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THE FUTURE OF FEDERAL FARM COMMODITY PROGRAMS (COTTON)
THURSDAY, FEBRUARY 15, 2001
House of Representatives,
Committee on Agriculture,
Washington, DC.
The committee met, pursuant to call, at 9:30 a.m., in room 1300, Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
Present: Representatives Smith, Lucas of Oklahoma, Chambliss, Moran, Thune, Gutknecht, Simpson, Ose, Hayes, Fletcher, Pickering, Johnson, Osborne, Pence, Rehberg, Graves, Putnam, Kennedy, Stenholm, Dooley, Clayton, Berry, Boswell, Hill and Larsen.
Also present: Representatives Lucas of Kentucky and Hinojosa.
Staff present: William E. O'Conner, Jr., staff director; Tom Sell, Alan Mackey, Jeff Harrison, Callista Gingrich, scheduler/clerk, Hunter Moorhead, Christy Cromley, Anne Simmons, and Russell Middleton.
OPENING STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
The CHAIRMAN. Good morning. I appreciate everyone being here, especially Members who are here since the House decided that it would not be in session today, which is great. We don't have to break for any votes, and we are looking forward to the opportunity to proceed and appreciate the members that are here for staying in town and attending.
I want to welcome everyone to the first of what promises to be a very intense and interesting set of hearings on the future of our Nation's farm policy. I want to thank members for their participation not only during this morning's hearing but for their active participation throughout this process.
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I believe that we can all agree that conditions in farm country are not nearly as good as they could be, or should be. Last year, this committee held a series of hearings, 10 in the field and five in Washington, that gave us the opportunity to hear testimony of over 200 producers representing farmers and ranchers from every region of the country. I believe those hearings provided the committee with a sound education on the serious problem facing American agriculture today.
Our hearings last year were only the first step in a long process. Now it is time that we move beyond generalities and search for concrete ideas that will improve the economic conditions of agriculture. Yesterday, we heard from farm economists who outlined the conditions facing American agriculture and the implications of certain Federal farm policies. It is within that economic framework that we now set our sights on finding real solutions to the problems facing our producers today.
Last year, I charged each of the major farm organizations and agricultural commodities with the task of building consensus within their respective bodice so as to provide this committee with very specific policy recommendations. I have asked each witness that will testify before this committee in the coming weeks to not only provide detailed proposals of where they would go on policy in the future but how that policy would affect related industries, how it would impact our ability to move product in the world market, how it would comport with our WTO obligations and how it would affect our Federal budget and overall spending on farm programs.
I expect that these hearings will be challenging, both for our witnesses and for members, as we engage in very detailed discussions about the complexities of farm policy. But we have a serious obligation before us, and it is only by putting the ideas on the winnower's table that we will be able to refine our thoughts and eventually build consensus around policy that will support a robust agricultural industry in this great Nation for all times.
With that, I am pleased to welcome and invite our witnesses to the table today to present testimony on behalf of the cotton industry. I want to thank you for your willingness to be the first to take the plunge as we dive into these hearings. Reaching a consensus, even within one commodity or industry, is no easy task, and I want to commend you for the work you have done to bring together all segments of the U.S. cotton industry, including producers, ginners, seed crushers, warehousemen, shippers, cooperatives and textile manufacturers. I also want to commend you for the quality of your testimony in terms of providing very thorough and detailed analysis of your policy recommendations.
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For purposes of introduction, Mr. Robert McLendon, who will be presenting the testimony today, is a farmer from Leary, GA, and is currently serving as chairman of the National Cotton Council. Joining Mr. McLendon this morning is Gaylon Booker of Memphis, TN, who is executive vice-president of the National Cotton Council, and Mr. Mark Lange, also from Memphis, who works for the National Cotton Council as vice-president of economic services.
Again, I want to thank our witnesses for being here.
Now I would recognize my good friend, Mr. Stenholm, for his opening comments.
OPENING STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. STENHOLM. Thank you, Mr. Chairman; and thank you for holding this hearing this morning, scheduling it and moving our committee forward. I commend you for aggressively pursuing the hearing schedule that is necessary for us to develop our future agricultural policy.
Mr. McLendon, welcome to this morning's meeting and to those that accompany you at the table. The National Cotton Council has met the chairman's request pretty darn good. I want to say not perfectly. There is a little bit of ambiguity in your testimony as I read it last night, and that comes as no surprise. When you have to please all seven segments of an industry and driving policy, it is difficult to come together. But you have done a remarkably good job in outlining the policy as it pertains to cotton, and for that I join the chairman in saying thank you and commending you. I have read your testimony. I will have some questions regarding your recommendations when we get to that point.
Yesterday, we heard testimony from Keith Collins, USDA's respected economist, and also Mr. Gardner and Dr. Ray. It is safe to say that this committee has our work cut out for us. Given agriculture's existing budget baseline, current WTO limitations and a depressed agricultural economy, the members of the House Committee will earn their pay as Congress tackles the delivery of disaster assistance under the present farm program and rewrites a new omnibus farm bill.
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So, once again, Mr. Chairman, thank you. Let me commend you for wasting no time in moving forward to address the challenges. And let's not waste any more time. Let's go on to our testimony.
The CHAIRMAN. Thank you, Mr. Stenholm.
Mr. McLendon please begin when ready.
STATEMENT OF ROBERT MCLENDON, CHAIRMAN, NATIONAL COTTON COUNCIL, LEARY, GA
Mr. MCLENDON. Mr. Chairman, members of the committee, thank you for inviting us to be here this morning.
My name is Bob McLendon. I operate a diversified farm in Leary, GA. My primary crops are cotton and peanuts. I currently serve as chairman of the National Cotton Council's Executive Committee and immediate past president of the Council.
On behalf of the entire cotton industry I would like to commend you for holding these hearings on farm programs and express our appreciation for the opportunity to testify today.
Most of the fundamental aspects of my testimony today are similar to the message I delivered here last July: Financial difficulties continue for farmers across the country, with prices too low to cover the cost of production; budget authority for agriculture is not sufficient; and the FAIR Act remains inadequate to protect farmers during times of extremely low prices.
In keeping with your directive, Mr. Chairman, my testimony this morning will focus primarily on recommendations for amending commodity titles. However, I would like to start my remarks by suggesting that until amendments to long-term agricultural policy are enacted it is very important that Congress continue to address the immediate, short-term financial needs of producers.
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For the short term, we urge Congress to continue to provide relief similar to the emergency assistance enacted during the last 3 marketing years. Specifically, we urge Congress to:
Number 1, supplement existing AMTA payments with additional marketing loss payments at the highest possible levels.
Number 2, allow producers to receive these supplemental payments on the higher of existing crop bases or an average of the recent planting history, provided adequate funds are available.
And, No. 3, mitigate the impact of limitations on supplemental payments, enabling producers to qualify for total payments of not less than the amount of the AMTA and the marketing loss payments received for the 2000 crop year.
Mr. Chairman, we also favor the continuation of assistance to help offset the impact of low cottonseed prices.
Our discussions within the Council on longer term farm policy have focused on the level of support that is necessary for cotton producers to continue to compete, given rapidly escalating costs of production and inputs and the cotton and textile policies of our competitors.
We like certain aspects of the current policy. Cotton's three-step competitive provisions, coupled with the marketing loan program and the issuance of marketing certificates, continue to play a central role for cotton. These provisions have enabled our industry to compete worldwide under most market conditions and have helped prevent excessive stock accumulations. We urge their continuation in the new farm policy.
Beyond these fundamental components, our approach in recommending new policy is to indicate the level of Federal assistance we need and the delivery mechanism we can support. Unfortunately, until CBO provides an official score, we cannot know with certainty the budget impact of these proposals or how they will affect our commitments within the World Trade Organization. Therefore, we would prefer they be understood as supportable concepts as opposed to our final recommendations with respect to every detail.
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Because of the need to provide adequate income support in a cost-effective manner and meet our international trade commitments at the same time, the National Cotton Council proposes new farm policy that relies on a combination of coupled and decoupled payments.
Our goal is income support from programs and the market that will provide cotton producers with a return equivalent to what they have received in recent years from all sources, including emergency assistance.
We encourage as much reliance on decoupled, AMTA-like payments as feasible. Additionally, we recommend some type of counter cyclical income support that is as coupled and as commodity-specific as practical without exceeding the amber box ceiling agreed to by the United States in the WTO.
Number 1, our members can support crop-specific payments that are triggered when the price of a covered commodity falls below a specific threshold. This would be similar to the 1990 farm law target price system.
Number 2, we also can support crop-specific payments, triggered when revenue per acre for a covered commodity falls below a specified threshold. This is similar to the modified SIP program.
Number 3, if necessary to comply with U.S. obligations under WTO, we can support a market-basket approach, whereby payments are triggered when gross revenue for specified commodities falls below a threshold level. However, under a market-basket approach, there would undoubtedly be years in which the revenue for an individual commodity would be out of sync with the market basket of commodities. We have a few more concerns with this approach than the more commodity- specific approaches that I just mentioned.
All of these programs share the important common advantage of, No. 1, cost effectiveness as compared to a purely fixed payment program and, No. 2, their predictability as compared to the emergency assistance packages Congress has approved during the past 3 years.
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I want to stress that we support a counter cyclical approach to Federal assistance as an addition to the current AMTA mechanism, not as a complete replacement for it.
As a part of revising commodity titles, we encourage you to retain as much cropping flexibility as possible. We support base acreage provisions that offer farmers the choice of keeping their current payment base or opting for an updated payment base. We also urge continuation of assistance to offset low cottonseed prices.
And, importantly, we urge you to eliminate payment limits or, at a minimum, retain the three-entity rule; retain provisions for the CCC loan redemptions with marketing certificates; and provide for separate and reasonable limits for each category of benefits.
