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70–703 DTP






FEBRUARY 14, 2001

Serial No. 107–1

Printed for the use of the Committee on Agriculture

For sale by the Superintendent of Documents, U.S. Government Printing Office
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Internet: bookstore.gpo.gov  Phone: (202) 512–1800  Fax: (202) 512–2250
Mail: Stop SSOP, Washington, DC 20402–0001

LARRY COMBEST, Texas, Chairman
    Vice Chairman
RICHARD W. POMBO, California
NICK SMITH, Michigan
FRANK D. LUCAS, Oklahoma
JOHN R. THUNE, South Dakota
BOB RILEY, Alabama
DOUG OSE, California
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ROBIN HAYES, North Carolina
SAM GRAVES, Missouri
MARK R. KENNEDY, Minnesota

    Ranking Minority Member
GARY A. CONDIT, California
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
TIM HOLDEN, Pennsylvania
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
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BARON P. HILL, Indiana
JOE BACA, California
RICK LARSEN, Washington
MIKE ROSS, Arkansas
KEN LUCAS, Kentucky
  ——— ———
  ——— ———
Professional Staff

WILLIAM E. O'CONNER, JR., Staff Director
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director



    Combest, Hon. Larry, a Representative in Congress from the State of Texas, opening statement
    Everett, Hon. Terry, a Representative in Congress from the State of Alabama, prepared statement
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    Larsen, Hon. Rick, a Represntative in Congress from the State of Washington, prepared statement
    Collins, Keith, Chief Economist, U.S. Department of Agriculture
Prepared statement
    Gardner, Bruce, professor of agricultural economics, University of Maryland, College Park, MD
Prepared statement
    Ray, Daryll E., agricultural economist, Department of Agricultural Economics and Rural Sociology, University of Tennessee, Knoxville, TN
Prepared statement

Submitted Material
    Klintber, Patricia Peak, ''Mythbusters: How Freedom to Farm Was Made to Fail'', Top Producer, December 2000, submitted by Mr. Stenholm

House of Representatives,
Committee on Agriculture,
Washington, DC.
    The committee met, pursuant to call, at 10:25 a.m., in room 1300 of the Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
    Present: Representatives Boehner, Smith, Everett, Lucas of Oklahoma, Chambliss, Moran, Thune, Jenkins, Gutknecht, Ose, Hayes, Fletcher, Pickering, Johnson, Osborne, Pense, Rehberg, Graves, Putnam, Kennedy, Stenholm, Condit, Peterson, Dooley, Clayton, Hilliard, Holden, Baldacci, Berry, Boswell, Phelps, Hill, Baca, Larsen, Ross, Aníbal Acevedo-Vilá.
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    Also present Lucas of Kentucky.
    Staff present: Tom Sell, Lance Kotschwar, Dave Ebersole, Alan Mackey, Callista Gingrich, scheduler/clerk; Jeff Harrison, Ryan Weston, Christy Cromley, Howard Conley, Anne Simmons, and Vernie Hubert.

    The CHAIRMAN. The hearing of the House Committee on Agriculture to review the current state of the farm economy and the economic impact of Federal policy on agriculture will come to order.
    Not long ago, nearly all of the top farm economists were predicting that the stage was set for another golden age of agriculture. This was the atmosphere in which the 1996 farm bill was written. Unfortunately, within the 2 years of the farm bill's passage, we saw our fortunes change. Today we are going to hear from top farm economists who, I understand, are going to predict the fourth consecutive year of record low commodity prices. Since each of our distinguished panelists is a friend of agriculture, I don't think any of them will take it personal when I say that I hope their predictions are as inaccurate today as they were 6 years ago.
    For the purposes of this hearing, we will assume that all the kinks have been ironed out of their forecasting models and the crystal balls are working.
    In early 1999, this committee rolled up its sleeves and began working with producers from all over the country toward improving the production side of the farm safety net. As a result, a bipartisan Congress overwhelmingly passed and the President signed into law the most sweeping improvements to the Federal Crop Insurance Program in its 63-year history.
    Last year, at the same time it was completing work on crop insurance, this committee turned its attention to the price side of the farm safety net. All said and done, the committee held 10 field hearings, five hearings in Washington, and heard the testimony of over 200 producers that represented farmers and ranchers from every region of this country. During these hearings, I believe this committee learned a lot about the serious problems that confront today's agriculture producers.
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    But today we are meeting to kick off a series of hearings where witnesses, farm economists, agricultural experts, and especially producers, will tell us exactly how they think we can best tackle these problems. Specifically, we will hear today from farm economists about economic conditions in agriculture and the implications of certain Federal farm policies. Then tomorrow, we will begin hearings from producers about their specific policy recommendations in light of what the economists say.
    These hearings are important for two reasons. First, I believe that people who do not contribute to a process have no room to complain about the outcome. Second, I believe the best ideas are tested ideas. By fully vetting every idea with producers, I believe we cannot only build consensus, but I believe the consensus we build will be the right one.
    We begin this process today with three expert farm economists. First, USDA's distinguished Chief Economist, Dr. Keith Collins, will give us a detailed explanation of where American agriculture stands today and how it got there and what lies ahead.
    Then, in the crossfire, so to speak, we have Dr. Daryll Ray, an agricultural economist from the University of Tennessee, and Dr. Bruce Gardner, a professor at the University of Maryland. These two experts will tell us about the positive and, perhaps, sometime negative impacts that Federal foreign policy can have on agriculture.
    And finally, as you all know, we members sit where we do on the committee because of the seniority system. But given the sharply divided opinions, we are going to hear from today's witnesses, seniority alone will not fully explain why I have such a wide buffer zone separating me from the witness table. I like to let the young guys like Mr. Putnam, Mr. Graves, and Mr. Kennedy sit ringside.
    I thank the witnesses for being here and I recognize my good friend, the Ranking Member, Mr. Stenholm, for an opening statement.
    Mr. STENHOLM. I have no opening statement. I welcome the witnesses and look forward to hearing from them.
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    The CHAIRMAN. All opening statements of members will be submitted and accepted into the record.
     We have made it a practice not to have opening statements. It would take 4 1/2 hours just to have 5 minutes of opening statements by each Member. We are here to listen to the witnesses and I appreciate all of our Members' indulgence in that.
    [The prepared statements of Messrs. Everett and Larsen follow:]
    Thank you, Mr. Chairman, for holding this very important hearing to review the current status of the agriculture economy. It is no secret that we have been experiencing a critical down cycle in production agriculture. I especially want to thank USDA's Chief Economist, Dr. Keith Collins for adding this hearing to his very demanding schedule.
    Farmers throughout the Nation greatly rely on several of the same factors. Good weather and adequate prices are a basic necessity. However, when one or both of these factors are missing, farmers begin to suffer.
    Producers have long known the hardship and struggle that comes with working the land. However, multiple years of depressed commodity prices have created market conditions unseen by farmers and ranchers since the 1980's. In my home State of Alabama, these conditions have caused an enormous strain on all of our producers. This strain is not only being felt by producers, but throughout the rural community.
    I commend Chairman Larry Combest for his decision to conduct hearings to review current agricultural policy. These policy hearings will provide members of this committee with ideas regarding production agriculture.
    It is obvious that farmers are facing depressed prices due to a lower demand for farm products. Last year under similar circumstances, Congress passed an assistance package that provided direct payments to farmers. This assistance package provided a much-needed boost to the farm economy. The direct payments provided in the past have allowed a number of farmers to continue a viable farm operation. However, I believe our producers must participate in the risk management programs that are available to them. The Agriculture Risk Protection Act allows producers to buy additional coverage at much lower prices through improved premium assistance. This program provides farmers with a tool to protect themselves from adverse conditions in the farm economy.
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    Since passage of the Freedom to Farm Act, there have been opportunities and challenges for agriculture. Producers have enjoyed the planting flexibility component of the Freedom to Farm legislation.
    However, the farmers of Alabama are experiencing a number of economic hardships. For instance, the low commodity prices over the past three growing seasons have made it difficult for producers to provide their lenders with the equity needed to obtain financing that is used in production of the next crop. I believe today's hearing will provide insight to the members of this committee regarding the current agricultural economy. This information will be helpful as we continue to support production agriculture and our
local communities.
    Again, I would like to thank the chairman for holding this hearing.
    I am anxious to hear from our distinguished panel of witnesses.
    Thank you Mr. Chairman. I appreciate the opportunity to be here today and to serve on the Agriculture Committee this Congress. I look forward to working with you, the Ranking Member Mr. Stenholm and the rest of my colleagues as we continue to explore how best Congress can most productively support our agriculture industry.
    I am particularly pleased to be here representing the Second Congressional District of Washington State, where agriculture is a vital part of the economy and a meaningful part of the region's identity. The second district extends from Everett north to the Canadian border and from Puget Sound to the Cascade Mountains. I am now actually the first Member of Congress from the western side of the State who has served on this committee in over 50 years.
    While Washington is particularly know for its apples, we are also among the Nation's largest producers of raspberries, strawberries, blueberries, spinach, cabbage, lentils, hops, carrots, sweet corn and asparagus.
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    Unfortunately, with prices for many agriculture commodities at historic low levels many of the farmers and ranchers in all our districts are financially stressed. In fact, according to Farmland Trust, the Puget Sound region in my State is the fifth most threatened farmland region in the Nation.
    That is why I look forward to working with the farmers in my district, with you Mr. Chairman, and with the rest of my colleagues in ensuring that we protect our agriculture community and that the United States maintains its position as a world leader in agriculture.
    The CHAIRMAN. Dr. Collins, please begin.
    Mr. COLLINS. Mr. Chairman, and, members of the committee, thank you for letting me be here today, to open this hearing with a brief report on the state of the farm economy. In recent years, the U.S. economy has enjoyed strong income growth, low unemployment, surging productivity, low inflation, and generally low interest rates. Those trends have made life better for most Americans.
    Agriculture, too, has been helped by some of those trends, such as the strong income growth, which has boosted farm product demand. Also, it has raised off-farm income for farm households. And low inflation and interest rates and new technology have also benefited U.S. agriculture. Unfortunately, production agriculture has been particularly vulnerable to foreign competition, a strong dollar, economic recession in foreign countries, and, most recently, sharp increases in energy costs.
    As I look at the prospects for 2001, I think there are some signs of improvement in underlying market fundamentals. Export growth, which has been a continuing problem, now looks a little bit more positive. Foreign GDP grew 4 percent in the year 2000, and that was the largest gain in more than a decade. In this year, we expect it to grow over 3 percent.
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    Following the sharp appreciation of the dollar in the late 1990's, declining interest rates and the slowing U.S. economy should reduce the value of the dollar in 2001, making U.S. products modestly more attractive to foreign buyers.
    The value of U.S. agricultural exports is forecast to rise to $53 billion this year, a number that we will revise next week. But as it stands, that is up from the recent low of $49 billion 2 years ago, nevertheless, quite a bit lower than the $60 billion record of 1996.
    In January, the index of prices received by farmers for all crop was up 4 percent from a year earlier, and the index for livestock products was up 6 percent from a year earlier. Nevertheless, many commodity prices are increasing from what have been 15- to 25-year lows. Improvement is expected to be slow in coming.
    In addition to low commodity prices, many producers over the last several years have been affected by weather-related problems and, most recently, the rising energy-related input prices. The $25 billion in supplemental assistance to producers over the past 3 years, has greatly limited farm financial stress that otherwise would have occurred. This assistance resulted in a record high $22 billion in direct Government payments in calendar 2000 and a record high $32 billion in CCC outlays in fiscal 2000.
    CCC outlays are projected to decline slightly, to a little over $20 billion this fiscal year. Had Congress not provided the supplemental assistance to farmers, U.S. net cash farm income in 2000 would have likely fallen to the lowest level since the mid–1980's. Instead, net cash income was up year over year and about $2 billion higher than the average of the 1990's.
    With no further supplemental assistance legislation for the 2001 crops, we project net cash farm income would decline about 10 percent in 2001 from $56 1/2 billion last year to under $51 billion this year as production expenses continue to rise and Government payments decline.
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    Fuel expenses are expected to be about unchanged this year, compared with last year, but higher expenses are in store for nitrogen fertilizer, hired labor, repairs, and other inputs.
    The added payments of the past 3 years have helped maintain land values and limit the increase in farm financial stress. Farm numbers have been fairly stable. The proportion of nonperforming farm loans has been about the same as the last couple of years. The overall debt-to-asset ratio remains manageable. Off-farm income has also helped stabilize the farm economy. Off-farm earnings for farm households are estimated at $60,000 in the year 2000, up from $36,000 in 1992.
    Turning to specific markets, the major field crops have been particularly hard hit by low prices the last couple of years. Direct Government payments accounted for three-quarters of net cash income for major field crops in 1999 and two-thirds of net cash income in the year 2000.
    As we look ahead for the remainder of this crop year in the 200–01 season, several commodities are likely to see stronger markets as supplies tighten. For example, global wheat stocks are shrinking. Wheat plantings last fall were at a three-decade low. While corn carryover stocks are expected to rise somewhat this marketing year, less acreage expected this spring, stronger exports and strong industrial use are all positive for corn prices. Cotton prices are up some 30 percent this year, as global supplies have tightened, although prices still remain weak relative to history.
    A number of horticultural products may see stronger markets as exports expand and acreage is trimmed. And fed cattle prices are expected to be up 7 percent in 2001 as beef production drops 4 percent.
    On the other hand, while U.S. rice supplies are declining, rice prices are down, primarily under pressure from foreign competitors. In addition, price pressures are likely to remain for soybeans, for milk, and, particularly in the second half of 2001, for hogs.
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    Recent farm programs have had mixed impacts on market fundamentals for major crops. For example, farmers have taken advantage of planting flexibility by switching to alternative crops to benefit their operations. Soybean plantings in 2000, for example, were 25 percent above what they averaged under the last farm bill. Wheat was down about 12 percent compared to the last farm bill, while corn and cotton plantings were up 5 to 10 percent compared to planting averaged under the last farm bill.
    With loan rates set at the maximum levels authorized by the farm bill and farm prices dropping, loan deficiency payments and marketing loan gains have provided built-in support to farmers. Those costs have risen from less than $200 million in 1996 and 1997, to nearly $8 billion for the 1999 crop and a projected 6 to $7 billion for the 2000 crop. However, these payments, which are based on current production and prices, have also encouraged production.
    One USDA estimate, for example, suggests that the projected loan benefits increased plantings of the eight major crops by 4 to 5 million acres in the year 2000, roughly a 2 percent increase.
    In the absence of new supplemental assistance, U.S. farm income may drop below recent levels during the next few years as higher commodity prices and cash receipts do not fully offset declining Government payments. But if we can move beyond the situation of recovering economies around the world, high exchange rates, high energy prices, and a string of high-yield years around the world, the outlook for the farm sector would improve as both domestic use and exports, particularly to developing countries, should strengthen farm prices and incomes. And those prospects would be further strengthened if we can make meaningful progress in reigning in protectionism around the world, starting with China.
    Mr. Chairman, that completes my statement.
    [The prepared statement of Mr. Collins appears at the conclusion of the hearing:]
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    The CHAIRMAN. Thank you very much, Dr. Collins.
    I need to mention that Dr. Gardner is finishing a class at College Park and he was going to drive in right after that, and so we know he would be a few minutes late.
     So please proceed, Dr. Ray. Thank you.
    Mr. RAY. My name is Daryll Ray. I am an agricultural economist with the University of Tennessee for the Agricultural Policy Analysis Center. I would like to begin by pointing out three points on some data that I have enclosed and I want to make these points as forcefully as I can because I think they reveal a lot about the nature of the problems that we are showing in agriculture right now. For those of you that have my materials, I would like for you to go to page 6 and look at figure 3.
    On figure 3, we have harvested acreage for corn, soybeans, wheat, and cotton. That is what the four crops are. And we have got this indexed to 1996 equals 100 and you will see that there has been virtually no change in the acreage of those four crops. And, yet, we have tremendous changes in prices. If you look at the bottom line there, we have had a price drop for those four crops of about 36 percent. If you add in the LDPs, that reduces the revenue per unit to 31 percent. If you add in LDPs, plus the AMTA, plus emergency payments, that shows a decline of 21 percent.
    So even though we have had—and you pick your choice—36, 31, or 21 percent decrease in prices or revenue per unit, we essentially have seen no impact on the total acreage of the four crops. Of course, the mix has changed, but that land is being used to produce something. That is one point I wanted to make.
    The second point is, is that crop exports haven't been growing for the last two decades. They have been flat. If you would go to page 8 and look at the figure at the bottom, page 9, you can see the information for corn. And it is pretty evident that while domestic demand has been increasing at a reasonably constant rate from the mid–1970's on, export demand is flat. It varies, but the trend is totally flat. Exports have not been the driving force of crop demand in this country for over two decades, contrary to what we are led to believe in some ways.
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    On the next page are a couple additional graphs, one for soybeans and one for wheat. The soybean graphs look somewhat similar to corn, except there is somewhat of an upward trend in the latter part. But if you look at wheat, you see that actually wheat exports have trended down, while domestic demand has gone up. So, again, the point is, is that over the last two or more decades, exports have not been the driving force of crop demand in this country.
