcels of land across the road from each other, and has PCP's 1015 cents apart. Harvest is the most stressful time of the year for farmers. In this instance, government is adding to that stress.
NeCGA has developed a plan that we think will improve the process. We believe that any program of this nature should be market clearing, and with that in mind we present the following: LDPs are applied to a qualifying quantity of a commodity that is utilized not requiring a cash transaction, such as grain for feeding, silage, or personal processing. It could be claimed as it is harvested or anytime after September 1 based on the producers APH. Market Assistance Payments are applied to that qualifying quantity of a commodity that is contracted for market. Prior to the loss of beneficial interest, the payment may be fixed by request anytime during the crop-marketing year. A contract for market, specifying delivery and price, must exist. Payment of the Market Assistance Payment would be at settlement. There are several advantages to this plan. (1) Market Assistance Payments can be fixed if commodity is contracted even though the crop has not been harvested because it is produced on a participating farm and payment is not made until stipulations have been met at market contract settlement. (2) Loan provisions may continue until settlement because payment is not received until settlement. A producer who forward contracts grain that is under commodity loan can, in effect, set their repayment rate, at anytime prior to contract settlement. (3) The loan remains secured by a commodity lien and the market contract price will cover additional interest accrued after the date the payment is fixed. (4) The market contract prevents forfeiture to the government. (5) The commodity on which a Market Assistance Payment is received will actually be committed to the market. (6) Marketing decisions can be fully responsive to the market without fear of timing relating to program provision eligibility.
Page 197 PREV PAGE TOP OF DOC NeCGA supports CCC maintaining a strategic reserve of corn isolated from the market, that it be farmer owned, and that it be stored on the farm with storage rates comparable to commercial rates. With Freedom to Farm, the U.S. is showing the world we are a reliable supplier of grain. However, as late as the summer of 1996, we were virtually out of corn. Corn prices went to $5.00 and beyond, eroding a strong demand base that had been built, and is somewhat responsible for our huge carryover supplies today. A reserve makes sense to help bring some stability to volatile markets.
Another weakness we see with Freedom to Farm is that the Secretary of Agriculture has virtually no options available when crops are large and demand disappears. In 1998, the market was telling producers we need your corn. Our farmers responded by producing 9.8 billion bushels of corn only to see the market we produced for disappear overnight. Lost exports for corn alone amounted to 500 million bushels, adding those bushels directly to carryover. When this occurs, we believe the Secretary needs the ability to respond. We suggest some type of voluntary, bidding program, to retire cropland from one to three years, possibly as an addition to the current CRP program, and using CRP rules. Maximum acres nationally, could not exceed 15 percent of cropland.
Improvement of the Federal Crop Insurance Program has to occur. We support reform that allows producers to insure yield potential despite recent production history. Crop losses, in successive years, can render crop insurance useless as a risk management tool. We also support reform that states: when the cost of harvesting a crop exceeds the value of a crop in the field, the yield will be zero for crop insurance purposes. The State 's average, custom harvesting rate could be used as a guide. With so much land changing hands today, producers need to be able to insure any new acres they are farming at its full production potential. Current policy, using ''T'' yields, prevents many from doing so. We also believe Revenue Insurance needs to be explored as a means of strengthening the ''safety net'' for agriculture.
Page 198 PREV PAGE TOP OF DOC Farmers are constantly looking for ways to add value to the crops they grow. End users are now offering a variety of contracts, looking for specific traits in grain The contracts require that the grain be ''identity preserved'' and can not be co-mingled with other grain. We believe these niche markets offer great potential to many producers, particularly to the smaller farmer, who is struggling to compete with larger operators. The problem is that farmers, over the years, have built farm storage facilities based on handling volume rather than being able to preserve the identity of smaller amounts of grain. A solution to this would be the implementation of a low interest loan program, for the construction of grain storage facilities. A producer could then have smaller bins available to produce for these niche markets, whenever those opportunities occur. We believe the future success of many in production agriculture will depend on being able to respond to these market opportunities.
Mr. Chairman, I thank you for the opportunity to present this testimony today. Doing nothing is not an option we can consider. NeCGA requests that you continue to analyze these issues. Please feel free to contact me, at any time, to discuss how we can move forward, work together, and find solutions to the problems facing all of us in production agriculture.