Payment limits in any form are both counterproductive and discriminatory. Limiting farm program benefits on the basis of size tends to disadvantage the larger, more efficient farming units, causing them to be broken up into smaller units that are less efficient and less capable of surviving in a global market.
Moreover, crops such as cotton, with a relatively high cost of production, are especially disadvantaged by payment limits since their imposition results in a smaller percentage of a cotton farmer's output being eligible for benefits.
Mr. Chairman, continuation of the marketing loan program is a central component of our recommendations today. We cannot, however, report that we have industry consensus on the loan rate. Our producer members favor a somewhat higher loan than the capped 51.92-cent level under the current law, but other segments of our industry have reservations about raising the loan rate. Our leaders continue to discuss this matter, and we believe we will be able to provide a timely recommendation with respect to loan rates during the course of new farm bill discussions.
In closing, I would like to summarize our recommendations for Extra Long Staple cotton policy.
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The Council supports continuation of the ELS nonrecourse loan program without amendment. We also support continuation of the ELS competitiveness provisions that were authorized in the fiscal year 2000 agriculture appropriations bill, but we support full funding of this program. Finally, we support establishment of some form of counter-cyclical payments commensurate with those that could be established for Upland cotton. We believe a price objective for American Pima cotton, in the neighborhood of $1 per pound, including returns from the market plus counter-cyclical payments, would be commensurate with an 80-cent price objective for upland cotton.
Mr. Chairman, that concludes our farm policy recommendation for upland and ELS cotton. With the help of my colleagues, I would be pleased to respond to any questions the panel might have on our recommendations.
The CHAIRMAN. Thank you, Mr. McLendon.
Mr. Booker, Mr. Lange, either one have comments that you wish to make at this time?
What we have done is we have invited everybody to write a farm bill, and in that then they begin to get a little bit maybe appreciation of the difficulty it is to do that. Because it has got all to fit, and we don't always have scoring when we look at it, and we have got different colored bobbings, and we have got WTO agreements, and we have got all these things that this stuff has to fit in, and it is challenging, as I think you are aware.
Let me ask a question here in regard to your proposal in which under your estimate, if you are establishing a floor based on 1999 payments—that is around 80 cents a pound for cotton, that correct?—anticipation of 60-cent cotton price, and that is going to leave a 20-cent gap, how do you make that up? How do you make it up under the proposal?
Mr. MCLENDON. Well, we recommended a fixed payment decoupled payment of 10 cents a pound; and we arrived at that through the fact that in the year 2000 crop year that was part of the equation, the amount of money we received. But we used a decoupled payment of 10 cents and then a coupled payment based on a farmer's acreage and his historic yield, that the balance of approximately 10 cents would be coming from that, which would be—and the reason for breaking it up was to comply with the WTO. And I have a much better appreciation of what you have to go through in writing a farm bill.
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The CHAIRMAN. OK, so you would have two payments, one coupled and one decoupled.
Mr. MCLENDON. Yes, sir.
The CHAIRMAN. Now, if I am a cotton producer and we are basing that on historical pounds, is that on the historical base that I am using to receive my AMTA payment today?
Mr. MCLENDON. Yes, sir, we are proposing that you would have a choice.
The CHAIRMAN. That or I could prove up.
Mr. MCLENDON. That's right. You could come to the last 5 years.
The CHAIRMAN. So I don't have to necessarily be growing that cotton, I wouldn't today, to receive an AMTA payment.
Mr. MCLENDON. That's right.
The CHAIRMAN. That is one of the criticisms, obviously, we have gotten is we are making payments to people that may not be farming; and I want to see how you address that.
Would it also be possible for me—let's say I have a historical cotton base that I have been drawing AMTA payments on, and I was growing—now I decide—for the past several years. I decide I was going to grow corn. So now I am a corn farmer. And if I can use—if I can, rather than using my historical base, I can prove it up, could I then be eligible for an assistance package under corn and under cotton?
Mr. MCLENDON. No, sir, we are proposing that if you chose to use the last 5 years you would go with the corn program, and you would be no longer eligible for the cotton that you received up till the end of the Freedom to Farm Program.
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The CHAIRMAN. All right. In the Commission on 21st Century Agriculture report hearing, your testimony of a few days ago, one of the things they proposed was using as a trigger mechanism, and basically so that we put it in the right box, was to be using farm income, historical farm income, and when it fell below that then a payment would be triggered, counter-cyclical payment would be triggered but not crop-specific. And my question that I asked of them was: What if you had an extremely good year in cotton and an extremely bad year in corn and overall you had farm income at the same level? Then those people who were really distressed in the corn production would not get any assistance, but what you are doing is you are basing it on the income that a cotton farmer received over the past or the basis year of 1999, and I would presume for the other commodities as well.
Mr. MCLENDON. Yes, sir. Of course, and we have the same problem with the market-basket approach you do. And a crop that makes up a small part of the seven program crops—you could have a bad year for rice or cotton and where the corn or wheat makes up a big part of that market basket you would have a distorted picture. The overall picture would look good. So we have the same concerns you do.
The CHAIRMAN. We are doing more of a regionalization then if we talk about basing our payment trigger on the price of cotton given a basis year of 1999.
But what if you have, let's say, within the industry that you have got an extremely good year in the Delta and you have got an extremely bad year in west Texas. And, obviously, if you have got a huge amount of cotton that has come out for loss of disaster or whatever then that generally is going to trigger a higher price for that cotton which is available. So that overall you have had a—not only did that farmer in west Texas not get the 60—or it would generally be less than that probably anyway—didn't that get that 60 cents, but then overall they wouldn't be eligible for any assistance if the overall going to the cotton producer met the 1999 base level. Is that correct?
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Mr. MCLENDON. No, sir. Your counter-cyclical payment would be based on that farm's historic acreage and yield, so it would not be paid on production. Now the price he got out of the market, that 60-cent that CBO is saying we would get this year, would be from the sales but that those two payments, coupled and the decoupled, your west Texas farmer would get those payments.
The CHAIRMAN. But if those were based on the market price falling below the 1999 base, if the market price was not below the 1999 base because—because the fact you had a huge loss in one area and another area made good and they were getting a lot more for their cotton if they were getting 80 cents a pound in the Delta, then that wouldn't trigger a counter-cyclical payment.
Mr. MCLENDON. That is right. You are correct. And if the average price received for cotton by the countries was 80 cents, then you would have that farmer that would not receive a payment.
The CHAIRMAN. I will try to abide by the clock as well.
I should have mentioned in my opening statement there will be a list of questions that we are going to try to get answers from everybody who comes. Some of those will be covered in the question period. Some of them will not be. So we do want to—depending upon what we are able to cover and what we are able to glean today, we probably will be submitting questions for your review and response.
Mr. Stenholm.
Mr. STENHOLM. Mr. McLendon, you state that the FAIR Act's Achilles' heel has been exposed, that bankruptcy has been avoided only because of emergency payments. Is the same not true of the 1995 farm bill, that but for a large expenditure under its authorities farmers would have been bankrupt? How are the two bills different in this respect, the 1985 farm bill and the 1995–96?
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Mr. MCLENDON. Well, the 1995 farm bill scaled down Government payment and Government assistance. We did not have the target price concept that the previous legislation had. And I guess 1985 had target price.
Mr. BOOKER. That is correct.
Mr. MCLENDON. So that is the reason we are going back in our example No. 1. That concept worked extremely good for cotton in that that if you had a target price and you had a type of counter-cyclical payment when prices fell below that and so when the FAIR Act was enacted it scaled down these payments. We had good prices when the FAIR Act was passed in 1995, but the Cotton Council has some reservations about that legislation being effective when prices came down.
But that is basically the difference in what happened when prices came down. We had nothing to catch us, to hold us up, and so without what you have done the last 3 years we would have been in an extremely bad situation in the country. Things are—we just been able to survive thanks to what this committee and Congress has done for us. But that is basically the difference in the two legislations, in that 1995 didn't have a safety net and 1985 did.
Mr. STENHOLM. Both of your models you submit today sort of suggest a target price. Would you not prefer a target price except for the WTO limitation problem?
Mr. MCLENDON. We have discussed that, and that's our answer, to comply with our trade agreements within WTO. We had to devise a mechanism that would allow us to abide by the rules that we would agree to, but it is a very good method of providing a safety net. It worked really good for us in the past.
Mr. STENHOLM. Yesterday, we had testimony that specifically drew attention to the fact that currency values are having a major effect on trade as far as competitiveness is concerned. And we have examples in the grains, for example, in which up to a 40 percent advantage can go to a grain producer in another country because of the value of the currency in that country. We have had the blessing, I think, of a strong dollar. I have a hard time saying that a weak dollar is going to solve America's problems. It is creating a tremendous problem for agriculture in that we have to compete in this marketplace.
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Do you have any direct information that would show some of cotton's competitors in the international marketplace? Has their currency—what kind of an advantage it gives them? For example, if it is 40 percent, 50-cent cotton in the United States, will be competing on a level playing field with 30-cent cotton roughly in another country. Do we have that with some of our major competitors? Anything you could share with us?
Mr. MCLENDON. Could I call on Mark Lange to address that as our economist?
Mr. LANGE. One of the critical factors for cotton is textile imports, and the way we see currency impacts most directly in the United States is that a dollar today will buy two knit shirts, where it only bought one a year ago from the imported market. And so the impact follows indirectly. We get an import surge on textile and apparel products and which damages our U.S. textile industry and reduces demand for U.S. textile products and reduces the U.S. mill purchase of our producer's cotton.
Mr. STENHOLM. We are going to want to pursue that a little bit more in the spirit of which the chairman mentioned in additional questions for the committee when we get a little further aligned.