    Third point I want to make. Lower prices have not caused our fiercest export competitors to reduce their production. If you go back to page 6 now and look at the figure 1, that is the figure for Brazil. We find that Brazil has increased its acreage by 13 percent between 1996 and 2000. Of course, the reduction in prices have been in the neighborhood of 40 percent. That has come at a time when we have increased our acreage, as Dr. Collins was saying, tremendously, 25 percent for soybeans. It is over a 13 million acre increase. Prices have gone down by 40 percent. We have increased our product, our output on acreage by 13 million acres and, yet, Brazil continues to produce. These, I think, are important points that we need to keep in mind with regard to the price responsiveness of supply and demand in agriculture.
     I want to then take a look at how this might have implications for the 1996 farm bill. I believe the 1996 farm bill was based on speculation with regard to some of these things we have been talking about here. Speculation that export growth would propel agriculture into a new era of prosperity, which has already been mentioned. Also, though, that there was speculation that farmers would now respond to market signals, producing less when prices declined and more when it increases.
    Also, there was speculation that domestic and export demand would now expand quantity demanded if prices declined and vice-versa. You put all that together and what it suggests is, is that there was speculation that agriculture could now self-adjust, self-correct, on its own without politically unacceptable devastation to the sector. It would work on its own. We know it hasn't worked out that way, and I think we are in denial about it. I think we are in denial that anything long-term is to blame for the devastating low prices in low-market incomes and crop agriculture.
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    I think we are more willing to blame agriculture's problems on the Asian crisis, exchange rate, energy prices, or anything else that comes along. Others blame it on the level of loan rates, emergency payments, or crop insurance. The implication is that once the you-name-it disruption subsides or is remedied, agriculture will be just fine. And I think that that isn't true. Every industry has disruptions, including agriculture. The main point is, is how well agriculture can adjust to those disruptions, irrespective of what it is.
    And as an agricultural economist that has been looking into these issues and analyzing them for over 30 years, I believe that the market experience of the last 4 years shows that crop agriculture is just as prone to the chronic price and income problems as it was when farm programs were instituted decades ago.
    In order to understand why agriculture has behaved as it has, I think all we need to do is look at two things. We need to look at the rate of growth of supply relative to demand and the price responsiveness of supply and the price responsiveness of demand and try to understand why it is that agriculture has these kinds of characteristics.
    Starting with supply, supply tends to grow relatively steadily. Yield increases are the major source of that growth. And I would remind us that the yield increases can be traced back to a large part to the technologies that are developed at publicly supported land-grant universities and Federal research stations. And that is a good thing. The continual full use of that expanding capacity, regardless of the demand conditions, does turn out to be a problem occasionally. And crop farmers cannot adjust industry output in the short run nor can they adjust the capacity of the industry in the long run. And, of course, other industries do do that. They routinely have excess capacity that they hold in reserve for peak periods and the leading largest firms in the industry make decisions about how fast the industry should expand.
    On the demand side, domestic demand, basically in this country, is a function of population. Per capita incomes are important for other kinds of commodities, but they are not that important for agricultural products for food. We are so well-fed and we are so rich that we don't increase our intake of food as prices decline. We just change the mix and buy more services.
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    Export demand. Export demand often does not grow at all for decades at a time. Now, in a given year, it might increase. It might increase for a couple of years, but if you are talking about steady growth, that doesn't happen very often. Actually, in the last century, it has really only happened three times, and two of those were during world wars. It is not something that you necessarily can base expectations on.
     I believe that, for the most part, countries that can grow their own food, prefer not to import anyway, especially staples. They are forced to sometimes because of the natural resource base that they have and for other reasons. But if they can grow it on their own, they have a tendency to want to do that for self-sufficiency reasons and for reasons that we will talk about in just a moment.
    When we talk about the relative growth of supply versus demand, I would argue that the publicly funded supply routinely exceeds the growth in domestic and export demand. And, again, that is good thing, because we need to have the capacity to feed ourselves and to provide product in the long run, but it gets us into trouble.
    Price responsiveness. I would argue that total acreage, crop acreage, is unresponsive to price declines in both the short and the long-run. Farmers really have no incentive to reduce their acreage when prices decline. There is no rational reason for them to reduce their acreage because all it does is reduce their revenue. As long as farmers can scrape together enough money to plant crops, they will continue to do that until their equity is gone or until the bank won't let them in the field. Basically, they are out there to produce.
    It doesn't really matter whether that money comes from market sales, from coupled or decoupled payments, from working off the farm, spouse's income, or whatever. If they have enough money to produce, they will. Is this true for other industries? Of course not. No other sector would allow price to approach the cash cost of production, let alone drop below it. Output would have been curtailed long before that.
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    If that farmer goes bankrupt, the land is purchased by another farmer and remains in production, perhaps even at a higher level. Does this happen in other industries? No. If there are too many tire plants, that tire plant goes out of business and those facilities are used for a different industry, not by Goodyear. And agriculture doesn't work that way. So I would argue that the bottom line is, is that land will be farmed either by the existing farmer or the one that replaces him, but it will be farmed.
    Also, demand is unresponsive to price changes because food is essential for life, like insulin for a diabetic. Price is really of no consequence. We are going to buy food no matter what. But after we have bought it, we are not going to buy anymore. So it has a different kind of characteristic relative to about any other kind of product that we can think about. The price declines for most other kinds of products, we are out there buying more. Not for food.
    On the export side, export demand also responds very little to lower prices, even after 4 years, we have seen. Importing countries do not import more because prices have declined appreciably, and for some of the same reasons that we don't increase our demand for food or feed when prices decline. So if we do have a price decline, the export pie expands very little due to lower prices. And since our export competitors tend to export all of their production in excess of what they can sell at the domestic market, we tend to be the residual supplier. And I would argue that we are just as much a residual supplier at the high-price levels in the 1970's as we are at the low-price levels today.
    Also, if you have reduced prices for a period of time and importers are producing their own food, they will not decide to reduce their production and import it just simply because prices are lower. The behavior is because of food security and other political reasons. Many of these people have actually gone hungry and they do not want to give up their ability to produce domestically.
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    As an economist, I would like to believe that comparative advantage is an important source of international trade, and for many products, I think it is. But I think it is delusional to think to think that comparative advantage is in the driver's seat in the case of agriculture.
    As we have seen, export competitors react to lower prices much the same way as our producers do. They produce anyway. After we looked at Brazil and EU and you can look at others—Canada has declined some. But if you look at the total acreage of all, it is very unimpressive.
    With regard to the EU, we used to say that we were going to lower our prices for the EU so we could bring it to its knees. That was something that we commonly heard in the 1980's. After years of receiving price-depressing wheat export revenue and experiencing continued downward shares of the world wheat exports, not only were we unsuccessful in reducing wheat exports from the EU, it now appears that EU is capable of exporting wheat without export subsidies in the near future.
    So we have spent an astounding amount of money—an astounding amount of money—to drive the price below our full cost of production so that we could regain export shares of the late 1970's. Obviously, this hasn't worked. So are we going to learn from that policy failure or are we going to continue to stay the course, produce more than can be sold at profitable prices, so we can be competitive in the export market, but receive successively less from the sale of crop exports?
    At your leisure, I would invite you to look at page 13. But it shows prices and export value for the last 4 years under this, and you will see that it has declined and declined markedly.
    To conclude, I would just like to say that agriculture is, indeed, unique. Much of that uniqueness is rooted in two characteristics that we have talked about. Cropland is going to be used for crops, either by the existing farmer or another farmer, but it will be used. It will shift very easily from one crop to another, but that cropland, for the most part, will be used. That is on the supply side. On the demand side, food is so essential that we must have it, but we need it in a finite quantity. And it doesn't really matter whether the price is high or whether it is low. We only need so much and that is all that we will demand.
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    For these and other supply and demand characteristics, virtually assures that there will be little change in the total crop acreage and little change in the quantity demanded as prices fall, even as we have seen the 40 percent decline in prices over the last 4 years.
    Now, occasionally, exports will increase and they often have for a year or 2, but usually not over a long period of time. Technology, on the other hand, is increasing the yields for agricultural commodities. And if you have this combination then of price unresponsive supply, price unresponsive demand, and supply shifting faster than demand, prices and incomes can be expected to be chronically depressed. And so I would argue that this is not a short-term problem. And I will leave it at there. Thank you very much.
    [The prepared statement of Mr. Ray appears at the conclusion of the hearing.]
    The CHAIRMAN. Thank you very much, Dr. Ray.
     We will go ahead and begin some discussion and then we will certainly stop when Dr. Gardner gets here. Thank you both for your testimony and for the information which you included. And I will command that to my colleagues that there is a lot of very interesting information in there.
    There are several areas I want to hit, and so we will try to do this in short answers, if at all possible.
    Dr. Ray, the first thing you called our attention to was on page 6, figure 3, in which pointed out the crop acreages remained about the same. I don't contend that it is the crop acreage that has as much of an impact as it is the crop production. And pretty much, historically, we have seen, when we have had diversion programs set aside, whatever we want to call them, that actually production has not changed that substantially. There may have been a lot of acreage that was not produced, but generally the tendency is to increase inputs into that acreage, of which one is farming, and, therefore, production pretty much remains the same.
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     Do you have any views of—or looked at from the standpoint if we are trying to put a correlation between what we are actually producing and price, have you ever looked at what maybe one might want to consider if we were trying to have some kind of control over supply and demand, of some kind of way to do that other than the acreage controls?
    Mr. RAY. You are absolutely right. There is a tremendous amount of slippage when you have an acreage control program, especially at the lower rates, and it doesn't have as much impact on production as you would think it would, given the set-aside rate. The reason that I focused on acreage is because that is the variable that farmers have control over for the most part. The yield is primarily determined by weather, and there is so much variability in that that is totally unpredictable by the farmer.
    I do think that we do need to look at mechanisms that minimize the slippage that you are talking about, if we do want to do supply-control programs. I think we have to continue to have the planning flexibility so that we don't get into the same kind of program structure that we had before, where you would reduce by specific acreages, but rather reduce, in some way, the total resource based for agriculture and allow farmers to have their flexibility. You bring up a very important point.
    The CHAIRMAN. Let me ask you both, to see if you happen to know where we are here, or have seen anything recently. Sometimes I find the best poll are the coffee shop polls, when you stop in and sit down and start talking to a group of farmers or whatever. It is my impression, from talking with people over the past several weeks, that given exactly today, February 14, Valentine's Day of 2001—go back exactly a year—and I believe that generally farmers, and certainly I will say, regionally, in my part of the country, were better off than they are today. We were hearing this from farmers. We were hearing it from agriculture lenders, that most of them had been able to cash flow. It looked like that—which was due, I think, to the very generous efforts of the 106th and the 105th Congress. But they were able to cash flow and probably were going to be able to get their operating loans for the year.
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    I am hearing a very distressing news now, that they are in much worse shape this year, on February 14, than they were last year. Now, given that we have had primarily the same amount of money that has come in assistance and given that we have had generally in the same ball park, in terms of commodity prices, and you put aside unusual situations where one area may have had certain weather losses or whatever, but looking at it as a whole, I asked the people why that is. Generally, the response is due to a substantial increase in production costs, and most of this is energy-related, either natural gas irrigation, butane, propane, diesel, gasoline, anhydrous ammonia, all of those things that have an energy-based cost. Have any of you looked at that and can you confirm or tell me that I am right or wrong in that assessment?
    Mr. COLLINS. I certainly have looked at that and can confirm that. If you look at production expenses in agriculture in the late 1990's, they were fairly stable. They were growing 1 percent a year. In the year 2000, however, they went up $7 1/2 billion with net farm income being roughly $55 billion. Percentage-wise that is a huge share of net farm income. In 2001, they are going to go up again another 1 1/2 to $2 billion. And so there has been a surge. It is across the board. Tight labor markets have raised labor expenses. Labor is the single biggest cost. Hired labor expenses per year are some $15 billion in agriculture.
    But the single biggest increases are coming from energy. We saw about a $2 1/2 billion increase in fuel costs last year. This year, we are going to see a very sizable increase in fertilizer costs. Our estimate, at USDA, right now, is for about a $400 million increase. My guess is we will probably be revising that upward as we go through the year because of the increase we are now seeing in nitrogen prices.
    So I think your observation is true. If you look at farm prices, as I indicated in my statement, now, compared to a year ago, they are up 4 to 6 percent. However, we have seen very big increases in production expenses and we will see them again, particularly for fertilizer, this year.
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    In addition to that, I think another concern on people's minds is probably the fact that over the last couple of years we have had four supplemental assistance bills. Those bills are now playing out. And, as people look ahead, they don't see something legislated and I think that has an effect on bankers and credit availability. We also know, from looking at the situation in agricultural banks, that loan-to-deposit ratios for a lot of banks are a little higher than they would like. And so we are getting a lot of reports that bankers are tightening credit conditions this year. So I think that is probably another factor in it.
    The CHAIRMAN. Dr. Gardner, thank you for joining us. I told everyone you were having a class. If I had been one of your students, I would have presumed this morning, I would have gotten a walk and I would have probably cut your class. But we are glad you are here. We have just finished with the other testimony. I hate to rush you and put you on the spot, but if you are ready, please proceed.
    Mr. GARDNER. Thank you, Mr. Chairman. I apologize for being late, but, as you say, I did have a class and I thought I would keep my responsibilities to the State of Maryland by meeting them today. And I didn't get a chance to practice this on them, but let me just summarize my testimony briefly on the farm economy by reviewing three aspects of today's situation and trying to put them in a longer-term context, if I could. And then I will briefly address the policy implications as I see them.
    First, I know we have heard a lot, and I have read my colleagues' testimony, about commodity prices being at record lows, farmers not being able to cover their costs at current prices, the outlook for 2001, perhaps only modest improvement. I fully agree with these characterizations of where we are. I don't have anything to add on that. I would re-emphasize, though, that I think that there is nothing fundamentally new about the situation that we are in now. This kind of cost-price squeeze and difficulties in the markets have been typical of most of the 20th century, I would say.
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    The second thing, though, that I wanted to talk about, is to go outside the commodity models to recall that the average farm household now has a level of income that exceeds that of the average nonfarm household. And this is a relatively new phenomenon. I have included in my testimony a diagram, figure 1, that shows the history of how that has worked. Until 1960, farm families appeared stuck with incomes at 60 percent or less of the level that nonfarm families enjoyed. But since that time, there has been a dramatic improvement in a relative standard of living of farm people.
    The third fact that I would point to, is that in 2001, we have a much larger number of farms that had been projected 20 or 30 years ago. And the other diagram that I included in my testimony, figure 2, shows a representative trend projection of the number of farms that was published in 1970. Based on the decline in farm numbers that had occurred up to 1960, the projected number of farms in 2000, at that time, was less than 600,000. Yet, now, we find, in fact, we still have over 2 million farms.
    What explains the persistence of large numbers of farms with relatively high household incomes while at the same time most farms find it chronically impossible to make profits in commodity markets? The main answer is off-farm income, which is earned by farmers and, increasingly, by family members. This situation is sometimes viewed as a weakness in the U.S. farm economy, but I regard it as a strength. Off-farm income sources have enabled hundreds of thousands of families to stay on the land when otherwise they would have had to leave.
    But to complete my picture, we have to consider some exceptions to the statements that I have just made. First, with respect to household incomes, there are still millions of people in rural America who are at a poverty-level standard of living. Some of them are farm families, but most of them are not. They are hired farm-worker families or others who live in rural areas, but do not earn their living from agriculture.
    The second exception, perhaps more directly relevant to the work of this committee, is that commercial agriculture, without the assistance of off-farm income, does provide a good living for many farm families. Consider the larger-family farms, that is, the approximately 150,000 farms that sell more than $250,000 of products annually. That is using USDA's breakpoint between small and large farms in their recent small farm report.
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    These farms are less than 10 percent of all farms, but they account for about two-thirds of all U.S. sales of farm products. On average, these farms earned over $100,000 from their farming operations in 1998, according to USDA's estimates. Now, this figure is not as high as it might look in that, these farms had an average net capital invested of over a million dollars. Their incomes amount to only a modest rate of return on this very large investment, about 6 percent, by my estimation. Still, this is a lot different from the smaller farms, most of which show a negative return on capital.
    So where does this leave the policy situation for 2001? Well, I think, maybe it is a modest point, but I would say that it is really important to separate policy aimed at helping people in economic trouble from policy aimed at commercial agriculture. People who have low incomes or are in danger of bankruptcy, should be assisted in various ways, and, in fact, I think this committee should devote a lot of attention to improving the human resource and rural development policies that we have. But these policies should be separated sharply from commodity programs. I think it is hopeless to think that higher commodity prices could make small farms economically viable without off-farm income.
    For example, we have about 1.3 million farms, that is, the majority of the U.S. farm population, that sell less than $40,000 of farm products annually. It costs these farms about $40,000 to produce those products. So even if policy could somehow raise all commodity prices permanently by 50 percent, the best this could achieve would be an increase of about $20,000 per farm from farming.
    Second, policy for commercial agriculture should let farmers farm and should not attempt to micromanage farming or the commodity markets. I think it would be most productive to focus policies that have, in the past, reaped the greatest rewards for our Nation, including the food consumers, as well as producers. And these, I think, are the policies that have made the United States the world's leader in agriculture and food production, including our continuing efforts in research, technology development, technical education. I think it is important to maintain these efforts and to continue to turn these investments toward remedies for the genuine market failures that exist.
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    For example, protective water quality, to keep supporting biotechnology development, including the establishment of appropriate incentives and property rights and new technology, of protocols that will efficiently meet the appropriate science-based standards of food safety and quality, and gaining international agreement to reduce protectionism in this and other areas of agricultural trade.
    A key practical step in this last area, is congressional granting of fast-track negotiating authority to the President. With respect to commodity policy, more narrowly defined, despite the criticism that has been leveled at AMTA payments and supplements to them in the last 3 years, I think it is a good feature of them, that they let farmers be farmers and do not attempt to outguess the markets.
    The one aspect of our current policy for which this cannot be said, however, is the loan program. Loan deficiency payments are encouraging overproduction and this reduces price still further. In my written testimony, I estimate that the $7 billion, roughly, in LDP payments, generates additional production sufficient to cost farmers about $2 billion a year because of reduced commodity prices.
    In contrast, AMTA payments go almost completely into farmers' and landowners' pockets. Moreover, loan deficiency payments, by sending overoptimistic production signals to producers, are forestalling production adjustments that market realities are calling for.
    Therefore, I would say, this is your business, but I am making a recommendation, that if we had to do something that would reduce the outlays in agriculture from the $20 to $23-billion level that was spent last year, it would be better to cut loan rates and keep the doubled AMTA payments, rather than cut the AMTA payments and maintain loan rates at current levels.
    And finally, let me say that while I favor reducing loan rates from the caps at which they have been maintained, I also believe that the loan program is far less damaging to the efficient operation of our farm economy than the acreage-reduction programs and the stockholding policies that we used to follow before 1995. I think a big mistake would be to go back down that road. So that completes my summary and I would be pleased to answer any questions.
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    [The prepared statement of Mr. Gardner appears at the conclusion of the hearing.]
    The CHAIRMAN. Thank you, Dr. Gardner. Mr. Stenholm.
    Mr. STENHOLM. Dr. Ray, one of the conclusions that I come to with regard to your charts on page 6, and it is confirmed not just by the 1996 to the year 2000 numbers, but you can go back in any historic period, back to the early 1970's, and you have a difficult time sustaining the argument that the price of our commodity in the United States or our policy has anything to do with world production or our exports or imports, I should say. We don't export any more when it is cheaper than we do when it is higher. There is something that is having an effect on it.
    Now, I would come to a conclusion, when you look, for instance, at the soybean acreage and price, that there is a direct relationship between the value of our dollar and our ability to compete in international marketplace. In fact, you can come to the conclusion that that is it. That if there is a 25 to 40 percent change in the value of our currency, that means that a commodity selling for a dollar in the United States, is competing with a 60-cent commodity in the other country and both producers are, in fact, on a level playing field. And I ask that question to all three of you for comment.
    Mr. RAY. I agree that the exchange rates are an important component of the demand for our exports in a given year. Given the way that our export competitors view the international market, and given the reasons that after the cropland is in place in those countries, as well as in our country, I think that those quantities probably would go on to the market at a very similar volume as we see with the exchange rates as they are today. It is just that they wouldn't probably get as much for them relative to us.
    I think in a given year, it is going to make a difference for us and how difficult it is for us to get rid of our exports, but I am not sure that overall that it would solve our problems in the long run.
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    Mr. COLLINS. I don't know if I have too much to add to that. I do think exchange rates are an important factor in what has happened over the last couple of years. There has been some recent work that one exchange rate analyst did in the Economic Research Service, which you may have seen, which shows between 1995 and this fall, the trade-weighted value of the dollar against the currencies of those who import our goods, is up 25 percent, but against those that we compete with in the world market, the dollar is up over 40 percent, 40 to 45 percent. That study concluded that this did have an appreciable effect on our market share in world markets.
    Surely, world markets are fairly competitive and our supplies are going to compete price-wise with other producers' supplies, but the value of the dollar can cause our competitors to, in effect, be more profitable than our farmers are at a given price. So I do think it has an effect on—in some sense, almost insulating our competitors and also in hurting our market share in world markets. So it is certainly part of the equation for why our exports are not growing quickly—or why they are growing so very slowly over the last couple of years.
    Mr. STENHOLM. You imply that it has an effect. To me, it is a little bit more than just an effect. If you have got a 42 percent advantage in your currency value in another country, that is more than just an effect.
    Mr. COLLINS. It is a large effect. Yes.
    Mr. STENHOLM. Thank you.
    Mr. COLLINS. Okay.
    Mr. STENHOLM. I like the tone of your voice better on the second one there, otherwise, I am wrong.
    Mr. GARDNER. Well, can I say, I agree with the importance of the value of the dollar. But I would like to come back to your point that the U.S. prices don't make any difference or appreciable difference for what other countries do. I do agree that other forces are probably dominant. That what is going on in the crops around the world make more difference and that isn't usually the dominant effect. I just, before this semester started, came back from a trip to Australia, and met with the ministry of agriculture people there, and they are very concerned—they don't like current policies at all because the loan deficiency payments, for example, are driving down prices.
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    Now, I was critical of the loan deficiency payments in what I just said, but I think compared to what we used to, of set-asides that supported prices, I like loan deficiency payments much better, from that point of view, that it is making our foreign competitors more worried rather than providing an umbrella for them. So I don't want to dismiss the effects of our price policies out of hand, but I agree with your order of priorities.
    Mr. RAY. I would just add that if you look over that full period of time, there were times in which the exchange rates were not to our disadvantage and exports weren't strong as well. So I think it is part of the equation, but I think there are other things affecting it in addition.
    The CHAIRMAN. Mr. Chambliss.
    Mr. CHAMBLISS. Thank you, Mr. Chairman. Dr. Collins, I heard you reference the impact and the importance of our Government payments that have been made over the last couple of years to our farmers. And, in fact, I read an article the other day that said that 47 percent of gross farm income in 2000 came from Government payments, which is kind of a very astounding figure in the overall farm industry. I would like to know you all's thoughts on whether or not we have made our farmers too dependent on Government payments. And, second, where would our farmers be without it? I have got farmers, I am afraid, wouldn't be farming this year, without question, if they didn't get 47 percent of their gross income from Government payments. And that is an issue, as we go into the farm bill, that really we are going to have to wrestle with, and I would appreciate you all's comments on that.
    Mr. COLLINS. I would be happy to respond. First of all, just to clarify the data, Government payments in the aggregate are roughly half, as you say, 47 percent of net farm income, not gross. Gross, it would be a much smaller share. But that is a national average.
    Mr. CHAMBLISS. All right. I said gross. You are right.
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    Mr. COLLINS. Yes.
    Mr. CHAMBLISS. I meant net. I am sorry.
    Mr. COLLINS. But that is a national average. I also indicated in my opening comments that for specific commodities, it is just extraordinarily higher. In 1999, it was 75 percent of net farm income for the eight principal crops. Dr. Gardner was talking about larger farms. I just looked at the data from our farm survey. For commercial soybean farms—those are ones that sell more than $50,000 a year—and their average net farm income in 1999 was $47,000 and their average Government payment was $37,000. So all I am doing is giving you a couple of facts to illustrate your point, it is even more astonishing that you first implied.
    Now, to get to your question. Have we made farmers too dependent on Government payments? And my response to that would be, yes. I mean, it seems pretty clear to me that we have. If you look at American agriculture, we bemoan the problems that we have in crop agriculture, the principal program crops, and keep talking about the need for payments or support year after year after year. We can look at other parts of American agriculture, remembering that principal crop agriculture is only a third to 40 percent of U.S. agriculture, we have other parts of American agriculture, which also includes vegetable crops, fruit crops, livestock products, where Government payments are fairly minimal. And, yes, they go through periods where there are surpluses and low prices, and they go through periods where there are shortages and high prices. And overall, on the average, they seem to do OK and continually increase production and supply Americans with more horticultural products and livestock products year after year. So that part of American agriculture seems to be alive and well, not without occasional problems, but alive and well. And they are doing that without Government payments.
    And so, I think we have a couple of problems in what we have done over the last couple of years. For example, in 1996 and 1997, those 2 years we paid out $7 billion more in Government payments than we would have paid out under the old farm bill because we had these fixed AMTA payments, which, I think, set a standard for income levels that now we are measuring our performance against. And so that is kind of a concern.
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    Second of all, I would say, with Mr. Ray's talking about the lack of response of crop agriculture to price signals, well, gee, that is not a surprise to me. I don't expect a whole lot of a response when we dump the amount of money that we dump into production agriculture year after year. I mean, clearly we are insulating producers from a response.
    I think that it is true, and I agree with what Dr. Gardner said, that some of our programs, like the LDP Programs, are counterproductive in that regard. Yes, we are trying to help farmers, because without that, there would be a lot of financial stress. But in so doing, we are also creating some problems as well. So, in that sense, I say to your question, yes, we have made farmers dependent on these payments.
    In the end, our goal is market orientation—I would say that is generally what our goal has been. Mr. Ray, in his comments, said, that he thought that the 1996 farm bill was based on speculation. I would say, no, it was not. The 1996 farm bill was based on the notion of trying to get Government off the back of farmers and to start to move toward getting their returns in the marketplace. And if that is truly something that we believe in, then we have to figure out a way to make farmers less dependent on Government payments.
    Mr. RAY. I would make a couple of comments. As Dr. Collins mentioned, the national number is much smaller than if you look at it in a more specific sense. On page 14, I have done the same kind of calculation, but done it for individual states. And for those states that have primarily crop production or a large share of their net income is from crop production, that ratio goes well over 100 percent. In the case of Indiana, it is 1.9 times the net farm income. Direct payments are 1.9 times larger than net farm income. And for the whole Grain Belt, Midwest region, why it is about 100 percent. And, as Dr. Collins shows in his set, and as I have a graphing here, if you look at net cash income for the eight crops, three quarters or more of that income is from Government payments. So it is an extremely serious thing.
    I would just say a couple of things about other commodities. It is true that there are other commodities that don't have farm programs like we do, but, of course, they often have other kinds of mechanisms. They will have marketing orders or other kinds of structures that influence the amount that comes on to the market.
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    And I would also argue that the livestock sector is somewhat different because farmers that do livestock do not hesitate to not produce in a given year. They will leave their buildings empty and decide to go out, whereas in crop agriculture, it is extremely rare to see a farmer leave his land idle. So we are talking, I think, about apples and oranges with regard to that.
    The supply response, I would just say that even if you include the AMTA and the emergency payments and the LDPs, and you look at how that has changed percentage-wise from 1996, or if you go with the 1995, which it would be a larger percentage because we know prices were higher then, we have had a significant reduction in that level. Twenty-one percent, if you go to '95, would be much larger.
    And so what that is really saying is, is that if you can drop all of those revenue units by over 20 percent and you get no response in total crop acreage. And to me, the economic textbooks don't say that you have to get no response until your price is below the cost of production and then you get a response. You don't have a vertical curve and then, all of a sudden, you have response when you get down to variable costs. That is not the usual way that economies work.
    Mr. GARDNER. If I could just add two points, just to elaborate a bit on those commodities that don't get assistance, I think this is a question that we could debate some, but you could range commodities from those that get a lot of support to those that get moderate support, say, through marketing orders and other things. And there are, though, commodities that essentially have no support. And I don't see, really, evidence that you can arrange the profitability of farming and commodities by the amount of Government support. I really think that the ones that have the least support do just as well as the ones who have more support. And in that sense, your point is well taken that there is something sort of addictive that by putting the payments on these particular commodities and sustaining them for a long period, even when we had high prices in 1996 and 1997, you are creating conditions that make those farmers dependent on the programs in a way which they would not necessarily have to be. And then the question is, how do you get out of it?
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    I would say just one point that helps in getting out of it is one of the things that I think is fairly well-agreed upon that these programs do is that the way in which they affect farmers' income is not through everything that happens on the farm, but in the particular way of holding up land values and land rental values. I mean, one of the striking things about the last few years is the way that cash rental rates for land have stayed up, even though the commodity prices have fallen a lot. And people talked about temporary adjustments and wanting to maintain relationships with landlords for a year or two of this. But when it goes on 3, 4, or 5 years, there is more to it than that. And I think what it is, is that these payments are holding up the cash rental rates and holding up land values. That means, if you back away from the payments, one of the things you are going to do, right away, I believe, is to have some reduction in those rental rates and possibly land values.
    That is going to hurt the balance sheets of farmers and it is going to have some effect on rates of return to land, but something like half the land is actually owned by nonfarm people. So it will spread the pain around a bit and I think that is something else to factor into these deliberations.
    Mr. CHAMBLISS. I am assuming on what all three of you said, that the answer to the second question would be that we have made folks totally dependent basically. Thank you, Mr. Chairman.
    The CHAIRMAN. The gentleman's time is expired. Mrs. Clayton.
    Mrs. CLAYTON. And, thank you, Mr. Chairman. Thank you, Mr. Chairman for bringing the forecasters of doom and gloom. Is that what we want to say? But I am very pleased that you started off from the economic standpoint, because I may be misreading all three of them, but in some ways they say different things, but they come to the different conclusion. It would appear that Mr. Collins is trying to give an overview or he is a little remissive in terms of where he was before, but being a little more pessimistic as to what the outcome will be and giving some hope that the export rate would increase given certain circumstances.
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    Mr. Ray, on the other hand, if I am understanding correctly, has established a premise and that premise is, indeed, production may be the culpability here. And also the premise is that production can't be controlled given the fact that you have so many small farmers who are going to farm regardless. I mean, it is their nature to farm. And, therefore, regardless of whether they get their money from the Government or they borrow it from cousins or whatever, a price, they are going to farm. That is their nature to farm.
    Mr. Gardner, on the other hand, says, not only is that a problem, but if you need to begin to think—and this is my bias, so I associate with it. You need to begin to think of rural communities in addition to farmers and that farmers—and I think I read somewhere that the vast majority of them make less than $40,000, but and when you look at communities in which they live, their income is supplemented by off-income. But they are larger community people. There are a large number of nonfarmers who, indeed, are suffering. So in addition to our policies and our farm bill, we need to look at policies that affect the farmers and policies that affect our rural community. And did I summarize what you all——
    Mr. GARDNER. That is a fair summary. And I do think that if we do need to look at—well, what I really wanted to emphasize was that we have to separate commercial agricultural policy from income-support policy, I believe, to the extent we can, and that we should not rely on manipulating or regulating commodity markets as a source of raising the incomes of low-income people. The people who are the lowest income people in agriculture are just not going to be helped sufficiently by that course of action.
    And that in commercial agricultural policy, we ought to be, as much as we can, strictly business-oriented and think about what is going to be best for productivity for the efficiency of our sector and to keeping those farmers able to keep being progressive and adopting new technology and doing what they have to do to make us the leader of agriculture in the world as we have been. And I just want to see those separations.
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    Mrs. CLAYTON. Right. Would you suggest that the policy in the 1996 farm bill allowed commercial farmers to be progressive without Government intervention?
    Mr. GARDNER. Well, I would say that, as Mr. Collins said, it is a step in that direction.
     And I do think that the whole debate in 1996 was focused, at least a large part of it, on what can we do to make commercial agriculture, more market-oriented. And, in fact, I think that the Act achieved that by the result that is some aspects that we don't like, that we continued making those payments even when prices were high. But still, that does achieve the objective of letting farmers farm and not trying to tell them that if you do such and such, you will get a payment. If you don't do such and such, you won't get a payment, and putting acreage restrictions on them and other activities like that.
    Mrs. CLAYTON. Mr. Ray, did I misunderstand you to suggest that having so many small farmers is a problem? I am not suggesting you want them to go out of business, but the reality is that farmers are not going—you can't control them like you can control other entities, because you have sectors that are consolidated so you can control that. But small farmers, you can't determine how much they produce.
    Mr. RAY. My mission is to try to understand what the nature of agriculture is and not make a judgment about whether it is bad or good, but just recognize how it works. And I think that it is important to recognize that when cropland is put into production, farmers are going to—either the farmer that is there now, or the farmer that replaces him, is going to grow cropland—is going to grow that and produce crops, whether the price is high enough for him to make a profit or if he has to lose equity to borrow money to keep in production and when he goes out, somebody else will come in. And, of course, that is an overgeneralization, to some extent, but it is generally correct.
    And I would also say that I think there are some folks that think that in marginal farming areas is where we would lose agricultural land and, therefore, production would decline and everything would be okay again. Of course, marginal areas are called marginal for reasons. If you can only get a crop once out of every 3 years, why then you are not producing much as far as the aggregate in concerned anyway.