You, along with other agricultural organizations, sent a letter to the House and Senate Agriculture Committees requesting they send letters to the Budget Committee requesting agricultural's baseline be increased to the amount spent on regular and emergency programs in fiscal year 2000. That is approximately $32 billion. Does the Council believe that $32 billion will be necessary per year to fund the next farm bill?
Mr. MCLENDON. We certainly think the level of support should be commensurate with what we received the last 3 years. And, you know, you go for fiscal year basis or calendar year basis and get different figures, but I think that we probably need somewhere between $22 billion and $25 billion. We within the Council don't have a firm policy on that figure, but we do have a policy supporting on a level of support that we have received the last 3 years, and that is a big figure.
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Mr. STENHOLM. Sure is.
The CHAIRMAN. Mr. Smith.
Mr. SMITH. Thank you, Mr. Chairman.
Just following up on Congressman Stenholm's question. Do you see anything in the future where cotton in the United States can be competitive in a world market without this kind of Federal subsidy?
Mr. MCLENDON. Yes, sir, I have given a lot of thought and concern to that. I make my living farming and I would like to get everything I get from the market.
There are two areas that I think that could help me to become extremely competitive in the world market and eliminate the need for assistance, Federal assistance. I have been able to reduce my—on my farm, cost of production with technology that has been offered to me; and I see the role of Congress helping in the process of approving technological advances that are available to me on my farm.
An example of that, thanks to this House, the appropriations that has been passed for the Boll Weevil Eradication Program plus approval of BC technology and round-up technology has improved the varieties that are available to me. I have reduced my variable cost on my farm 50 percent in the last 20 years.
Mr. SMITH. How much closer does that mean, move you towards being in a competitive situation with imported cotton?
Mr. MCLENDON. It is getting me closer to there, but we have got to have a margin of profit that allows me to compete in the world. And I can get that by two ways. I can reduce my cost, and I can improve the selling price of my product through improved trade negotiations that our Government has been involved in which will allow us to be on a more—a level playing field in the world, will help us to be able to better sell our products. So that is a secret to us being able to survive, is reducing our costs and having improved market to sell our product in.
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Mr. SMITH. Mr. McLendon, here is my concern with cotton and all farm commodities, is I am particularly aware of the problems that are facing us with the insolvency of Social Security and Medicare and when the baby boomers start retiring in 2008. And the additional responsibility for meeting our commitments for the benefits that we have promised in legislation means that we are going to be—there is a $9 trillion unfunded liability down—and I will guarantee you that if it comes to a competition of using available dollars with increased taxes or whatever to fund agriculture at the level we have been funding for the last 10 years or to pay those Social Security and Medicare payments, Social Security and Medicare are going to win out; and then there is going to be real desperation in the agricultural community.
Somehow the challenge ahead of us is to try to develop the kind of programs that are going to allow us to survive the tremendous financial pressure on Government starting 8 to 10 years from now. So somehow we have got to be smart enough to start being less dependent on Government programs or to develop those kind of programs like you suggest where we get it from the marketplace.
Mr. Chairman, I would like to consider a 10-year farm bill. I think 10 years gives us a little more opportunity to develop the kind of farming operation knowing what we are going to get.
I want to finish my time, though, asking about crop insurance. What percentage of cotton farmers would you guess use crop insurance?
Mr. LANGE. We think there are about 60 percent that are using the buy-up beyond the CAT coverage right now.
Mr. SMITH. And give me—I mean, we spend a significant amount of dollars in subsidizing the crop insurance program. Could that money be better spent in counter-cyclical payments or other farm program payments?
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Mr. BOOKER. Mr. Smith, we believe that, on the one hand, you need a good farm program designed much like the one that we have recommended here. And we believe also we need a good crop insurance program to help us deal with disasters, weather-related, insect-related, other kinds of disaster. But the programs we recommended here for farm policy I don't think one of these should substitute for the other. We need them both.
Mr. SMITH. You need them both, but it is all dollars. Eventually in the budget process it is all a consideration of how many dollars are spent. And crop insurance on its own merits—without the Government subsidy, no farmers would pay that price. So is that a perpetual thing, that it is not going to work without that continuous forever Government subsidy?
Also, the question we have got to face up to is where we go on farm programs and how do we get the reward for farmers, the payment for farmers that are a reasonable level of what they can sell their commodities for at the marketplace, rather than continuing a program through tax dollars that is going to be under more scrutiny and more probably a greater likelihood of reducing in the next 8 or 10 years.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you.
I want to give you—one of things that I suggest to people, you said everything that you want is everything you get from the market. Well, you could get it from the market today, and the market is not real well. So always say at a profitable level.
Mr. MCLENDON. Opportunity to make profit.
The CHAIRMAN. The market is not working real well right now.
Mr. Larsen.
Mr. LARSEN. Just, really, one question. I am new to the committee, new to cotton, but I just have a basic question about costs and cost drivers and if you could enlighten me, at least me, on perhaps what are the top four or five cost drivers in your industry. What of those costs do you think that you have some control over and what are you doing as a result to control those costs?
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Mr. MCLENDON. In a fixed cost—and I break up costs into fixed and variable—most producers have had to get bigger to survive because our margins have continued to shrink and we have gotten—we use bigger equipment, less people, just like other industries that are producing things that are not agricultural products. So the consolidation in agriculture has occurred just like it has in other industries, and that has allowed us to reduce our fixed cost. We are doing more with less.
To give you an example, on my farm, when I had six-row equipment, I had seven tractor drivers; and now I use 12-row equipment, and I have four tractor drivers. So we have addressed the fixed-cost problem.
The thing that concerns me, and I have just about run out of things to do to try to reduce my cost, and this technology thing that I mentioned has allowed me to reduce my variable costs, and now we have got high oil prices and energy prices, and so I am going to be faced with high nitrogen prices this year. It has doubled. I bought nitrogen for $90 a ton last December, and I am paying $180 for it now. So it is a challenge to reduce my cost, but there is a lot of inputs that go into the variable cost.
And now because of the technology that we are buying through the seed, the seed now that used to be a minor item really on a cotton farm—and I have got friends in west Texas, they would have enough seed to plant their crops three times—well, now the seed costs about $7 an acre, and the technology fee is 32 bucks an acre.
So things are shifting, but that the kind of challenge we have in our business is to reduce our cost. But the seed now is the biggest cost, the technology fee, but it is a good investment. It is the type of investment we can make and get several dollars back because it reduces chemical uses and insecticide uses and so—but that is how the—and what I am doing on my farm is not uncommon throughout this country. We have gotten bigger equipment, and we use the technology that is available to us, that is offered to reduce our overall cost. We are not able to reduce it as fast as we need to, but it is a challenge for us.
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Mr. LARSEN. Thank you.
The CHAIRMAN. The committee would like to recognize a guest and appreciate your being here. Mr. Hinojosa from Texas is sitting in on the committee today.
Mr. Osborne.
Mr. OSBORNE. Thank you for being here today.
I am not that familiar with cotton like maybe others on the committee. I do have a couple of concerns. You are asking for no payment limits, AMTA payments, higher loan rate coupled and decoupled payments, some counter-cyclical payments, continuing emergency payments; and it seems to me that if we were to do this for all commodities that would be a huge expense. And I am very sympathetic to what is going on in agriculture. I know a little bit more about corn and soybeans and milo than I do cotton. But I guess, as I look at the budgetary process, I agree with a couple of comments earlier that at some point we probably can't continue to do this and do all of the things that we are trying to get done in Government. And so just a couple of quick questions.
Is there any value-added agriculture in the cotton industry? And, if so, could you explain to me what potential there is there?
Mr. MCLENDON. Yes, sir. Thank you very much.
I mentioned earlier that we were recommending that the level of support from Government be to the level of what we received the last 2 or 3 years. I might point out that since 1985 we have received about $10 billion a year, but I mentioned what we would received the last 2 or 3 years was considerably higher than that.
Mr. Osborne, in regard to value added, the value of cotton, what we say to Farmgate or off the farm is about $5 billion, the 16 to 17 million bales that we produce as farmers in this country. One out of every 13 jobs in this country is as a result of cotton. And the value—the retail value of all cotton products is about $55 billion. So we take that $5 billion of cotton, raw cotton that we as farmers produce and it is rolled over through the process of finally being made into a shirt or some kind of textile apparel, and the retail value of that is about $55 billion. There is no other commodity that stimulates the economy like cotton does.
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Mr. OSBORNE. OK. Another question—and maybe I should know this but I don't. Are we importers or exporters of cotton?
Mr. MCLENDON. We consume—of the raw cotton that we produce on the farm, we domestically consume about 60 percent of that, about almost 10 million bales, and then we export about 40 percent of that. That runs about 8 million bales. Now, we are consuming in this country a little more than 20 million bales of cotton in the form of textile apparel even though we are only producing 16 or 17 million bales, and it varies from year to year based on whether we get a rain or not. But over 60 percent of the textile apparel that we consume is imported into our country.
Mr. OSBORNE. And do you see some problems currently with WTO and NAFTA? Do you feel that that is working? Do you feel that there is some adjustments that need to be made in terms of foreign trade?
Mr. MCLENDON. Well, I mention that trade is important to us. And Congress passed the CBI parity bill this past year, and I commend this committee and on work that was done. We worked on that for 3 years, and what that will allow us to do is to take U.S.-produced yarn and fabric and send it to the Caribbean and make textile apparel and bring it back into this country duty and quota free. Because of our location, we got a transportation advantage, and we think that this legislation is going to help us be more competitive and sell more U.S. cotton. We will be able to compete with the Asian imports of textile apparel into our country. NAFTA has hurt some commodities maybe, but, for cotton, Mexico has resulted in being our No. 1 market for U.S. cotton, and it is the labor that is there. We are able to utilize that labor just like in the Caribbean, and so NAFTA has helped cotton.