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    But I would argue, following some of what Dr. Collins said, that if we left it to itself and there was a downward spiral, we would see a reduction in land prices—and I think Dr. Gardner mentioned this too—and it would not just be in the marginal areas. It would be in central Illinois. It would be in Iowa. And where we are talking about debt ratios now that are reasonable, if you divide the price of land by two, some of those are not going to be as reasonable as they would appear today.
    So I think that we have to recognize that agriculture is, indeed, different and I do think that we had a premise in the 1996 legislation that, no, agriculture isn't different anymore. It will respond. It will respond to lower prices both on the supply and the demand. It will work. And I don't see any evidence of that based on what we have seen in the last 4 years.
    Mrs. CLAYTON. Thank you, Mr. Chairman.
    The CHAIRMAN. Mr. Smith.
    Mr. SMITH. Thank you, Mr. Chairman. The Commission on 21st Century Agriculture, in their report, suggested that we do away with the limitations on payments to farms. I am somewhat concerned that our policies result in—encourage the expansion of the bigger and bigger farms and do away with what we have traditionally thought of as family-sized farms.
    John Campbell, in his minority report, said that his analysis is that as we add these Federal farm program payments, then it is reflected in the land values that tends to encourage the larger farmers buying out the smaller farmers. On that point, I would like to get your thoughts. My impression is, ever since we started the farm programs in the 1930's, that we have tended to have a program that the bigger you are, the more Federal dollars you get and, to a certain extent, those medium-sized farmers have decided that they are going to—that they are almost forced to buy up more land from the smaller farmers. And so I am a little concerned that our programs tend to encourage the abolishment of the small, family-sized farms and encouraged the bigger farms and would like any of your reactions, starting with you, Mr. Collins.
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    Mr. COLLINS. Well, I guess my reaction initially to that is that farm programs may be a factor in that, but I don't think they are the primary factor. I think the primary factor is technology, which enables people to handle more acres, produce more, for a given amount of labor. I think the second factor would be the people's desire for more income. When you can handle more land and you can handle more animals and you can get a certain amount per unit, you want to increase your income, you produce more units. I would say those are the two dominant factors.
    I think farm programs can be a factor. They can also work both ways. I mean, we do have hundreds of thousands of fairly small farms that are getting 5, 10, $15,000 a year in Government payments. To some extent, that is helping them stay in agriculture. So I think that payments can be a factor that is keeping people in agriculture.
    On the other hand, you could have large farms who have low costs of production that are getting Government payments and they can use those payments to go out and acquire more farmland, more effectively than a small farm can. So I think that Government payments can be used on both sides of that argument. So they may be a factor. I think there are other factors that are probably better in explaining the consolidation in agriculture.
    Mr. SMITH. And maybe it is sort of a policy question rather than an economic question, but should we look at our farm program policy to make a special effort that it doesn't tend to favor the larger farmers? And then, Mr. Ray, why don't you comment on the whole issue of where we go on farm size or however you want to split it up?
    Mr. COLLINS. Well, that question, Mr. Smith, gets at the heart of what farm programs are all about. You asked, should our programs not favor the larger farmers? Well, what is the purpose of the program? If the purpose of the program is to somehow support production, then it wouldn't matter whether they are large. If the purpose of the program is to remediate low income, then it might not matter whether they are large. It would be income that would be the important factor. I don't know that I can really answer that question that well.
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    It is sort of the problem I have with payment limits. The assumption behind payment limits is that the larger you are, the more profitable you are, so the less you need the payment. Well, that may be true and that may not be true. If the purpose of the payment limit is really to get at preventing payments to go from someone who is at a high income, then maybe you should gear the payment based on income levels rather than size. I am giving you a circuitous answer because I don't know that size alone is necessarily the issue that I would use to reconfigure farm programs.
    Mr. SMITH. Well, it would be one of my considerations, because I am a little concerned that the rest of agriculture has the propensity, the tendency, to move where our poultry industry has gone. And now, we have seen it generate a great deal in the hog and some of the other livestock arenas. And I think it has got to be part of our policy considerations. Mr. Ray, and then, Mr. Gardner.
    Mr. RAY. I would agree with much of what Dr. Collins said. I do think, though, that we have to remember that the land market is based on the—is made on the margin. It is whatever that last, most efficient farmer can afford to pay to expand his enterprise, that is what sets the market, for the most part. And to the extent that that farmer receives a larger proportion of his income, or from payments for each bushel, because he is a more efficient producer, that will put him in better stead to bid away new land. So I think it does have an important component.
    I would also say that in the current environment, in some parts of the country, I think that the livestock industry is an important part of what is happening to land prices. We have seen some places where the buildings for the poultry houses, but more especially, the hog houses that have been put up, have been up long enough so that they are generating a cash flow and a lot of that money is being put into land.
    And, in fact, there has been a survey in north central Iowa in a particular county, and 90 percent of the folks that bought land were in livestock and bought it for that purpose, rather than for—so I think there are lots of things involved, but I think just because the price is essentially determined on who will pay the largest rent and who will pay the largest value determines the price for rent and for land, that it has to be an important component.
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    Mr. SMITH. Certainly. But it is reflected on what they get from the Government since that is a majority of their net income. Mr. Chairman, do we have time for Mr. Gardner to give a quick response?
    The CHAIRMAN. Sure. If he has a response.
    Mr. GARDNER. I would just say that I agree completely with your general idea that what you would like to do with these policies is make them neutral between the difference sizes of farms. At least, that is the way I understand what you want to do. And I think that is the right objective. It is very tricky, though, as both people have said, to tell exactly what our current policies are doing. And I would be hesitant to go further with payment limits and that sort of thing in seeking after this neutrality because it is pretty—if you did get very stringent payment limits, then it would be quite clear that you would be penalizing the larger farms. And I don't think you want to do that.
    Mr. SMITH. Well, the suggestion was that we do away with any limits. And administratively, that would be the easy way to go, of course.
    Mr. GARDNER. Yes.
    The CHAIRMAN. Mr. Dooley.
    Mr. DOOLEY. Mr. Gardner, I was just curious on one of your points you made in terms of the commercial farming. They had 100, and, I think $70,000 or so of net farm income or whatever the figure was. Or 117. That was inclusive of program payments. Do you know what it was if you took that out?
    Mr. GARDNER. Yes. That group, on the average had something like 40 to $50,000 in program payments. If you could imagine taking them right off of net farm income, it would be a lot less. I have calculated a rate of return of 6 percent. Just for purposes of argument, said, suppose you took their farm income and allocated $40,000 as a return to labor and management, what would you have left to return to your capital, and I came up with 6 percent. If you took the farm payments out, that that group got, it would be more like 2 percent. So it would clearly make a big difference.
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    Now, I think the difficulty—so I can do that calculation, and I don't disagree with doing it. But the one thing we have to remember is that if we took those payments away, especially those parts of them that are encouraging overproduction, we would see higher prices. So, therefore, you wouldn't see a net reduction of that amount. That as the Government paid less, we would see the market receipts going up, I firmly believe.
    Mr. DOOLEY. And that would be an average, so certainly there would be some entities and farms that would be receiving a far higher percentage in terms of the rate of return on the investment.
    Mr. GARDNER. Right. And some lower. And some, as Dr. Collins was saying, is that some of those farms are very heavily concentrated in producing commodities that have programs and others are heavily concentrated in commodities that don't. So it would be a great variation from one to another.
    Mr. DOOLEY. So even in the absence of the program payments, you would have, on average, for commercial farms, a 2 percent return on investment.
    Mr. GARDNER. That is what I estimate.
    Mr. DOOLEY. And so even in this time, where we are seeing very sustained low commodity prices, the average commercial farm is making a profit and some of them are showing commensurate rate of returns with some other investment alternatives that are out there.
    Mr. GARDNER. Well, yes, but I wouldn't say 2 percent is commensurate.
    Mr. DOOLEY. Well, my portfolio last year would have been a home run comparatively. Yes. I guess, Mr. Ray, on some of your figures, when you were showing your contention that acreage isn't influenced by price, I was kind of interested—you are only using a 4-year analysis on—when you used the soybeans. Do you not attribute some of that response to the programs that we, in fact, have put in place and the amount of direct payments that we have been putting out and the loan deficiency payments that have sent some market signals to producers to continue producing? And would you expect to see a change in those graphs if we didn't have a program that was in place?
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    Mr. RAY. I sure would expect a change, but I am not sure I would see it in 4 years. I think that farmers will continue to produce until they essentially bankrupt themselves and probably the next generation. But eventually, it would occur, but it would just take, I think, longer than 4 years.
    Mr. DOOLEY. I understand that you are saying that we have entered into a totally different era in agriculture. Because of what your contention is, is that why shouldn't we have all been bankrupt before now?
    Mr. RAY. I am not sure I understand that question.
    Mr. DOOLEY. Well, I guess my point is, is that you are saying that with this trend-line, is that farmers are going to continue to produce, even in spite of low prices, and thus they are eventually driving everybody into bankruptcy. If that is your theory, why didn't it happen 10 years ago, 20 years ago, and 50 years ago?
    Mr. RAY. Because we had a Government program that would essentially balance supply with demand and wouldn't allow the prices to become as low as they are and had other mechanisms to support prices and incomes just as we do under this program, but a somewhat different mix.
    Mr. DOOLEY. So you are contending that our prices would be able to be maintained at a higher level that would be not impacted by international supply and demand issues.
    Mr. RAY. I am saying, I am not sure I am understanding what your asking.
    Mr. DOOLEY. My point is, is that you are making a contention that farmers are not making decisions in order that there is not management decisions, cultural practices, that are allowing them to be profitable even in this era of low commodity prices. I would dispute that. If your theory was correct, is that, it should have happened before now. I would contend, because the supply management policies can never maintain domestic prices that are distinctly higher than international prices when we are selling into an international market.
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    Mr. RAY. The downside of that is, is that if you let the prices go, what you do sell internationally is worth less and I am not sure what we gain by lowering our prices and getting less revenue. Farmers, of course, are very good at changing the mix of commodities and doing the best they can with the circumstances that are presented to them. I mean, they will use the fertilizer. They will use the other inputs to their best advantage, and they will grow soybeans if that is more profitable. And they will change the mix. But my point is, is that they will grow something. It is one thing to say, if you look a partial equilibrium analysis, the price of soybeans goes up, the price of corn goes up—goes down. They go to soybeans. There is no question about it.
    The hard part is, is if the price of everything goes down by 40 percent, what do they do then? And do they go out of production? Do they leave that land idle? And I would say that the indications are that that isn't what happens. I mean, that is my point.
    The CHAIRMAN. The Chair would recognize momentarily, Mr. Stenholm.
    Mr. STENHOLM. Mr. Chairman, I have an article from Top Producer by Patricia Klintberg that I would like to insert into the record at the appropriate point that also has some additional economic views in line with the three gentlemen at the table.
    The CHAIRMAN. Without objection.
     Mr. Thune.
    Mr. THUNE. Thank you, Mr. Chairman. Thank you, gentlemen, for sharing your thoughts about the economy with us today. I would like to just get your reaction, if I might, we, as been mentioned earlier, took the report from the 21st Century Commission on Agriculture a couple of weeks ago, in which they made a number of recommendations about the so-called safety net and what we ought to do about Government support of agriculture, which included continuing the Production Flexibility Contract Program, continuing the LDP Program with the marketing loan rate, and then going to some sort of a countercyclical payment system, which they called a supplemental income support payment, that would be based on the overall farm income and average and then how far any particular year would fall below that, which, I think, creates certain problems if you don't make it commodity-specific or region-specific or whatever.
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    But nevertheless, that was sort of their proposal. In the minority report that was filed, a recommendation that marketing loan rates be increased to 80 percent of the cost of production. I am told, as well, the National Association of Wheat Growers is going to come in with a request to increase marketing loan rates.
    My question is this—and I would like to get your reaction from a macroeconomic standpoint—and that is which of these proposals would be less market-distorting, would be less likely to add to surplus stocks, and most likely to improve prices? Bear in mind that—forget the trade agreements because, obviously, with some of these, depending on which box they fall into, there are some trade implications there. But just from an economic standpoint—because we are trying to come up with specific solutions.
    I think this committee and the chairman has rightfully asked those who come before this committee, to make recommendations that are specific with respect to how we address amending the current Federal farm policy. I am curious in your reaction to the recommendation—each of those various recommendations and how they would affect overall markets, prices, and surpluses.
    Mr. COLLINS. Well, I would be happy to start. I guess of the two choices you put on the table, the first one, the countercyclical payment, would, in my mind, be less distortionary, create less of a problem than raising the marketing assistance loan rates. As Dr. Gardner and I both stated, it is our belief that the—or it is my belief, and possibly his, that the marketing assistance loan rates have engendered more production. You raise them yet further, you are going to engender yet more production.
    They clearly set a minimum price received for producers. They are paid on current production. They are amber under the WTO. They are unambiguously trade-distorting and production-distorting. If you want to go down that road, fine, but that is the consequence, that you are going to blunt the market signals to producers and get the kind of analytical results that Dr. Ray is getting, that you don't get cutbacks in production.
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    The former proposal that you mentioned, the countercyclical one, certainly I could find flaws with that, as well, but in contrast to the LDPs, if I understand that program, it is aggregation of commodities, all pulled together into one lump sum and you are measuring the income of a group of commodities against a benchmark. No individual producer of a specific crop really knows what they are going to get out of that program when they are planting the crop.
    Moreover, whatever they do get out, is going to be based on their historical acreage and yield. So increasing yield, or increasing acreage, is not going to result as a consequence of that type of a program. So I find that a less distortionary program. So of the two, I think, that the countercyclical program would be less of a problem.
    Mr. THUNE. Anybody else have a comment on that?
    Mr. GARDNER. I agree with that priority.
    Mr. RAY. The only comment I would make is that I believe if you are looking at the kind of what I would call income-averaging kinds of programs, basically you are assuming that you have as many ups and you have downs. If you have a situation where you are decreasing net incomes on a trend, then it is not going to work nearly as well. That would be the comment I would make about the countercyclical thing and the way that they have put it together.
    Mr. THUNE. Would you explain that one more time?
    Mr. RAY. Yes. I think that many of the programs that we are talking about, whether it is revenue insurance, whether it is a countercyclical program that is based on previous incomes and then we average them up and see that they meet a certain standard, in essence, what we are really assuming is, is that on the average, farm income is okay.
    We are just going to redistribute it a little bit when things are low. But, on the other hand, if it spirals down year after year, you are essentially getting a lower and lower threshold for that support. And as long as that is understood, then that is fine. But I think that we run that risk.
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    Mr. THUNE. My time is expired. I would like to continue to explore, at some point, maybe if we have another round, Mr. Chairman, how you would view that in terms of if you did that same approach by commodity, or even by region, rather than in the aggregate. Thank you.
    The CHAIRMAN. We won't have another round. Mr. Osborne.
    Mr. OSBORNE. I would like to thank you gentlemen for being here. I am sorry I missed a little bit of your testimony because I am very interested in it. My question would be probably a little bit more mundane and more immediate. The planting season is only a couple of months away. And in my part of the country, there is tremendous concern about the shortage of anhydrous ammonium and it being tied to natural gas, which is required to manufacture anhydrous ammonium. So the input costs look like they are going to continue to rise. And right now, I think, producers that I have talked to, that is probably their biggest concern. And I just wanted your reflections on this problem, whether you see it as a long-term problem, a short-term problem, what your predictions are, and so on.
    Mr. COLLINS. If I might comment on that, it is a serious problem for this year. It is a problem that has been in the making for some time because we had low natural gas prices in 1998 and 1999. The number of rigs producing natural gas fell to as low as 400 a month operating. In addition to that, we had the coldest November and December on record.
    So a decline in natural gas production, combined with an increase in demand because of weather, combined with an increase in demand because of electricity, where all the new peaking generators going online are powered by natural gas, we saw natural gas prices go from roughly $2 to $3 per million BTU up to as high as $10 per million BTU in January. Natural gas is 70 to 90 percent of the cost of producing anhydrous ammonia. As a result of that, we saw production capacity utilization for anhydrous ammonia and other nitrogen fertilizers from over 90 percent to 50 percent by December. So farmers ought to be concerned about supplies and prices.
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    On the other hand, we have now seen a 40 percent drop in natural gas prices in the last month. We have seen a number of companies bring nitrogen production plants back online. They can be brought up back online any time from a couple of days to a couple of weeks. There is lots of nitrogen being imported into the United States. I think producers will have adequate nitrogen supplies this year. They are going to reduce their application rates. They are going to shift some out of heavy nitrogen-intensive crops, like corn. I think there will be less corn acreage.
    As a result of that, we will see less nitrogen use to go along with the lower supplies, but producers are going to pay quite a bit more. They may pay 50, 60, 70 percent more for their nitrogen this year. For corn, in Nebraska, we are talking 8, 10-cents-a-bushel increase in nitrogen costs. If they also pump irrigation water, using natural gas, which they do in Nebraska, we are probably talking another 10 to 15 cents a bushel in higher natural gas costs for pumping. So you are now talking in the neighborhood of 15 to 30-cent-a-bushel increases in nitrogen and natural gas costs for corn producers in your state.
    It is a concern. But I do think, from looking at the available supplies across the board of anhydrous ammonia, ammonium nitrate, urea, and nitrogen solutions, that there will be adequate supplies when producers need them, but they are going to pay a lot more for them.
    Mr. RAY. I would just add to that that in the last 3 years, at least, in many parts of the Midwest, we have been lucky enough not to have to use much LP for drying corn. It has basically been a situation where it has been field dried. There is no guarantee that that, of course, is going to continue to be unlikely. If it does, that would be an additional cost that could be extremely important.
    When it comes to these kinds of issues, like energy and so on, and my comment again is, to each of us, when they come up, to think about how agriculture is different from other industries with regard to that. And that is just another example. The airline industry, we know what they do. The trucking industry, we know what they do. There are very few things that farmers can do. So there is a different and a unique kind of thing that relates to the way agriculture can respond.
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    Mr. COLLINS. Well, I think there is a lot of things farmers can do. They can plant other crops. They can reduce their nitrogen application rates. They can do nitrogen soil testing and make sure they are applying the right amount of nitrogen. I think there are adjustments that can take place for farmers. Yes, they are limited in their flexibility, but I wouldn't write off and say they can't adjust at all to higher nitrogen prices.
    Mr. GARDNER. Well, I don't really have anything to add on the farm side, but I think, if you are thinking about the policy side, you also have to think about the supply of natural gas and nitrogen. And, to me, this is another case where you have to think about how the market for those products are going to work. So I would say that while we are thinking about what to do with respect to the high prices that farmers are paying, you are going to need those high prices to get the future nitrogen supplies coming back again, as Dr. Collins was saying. So I think you need to look at that side of it too.
    Mr. COLLINS. In the spirit of being an economist, I don't want to be too unambiguous about available nitrogen supplies this spring. As I said earlier, one of the key factors has been the weather. Right now, we are in a warm spell, so we are seeing natural gas prices come down. I do worry about a cold spell and seeing natural gas prices go back up and squeezing nitrogen producers' margins again and slowing that production. So we are in a pretty volatile period right now with very low natural gas stocks, another 12 months to 2 years before we get a big increase in natural gas production, and very dependent on weather, where some 35 or 40 percent of all natural gas use goes to residential and commercial use.
    Mr. OSBORNE. Thank you.
    The CHAIRMAN. Mr. Kennedy.
    Mr. KENNEDY. Thank you. I would first of all like to recognize that we have some good Minnesota corn growers with us here today and I am happy to report that they are based in the Second Congressional District in Minnesota. We have Bruce Stockman, the executive director; David Ward, Richard Peterson, Andy Quinn, Gerald Tumbleson, and Loren Tusa, and welcome you all here today and appreciate your concerns. And they are a very forward-looking group that, like me, focuses on how do we increase demand for our products.
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    And, Dr. Ray, you mentioned how our demand has not kept up with our growing, increasing yields in our crops. And my question to and to everybody on the panel is what would be the impact if we had significant breakthroughs in growth and demand for our product? And I will cite just two possibilities.
    Number one, if we had a real WTO conference that did have a breakthrough in some of the trade barriers that have prevented our exports from going up. Second, if we did do things like banning MTBE, keeping the oxygenate requirement, which would allow us to maybe even double or more our ethanol production. And also maybe also make progress on having biodiesel substitute for sulfur in diesel. If we made significant improvements in demands in some of those areas, what kind of impact would it have on the economics as you guys have reported it?
    Mr. RAY. Increasing demand is something that everybody would prefer. And the ones that you have would be extremely helpful, especially the ones relating to energy, I would say. Any reductions in restrictions worldwide that impose constraints to our farmers would—and we could eliminate those, definitely would be to our advantage. And if we can increase our domestic demands appreciably, and appreciably meaning 10 to 20 percent, we would not be here worrying about farm income or farm prices. It definitely would make a tremendous difference.
    I will just warn you, however, that I think that there is as much possibility that the freer trade around the world will expand production of other countries as much or more than it does us and that not all the benefits may be positive for agriculture in the United States in the long run. And I point to the multinationals that have every incentive to increase production in China and Brazil and other places. And so we are going to be in a position to see, I think, additional output, as well as additional demands around the world.
    Mr. COLLINS. To answer your question, first of all, on multilateral trade liberalization, I would think that is one of the single most important things we can do. Part of this unresponsive world that has been talked about here today is because of the proliferation of protectionism around the world. Government subsidies in developed countries alone, today, are back as a percentage of production to what they were in the mid–1980's, when the Uruguay Round began.
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    I think there are measurable things that could happen. One of the most important things that happens from trade liberalization is economic growth. We have talked about this slow growth in exports of bulk commodities because we have a bulk commodity mindset here today. But if we look at nonbulk commodities, like meat, export growth has been phenomenal over the last 20 years. The annual average rate of growth for beef exports, since 1980, has been something like in the order of 14 percent a year.
    We talk about corn exports being flat. We exported no corn in the form of beef in 1980. Today we export 400 to 500 million bushels of corn in the form of beef. The reason for that is, is the livestock products, horticultural products, high-value products, are highly responsive to income growth around the world. Trade liberalization promotes income growth. So if we can promote trade liberalization, we help promote income growth in developing countries. We can increase demand for our agricultural commodities, including bulk commodities, maybe not directly that fast. Maybe they are not going to buy that much corn directly from us. But, good heavens, I think they are going to buy beef and pork and poultry and I think our corn will go out in that form.
    So I am optimistic as I look at countries like China. Yes, maybe there could be a threat where multilateral liberalization will help encourage production, but, as we stand here today, last year, China exported 10 million tons of corn to the world marketplace, all with export subsidies. This year, we expect something like 6 million tons of corn to the world marketplace with export subsidies.
    I think trade liberalization and getting China into the WTO is certainly going to help that situation. They may not become a major grain importer, but I hope we can discipline their export subsidies and take some of that unfair competition out of the world marketplace.
    With respect to energy, I am very optimistic about that as well. We have done a lot of work, which I would be happy to share with you, on what happens if we had a renewable fuel standard or what happens if we phase out MTBE and keep the 2 percent oxygenate requirement and all these kinds of things. I think it could result in anywhere from 5 to 15-cent-a-bushel increase in the price of corn. These are important ways to help increase demand for corn.
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    There are other benefits. There are environmental benefits as well. There are energy security benefits to this as well. So we are pretty positive about the prospects for renewable fuels from agricultural materials in the long run.
    Mr. GARDNER. Well, I fully agree with your idea of pushing demand as the best way to increase farm income and keep market-oriented. And I agree with the idea that it is the international agreements, further working the WTO for trade liberalization as the single best way to go on this just because the Uruguay Round got us started on some trade liberalization, but the net gains so far have not been nearly what they could be. I think this was expected from the beginning because every country, including ourselves, built in ways that we could join the Uruguay Round without actually having to import that much more to begin with.
    But I think that another round from the place we are at now can really make a big difference. And it is true that we will share the gains of trade liberalization in agriculture with other producing countries. It is going to be a general improvement in the picture for agricultural exporting countries. And, sure, other countries around the world will share in that, but at least it will be market-based and we can reduce the role of the subsidies that have been hindering us in the past.
    On energy, I would be a little more cautious. The general idea of new uses of agricultural products, this is fine. We should do research. We should push these kinds of things. But on the energy front, I would say this is fine as long as it is scientifically based. I would hesitate to recommend that we do regulatory changes to increase a demand for ethanol just on a political basis. As people who produce food, we ask that rules for biotech for food regulations be science based. And I think we should say the same about this energy area. That to the extent that agriculturally based agricultural energy products do have genuine environmental benefits and are efficient sources of energy, yes, let us push them as hard as we can. But I think, as somebody just stepping back from it a bit, we don't want to keep the petroleum industry down just for the sake of doing it—thinking about for the whole national economy, they should have a fair shake too.
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    Mr. COLLINS. Can I just make a follow-up comment to that? I agree with Dr. Gardner's concern about regulating increased demand for renewable fuels or even tax preferences for that. But an area where we can make a big difference is research.
    And I have taken some time to look at some of the old cost-of-production surveys for ethanol back 20 years ago. It was costing $2.50 to produce a gallon of ethanol 20 years ago. Today, the most recent cost surveys are showing $1 a gallon. Now, I think there is an opportunity, through research and development, to continue to reduce the cost of production of energy from agricultural materials. And I would say that fundamental kind of research is an area where we could think about focusing more effort.
    Mr. KENNEDY. I appreciate your comments, Mr. Collins, both on the fact of meat being a great export opportunity. And I think if we can keep mad cow disease under control and not in the United States, that can give us a competitive advantage, I think, on the world markets, which can increase, commensurately, the demand for our crops. And I also think, if you look at the great progress we have made in the efficiency of ethanol production over the last several years, if we continue on that curve, or even expand it, that can increasingly make ethanol a good substitute for reliance on foreign oil. So I appreciate both your comments and encourage us all to focus on the increasing demand side of making agriculture better.
    The CHAIRMAN. Mr. Moran.
    Mr. MORAN. Thank you, Mr. Chairman. There is often discussion by economists about the increasing demand or the future of demand for agricultural products produced in our country. It seems to me that there is less comment in your testimony about the effects on world supply. What are we anticipating other countries doing? And that is one question, although I think this also relates to Mr. Ray's point about the elasticity of supply and demand in regard to price. Is the world the same as what you indicate for American agriculture, or does world production respond to price increases and decreases even in the short run?
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    Mr. RAY. I see very little evidence to suggest that other agricultures respond significantly. They will, crop by crop, just like we will. I think you pointed out a very important aspect of this that really hasn't been developed in the conversations today relating to the ability to expand acreage around the world.
    I think, at one time, we felt the only way to increase output was through yield increases and we had the advantage and technologies and our yields were going up faster than around the world. Both of those two things, that is, the ability to increase acreage in Brazil—they could almost match our acreage if they wanted to. The land price would probably be in the neighborhood of 300 to $500 an acre, rather than 2 to $3,000.
    And there are other areas where lands will be brought in, whether that be in restoration of existing lands in the Ukraine and China and so on. So I think that the production potential is very large. The other part is, is that now, we are not the only ones that have the technologies. We are in a truly global technological market now where if it is available to us, it is available to others. And I would argue that if you see an opportunity as a Cargill of raising the yield of corn from 70 bushes to 140 in China, versus increasing it a half a bushel a year here, my guess is, is that they will notice that as a real opportunity and probably not miss it.
    Mr. MORAN. I have been reading recently about increasing production, or at least the ability to increase production, plus the transportation costs in South America, especially Brazil, and I think there are some rather significant kinds of policy discussions that need to result from what may or may not happen outside the United States. Mr. Collins, is there economic figures in regard to where world production is headed?
    Mr. COLLINS. Yes. There are different long-term forecasts USDA, and other groups, like the Food and Agricultural Policy Research Institute put out. They have proven to be good and bad over time. A general answer to your question is, that there are a lot of countries around the world producing a lot of commodities pretty efficiently that can compete and it is for good economic reason. They grow a lot of wheat in Australia, in Canada, in Argentina, because they can grow it there and they can grow it efficiently and they are out there competing with us. I don't expect that to go away.
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    I think we are going to have a lot of competition as we move ahead. We have been able to compete well because of the tremendous technology change in American agriculture and the enormous productivity growth that we have had, which have provided massive benefits to the American public, even to the world. And I would say that the way to stay on that path is to continue to develop the technology so that we can remain competitive.
    When you look at particular regions of the world, I think that the demand side is where we can create a lot of new opportunities. Dr. Gardner mentioned the Uruguay Round is really the first opportunity to get at trade liberalization and agriculture. We did some good things in the Uruguay Round.
    On the other hand, there is an enormous way to go. If you look at tariffs in agriculture, they are 10 times greater than they are in industrial products, because we only just began tariff reduction. We just went from quotas and licenses to tariffication in 1994. A lot of that tariffication was what people might call dirty tariffication. They set tariff rates that are enormously high and they are not necessarily the effective tariff rates. And so we have got an opportunity to open up some markets around the world, and I think that would help.
    On the competitor's side, there is no question about South America. I see that as the number one competitor for the future. If you look at Argentina and Brazil in the 1990's—I was just looking at their acreage to soybeans. It went up 25 million acres in the 1990's in Argentina and Brazil. In fact, it went up rapidly in Argentina. While a lot of people always focus on Brazil, Argentina also had a very large increase. And we know that there is enormous acreages available in Brazil that don't require a whole lot of land clearing that are highly productive. And for that reason, I think, our soybean producers are going to be under a lot of pressure for years to come.
    Our forecasts for soybean prices over the next several years are not very good. We also could see more competition from central and eastern Europe. That is an area where that I think they have good production potential as well. We may see some in China. But my guess is, in China, and it is just a guess, that because that tends to be more intensive agriculture production, over time, we are going to see more competition from them from the horticultural commodities and less, perhaps, from the bulk.
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    And then there is other countries of the world, like India and Pakistan, where India is a wheat exporter now. And they sort of bounce in and out of that. Will they make fundamental changes and become a chronic wheat exporter? I don't know the answer to that, but it could happen as well.
    So there is no question the competition is going to intensify, but Americans have always figured out how to stay a step ahead of it or even with it. And I have confidence we will do that.
    Mr. MORAN. Thank you, Mr. Chairman. Three economists, three questions, and 5 minutes—they don't fit. So I hope to come back with a couple of follow-ups.
    The CHAIRMAN. We will do that. Did you have a comment, Mr. Gardner?
    Mr. GARDNER. Well, if there is time, I just wanted to add one thing. That in this international picture, the technology has been there and I think that we have competed very well and we will continue to do so. But I would like to actually go back to Mr. Stenholm's point that he emphasized early, that we are, perhaps, putting a 25, 35 percent tax on ourselves through the value of the dollar at the moment, compared to where we might be. And that makes up for a lot of productivity growth. So there is some possibilities there. I wouldn't want to raise too much optimism that the dollar is going to fall real soon, but it may. And I think that that underscores the importance of this macro picture, in addition to our international competitiveness on productivity grounds and the trade liberalization, both of which I agree are fundamentally very important. But we don't want to neglect the value of the dollar.
    Mr. MORAN. If I get a chance for a second round of questions, the valuation of the dollar and the policy implications are a question I would like to raise with all of you. Thank you.
    The CHAIRMAN. Mr. Gutknecht.
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    Mr. GUTKNECHT. Thank you, Mr. Chairman. And I would like to thank the panel. The testimony today has been both enlightening and sobering. And I want to thank all of you, and particularly Dr. Ray. I didn't particularly like to hear what you had to say, but I think we need to hear that. My first question—and I am not sure if it is for you or for the staff—is your testimony available on the web? I would like to have more of my producers back in Minnesota see that. And I would like to put that out on my web site. So if we can somehow do that, I would really like to make that available.
    Second, I want to attach myself to the comments of my new colleague from Minnesota—that it strikes me that we really have, literally, since the Civil War, from a Federal farm policy perspective—we have put an awful lot of emphasis on the production side of agriculture. Our land-grant institutions, we put an awful lot in terms of being able to produce more crops. We have done precious little, though, it seems to me, to try and figure out what we can do from a Federal perspective to increase demand. And it seems to me, as we go forward and we look at farm policy, we have got to put more emphasis on that side of the equation. Certainly, research is part of that.
     Dr. Ray, I would like to get your assessment, if that is a potential answer, and we are really talking about revenue per acre rather than price per bushel. Because it seems to me if we continue to chase our tail relative to price per bushel, we really don't make a whole lot of progress. But is there a way, do you think, practically, we could construct some kind of a countercyclical revenue insurance program, and does that make sense from your perspective?
    Mr. RAY. There are some advantages, for sure, using revenue in the sense that you can take care of both the yield variability and the price variability with one product. And that has a lot of appeal. The problem that I have, that I mentioned before, was related to using historical averages as the criteria for deciding whether or not an individual would be paid out of that fund. And that isn't necessary, of course, to use historical averages.
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    I see the major pitfall being that it is very possible, and then all you have to do is look at the numbers that have been presented here. The net cash income to the eight crops, if you didn't have those Government payments, would be declining, and therefore, your base that you would be basing those products on would be declining as well.
    Now, some would argue that they wouldn't decline or they would decline a lot less because there would be response on the supply side and on the demand side, they would keep it up. I don't see that. And if I talk to farmers, I don't hear them saying that they are willing to reduce output.
    But on the other hand, there would be other ways that you could set up the criteria for deciding whether or not an individual had reached the level of income that would generate money from that fund.
    Mr. GUTKNECHT. Let me come back to this whole issue of commodities. There was a story on one of the public television shows several months ago about Cornelius Vanderbilt. And when he started making steel rails, talking about commodities, I think the price was over $100 per rail. And he continued to increase efficiency and increase efficiency and drive costs down. I think by the time he finished his last plant, they were producing and selling them to the railroads for $11.
    But isn't there sort of a pattern in virtually every commodity that ultimately the efficiency drives the margins down to virtually zero? I mean, if we are purely in the commodity business, aren't we really sort of long-term setting ourselves up for economic problems?