These are the kinds of things that I was referring to that from a trade standpoint would help us to sell cotton.
Mr. BOOKER. If I could comment just a bit further, I guess, in response to your question, the short answer is we are net exporters of raw cotton, but we are major net importers of cotton textiles. And with respect to your observation about the cost of the program, it is a very expensive program that we are recommending, but our cost estimates of these programs come in somewhat under what the Federal Government has been spending for the past 3 years on programs including the emergency assistance. And if we get any kind of improvement in prices the counter-cyclical part of these costs that are implicit in our program diminish or go away.
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Mr. OSBORNE. Thank you. I have no further questions.
The CHAIRMAN. Mr. Berry.
Mr. BERRY. Thank you, Mr. Chairman.
First of all, I would commend the Cotton Council for their presentation; and anybody that can come up with a program that makes everybody happy in that industry does an outstanding job. You always do, and I appreciate it.
Mr. McLendon, I appreciate your remark about your wish to get all of your income from the marketplace. I think every farmer in this country feels that way, and I certainly feel that way. I am a farmer also, as you know, but I am confident that our farmers can compete on a worldwide level if we had a level playing field.
The bad news is that playing field does not exist, and I don't think it will in my lifetime. I wish that was not the case, but I don't think it will. And, you know, given that situation, I think that is one of the justifications for having a safety net farm program that—something like what you recommended.
You know, I think our own monetary policy regulations that are put on our industry from various and sundry sources within our own Government, the international situation that we have to deal with concerning market access, nontariff trade barriers and phony environmental issues put a burden on us with other governments that we just simply can't compete with on our own. And we have to have our own Government help support us, along with the fact that as we negotiate market access if we don't have a farm program backing us up in that arena, with both hands tied behind us, it doesn't work very well.
I also feel compelled at this point to make the comment that an adequate supply—a reasonably priced supply of food and fiber is just as important to the security of this Nation as anything else we do. It happens so easily in this country and almost appears to be without any effort whatsoever and the American farmer is so unrecognized for his enormous contributions to the economy and the economic success of this country that I think we should recognize that at this point and recognize the fact that we cannot be a secure Nation—if we think farm programs cost a lot now, just wait till we get into the situation with food and fiber that we are in with oil right now. We will find out how much it costs, and it makes the little bit that we are spending on farm programs as a Government look pretty small. And it is actually a pretty efficient investment for our Government to make in the supply of food and fiber.
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So I appreciate what you and the Cotton Council have done and appreciate you being here before this committee today.
Mr. MCLENDON. Thank you.
Mr. BERRY. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Pence.
Mr. PENCE. Thank you, Mr. Chairman; and I would also like to commend Mr. McLendon and the National Cotton Council for your presentation and your leadership.
I am also one of the freshmen on the committee. I am the only freshman that currently is not living on or active in farming, but I represent a district in east central Indiana where farming is a way of life. We are mostly focused on corn and soybeans in eastern central Indiana. But I do wear cotton and want to admit that to you.
I am fascinated by this whole debate and am honored to be on the committee, because I think this is a very important 2 years in the life of American agriculture, particularly coming off of some difficult times in different sectors of the agriculture economy and trying to figure out how we deal with this counter-cyclical issue, as the chairman has indicated that he desires for this new farm bill to do.
My question is a very broad one; and that is, as you look at, over the last 6 marketing years, the price of U.S. spot market cotton has fluctuated more than 100 percent. Having a business background, that seems to me to be mind boggling in terms of planning. Could you explain in layman's terms how you account for that kind of price fluctuation during that period?
Mr. MCLENDON. Well, it is not simple; and I don't know that I can answer it so it is simple. I will ask Mark to comment on it, but I want to say just one thing. He can do a better job as an economist than I can as a tractor driver. It is something that has always happened and I look back at trying to market my crop and I see how it has been and if I had been smart enough I could have sold it at that price. You know, hindsight's 100 percent. But what you have seen has been happening for a long time, and I will ask Mark to respond to it to give a more specific answer.
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Mr. LANGE. In 1995 and 1996 the world felt like it was running short of cotton, and world prices ran up very sharply. And in a very short period of time the Chinese—actually within 2 years after that—had accumulated a rather substantial stock of cotton, and the world began to be very nervous about what they intended to do with that stock. And in the 1999 year they actually began to move that cotton into the world market very, very aggressively; and we saw in a very short period of time prices fall dramatically and reaching a modern low of about 44 cents in January 2000. So it was a dramatic switch from a very tight market in 1995–96 to the Chinese moving a tremendous amount of stored-up cotton on to a soft market after the 1998 economic recession in Asia.
Mr. PENCE. Mr. Lange, would you characterize that as dumping on the world market or is that too harsh of a term?
Mr. LANGE. Well, it amounted to a dumping effect. But, in fact, I don't think it was an attempt by the Chinese to necessarily drive anybody out of business. It was a domestic decision to reduce their stocks, the stocks that become very burdensome to them. They began that crop year with stocks larger than their expected use of cotton for that year, and they were expecting to produce a sizeable crop as well. So it was just a domestic policy decision.
Mr. PENCE. One last question. Mr. McLendon, you have been very complimentary about the CBI parity bill, and I wondered if you might recommend that this committee and this Congress consider expanding that legislation to even a larger sphere in this hemisphere?
Mr. MCLENDON. We do not have specific policy on expanding NAFTA, but based on what I have seen NAFTA do, and I think that it would help cotton to expand it, to expand markets, anything that would give us transportation advantage, enable us to sell additional cotton I think would help us.
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All the abundant labor in Asia, it is creating an opportunity to make cheap textile products over there. And as long as the dollar stays strong—and I am like Mr. Stenholm. I like a strong dollar. I like a strong economy. And if the dollar had been doing it, that is fine, but it does create an opportunity to sell textile products in our country.
So anything that would enable me to sell U.S. cotton or sell more raw cotton like NAFTA has done I think would be good for us and I think we should explore that. But it is a complicated thing, and you have got—a lot of people don't want to do, but NAFTA has certainly helped us. And I think CBI, it being implemented now, it was enacted effective October the first, and I think we have got tremendous opportunity with that. So I think we should look at expanding it.
Mr. PENCE. Thank you.
The CHAIRMAN. Mr. Boswell.
Mr. BOSWELL. No questions at this time, but I just want to make a comment. I, too, appreciate your presentation and concerns. And as a producer, not of cotton, I know you have to have profitability; and I will work with this committee and our leaders to do what we can to be sure that you stay in the field and you keep raising cotton.
Mr. MCLENDON. Thank you. We appreciate what you have done.
The CHAIRMAN. Mr. Kennedy.
Mr. KENNEDY. I, too, would like to thank you and the National Cotton Council for giving us a specific proposal. I would also like to acknowledge that we have our good Minnesota corn growers with us here today and appreciate their interest in the other programs, and I think it is good for agriculture to understand the rest of agriculture.
Mr. McLendon, you talked about technology and how that has helped you not only reduce your costs but it also has helped cotton and other crops to be grow in more places and with higher yields than we have really ever had before, and they have seen the increase in yields every year. It seems to me that the only real long-term hope we have of getting our profit out of the marketplace as we have been talking about is if we can be growing demand by as much or more as we are growing the production through increased yields.
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On the corn and soybean side we have the opportunity, for example, to go into energy and convert corn or soybeans into energy in the form of ethanol or biodiesel and tap into an entirely different market to grow demand. What ideas does National Cotton Council have and what efforts are you doing to grow demand for cotton worldwide or find other uses?
Mr. MCLENDON. Well, a program that has been really beneficial to us is a CCI program which is a—it is a partnership with the cotton industry and with Government to fund this thing to create demand where we target markets to go in and promote cotton, U.S.-produced cotton; and we have done this all over the world.
We also have the NAP program. That has long been available. So those type of export enhancement programs that we have provided funds for have been a tremendous benefit, and we—it is not an exact science like corn for ethanol is not. You get an overproduction or underproduction. So, based on weather, we can't make the growth of market equal our production. You have spurts back and forth. But the CCI program that we have that Congress has funded has been a tremendous benefit in stimulating demand for U.S. cotton and cotton products.
Mr. LANGE. If I could, I might also mention that the U.S. cotton grower places a check-off program on themselves and funds the Cotton Board which, in turn, supplies funds for Cotton Incorporated which has led to a very dramatic increase in the U.S. consumers' purchase of cotton products at the retail level in the last 15 years. It has been an amazing story of success.
Mr. KENNEDY. Good. Well, thank you for those comments.
One of other things that we are also focusing on is trying to start new multi-lateral WTO discussions on opening up trade. What opportunities are there for American cotton producers if we have a successful WTO negotiation?
Mr. BOOKER. Well, we are interested in market access and particularly from some markets that our textile products have not been able to gain easy access to through the years. Also, we have talked about the heavy burden that American agriculture places on the Federal Government through the programs that we have had to have to keep us solvent; and through the Uruguay Round of the GATT negotiations we did see overall subsidies by the signatories to that treaty say that they would reduce their subsidies. But the United States was below the subsidy levels at that time of some of the other signatories, and we agreed to bring those down in the same relationship.
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And I believe as we go into the new round of FTO talks that if we are going to propose that agriculture subsidies be reduced, as I understand our negotiators were planning to do, that we certainly need to be sure that we do not come out of those rounds with U.S. agriculture further disadvantaged in terms of what we are permitted to do as opposed to what the other signatories are permitted to do in support of their agriculture segments.