    Mr. RAY. I think that you have identified an important point that needs to be brought out, is that through time, with the higher yields, the lower cost per unit, we have been able to reduce the cost per unit for producing some of these things in some respects. On the other hand, when you look at some of the input costs that are affected by the general economy and by other kinds of influences, there are some offsetting effects on that too. So it works both ways.
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    Mr. GUTKNECHT. Which leads to my next point. As we look forward, don't you think that one of the things we ought to look at more seriously, from the perspective of this committee, is how we can encourage farmers to participate in more value-added programs? I mean, at the end of the day, if we are purely in the commodity business, it seems to me it is very difficult for us to make a real profit.
    Long-term, though, and I see this with both the people who are participating in my area in the ethanol plants and those who are participating in other value-added endeavors, their incomes have held up relatively well. In fact, I heard a story the other day about one corn producer in my area who averaged considerably above what the price is posted at the local elevator for his corn because he contracted with the local ethanol plant. And it seems to me that we have got to figure out ways to help the farmers participate in more of that downstream value-added profit.
    Mr. RAY. I agree.
    Mr. GUTKNECHT. I yield back.
    The CHAIRMAN. Mr. Lucas.
    Mr. LUCAS of Oklahoma. Thank you, Mr. Chairman. Dr. Ray, let us visit, for a moment, about the rational behavior aspect of my fellow producers and me. I think one of those principles that you pounded into us 20 years ago, sitting in policy class at OSU, was the concept, that general concept, that there will always be a finite number of resources. There will always be an unlimited number of demands. And the rational decisions that are made by people will allocate the resources to the best possible good.
    But looking at agriculture, where, at least in my community, I see a tendency, almost no matter what the crop, to see resources bid up to the point where the rate of return is 2, 2 1/2, 3 percent, just a general term. It would appear to the rest of the world, where we would insist upon a higher rate of return, or we wouldn't invest those resources, that those of us in production agriculture are totally crazy. At least, that is what they would say.
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    But looking at how we got to this point, isn't it fair to observe that in the lifetime of most of our producers out there in the countryside, we have had Government programs? If you farmed prior to Uncle Sam's first attempt at comprehensive farm policy, you had to be farming in, what, 1932? And if you farmed without Uncle Sam at a time of relative prosperity, you had to be farming in 1925–26, something like that. So literally, to have producers who remember the world before Uncle Sam, you have to be almost 100 years old out there on the farm.
    So basically, I guess, my premise is, that most of our producers now do not know a time prior to Uncle Sam's involvement in agriculture and there is a tendency to make decisions based on the assumption that USDA will be there. Literally, in 1996 and 1997, in my town meetings in northwest Oklahoma, the question was, are you really getting out? Are you really going to do that? Do you really mean this flexibility stuff? And especially my producers past the age of 40 didn't believe it for a moment. Am I misreading some of those underlying issues out there and the thoughts that are running through the minds of my fellow producers?
    Mr. RAY. No. And I think that expectations are really important. And that is why I don't necessarily believe that whether or not you couple or decouple payments that that is going to have that much of a different effect on the response of farmers. Because what is really important is what the expectations are.
    The other thing I would say is, is that it is very laudable for us to be spending money to do research to shift the supply curve to the right and benefit consumers. And, yet, economic theory would say that anything that we do as a Government, to interrupt the free market system, is a net drag on the economy. So I would think that we should be at least as interested in trying to decide what a free market is. And is it true if we have a free market in agriculture, is it one in which we also are shifting the supply curve to the right with expenditures on research and extension? Or is it one that is not?
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    And I would argue that if we had not made that expenditure, if we had not shifted that supply curve, that there would be very little need for even looking into farm prices or incomes and we would be spending a lot more for food. But on the other hand, if we are going to talk about a free market, we really shouldn't be intervening on either side of the market.
    Mr. LUCAS of Oklahoma. What effect does the U.S. Tax Code have on the production agricultural situation? And you made the comment earlier about when a farmer stepped away, because of circumstances, someone was there to take up his or her place. What effect does allowing losses generated on the ''F'' form to be transferred over, have on agriculture, thinking of the recent stories about the Ted Turners of the world and people who are not traditionally involved in agriculture, who seem to be willing to move substantial amounts of resources there?
    Mr. RAY. I am sure that it has a negative impact. And, again, it is probably one of many things. And the extent of it, I guess I wouldn't be able to answer, Mr. Lucas.
    Mr. LUCAS of Oklahoma. And I will give you credit, Dr. Ray. Sitting in your class 20 years ago, watching the children of American Agriculture Movement members quiz you rather thoroughly about policy questions, was fascinating. You did a fine job then.
    Mr. RAY. Thank you.
    Mr. LUCAS of Oklahoma. One last question. It has been my observation also that in my own immediate area, of the two periods of what I would define as golden opportunities in agriculture, came after periods of real stress. The 1940's, particularly the late 1940's, and in the 1960's, when land prices reflected more realistic levels, particularly in the southern plains, a result of the depression and the dust storms of the '30's and the drought and the dust storms of the 1950's. Have we had such a golden period since the 1970's? And I am not even asking you to agree with my definition of what a golden period was.
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    Mr. COLLINS. Well, I don't know if I could define it as a golden period, but after the farm crisis of the mid-'80's, we did see a fairly substantial period of rising incomes in American agriculture. In fact, I think the all-time record income year was in the early 1990's. So we had a few years in there where we had some strong export growth around the world and we had some better incomes in American agriculture, between the crisis of the 1980's and the crisis of the late 1990's.
    Mr. GARDNER. Well, if I could put a little different way of looking at this. The way I would say that these best periods in American agriculture have been, have been not necessarily based on land prices, but on the demand factors that we have been talking about. There are a few periods in which a lot of money has been made in agriculture—some extent before World War I, World War I, in World War II, a little bit in the Korean War period, in the commodity boom of the 1970's, and a bit in 1995 and 1996. You have seen these periods when you have unexpected surges in demand, and those have been the periods in which money has been made in agriculture.
    To some extent, I think that those have been the gains that have sustained agriculture through the long periods of low prices, notwithstanding all the Government programs. And, in fact, I would say moreover that that has been the case not only in the supported commodities, but all the commodities have had this similar kind of boom and bust characteristic. And that has been, perhaps, the most important thing, and sort of what are the good periods and bad periods.
    The CHAIRMAN. There some more questions that members have. I would like to sit here and hypothesize for hours, but I am not going to put you through that. But we have got about 8 minutes and we are going to have a couple of votes, and I am not going to ask you to stay so we can come back. We will divide that period of time up. I will not ask any more questions, but we will see if other members have a follow-up they need to address. Mr. Moran.
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    Mr. MORAN. I just might ask Mr. Gardner if he would provide me with any suggestions that he might have that provides direction in response to this comment in your testimony, which I agree with wholeheartedly. The Agriculture Committee should not neglect broader rural issues and should address rural development in wide-ranging, but intelligently targeted set of programs. That is a great suggestion for us. I think it is important. And maybe just if you, at your convenience, if you have any particular suggestions, I think our farm policy needs to include rural development as a significant component and that the savior of rural America is not just what the loan rate is or necessarily even the price of wheat, although I think those are awfully important issues as well. And then, Mr. Collins, I would appreciate any input you might have about how we combat the—what did you say, in 5 years, the dollar has appreciated over 40 percent relative to our competitors. Do we address that on the domestic side or do we address that in trying to increase exports through export assistance? And I yield back the balance of my time, Mr. Chairman. Thank you.
    The CHAIRMAN. Mr. Stenholm.
    Mr. STENHOLM. Dr. Collins, a moment ago you posed a rhetorical question as to we have to figure out how to make farmers less dependent on Government payments. For the life of me, I cannot figure out how you do that in the world as it is.
    Mr. COLLINS. That is why we have the same programs year after year. No one can figure that out.
    Mr. STENHOLM. I could not agree more, and that has been a constant struggle. And I thought it was interesting a moment ago, when the only good times that we seem to have had in agriculture are when we have unexpected surges in demand.
    About three of those were associated directly with war and one or two others with instability in certain areas of the country. Now, that is the real world in which we have to try to design policy. And I think we are going to want to follow up with you, as I know you will be with us, regarding the currency question. And I am not for a weaker dollar. I think America is better with a strong dollar. But I am for having the rest of the country understand that those industries like agriculture, and other industries that are dependent upon exports, and what that means for our country, freer and fairer trade, have to understand that that is a significant obstacle to overcome.
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    Last year there was a lot of rhetoric concerning pharmaceutical costs in that Canadians, for example, and Mexicans can buy their pharmaceuticals cheaper than we can in the United States. Same medicines, same companies. We have got the same with agricultural products. Technology now can be bought cheaper in Brazil.
    I think as we get into how do we balance these naturally occurring economic phenomenon out in the world, that there are other reasons, other than the ones that we traditionally have used to justify, whether it is AMTAs or price supports or LDPs, or what have you, there are other ways to justify and, perhaps, there may be better ways to tie it so that we do send market signals. Right now we are not sending market signals to our producers that are producing the 150-something thousand that produce 72 percent. We don't send a market signal to them. As you have testified today, nothing changes. Same production. Everybody is farming. Everybody is going on.
    Finally, we have talked about energy. Dr. Collins, I think it was you a moment ago that said we can respond to that. Don't use as much fertilizer. And if you are going to irrigate and lose money, why not you and your banker sit down and go dry land for 1 year? Insure it. I suspect your bottom line will be better with a total loss in a drought condition than it will be irrigating and fertilizing and producing a crop. That has been the case in a good part of the country this last year.
    I think we have got to get off this business that the only thing we can do is just keep on producing and if more fertilizer produces more and we lose money on it, that is good. We ought to be thinking in terms of the most efficient cost per bushel. And maybe this is the time for us to focus in on that.
    The CHAIRMAN. I have one question that I would like for you all to just drop me a note on and follow up how you feel about this. Let me lay the scenario. Don't think about where this goes in the box because we are not going to talk about boxes here. We are assuming we are working on our numbers here that say about 8 percent of the farmers produce about 72 percent of the sales. If there is a concern that there is overproduction and if there is an effort to try to deal with that production, I would like your thoughts about how effective would that actually be if we established some kind of a price support system that is based on an economic foundation? And it is so low, i.e., price—i.e. payment limitations, that your large farmers, your 72 percent of the sales farmers, do not see an incentive to participate.     Then can we really develop a program that does, in fact, have some impact on supply if it is so uneconomically attractive to them that they would farm outside of the program? And in that, are all we doing is providing an income-support mechanism for that majority of farmers who produce the minority amount of sales?
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    Do we have to look at, if we are going to truly deal with some kind of a supply-management program, a program which, in fact, does have an impact on those people who farm the strong majority?
    I thank you all very much for being here and I will, again, will save you from having to come back. I am sure we will have some further discussion. The hearing is adjourned.
    [Whereupon, at 1:35 p.m., the committee was adjourned, subject to the call of the Chair.]
    [Material submitted for inclusion in the record follows:]
Statement of Keith Collins
    Mr. Chairman, thank you very much for the invitation to discuss the current state of the farm economy. My intent is to provide the committee with information on the current situation and outlook for U.S. agriculture as you begin your work on developing a replacement for the Federal Agriculture Improvement and Reform Act of 1996 (1996 farm bill). I will describe the current situation in major commodity markets, the financial well-being of farmers, and the prospects for economic recovery. While the overall farm situation of the past couple years of generally weak markets continues, there are early signs of recovery and many indicators continue to remain favorable, including farm asset values and debt levels, due in large part to record government payments the past two years. Global economic prospects are improving, global stocks of major crops are not excessive when compared with use, farm prices are generally up compared with one year ago, and reduced plantings could lead to a further tightening of stocks in 2001. However, a strong rebound in farm prices and income from the marketplace for major crops appears unlikely at least over the next couple of years in the absence of a major global shortfall in crop production. Under current legislation and programs, assuming no supplemental payments, net cash farm income in 2001 is projected to be the lowest level since 1994 and about $4 billion below the average of the 1990's.
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    The U.S. economy continues to enjoy its longest expansion in history. Strong income growth, low unemployment, surging productivity, low inflation, and interest rates have made life better for most Americans. Production agriculture has been helped by some of these trends, such as strong income growth, low interest rates, and new technology. However, production agriculture has been particularly vulnerable to foreign competition, a strong dollar, economic recession in foreign countries, and increases in energy costs.
    As we assess the prospects for 2001, many agricultural commodity markets show signs of improvement in their market fundamentals. In January, the index of prices received for all crops was up 4 percent from a year ago and the index of prices received for livestock was up 6 percent. Nevertheless, commodity prices are generally recovering from historically low levels. For the 1999–00 marketing year, the average price of soybeans was the lowest since 1972–73, the prices of corn and wheat the lowest since 1986–87, the price of rice the lowest since 1992–93, and the price of cotton the lowest since 1974–75. Cattle and hog prices were also relatively weak in 1999 but recovered more sharply than major crop prices in 2000. Milk prices were relatively strong in 1999 but fell to a 9-year low in 2000.
    In addition to historically low agricultural commodity prices, many producers the last several years have been adversely affected by weather-related problems and, more recently, increases in prices for energy-related inputs. Soil moisture levels remain very low in parts of the Southeast, most of Florida, west Texas, and portions of Montana. In addition, Sierra snow pack levels, which provide water to California's reservoirs for electricity generation and farmland irrigation, while improving continue well below normal.
    Congress responded to the problems caused by low prices and adverse weather by providing nearly $25 billion in supplemental assistance to farmers and ranchers the past three years, greatly limiting the farm financial stress that farmers and ranchers would otherwise face. These supplemental payments plus payments authorized under the 1996 farm bill pushed government payments to a record-high level $22 billion in calendar 2000 and Commodity Credit Corporation (CCC) outlays to a record $32 billion in fiscal year 2000. Lower government payments are projected to reduce CCC outlays to slightly over $20 billion in fiscal year 2001. Had Congress not provided nearly $9 billion in supplemental assistance in 2000, net cash income would have likely fallen to $47.5 billion in 2000, the lowest level since the farm financial crisis of the mid–1980's. Instead, net cash income reached $56.4 billion in 2000, nearly $2 billion above the average of the 1990's.
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    In the mid–1990's, the value of U.S. agricultural exports rose sharply peaking at a record $60 billion in fiscal year 1996, up by more than one-third from just two years earlier. During the mid–1990's, a confluence of factors boosted exports: world gross domestic product (GDP) grew at an annual rate of 3 percent, compared with less than 2 percent during the early 1990's and global grain and oilseed production fell about 4 percent.
    The surge in exports led many to conclude that U.S. agriculture was entering a period of long term prosperity—continued and steady increases in world economic activity would be enough to keep farm prices strong even with normal weather. Obviously, that long-term forecast did not materialize. Good weather and strong prices led to an abrupt turnaround in world crop production, which increased sharply in 1996–97. Then, in 1998, world economic growth, excluding the United States, fell to a paltry 1.3 percent. The slowdown in growth combined with continued strong crop production caused crop prices to decline sharply.
    For bulk products, such as feed grains, wheat, soybeans, cotton and rice, export value declined one-third from fiscal year 1996 to fiscal year 2000. Lower export prices accounted for nearly all of the drop in export value of bulk commodities, as export volume fell only slightly. In contrast, the export value of high-value agricultural products remained nearly steady at about $32 billion during fiscal year 1996–2000. In fiscal year 2001, the value of bulk exports is forecast to increase $1.5 billion to $19.3 billion, remaining well below fiscal year 1996's $28 billion, while the volume of bulk exports is expected to exceed fiscal year 1996's 119.3 million tons. The export value of high-value agricultural products is forecast to increase to $33.7 billion in fiscal year 2001, and the value of all agricultural exports is expected to reach $53 billion this fiscal year, up from the recent low of $49 billion two years ago, but still well below the record reached in fiscal year 1996.
    The turnaround in several key macroeconomic indicators make the outlook for higher exports more positive than it has been in some time. World GDP, excluding the United States, grew nearly 4 percent in 2000, the largest rate of growth in more than a decade. In 2001, world GDP, excluding the United States, is expected to slow from last year's high rate but continue strong at slightly under 3.5 percent. Many countries that were in recession in 1998 and 1999 are now registering strong rates of growth. Following the 1998 Asian financial crisis, South Korea's economy grew nearly 11 percent in 1999 and over 9 percent in 2000, and economic growth in Southeast Asian countries rose to 3.6 percent in 1999 and to almost 6 percent in last year. In addition, several Latin American countries had positive growth in 2000 after being in recession 1999.
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    Another key factor for U.S. exports is the U.S. exchange rate. The value of the dollar has increased sharply in the last several years, increasing the cost of U.S. farm products to foreign buyers and the cost of U.S. agricultural products relative to those of our competitors. Between April 1995 and September 2000, the U.S. real agricultural trade-weighted exchange rate appreciated by 25 percent, reversing about a decade in which the value of the dollar declined relative to other currencies. Over the same period, the U.S. dollar appreciated 42 percent relative to currencies of U.S. agricultural competitors. Declining interest rates and a slowing economy should weaken the dollar in 2001, making U.S. agricultural products modestly more attractive to foreign buyers.
    In 2001, farm cash receipts are forecast to reach $200 billion, up $4 billion from last year. This would be the second highest level of farm cash receipts surpassed only by the record high of slightly under $208 billion in 1997. Compared to 1997, crops receipts are projected to be down $11 billion in 2001, while livestock receipts are forecast to be up about $3 billion. Compared to last year, livestock receipts are projected to be about unchanged at slightly under $100 billion in 2001, while crop receipts are forecast to increase by $3.6 billion to slightly over $100 billion. These aggregate figures mask steep declines in cash receipts and income for major crops and milk. Cash receipts for grains, soybeans, and cotton declined from a record $57 billion in 1997 to $43 billion in 2000 and projected to increase slightly to $45 billion in 2001. In 2001, dairy receipts are forecast to be up about $1 billion from last year, but remain well below the record of $24 billion in 1998.
    Assuming no supplemental assistance for the 2001 crops, net cash farm income is projected to decline from $56.4 billion last year to under $51 billion in 2001, as production expenses continue to rise and government payments decline. Increases in petroleum prices and interest rates along with higher prices for other production inputs, including hired labor, increased farmers' production expenses by 4 percent or $7.6 billion in 2000, with higher fuel and oil prices accounting for over one-third of the increase. In contrast, farm production expenses rose only 1 percent from 1997 to 1999.
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    In 2001, farmers' total cash production expenses are forecast to increase $1.5 billion to a record $179.5 billion. Even though total planted acreage is expected to fall in 2001, higher natural gas prices will increase expenses for nitrogen fertilizer. Expenses for hired labor, repairs, and marketing could also continue to trend up in 2001. Fuel expenses are expected to be about unchanged from last year, as petroleum prices are forecast to moderate later this year. Despite recent interest rate reductions by the Federal Reserve, farm business interest expenses are projected to remain about steady in 2001. While about two-thirds of bank nonreal estate loans made in 2000 are variable-rate loans, these loans adjust at regularly scheduled intervals and lag the Federal Reserve rate.
    Government payments have offset much of the decline in cash receipts for major crops, thereby helping to maintain producers' cash flow. Direct government payments to farmers increased from under $8 billion in 1997 to a record $22 billion last year. In 1997, farmers received $6 billion in Production Flexibility Contract (PFC) payments and about $2 billion in conservation program payments. In 2000, direct government payments included nearly $5 billion in PFC payments, $6.4 billion in loan deficiency payments, $2 billion in conservation program payments, and nearly $9 billion in supplemental assistance. Loan deficiency payments were authorized under the 1996 farm bill and are available to producers whenever the prevailing market price (world price for cotton and rice) for a particular commodity falls below the price support loan rate. Producers did not receive loan deficiency payments in 1997 because prevailing prices exceeded the announced loan rates for program crops (feed grains, wheat, upland cotton, and rice) and oilseeds. Because government payments are tied to both historical and current production of major crops, the largest farming operations receive most of the payments. In 1999, the 14 percent of farming operations with annual sales above $100,000 received two-thirds of farm program payments.
    In calendar 2001, government payments are projected to decline about $8 billion to slightly over $14 billion. This forecast does not include any supplemental aid for 2001 crops, since legislation authorizing supplemental assistance for 2001 crops has not been enacted by Congress. Scheduled annual reductions in PFC payments under the 1996 farm bill and lower loan deficiency payments, reflecting improving prices for major crops, are forecast to reduce government payments by $2.5-$3.0 billion in 2001. In addition, with no supplemental aid legislation in place for the 2001 crops, emergency assistance to farmers and ranchers is projected to fall from nearly $9 billion last year to about $3.5 billion in 2001. The $3.5 billion in emergency assistance was authorized by Congress last year to offset crop and market losses in 2000 and will be dispersed in 2001. The farm income situation in 2001 is not unlike that in recent years, although this year some of the drop in government payments is expected to occur through lower loan deficiency payments that will be made up in greater returns from the market.
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    The major field crops have been having particular market difficulty the past few years. Net cash farm income on a crop year basis for the major field crops—wheat, rice, corn, sorghum, oats, barley, cotton and soybeans—excluding government payments was low for the 1999–2000 crops and projected to remain low for the 2001 crops. Direct government payments accounted for three-fourths of net cash income for major field crops in 1999 and more than two-thirds in 2000. For 2001, net cash income for major field crops is projected to fall by over $5 billion, declining from over $25 billion for the 2000 crop to less than $20 billion. The decline in net cash income between 2000 and 2001 is slightly less than to the amount of market loss assistance Congress authorized last year for major field crops. Absent new legislation, the regions and crops that have been dependent on government payments are likely to see the greatest decline in farm income in 2001.
    A national farm financial crisis has not occurred in large part due to record government payments and greater off-farm income. Farm numbers have been fairly stable in recent years—the proportion of nonperforming farm loans has risen only slightly, the debt-to-asset ratio remains at about 16 percent, down from 23 percent during the farm financial crises of the mid–1980's, and farm real estate values and land rental rates generally continue to rise. In 1999, U.S. farm land values rose 3 percent nationally and were up in 42 states, and cash rents paid for 2000 were up in 40 states. Bankers in the Chicago Federal Reserve District reported that land values in the district rose 7 percent over the 12-month period ending on October 1 of last year.
    While the national picture appears secure, regional and sector problems persist. The combination of low prices and structural change have caused the number of dairy and hog operations to decline and adverse weather in the Southeast, southern plains and elsewhere has contributed to regional pockets of farm financial stress.
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    Farm debt rose 2.4 percent in 2000, surpassing $180 billion for the first time since 1984. In 2001, farm debt is forecast to increase to slightly under $183 billion. As a percent of the value of farm assets, farm debt is expected to remain unchanged from last year's 16.1 percent. Even though farmers' balance sheets are much improved from the mid–1980's, a projected drop in farm income will reduce farmers' ability to repay existing debt.
    A useful indicator of financial stress is debt held by farms as a percentage of the maximum feasible debt that farms can take on, which is referred to as debt repayment capacity utilization (DRCU). Maximum feasible debt is a calculation based on net farm income, the interest rate, an assumed 7-year average repayment period for debt, and bankers' guidelines on the maximum level of income that should be used for principal and interest. In 2000, U.S. farmers, on average, used a little over 60 percent of their maximum feasible debt and this figure is forecast to increase to 65 percent in 2001. Although the DRCU in 2001 would be the highest since 1986 and the level has been rising steadily in the 1990's, it is forecast to remain about half that of the 1984–85 farm credit crisis period.
    DRCU may be taken a step further by looking at how this measure of debt stress is distributed among farming operations. A commercial farm business is an operation that sells at least $50,000 in farm products per year. Of the 2.2 million U.S. farms, about one-quarter, or 512,000 farming operations, sell at least $50,000 in output per year. These farms account for 90 percent of total U.S. production.
    Commercial farms that cannot service their debt and stop performing on their loans usually have debt equal to 240 percent or greater than their maximum feasible debt. In 1998, the number of farming operations in this category rose, but the number fell in 1999. The weak markets probably led producers to use government payments to pay down debt. In both 1999 and 2000, about 50,000 of the Nation's 512,000 commercial farm businesses had DRCU of 240 percent or more. In 2001, the number of commercial farming operations with DRCU of 240 percent or more is forecast to increase to 70,000.
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    The most obvious reason we haven't seen more of an increase in farm financial stress is record-high government assistance to farmers. In addition to record government payments, another reason a national farm financial crisis has not materialized is the strong nonfarm economy which has helped increase off-farm income opportunities for farm households. Earnings of farm operator households from off-farm sources averaged an estimated $60,000 in 2000, up from less than $36,000 in 1992. In recent years, about 90 percent of the total income of the average farm household comes from off-farm sources, and the average income, including income from off-farm sources, of farm operator households has been above the average for all U.S. households. Off-farm jobs in rural areas are a major factor in why the number of farms has stabilized at 2.2 million in the 1990's.
    Government programs and farmers' planting decisions. For the most part, PFC payments authorized under the 1996 farm bill are not affected by the amount of acreage a farmer plants to a particular crop and not linked to the level of market prices. Because PFC payments are essentially decoupled from current production and prices, it can be argued that they have very little if any measurable influence on farmers' planting and production decisions. In response to the increase in planting flexibility in the 1996 farm bill, producers have greatly expanded soybean plantings and reduced wheat plantings—soybean planted area was up nearly 25 percent in 2000 and wheat planted area was down about 12 percent in 2000, compared with the 1990–95 average. Plantings of corn and cotton in 2000 were up about 5–10 percent, compared with the 1990–95 average, with the increase likely reflecting both increased planting flexibility as well as the elimination of annual commodity acreage reduction programs under the 1996 farm bill.
    The 1996 farm bill capped price support loan rates for wheat, corn, rice and upland cotton at the level announced for the 1995 crop. Meanwhile, loan rates for soybeans and other oilseeds were also capped but at a rate 7 percent above the 1995-crop level. For the 1996–2001 crops, the Secretary chose to announce loan rates for wheat, corn, upland cotton, and soybeans at the maximum level permitted by Congress, contributing to the increase in oilseed plantings since 1995. With loan rates set at the maximum level allowed, loan deficiency payments and marketing loan gains increased sharply from less than $200 million for the 1996 and 1997 crops, to $3.8 billion for the 1998 crop, to nearly $8 billion for the 1999 crop and projected to be $6-$7 billion for the 2000 crop, reflecting the abrupt decline in major crop prices over the period. Because these payments are made based on current production and prices, they affect farmers' planting and production decisions. It is estimated marketing loan benefits in the form of marketing loan gains and loan deficiency payments increased plantings to the eight major crops by 4–5 million acres in 2000.
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    Outlook for Major Crops. Major crop prices for the 2000–01 season are expected to register modest improvement from last year's 15 to 25 year lows, reflecting another year of large global production of major crops and ample stocks. Given no major weather disruptions in the major crop growing regions of the world, further expansion in global demand for agricultural products is expected to lead to further improvement in major crop prices over the next several months and into the 2001–02 marketing year. While it is too early to predict a substantial recovery in major crop prices in 2001, global stock levels going into the 2001 season are projected to be down sharply from a year earlier. At the end of this season, global grain stocks are projected to be down13 percent from a year ago and the lowest since 1995–96. As a result, world prices could move up sharply if weather adversely affects global crop production over the next several months.
    In 2000, U.S. producers planted the lowest wheat acreage since 1973. Wheat prices this marketing year are projected to average $2.60-$2.70 per bushel, up from last season's $2.48. The projected increase in wheat prices this marketing year reflects lower total supplies, increasing total use, and declining carryover stocks. Total supplies are off about 2 percent from one year ago, primarily due to a drop off in winter wheat yields in Colorado, Kansas, Nebraska, and Texas. Total use is forecast to increase by 39 million bushels over last year's nearly 2.4 billion bushels, as food use, feed use, and exports are all expected to register gains. Wheat exports are projected to reach 1.1 billion bushels, the highest since the 1995–96 season, as weather reduced the quality of wheat in the European Union and Australia. Ending stocks are projected to fall for the second consecutive year from 950 million bushels at the end of last season to 839 million bushels at the end of this marketing year.
    Looking ahead to the 2001–02 marketing year, which begins on June 1, a further decline in winter wheat acreage will likely push total U.S. wheat acreage and wheat production lower. Farmers have responded to the planting flexibility provisions of the 1996 farm bill by planting less wheat and more oilseeds. Winter wheat plantings last fall were down 5 percent from a year earlier and the lowest since 1971. In addition, lack of soil moisture could push winter wheat yields below last year. Reduced wheat supplies in 2001–02 could lead to another year of reduced carryover and improving farm prices.
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    The 2000–01 corn crop of 9.97 billion bushels is up from last year's crop of 9.43 billion bushels and the second highest on record, as growing conditions were generally quite favorable for much of the Midwest. Average yield per acre of 137.1 bushels per acre nearly matched 1994's record of 138.6. With total supplies are up sharply from one year ago, ending stocks are forecast to increase nearly 200 million bushels over last season's 1.7 billion bushels. Total corn use this season is projected to reach a record 9.8 billion bushels, compared with last season's 9.5 billion bushels, as domestic use is expected to increase 2 percent and exports increase 6 percent from a year ago. The increase in domestic use reflects both higher corn feeding and higher industrial use of corn for ethanol production, which reached a record high of 1.6 billion gallons in 2000. Foreign corn production is down about 9 percent this season leading to much improved export prospects for U.S. corn, despite concerns about the presence of StarLink by some importers. Exports are forecast to reach 2.05 billion bushels, the highest since 1995–96. The farm price of corn for the 2000–01 marketing year is projected to average from $1.70-$1.90 per bushel, compared with last year's $1.82 per bushel.
    In 2001, higher natural gas prices will increase corn producers' fertilizer and irrigation costs. These higher costs are expected to lead to reduced corn plantings in 2001. Assuming normal weather, lower acreage coupled with another year of good export opportunities supported by continued global economic growth and expanding ethanol use could tighten ending stocks, strengthening market prospects for corn in 2001–02.
    Soybean plantings of 74.5 million acres in 2000 exceeded the previous record of 73.7 million acres in 1999. Soybean production was also record high in 2000, reaching nearly 2.8 billion bushels and up 4 percent from a year earlier. The increase in soybean production more than offset lower carry-in stocks causing total soybean supplies to increase about 2 percent in 2000–01. Most of the increase in total supplies is expected to be reflected in higher carryover stocks, as total use is forecast to be up slightly from last year's record. Domestic crush is forecast to be up about 1 percent from last year, equaling the record set in 1998–99. Abundant South American exports, somewhat weaker Chinese imports, and only a modest decline in the value of the dollar will likely push U.S. soybean exports somewhat below last year's record. Soybean prices for 2000–01 are projected to average $4.50–$4.80 per bushel, compared with last season's $4.63.
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    Less fall planted wheat, higher fertilizer prices, planting flexibility, and the benefits of the soybean marketing loan program provide an incentive for producers to further expand soybean plantings in 2001. Assuming normal weather, higher acreage could lead to another year of record soybean production and another year of rising carryover, even though total use could also reach another record in 2001–02. The EU's ban on the use of meat and bone meal in animal feeds could raise soybean meal exports, but foreign competition is likely to remain intense. Under the pressure of rising stocks, soybean prices could face additional pressure during the 2001–02 marketing year.
    Drought caused significant crop losses in some areas of the country in 2000, especially cotton in the southern and central Great Plains. Even so, cotton production was up 1 percent in 2000, resulting in the largest cotton crop in 3 years. Despite abundant current-year supplies, U.S. cotton mill use is projected to decline from last season's 10.2 million bales to 9.7 million bales, as textile imports continue to grow. U.S. cotton exports are forecast to reach 7.0 million bales during 2000–01, up 4 percent from last year. Lower foreign cotton production and improving world demand are projected to boost cotton exports this season. From August through December, the farm price of cotton averaged 56 cents per pound, compared with last year's season average price of 45 cents.
    The National Cotton Council's recent survey of planting intentions suggests a slight increase in cotton plantings in 2001. Despite the expected increase in production, price prospects could improve, especially if China's supply of exportable cotton continues to decline.
    Rice production in 2000 fell 7 percent from last year's record of 206 million cwt., as acreage declined 13 percent but yield per acre reached a record 6,278 pounds. Both total supplies and total use are projected to fall in 2000–01. With the drop in total supplies exceeding the drop in total use, total carryover stocks are projected to fall from last season's 27.5 million cwt. to 24.6 million cwt. at the end for this season. Rice exports are projected to decline from nearly 89 million cwt. in 1999–00 to 81 million cwt. in 2000–01. Through December, total commitments were behind a year earlier to the European Union, Japan, and Saudi Arabia. This season the price of rice is forecast to average $5.50-$5.90 per cwt., compared with last season's $5.93. Lower prices could lead producers to further cut rice plantings and production in 2001.
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    Large sugar production in 1999–00 resulted in large forfeitures of sugar to the CCC last year. In order to reduce government inventories of sugar and prevent additional forfeitures, USDA announced a Payment-in-Kind (PIK) Program for 2000-crop sugar under which producers could elect to divert a portion of their contracted acreage from production in exchange for in-kind payments. Payments under this program are projected to reduce CCC stocks of sugar to slightly under 800,000 tons on October 1. Import commitments under existing international trade agreements could pressure sugar prices, leading to additional forfeitures and CCC stock accumulation over the next several years unless producers reduce production.
    Outlook for Livestock and Poultry. U.S. red meat and poultry production continues to increase slowly, posting a 1 percent gain in 2000. In 2001, the gain in meat production is expected to be even smaller as beef production declines following several years of heavy heifer slaughter. Even though total red meat and poultry production reached a record 36.4 billion pounds last year, cattle and hog prices were much improved. In 2001, declining beef production is expected to push cattle prices higher, while increasing pork production could pressure hog prices, especially in the last quarter of 2001. Some recovery in milk prices is also expected as the surge in milk production over the past two years dissipates. Livestock, poultry, and dairy producers should benefit from another year of low feed costs.