Mr. KENNEDY. I think that is appropriate in any multilateral negotiations. You are right. But with a similar type of balanced approach, consistent approach across the country in subsidies, do you think that would be a significant opportunity for American cotton? Is that what you are saying?
Mr. BOOKER. I guess what I am saying is we fully anticipate that subsidies are going to be reduced, so long as they go down in some sort of equilibrium way among the signatories; and we think that that either keeps the playing field from getting more unlevel at a minimum, or we might have an opportunity through these rounds to better level the playing field.
Mr. KENNEDY. I thank you for your comments and thank you for your specific proposal.
The CHAIRMAN. Mrs. Clayton.
Mrs. CLAYTON. I thank you, Mr. Chairman.
Unfortunately, I wasn't here for all of our testimony, but I was trying to see if I understood correctly when you said that you thought the AMTA payments were appropriate but you thought they needed to be a little more—they weren't decoupled sufficiently—I am reading from Mr. McLendon's testimony. Do you feel that the AMTA payments that came through our program were not decoupled enough or needed to be more?
Mr. MCLENDON. They are decoupled; and, of course, they are decoupled so they would comply with the WTO agreements. What we were saying, that the additional payments would be coupled, the supplemental payments that we recommended would be decoupled based on the farm's base that they had in the crop and also the yield that they had assigned to that farm based on what they had done in the past. So we were recommending a decoupled and a coupled payment. If so, we could comply with the WTO agreements that we had.
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Mrs. CLAYTON. In other words, you wanted balance in whatever we did not to violate the WTO.
Mr. MCLENDON. Yes, ma'am, we had to try to live within those rules.
Mrs. CLAYTON. I am from North Carolina; and, of course, the Boll Weevil Eradication Program—at least we claim it started in North Carolina. I am not sure it was, but we claim it. When we invest money in the boll weevil eradication office, we have a bigger yield; and sometimes when we have a bigger yield prices go down, so you wouldn't suggest that we should not invest in that?
Mr. MCLENDON. No, ma'am I do not. Really, what has happened on cotton yields, our yields have actually gone down in the last—not significantly. But we have not had the increase that we would like to have. What the boll weevil program has done is allowed us to produce that cotton cheaper. That is one of those technology things that allowed me to stay in business.
Mrs. CLAYTON. So you would encourage the continuance of that.
Mr. MCLENDON. Yes, ma'am, I do. That program has really moved forward. We either have—the Southeast has eradicated and all cotton-producing areas of the country either have an existing program going on or have been eradicated. So that is a tremendous success story.
Mrs. CLAYTON. In my region, people are coming back to cotton. Of course, those who are already well established in cotton wish not so many people would come into it.
I remember visiting out in Texas one time, I guess Mr. Combest's area, and talking to the cotton farmers, saying North Carolina is really growing cotton; and they said do not do that. That will really mess up the price. They say, it is good. Too many North Carolinian's get in it, the price is going down.
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Well, the same analogy, I guess, can be applied to small farmers. It is expensive and efficient and though—so the Council is encouraging both small farmers and medium-size farmers as well as large farmers—what do you recommend as small farmers get into the business and looking at the expense, knowing where the trend is, what advice are you giving your small growers now?
Mr. MCLENDON. I have neighbors and friends of all sizes that grow cotton. And the things they have to do is the same—a small farmer has to do the same thing as a middle-size farmer. They have to cut their cost and do it cheaper. And it is not basically different. It is just that we have to continue to do the best job possible to reduce costs.
The main difference is the small farmers in most cases does all his work himself, but it is a decision he makes. But economics of scale gives some advantages, and a lot of times a farmer will start off small, and he will get bigger. And most cases that is what happened. We have had to get bigger to survive. And the small farmer—you know, I started off a lot smaller than I am now; and I had to get bigger to survive.
Whether a man starts off with a hundred acres or 500, acres he has the same problems. He can make a decision to stay small if he wants to, if he wants to do more of the things off the farm. But it is a decision—a personal decision a farmer has to make.
Mrs. CLAYTON. One other question related—my time is out. I'm sorry.
The CHAIRMAN. We will do another round in a moment.
The CHAIRMAN. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman.
I want to thank all of you for being here today as well.
I also come to this issue admittedly not as well versed in the commodity that you grow as I am with some of the things that we grow on the northern Plains, but I think it is of good value from all of us who come from agriculture country to understand the full gambit of agricultural programs. The more I hear, the more I find there are a lot of similarities in the plight of agriculture all over this country, irrespective of what it is we raise. I think those of us in the northern Plains are probably prepared to strike a deal with you today, though, and that is we won't grow cotton in South Dakota if you guys decide not to grow soybeans in the South.
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Mr. MCLENDON. That is a deal.
Mr. THUNE. I say that somewhat in jest, but I do have a question, a somewhat—admittedly an ignorant question perhaps, but do cotton farmers change their planning decisions based on Federal farm programs? Are there acres that get shifted to other crops as a result of decisions that are made here in Federal farm policy?
Mr. MCLENDON. No, sir. It is a tremendous investment to get into cotton production, like a lot of other types of production, and you have specialized equipment. You have a cotton picker that costs $175,000 that you use for 3 months out of the year. So we do not shift production that much. You make an investment, and you have got to use that equipment. You have got so many people out there. And on a short term, no, sir, the Federal farm programs do not get you in and out.
And that is the—when the freedom of farmers is debated—I like planning flexibility, but we just can't go from one crop to the next and just shut down the operation for 12 months.
You can shift your production. I was a corn producer before I started producing cotton. I made a long-term commitment to change, and I still have a corn combine and still have grain bins, but I made the commitment to get into the cotton business because of several reasons, not because of farm programs.
Mr. THUNE. Are there—and, again, this is a question perhaps I should know the answer to, but what level of tariffs are there or other trade barriers to imported—either raw cotton or textiles in this country?
Mr. LANGE. There are several quotas that exist for raw cotton imports in the United States. There are tariff rate quotas under the WTO. There is also a quota that is associated with the NAFTA Agreement. When the NAFTA Agreement reaches its fruition, there will be a no barrier with the trade with Mexico on raw cotton. Then there remains a special import quota trigger that is part of the competitiveness provisions than we seek to continue, and that has been triggered several times in the last 5 years, and raw cotton has entered into the United States under the provisions of the special import quotas.
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Mr. THUNE. How does that compare or are those types of barriers relative or proportionate to world-wide—the access that we have to the market of other countries? The reason I ask that question, what I am sort of getting at is, what is it that has the most direct impact on your profitability? Is it world market conditions and the types of barriers that exist? If you can compete on a level playing field is that more important to you than Federal farm programs? What has the most direct impact on your profitability?
Mr. LANGE. In response to your first question, the ones I mentioned specifically deal with raw cotton. Another very important component is textile trade. One of the things we find is the United States, in meeting its requirements under WTO, is continually opening our textile market and by the year 2005 there will be no textile quotas left in the United States for members of signatories of the WTO.
One of the problems we have is other signatories of the WTO are not opening their boarders to U.S. textile products, and in some cases—for example, China uses import licensing and currently is not importing much in the way of U.S. cotton because it denies a textile mill in China the access to it. It won't issue an import license. Import licensing is another form that we see in several countries of the United States that deny us access to that market. We are unable to ship them raw cotton.
Mr. THUNE. OK. I think my time is up.
Thanks, Mr. Chairman. Thank you.
The CHAIRMAN. My invitation to the gentleman from South Dakota would be, you grow all the cotton you can grow in South Dakota.
Mr. Chambliss.
Mr. CHAMBLISS. We have a lot of people trying to grow it. Bob, as my neighbor and long-time good friend, I am very proud of the work you do at the National Cotton Council and have enjoyed working with you folks. I thank you for being here today to talk to us about your ideas concerning the incorporation of the cotton program into the next farm bill.
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We have got a little bit of a problem in the Southeast, particularly with respect to the discrepancy in AMTA payments that you are well aware of. You are here representing all cotton growers, but I want you to amplify a little bit what you talked about in your presentation with respect to basing AMTA payments on the antiquated cotton bases that were used in the 1995 cotton farm bill and the effect that that has on the Southeast.
Mr. MCLENDON. Yes, thank you. It is a pleasure to be with you. It is a pleasure to work with you over the many years we have done, and I look forward to continuing to work with you and this committee.
But what has happened is, under Freedom to Farm, which we knew that would happen in some cases, you had a movement from one crop to another; and what happened in the Southeast we moved from corn, like I have done, to cotton. So the last few years we have increased our cotton acreage in Georgia, for instance, to about a million and a half acres; and we are getting an AMTA payment on about 900,000 acres.
So when you look at the payment made, we have a tremendous production in the Southeast that is not getting a supplemental AMTA payment or a regular AMTA payment. So we are recommending in our short-term recommendations to this committee that a farmer have a choice with remaining with his existing acreage and yield, or he has an option to move to a modified acreage and yield on his farm or acreage on his farm, and this would make this, we think, fair.
We are penalizing a guy that made a choice of changing crops under the Freedom to Farm, and we feel like that by having a choice to go to his most recent planted acres that it would be fairer to the growers. And this happened, Mr. Chambliss, outside the Southeast, but it is been more pronounced in the Southeast than any other section of the country.
Mr. CHAMBLISS. And the program that you have outlined to us this morning corrects that problem as well as a number of other problems within the current——
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Mr. MCLENDON. Yes. We have addressed that. And producers have discussed this for a long time. So we felt by giving the farmer this choice you would not penalize anybody. And the first thing you want to know, what is this going to cost? And we have estimated somewhere between 3 and 5 percent is the only increase we are going to have in the program. So it is not a big cost thing, but to an individual producer it will mean a lot more to that individual producer. But on the overall scope of the program it is, we estimate—Mark has done a lot of research on this—it is 3 to 5 percent is the cost of this choice.