    In 2000, hog prices averaged $44.70 per cwt. for the year, up 31 percent from a year earlier. Responding to the low returns of the past couple of years, producers began to reduce their breeding herds in late 1998 and continued to reduce them in 1999 and through much of 2000. In response to continuing herd liquidation, pork production fell by 2 percent in 2000. However, responding to improved returns, producers began increasing farrowings at the end of 2000. The number of sows farrowing during September-November rose 1 percent, and producers in December indicated intentions to increase farrowings by 2 percent during December-May. The increase in farrowings is expected to cause pork production to rise about 2 percent in 2001. Hog prices are forecast to average $40-$42 per cwt. in 2001, but rising hog and poultry production could push hog prices to the mid-$30 range during the fourth quarter.
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    Cattle prices are projected to be up about 7 percent higher in 2001, after posting a 6 percent gain last year. In 2001, liquidation of the Nation's cattle herd is expected to finally lead to reduced beef production. In 2000, lower cattle and calf numbers did not translate into less beef production, as record slaughter weights and reduced forage supplies due to dry weather led to record beef production. Beef production will remain large during the first six months of 2001, as cattle on feed inventories continue above year-earlier levels. Cattle on feed on January 1 were up 3 percent from a year earlier, and heifers on feed were also up 3 percent. During the second half of 2001, higher cattle prices and low feed costs should provide an incentive for producers to reduce heifer slaughter and begin rebuilding the cattle herd. Reduced placements of cattle on feed is expected to lead to a 6 percent decline in beef production during the last half of 2001. For all of 2001, beef production is forecast to be down 4 percent, with choice steer prices averaging $72-$77 per cwt. Not since 1993 has the price of choice steers averaged above $70 per cwt.
    Broiler prices in 2001 are projected to be about unchanged from last year after falling 3 percent in 2000. In response to continued low prices through most of 2000, broiler producers have begun to reduce the rate of expansion. In 2000, broiler production rose 2.5 percent which followed a 7 percent increase in 1999. In 2001, broiler production is forecast to increase by 2 percent. Broiler exports continue to show considerable strength. In 2001, broiler exports are forecast to reach 5.7 billion pounds, up 3 percent from last year and 16 percent from two years ago. Over the first 11 months of 2000, shipments to Russia totaled 1.26 billion pounds, 94 percent higher than a year earlier. Shipments to Hongkong/China were up 18 percent over the same period.
    Increasing milk production caused milk prices to collapse at the end of 1999, as producers responded to two consecutive years of high milk prices and low feed costs. For all of 2000, the all-milk price averaged $12.34 per cwt., a 9-year low and down from $14.38 in 1999 and the record of $15.46 in 1998. These strong milk prices coupled with low feed costs and favorable weather in most areas of the country caused producers to expand milk production by over 3 percent in both 1999 and 2000. In response to the collapse in milk prices, Congress authorized payments of $0.65 per cwt. to dairy producers on production of up to 39,000 cwt. last year and extended the price support program for milk through the end of this calendar year. Extension of the price support program along with the surge in milk production and a desire to maintain dairy producers' incomes has led to the largest government purchases and inventories of nonfat dry milk since the mid–1980's. On January 1, the CCC held 626 million pounds of nonfat dry in inventory. The sharp decline in milk prices this past year should begin to reduce the rate of expansion in milk production and lead to improved milk prices in 2001. The all-milk price is forecast to increase by about 5 percent in 2001 but to continue to remain below the average of the 1990's.
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    The outlook for horticultural crops is very uneven. As group, cash receipts are projected to be up in 2001 and the value of exports is forecast to reach a record $11 billion in fiscal year 2001. However, prices for some horticultural crops are being adversely affected by large supplies. For instance, the prices of applies, oranges, pears, and potatoes were down nearly one-quarter, and the prices of lemons and grapefruit were off 60–70 percent in January, compared with 1 year ago.
    Over the next several years, the agricultural sector is expected to continue to recover from the current weak market situation. Rising world demand for agricultural products along with continued progress toward freer trade through ongoing unilateral policy reforms in foreign countries and existing multilateral trade agreements are projected to lead to steady increases in U.S. agricultural exports. Increases in exports combined increases in domestic use boost farm cash receipts, but farm income could fall below recent levels during the next few years, as gains in cash receipts fail to offset lower government payments. In the absence of any new supplemental assistance, government payments are projected to fall sharply from recent levels over the next couple of years. Government payments also fall because projected increases in market prices for major crops reduce loan deficiency payments. Cash production expenses are expected to stabilize over the next couple of years as fuel prices moderate slightly but fertilizer and chemical expenses rise, reflecting the lagged effects of higher petroleum prices and modest increases in planted area. If declining government payments are not offset by rising market income and off-farm income, farm finances may come under stress. Beyond the next few years, the outlook for the farm sector improves as expanding exports further strengthen farm commodity prices and increases in farm income and farm asset values help to moderate farm financial stress.
    Mr. Chairman, that completes my testimony and I would be pleased to respond to questions.
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Statement of Bruce L. Gardner
    Mr. Chairman and members of the committee, I appreciate the opportunity to appear before you to address the current farm economy and the role of farm policy.
    It is even harder than usual to get a full and accurate picture of the farm economy in 2000–01. This is because different indicators are sending different signals.
    Prices of the major field crops are historically low, and on many farms these prices are generating negative returns. Both USDA's annual Agricultural Resource Management Survey (ARMS) and the 1997 Census of Agriculture indicate that net returns from farming operations are low for most farms. 1997 Census data estimate that 47 percent of all farms made a loss from farming on a cash flow basis (that is, even without counting depreciation of farm capital). Many farmers are in deep financial trouble, although not to the extent that was the case in the 1980's according to USDA's financial stress indicators. As of 1999, USDA's Economic Research Service estimates more than 170,000 (7.7 percent of all farms) are financially vulnerable or only marginally solvent. USDA, Economic Research Service, Agricultural Income and Finance, AIS-75, September 2000, p. 20.
And, while substantial new enterprises continue to be started up in dairy farming, for example, current market prices of grains, oilseeds, and milk would not justify investment in farming by most producers.
    Yet the average income of farm households, including off-farm income sources, is not low. According to USDA's estimates, the average farm household in 1998 (the latest year such comparison is available) had an income of $59,855, compared to $51,855 for the average nonfarm household. Thus the average farm household can support a higher standard of living than the average nonfarm household (even without considering the generally lower costs of living that prevail in rural areas). This is a remarkable economic achievement given that for most of the 20th century farm household incomes appeared stuck at 60 percent or less of nonfarm incomes (Figure 1). Even in the 1910–14 ''golden age of agriculture'' farm people did not break this barrier.
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    How do so many loss-making farms survive, and their farm households maintain a reasonable standard of living? Through off-farm income.
    Reliance on off-farm income is sometimes seen as a sign of weakness in our rural economy, but I see it as a sign of strength. Not only has it permitted farm households to catch up with the nonfarm population in standard of living, it is also the means by which many more of our small farms have been able to remain on the land than seemed possible thirty years ago. Figure 2 shows the number of farms over time. In 1970, a careful study of trends from 1920 to 1960 projected the number of farms falling, as shown in the lower line of Figure 2, to 580,000 in 2000. W.E. Johnson, *Projecting Occupational Supply Response,* in G.S. Tolley, ed., Study of U.S. Agricultural Adjustments, Agricultural Policy Institute, North Carolina State University, 1970, pp. 145-173.
It turned out to that we have almost four times that many! The main factor not taken into account in 1970 was how many small farms would remain in place, supported by off-farm income. In the 1997 Census of Agriculture, 1.35 million farms, 70 percent of the total number, had sales of farm products of less than $40,000. Even if those farms had zero costs of production they could not generate a net income from farming as high as the U.S. average income level.
    The picture for commercial-scale farms is quite different. The 153,000 family farms larger than USDA's $250,000 cutoff between small and large farms earned an average of $117,000 in net farm income, not counting their off-farm income, in 1998. These data are from USDA*s Agricultural Income and Finance Situation and Outlook, September, 1999, p. 26. Farms with more than $250,000 in sales are only 7.5% of all farms but account for over half of U.S. farm output. The rise in concentration that these figures reflect is sometimes viewed with alarm, but what it points to most clearly is the economic survival of so many small farms. If farm numbers had been cut to 600,000 by 2000 as earlier projections had forecast, the 7.5% would have been 25% and concentration of production on large farms would be measured as much less.
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Much of this income is a return to the average of $1.3 million their operators have invested in these farms. Allowing $40,000 for returns to labor and management, this leaves 6 percent as returns to the capital invested (assets minus debts). These are by no means huge returns, but it appears that these farms as a group are viable business enterprises under current conditions and levels of government support (and it should be noted that despite the attention paid to commodity programs, about two-thirds of U.S. farm commodities by market value get no direct support).
    Estimation of income and rates of return requires many assumptions, so it is helpful to compare the information conveyed by land rental and sales values, and overall farm equity (assets minus debts). Land prices have generally continued to increase in the late 1990's. USDA's estimated value of farm equity in 2000 is higher than at any time in the 1990's and is $150 billion ($70,000 per farm) higher in 2000 than it was in 1995. Data from USDA Agricultural Outlook, December 2000, p. 52.

    What explains the apparent paradox of low commodity prices together with substantial net incomes from farming of commercial-scale family farms, rising farm asset values, and levels of household incomes for both small and large farms that compare favorably with nonfarm incomes?
    With respect to large family farms and asset values, the main factors appear to be highly efficient, technologically advanced production at costs that continue to decline in real terms, supplemented by market price support provided by loan deficiency payments, and income support provided by the FAIR Act's production flexibility payments and supplements to those payments in 1998–2000.
    With respect to household incomes of small-farm operators, their costs are too high to generate significant farm profit even with the loan and payment programs, but their off-farm incomes have continued to grow. The incomes of these households are actually more closely tied to general prosperity in the nonfarm economy than to conditions in commodity markets.
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    It should also be noted that there remain many households with poverty-level incomes in rural America. But the great majority of them are not farmers. USDA estimates that half of all hired farm workers had family incomes from all sources of less than $20,000 in 1998, giving them the largest incidence of low household incomes of any industrial group. See Jack L. Runyon, *Profile of Hired Farm Workers, 1998 Annual Averages,* USDA, Economic Research Service, Ag. Econ. Report No. 790, November 2000.
More broadly, in many counties of Appalachia and the Mississippi Delta the 1990 Population Census found average annual incomes of rural families to be less than $15,000, and more than 30 percent of rural families to be below the poverty line; but only small percentages of these families live on farms.
    The Agricultural Market Transition title of the FAIR Act has been criticized for providing unneeded payments to producers when prices were high in 1996 and 1997, while failing to provide a sufficient safety net when prices fell in 1998–2000. I'd like to focus on the economic effects of current policy on farm commodity production and prices. In this respect AMTA payments are much less important than the loan program. Weak markets and low prices send signals to reduce excess output that in time cause production adjustments. But with loan rates set at their legislated maximum, and the administration of the loan deficiency payment program generating expected market returns to farmers that exceed loan rates by 10 to 15 percent, the loan program is overriding those market signals. The market mechanism is thus missing that permitted the hog market, for example, to adjust itself after the extraordinarily low prices of 1998 and 1999. The exact amount by which the loan program is fostering overproduction is difficult to estimate. Reasonable estimates are those of the Economic Research Service that indicate 2000 output of grain was perhaps 2 to 3 percent higher than would have been the case if producers had not received loan deficiency payments. This means market prices of grains and oilseeds would about 3 percent higher, with a bigger increase for cotton, if the loan programs were not encouraging production. This means that of the roughly $7 billion annually the loan program is giving to farmers, $2 billion is being taken back again—actually given to grain buyers—through lower prices caused by the program. The ERS background for the preceding estimates is in P. Westcott and M. Price *Analysis of the U.S. Marketing Loan Program,* draft, August 2000; and details of the calculations are spelled out in B. Gardner, *Agricultural Policy: Pre- and Post-FAIR Act Comparisons,* prepared for a Senate Agriculture Committee staff briefing, December 2000.
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    LDP-induced overproduction is a problem, but it is not as costly to our economy as the pre–1995 programs were, with their set-asides of cropland. Those programs, if operational today, would likely result in the idling of 20 to 30 million acres under annual acreage reduction programs. At a rental value of $70 per acre, USDA's estimate of average 2000 cash rents for cropland, such programs would generate a net loss to our economy, to a first approximation, of $1.4 to $2.1 billion annually. And the acreage reduction approach would provide, as the pre–1995 programs did, price protection for the expansion of grain acreage around the world. In contrast, the U.S. overproduction caused by today's loan programs discourages overproduction abroad.
    The preceding is not to say that the current loan programs are good. They have large budget costs and, as argued above, are forestalling farm production adjustments to current market conditions. I believe the single most important change that should be made in commodity policy is to reduce loan rates (which of course does not require legislation as the Secretary of Agriculture has the authority to cut loan rates substantially when stocks are large). Nonetheless, current programs overall are much less costly to our economy than pre–1995 programs were. My overall estimate is that the deadweight losses (costs to consumers or taxpayers for which there is no corresponding gain to producers) are less than $1 billion annually for current programs as compared to $4–5 billion annually for the programs of the late 1980's which involved a similar extent of market price intervention. See my paper cited in the previous footnote for details of these estimates.

    This year is a good time to ask how government can most productively support agriculture over the longer term. The situation as described above leads me to a two-pronged strategy: one prong to assist farm people who are in trouble, the second an industrial policy to maintain the U.S. position as world leader in agriculture and food, and an industry where independent commercial farms are able to grow freely and flourish economically. It is important to separate the two prongs, because if we try to focus our commercial agricultural policy on assisting people in economic trouble, we will end up with an agricultural industry that has to be propped up to survive, and it is hard to see that as an acceptable blueprint for the 21st century. Policy should not treat commercial agriculture as a sick sector that has to be permanently propped up, and should not treat commercial farmers as welfare recipients.
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    1. To address conditions where household income needs are greatest, the focus should be on broad-based human development programs for rural areas—education and health services particularly. The changes that have generated the greatest income gains for rural people in the past have been those that fostered a skilled, healthy labor force that could take advantage of opportunities that arise both in agriculture and in off-farm jobs. Relevant public investments (state and local as much as Federal) include not only formal schooling but also extension programs, employment information, and other kinds of adjustment assistance for all rural residents, not just farm people. In short, the Agriculture Committee should not neglect broader rural issues, and should address rural development in a wide-ranging but intelligently targeted set of programs.
    2. With respect to commercial agriculture, the policies that have reaped the greatest rewards for our nation, including food consumers as well as producers, have been those that have made the United States the world's leader in agriculture and food production, including our continuing efforts in research, technology development, and technical education. I believe it is important to maintain these efforts, and to continue to turn these investments towards remedies for market failures, notably protecting water quality and other environmental resources, and to keep supporting biotechnology development including establishment of appropriate incentives and property rights in new technology, protocols that will efficiently meet appropriate science-based standards of food safety and quality, and gaining international agreement to reduce protectionism in this and other areas of agricultural trade. A key practical step in this last area is Congressional granting of fast-track negotiating authority to the President.
    3. I believe that our commodity programs on the whole are now an improvement over those that preceded the FAIR Act in that they do not attempt to micromanage commodity markets or farmers' decisions as much as former programs have done. However, the remaining commodity programs serve little economically useful purpose from the national economic viewpoint. The smaller commercial farms that need them most don't get enough from them to convert vulnerable farm operations into profitable ones. With respect to safety nets and risk management, a case can possibly be made for assisting farmers with broad-based risk management tools such as revenue insurance or tax-sheltered savings accounts. But these programs should operate on a commercial basis. They should not subsidize riskier relative to less risky production, as current crop insurance programs do. Although a precise estimate is even more difficult than for the CCC loan program, an ERS assessment finds that crop insurance subsidies at current (2001) level *will add approximately 900,000 acres (0.4 percent) annually to aggregate plantings of eight major field crops* (USDA, ERS, Agricultural Outlook, October 2000, p. 12). The resulting price declines will be sufficient to reduce crop revenues by several hundred million dollars annually. This is a reason, from the farmer*s viewpoint, for preferring production-neutral payments such as the AMTA program provides; the gains from AMTA payments are not dissipated in market price declines.
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Such subsidies are economically dubious in just the way it is dubious to subsidize hurricane insurance for people who build houses on barrier islands; you end up generating more of the risky outcomes that the policy is set up to deal with.
    The preceding arguments lead in the direction of a first-best approach of converting at least the supplemental AMTA payments of the last three years into appropriate rural development, natural resource, education, and research programs. It is important of course to be cautious about such shifts. Poorly structured programs in these areas, say an environmental program that pays farmers to undertake costly activities that actually don*t yield environmental benefits, are more costly to our economy than simply handing over cash to farmers. In the latter case the recipients buy things they want, and this is preferable to having real resources just wasted.
If this is not feasible, a second-best approach would be to retain essentially the present program structure, leaving the level of payments to be determined by budgetary and political considerations, and relying less on CCC loan program support. A return to Federal supply management and stockholding is the least promising approach.