Mr. CHAMBLISS. And the net effect of that is going to be to get whatever payment comes from the Government to agriculture country in the hands of the farmer that is actually a producer on the farm, isn't that correct?
Mr. MCLENDON. That is correct. The guy that is producing the crop will get the payment.
Mr. CHAMBLISS. We had a little problem that we corrected 2 years ago with our Step 2 Program, and I understand that your proposal includes the market competitiveness provisions. And if you would tell us in your opinion what would have happened in the cotton industry had we not made an appropriation for Step 2 a couple of years ago when we corrected that problem.
Mr. MCLENDON. I am going to ask Mark. I could give it to you. Let him address it. It is his program.
Mr. BOOKER. Well, the Step 2 Program has been a very integral part of our program, and we introduced the marketing alone back in 1985. It worked well. It helped us get a lot of excessive stocks worked on over the life of that farm bill.
But we discovered during the course of our experience under the 1985 Act that there were times when we were not quoting U.S. cotton competitively with some of the lower-priced growths in the world because we were set up to discover a world price key to the 5 cheapest growers, an average of that; and the lower growths were often well below that. So the Step 2 Program was introduced to help us get closer to those lower quotes and did a good job of it.
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When we lost funding, when we depleted the funding for Step 2 back in 1999, we saw the effect of it in lost sales. We even began to see the New York Board of Trade price, which had been at a premium over the world price, fall back below to that world price level; and then, when the underfunding was restored, we saw it climb back up to about where it had been before. So the effect of it as when we lost it was to cost us some market and at the same time cost us some return from the market in terms of price. We think that if we don't have that program then that is the sort of thing that we can see for the longer term.
Mr. CHAMBLISS. Gaylon, we are sure glad to have you on board, but we are going to miss our friend Phil Burnet.
The CHAIRMAN. Not all of us are—just teasing.
Mr. GUTKNECHT. Thank you, Mr. Chairman.
I also come from the northern tier where we do not grow cotton, but it has been very interesting to listen to your presentation.
Let me say for a minute—not really a question but a comment. As a Member who also serves on the Budget Committee, the discussion about trying to preserve a $32 billion baseline, which is, in effect, I think what you were saying, that is going to be very, very difficult.
I just have to tell you—and that is not to say that those of us who are very empathetic to agriculture are not going to be in there trying to fight for every dollar we can. The chairman and the ranking member are already putting their oars in the water as it relates to the overall budget agreement.
We are also, I think, fortunate that the gentleman who chairs the Budget Committee now, Jim Nussle, is from northeast Iowa and really does understand the problems being faced by agriculture. But at the end of the day that is going to be a very tall order to try to preserve that level of baseline funding, and that is just not just for your benefit but for everyone who is here from the various commodity groups.
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The only issue I would like to ask you about, because one of the concerns we have in my area is the whole issue of concentration, I never really understood how do you sell your cotton and is that of any concern to your producers that we are seeing fewer and fewer potential buyers of products that farmers produce and, on the other side, fewer and fewer suppliers, if you will, of the things that you have to buy. And are we doing an adequate job of enforcing some of it—antitrust laws currently on the books?
Mr. MCLENDON. I will respond a little bit and then call on Gaylon to finish it.
We have had a tremendous consolidation in the manufacturing segment of our industry. That is a part of the Cotton Council, and we are working to improve their profitability, but they have really struggled the last few years, and we have had numerous mills to close. These are not cut-and-sort operations that rely on a lot of labor. These are yarn manufacturers that are very mechanized. They are as competitive as anyone in the world.
We can compete producing yarn. But that industry is just like agriculture. It has really suffered from profitability. The stock of the publicly traded companies has really gone down because the profits have gone down, and we have had mills—almost every week you hear of somebody closing a mill or in serious financial trouble. That concerns us.
But the actual merchandising segment has not consolidated, it has some, but not to the level that the manufacturers have. So far, the problem is the lack of profitability, that is our problem, more than trying to consolidate and eliminate the competitors that has been done.
Gaylon.
Mr. BOOKER. I think that is the right answer. I believe if you ask your question to a farmer on the turn row who is not making any money, you might get some of them to say, yeah, we need to see more buyers out there. But I think the fact of the matter is it is a highly competitive merchandising community and the competition among those that are out there to get Mr. McLendon's business generally would say that he is going to find somebody that will bid as much as the New York Board of Trade price, which is a major auction process, allows him to bid.
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Mr. GUTKNECHT. Thank you.
The CHAIRMAN. I will need to make sure the record does not go uncorrected. When I came to town almost 30 years ago, the first person I met in town was Phil Burnet, so I figured I could make that joke.
Mr. Ose.
Mr. OSE. Mr. Chairman, I am learning about cotton today, so I am going to listen rather than talk.
The CHAIRMAN. Good. We will let you hear a bunch then.
We will start now on another round. I have got some questions that I want to ask, and just answer them as briefly as you can, and maybe I can get through a number of them.
How dramatically does your proposal change if you have got a $40,000 payment on a plantation?
Mr. LANGE. Mr. Chairman, we believe that the sort of payment structure you see in front of you, on our model, if the counter cyclical is provided, a payment limit structure similar to the existing AMTA.
The CHAIRMAN. Are you talking it existing AMTA at $40,000 or are you talking about what we have done the last few years, which is double that?
Mr. LANGE. Well, if the counter cyclical is going to emulate what the supplemental AMTA has done, it is going to have to have a separate payment limit similar to what the original AMTA payments have.
The CHAIRMAN. Forty thousand dollars.
Mr. LANGE. Or higher.
The CHAIRMAN. I know. I am also trying to be realistic here. Because, obviously, we have some challenges. And I agree with you. I have made no bones about it. I prefer no limitations. But I haven't figured out how we are going to do that yet. And I want to make clear, I have your testimony, but under your proposal you are not making any recommendations for any kind of acreage or production controls.
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Mr. MCLENDON. No, sir, we think it is counterproductive to have acreage controls in it. We are in this world market and if we cut our acreage somebody else will step up and increase their acreage. We have discussed this a great detail.
The CHAIRMAN. Under the figure that was given—and I am not sure who helped provide that earlier. When somebody asked about the participation rate of cotton producers and crop insurance, the number came back at 60. Was that last year?
Mr. LANGE. Mr. Chairman, I gave that number. Yes, that is the percent of cotton farmers that we understand use the buyout provision.
The CHAIRMAN. The question was, was that last year, the crop year we just ended?
Mr. LANGE. Yes.
The CHAIRMAN. We are just entering the cotton crop year under the new program. I would be very interested if you assess that throughout the year to see whether that number may be changed. The crop insurance program that a cotton producer can buy crop insurance today for versus what was at the last year program is substantially different.
Mr. LANGE. From everything we hear from producers we expect a rather substantial increase in the number of participants.
The CHAIRMAN. Thank you. I just wanted to get that on record, because I think we are going to be seeing that number of things, and many don't recognize the fact that the last crop year under cotton was under a different program. Do you believe that either iteration of model one would create any incentive for a producer to take the payment and not produce the crop?
Mr. MCLENDON. I don't think it is an incentive because if—we probably still would have the same problem that we have had under the existing program. It gets a lot of publicity, but in any area, in traveling around, there is not a lot of people doing that. But it will not stop that because of having to comply with the WTO. But I don't think we have a lot of farmers getting their payment and not working the land. No, sir, I don't think it will be a problem.
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The CHAIRMAN. If the Congressional Budget Office determines that your cost estimates on gross Government expenses are underestimated, how would your program be modified in order to comply at acceptable levels?
Mr. BOOKER. Mr. Chairman, if they say that we have got too much or that we have underestimated the amber box spending, then I think we would like to come back and take a look at how you could get more of that spending into the green box. One way to do that under this first iteration of model A is to increase the fixed payment and decrease the counter cyclical. We think the second best approach to that would be to go toward that market basket approach where you have got a lot more room, apparently, but it has a few warts on it.
The CHAIRMAN. I appreciate that; and, obviously, we won't hold you do that. I generally do not answer questions that start with the word if. But if that does occur and if we are looking at that, obviously we would like to have your input because it—you know, a lot of proposals that you see can substantially be changed once numbers dramatically change.
Mr. BOOKER. That is why we have proposed in the testimony Mr. McLendon did that we would like these to be viewed.
The CHAIRMAN. We will do that.
From a practical standpoint, what is the earliest date that you believe change in permanent farm law should become effective?
Mr. MCLENDON. The discussion is going to go on, and I knew that we are beginning the process, and you know we have a hard job ahead of us in probably 2002 for permanent changes in the law. I think as difficult a job as you have and your committee has, it is going to take that time to get it done.
The CHAIRMAN. I will come back to that and just throw out some scenarios in a little bit on my next round.
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Mr. Stenholm.
Mr. STENHOLM. Mr. Booker, congratulations on your new position with the Council. And, Mr. Burnet, in spite of the chairman's rather disparaging remarks, he and I both are counting on you in your new position to double the price of cotton so that there will not be any concerns about budget considerations or anything and that we will reduce the cost of the taxpayer through the market. We know you will come through for us on that.
Mr. BOOKER. We are looking forward to that.
Mr. STENHOLM. Sorry Mr. Gutknecht had to leave, because his question regarding concentration—I would like to point out that in the area of marketing and price information transparency I think the cotton industry has got a system that I wish was emulated in all of agriculture in which you have instantaneous pricing. Any cotton farmer in a cooperative gin or an independent gin may walk into his gin office and immediately see what his cotton is selling for. You can find out who is buying it, perhaps. But the important thing is you know exactly what price is cotton and what grades are selling for.
Originally, when we started on this, there were a lot of producers opposed to that but no more, because now we understand marketing is extremely important and with the new technology now we will go even further. That is something the entire industry should be looking at with a positive eye.
To those within the industry, and I say here as I mentioned in my opening remarks, the fact that we have seven segments in an industry that attempt to work together—in fact, do more than attempt—it is very difficult to get producers and ginners and crushers and warehousemen and merchants and cooperatives and manufacturers to agree on a policy. But when we start talking about competitiveness and budget costs, I think we are going to have to sell our colleagues on the necessity of having Federal assistance to our producers in the international marketplace because we cannot compete on the dollar alone. I believe so strongly we cannot compete.
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Mr. Lange, I thought your number that you threw out regarding we can now buy two shirts for the price of one on a dollar—well, just think for a moment what our machines—the competition they are having to meet in being able to make that shirt in America and sell it. Pretty tough. And that is why we have attempted to make sure that our mills, our manufacturers can buy cotton at the same price that others can buy it. And that is the Step 2, Step 3.
You can look at the figures, and you will see we have been relatively successful. We have been able to increase the amount of cotton we export. We have been able to increase the amount of cotton we are manufacturing in the United States. At the same time, we are facing tremendous competition regarding—as—purely as a result of the dollar.
I hope that the other industry representatives that will soon come before us—I do not think it is helpful when the Grain Council, for example, says that there are important jobs this year, and will be continuing to try to educate people on the Hill that counter-cyclical payments, blunt market signals lead to overproduction, sets-asides, et cetera. I don't know of a grain farmer or a cotton farmer or any other farmer that could survive or could have survived in the last 5 years without Government payments. Now I am sure there are those out there because of debt, what have you, but when you look at your bottom line I doubt you can.
We traveled last year. The chairman and I made all 10 of our field hearings. We had 200 witnesses that came before the committee, producers. Only one suggested what some still believe is in the best interest of agriculture. Only one farmer came forward and said, Congress, you made a mistake when you appropriated the additional dollars. If you would have let the Freedom to Farm Act work as was intended, we would have a better situation today.
Well, I have a hard time finding many to agree with him, the devastation that would have occurred in rural America as a result of that. But we still have that.
I wish folks who use the product that farmers produce would begin to understand the answer is not cheaper prices. We can't get it any cheaper in this country and survive. It cannot be done. If you can show me how to prove me wrong on that statement, then let's have that discussion.
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And to those of you who will be reading this testimony and hearing about it, I welcome you sitting at that table and explaining to me how the answer to our farm problems is cut the budget and let our farmers compete in the international marketplace without our producers being there. I don't see how we can do it, but I welcome the folks to come before this committee and explain it. I will enjoy having you tell me, and I will be the first to say I was wrong after you have explained it to me.
I don't have any questions. But I had to get that out of my system. I am kind of bugged with some folks right now.
Mr. MCLENDON. I agree 100 percent.
The CHAIRMAN. I hope it is not me.
Mr. STENHOLM. No.
The CHAIRMAN. Mr. Osborne.
Mr. OSBORNE. I am almost speechless at this point.
I am interested in the safety net issues, and I am really interested in exploring with lots of people revenue insurance, as you have mentioned. We got the AMTA payments, we have the LDPs, and we have the emergency payments. And it seems like it is fairly involved, complicated. FSA offices have a hard time keeping up with it.
So we have explored the idea from time to time in my area of the country of some type of revenue insurance where if you averaged—just throwing out a figure—$300 of revenue per acre over a 5-year history and then having private insurance companies insure your land for $300 per acre and expand the payments to where maybe the Government payment for the premium was 90 percent—that is just throwing out a figure—do you see that as being any type of workable or acceptable type safety net? Have you thought about that? Is it feasible?
Mr. MCLENDON. We have discussed it. We call it cost of production insurance, and we have discussed it.
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First of all, we would not want that to be a delivery system for program benefits that we receive from Congress. But it is—and there have been some pilot projects by the crop insurance to look at the cost of production. I am not as familiar with those as I probably should be. But it is something that has been discussed in the past and ended up the reform of crop insurance last year. I am sure it received a lot of discussion. And the crop insurance program is improved, like the chairman mentioned. But it is something that we have discussed for a long period of time.
Mark.
Mr. LANGE. There are several firms currently exploring the possibility of offering a cost of production insurance on a pilot project basis in several areas of the Cotton Belt. So in 2001 hopefully we may see how a product like that can function.
Mr. OSBORNE. One other question I have. In some of the northern tier States you hear a lot of commentary about green payments. I would imagine that you are under some heat on EPA regulations, and it makes your cost of production higher. So it has occurred to me if we are going to require and impose more environmental restrictions that maybe the Government should participate more heavily in paying for consequences of those requirements. So we have such things as payments for buffer strips along streams, CRP lands. I am sure in your case carbon sequestration probably would not have much validity. But do you see anyplace where the so-called green payments, environmental payments might be of assistance to you, would make any sense?
Mr. MCLENDON. We don't oppose those type payments. Our concern is that sometimes we might be required—in order to get a payment, we would have environmental requirements that we had to meet on the farm before we could receive any payment; and that concerns us. But the program that we have now to assist us to plant pine trees or grass are fine. We do not have any objections to those type of things, but we do have concerns that we might have environmental requirements that we had to meet if we had a lot of those type of payments in order to have any program benefits, and we oppose those.
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Mr. OSBORNE. Right. And I don't necessarily envision this as being additional requirements, so it may simply be more adequate payments for conservation practices that are now being expected of you. But since you are in such a different industry than I am familiar with I was just—and I appreciate your answer.
Mr. MCLENDON. Well, it is something that we have talked about; and from a farmer's standpoint they are concerned about having to open up their land to anybody who wants to come on it if they receive some of that environmental—and they are concerned from a liability standpoint. Somebody gets hurt out there and what goes on now from a—in the court of law and the liability of somebody coming on your land that you did not give permission but they can still sue you.
We don't oppose those type of payments at all, as long as we don't have a list of standards that you have to live up to in order to get any kind of program benefits.
Mr. OSBORNE. You just don't want additional regulations.
Mr. MCLENDON. Being from the Southeast, you know we have had thousands of acres of pine trees planted; and Congress has participated in that program by assisting not only in the payment—a portion of the cost of planting the trees, and it has been a good program.
Mr. OSBORNE. OK. Thank you.
The CHAIRMAN. Mr. Dooley.
Mr. DOOLEY. Thank you.
I want to compliment the Cotton Council for the work you did in putting together a very thoughtful program. Some of us are concerned about what we see happening. It looks like a disconnect between sustained low commodity prices and land values that have—in the last few years have stayed pretty strong and in some cases even increasing.
You know, my assessment is that that could in some ways be a reflection of capitalization of some of our direct payments or Government programs into land values. I think one of the things we will struggle with moving forward is how do you ensure that we develop a foreign policy and program that benefits actually the target population out there, which I think is actually the farmer, which oftentimes and increasingly is not the land owner. And I am concerned with your decoupled payment of 10 cents that you would have is going to be based on either current history or current yield or past history, which inevitably would be tied to that particular piece of property, would it not?
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Mr. MCLENDON. Yes, sir, it would be; and that type of payment has to be tied to the land, we think, in order to be complied with the WTO.
Mr. DOOLEY. But that is going to be the most significant component of your program, would be this 10 cents per pound, would it not?
Mr. BOOKER. Of the projected prices that we see in the CBO baseline it would be.
Mr. DOOLEY. Be significant.
I guess the other concern that I have is—and it is not that I have a better solution, but when you do it decoupled and you are also doing it coupled payment—and Mr. Combest asked a question, is that you could still then be moving out of cotton or out of corn, so to speak, getting your decoupled payment on corn and then getting a coupled payment on cotton.
Mr. BOOKER. Well, the way these—and the models that we have drawn up, both the decoupled payment and the counter cyclical payment are based on historical data. They don't have to be that way. The National Cotton Council's policy permits us to support a program that would be where you would have a counter cyclical paid on what is produced or current acreage.
Mr. DOOLEY. Which would be the coupled payment?
Mr. BOOKER. Yes.
Mr. DOOLEY. But that would mean that you would then—you could then, though, see, basically, if people making decisions due to prices to some extent, that I am going to get my 10-cent payment on the cotton, move into another product and another commodity and get my coupled payment there.
Mr. BOOKER. There are trade-offs in these approaches, as you know, of course. If you went to a coupled approach for than counter-cyclical payment and if you asked us is there a possibility that Government programs can influence shifts among crops, then the answer would more likely be, yes, we could see that.
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The way it is structured here you can answer that the Government program is not likely to influence the movement of one crop to the other. You make those decisions on some basis other than what the Government program is.
But, again, if somebody has a good approach that couples the payment and there is good reason to do it, there is no reason why the Cotton Council couldn't support it. And the Cotton Council would still be supportive of the prohibition that we have on moving into nonprogram commodities and receiving a decoupled payment. In my area we have a lot of folks growing vegetables and especially crops, and they are not too keen on the Government having to subsidize their movement into these crops.
Mr. BOOKER. What we have done here is, the structural program, just based it on seven program crops; and we haven't attempted to address what you do on other commodities.
Mr. DOOLEY. You do not have a policy position on a prohibition against moving into these other nonprogram commodities.
Mr. BOOKER. I am reminded here that we support the fruit and vegetable provision.
Mr. DOOLEY. Yes, that is obviously very important.
I guess as we move forward here the one thing that I think we need to continue to focus on, and again a good-faith effort on your part, is how can we ensure that the investment of taxpayer dollars we are offering to create this safety net are in fact going to go that farmer. In some of the programs that you are advocating here I am concerned that a significant portion of that is going to be capitalized in rents, land values—and, you know, I hope we can find ways in which we can structure our program so I can minimize that, so we can actually see asset valuations that are more commensurate with actual market conditions that can, I think, go a long ways to ensuring a more realistic financial situation in the industry.
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Mr. MCLENDON. Your observation that we have not had decreases in land prices—and in spite of what is going on in the country with low prices, that did happen in the 1980's; and it hasn't happened so far because we have had, in my opinion, such a strong economy away from agriculture that there has been a tremendous demand to buy farmland by nonfarmers. And I think if we are in a recession now and it does get worse I think it will happen. I think the people that are professional farm managers have been concerned for the last 2 or 3 years that we were going to have a decrease in land value because they saw it in the 1980's. We had low prices and a bad situation.
Again, in my opinion we have had such a strong economy outside of agriculture it has supported land values, but that support won't last forever, and your concern will go. But I don't see the payments that we are receiving increasing land values or holding them up. I don't see that.
The CHAIRMAN. Mr. Chambliss.
Mr. CHAMBLISS. Gentlemen. You may be correct, Bob, that it may not be holding land prices up. But obviously Mr. Dooley and I share that concern about who gets that money that I alluded to in my previous question, and on our subcommittee he and I will be working very hard to ensure that whatever Government assistance is provided goes to the farmer and it doesn't affect land lease payments, which in our part of the world is a critical issue.
I will tell you, too, that yesterday we had some very noted economists testifying about their ideas concerning what we ought to be thinking about for the new farm bill, and one idea that was thrown out is the fact that probably a large contributor to low commodity prices are large Government payments. You can't totally substantiate that, but, obviously, we need to be looking at that. There is going to be some concern raised about that as we get into the next farm bill, and I am not sure what the answer is.
I was interested in your comment on Mexico becoming our largest importer, and we all know that that is the case from a cotton perspective. I see some folks in the audience that represent the textile industry, and I know they would be quick to tell us on the flip side of this we have seen a migration of our textile industry south for labor reasons, and that is probably what has contributed to Mexico becoming our largest importer.
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In that vein, does the Cotton Council have a position on the fast track legislation, trade legislation?
Mr. MCLENDON. We support fast track.
Mr. CHAMBLISS. Good. In talking about your proposal, you talked in terms of what we have done over the last 3 years from an emergency supplemental standpoint. Am I understanding you correctly to say that if we followed your proposal to a T and if the development of the crop insurance reform program that we passed last year does what you think it ought to do and what we think it ought to do, would we in effect be out of the emergency agricultural supplemental bills from a congressional perspective?
Mr. BOOKER. I don't know whether we can predict that the new crop insurance program would get us completely out of that or not, but we could certainly hope that it would go a long way towards reducing any needs for Federal assistance related to crop disasters. To the extent that we have got problems related to general economic problems, there could be still a need for some Government assistance.
Mr. CHAMBLISS. Has the Council taken any position on whether or not a farmer who does not participate in the crop insurance program would be entitled to natural disaster caused payments?
Mr. MCLENDON. No, sir.
Mr. CHAMBLISS. OK. The one thing that I want to make sure that we continue to talk about in terms of going back to our land lease payments, Bob, you allude to the fact that we have got a lots of recreational folks coming in, buying our lands, particularly in our area of the country; and I am sure that is happening across the country. They are buying farmland particularly for recreational purposes. Do you see that having any effect on our lease rates?
Mr. MCLENDON. No, sir. In a lot of cases those people are able to take less return on their investment than a farmer has to get in order to pay for his land. I have seen that happen.
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Of course, you and I both live in an area where I think we have got more of that going on in the Southeast than in other sections of the country, because I will mention that in meetings and I can see the response. It is not quite as pronounced as it is in the South, maybe because of our climate or what it is. But it has not driven up the rental rates. High commodity prices in 1995, 1996 drove up rental rates; and that did more to drive up rental rates than anything. Then as prices came down it has been awful difficult to get the landowner to accept less rent. It is a lot harder going down than it is going up.
Mr. CHAMBLISS. In your testimony you allude to the fact that we have had more cotton planted in the last year. I assume that is attributed to the Boll Weevil Eradication Program. Is that a fair statement and do you see that continuing to increase?
Mr. MCLENDON. I don't think it will continue. It will go back. That was a fair statement for the Southeast that had lost cotton production because of the weevil. When we eradicated the weevil we put profitability back into producing cotton, and we got a response in acreage.
Now you have sections of the country, such as the high plains of Texas, they do not have alternate crops like we did in the Southeast. They do have an alternate crop but not as many choices as we do in the Southeast. So the shift from corn and other acreage to cotton was because of the weevil, and has allowed us to produce cotton at a point we could make a profit again and which we lost it. But I don't see that happening in the other sections of the country. I just see it—the effect will be it will allow us to produce cotton cheaper.
Mr. CHAMBLISS. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Berry.
Mr. BERRY. Thank you, Mr. Chairman. I would like to associate myself with the complimentary remarks that have been made about Phil Burnet here today. Phil has been a great——
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Mr. CHAMBLISS. I think I am the only one that complimented him.
Mr. BERRY. Well, Phil has been a great friend to me personally and to this committee and to American agriculture; and, Phil, I want that to be part of the record. We appreciate what you have done, and we expect great things from now on. And I am sure Mr. Booker will continue the great tradition of the National Cotton Council and your staff.
I would also associate myself with the comments that the ranking member earlier—just kind of shows us the ''where's the beef'' situation. You know, if we can do this without the Government being involved, I would love to see how we can do it, but I don't think we can.
I would just like to ask one question and see what the Cotton Council thinks about that. Do you think that the United States has enforced its own trade laws and its own trade agreements effectively?
Mr. BOOKER. If you were asking that question to the folks that I understand must be seated behind me here from the textile industry they would say there is no way that is right. We have seen those quotas exceeded by major proportions. So I think our answer to that is, no, we haven't done a good job with it.
Mr. BERRY. I think that is yet another reason why we have to have programs. Thank you.
The CHAIRMAN. Mrs. Clayton.
Mrs. CLAYTON. Some of my questions were asked by others. But I want to go back to the AMTA payment, the response you gave the chairman in terms of the AMTA payment. Were you asking for the AMTA payment to be limited at the 40 or were you asking the AMTA payment be supplemented?
Mr. MCLENDON. We were asking that the supplemental AMTA payment—the additional AMTA payment, they did have a separate payment limit in addition to the decoupled payment.
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Mrs. CLAYTON. OK.
Mr. MCLENDON. So you would have two payment limits. We were recommending that each part of the program have its own pavement limit, not just one overall payment limit.
Mrs. CLAYTON. I see. What was the overall payment we did last year? We gave out monies the first time around, but——
Mr. MCLENDON. Well, we have a $40,000 payment limit on the AMTA payment, but we also have the three-entity rule that allows you to participate in the program. But the $40,000 is a payment limit on the AMTA payment. Then you have the marketing loan payment limit in addition to that.
Mrs. CLAYTON. Yes, but that is the supplemental you were speaking of.
Mr. MCLENDON. No, ma'am, that is a totally different program. But the additional AMTA payment, when Congress—when you passed it you set it up under a separate payment limit. It was not the original payment limit. So a farmer that had maxed out, he had gotten $40,000, he was entitled to additional payments under the supplemental program.
Mrs. CLAYTON. Is that the three-step program we did? Maybe I am confused on what we did. I thought we had a three-step program.
Mr. MCLENDON. We do, and that is separate from this supplemental AMTA payment.
Mrs. CLAYTON. I will just follow up on my own. Let me ask you again about the yield because the AMTA payment is based historically on—how many is it—3 years or 5 years?
Mr. MCLENDON. It is 5 years.
Mrs. CLAYTON. It is 5 years. And the reason you spoke to Representative Chambliss about the boll weevil and others is that we are far more efficient in production than we have been. So to be limited to the historical yield then the rates are not equal and, therefore, not only is this in the South but I guess this may be for other crops other than cotton.
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But what I hear from cotton is that we want some way of adjusting the—is there a mechanism in the system—I guess maybe the chairman can ask the—is there a mechanism in the system that can allow for the county or for the individual farmers to have an update? I know you recommended that, but is the system now with a trigger that you can get a county-wide yield and that each of the farmers could benefit from that?
Mr. MCLENDON. There is not a mechanism for change that the law provided for a certain period of time establishing the yield and the base that that farm had, and we were recommending that that be reviewed.
Now if you are not a grower, if you have not grown cotton, then you can go in and be assigned a county yield. But for a grower that has a history of planting or that farm has a history of planting—not the grower, the farm has a history then——
Mrs. CLAYTON. He is limited to the average of the 5 years.
Mr. MCLENDON. Yes, ma'am.
Mrs. CLAYTON. The other question, your Cotton Council involves your manufacturing, I guess your retailers as well as all the processes as growers as well. I know in my district many of the manufacturers—and you referred to some of them as mom and pops. But some of them are not mom and pop. Some of them are going out of business and making that decision for, I guess, good and valid economic reasons. But in the last year I know we have lost at least 1,500 jobs in various places in my district just—probably less, the last 8 months, really.
Last year—a large company like Burlington a few years ago announced three plants closed in my State. Then you have the smaller ones now, some of them consolidating, some not. But, eventually, the nexus to the industry does have a relationship with growers; and I thought I heard the response to a question was that the consolidation or the diminishing of people who have been buying your goods and manufacturing your goods has not had any negative impact on price or is that—that activity can happen, the manufacturer can go out of business, that doesn't affect you?
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Mr. MCLENDON. It does affect us and anytime you have people going out of business, they are going to buy less U.S. cotton and it is going to reduce prices. The things that have been done and we are trying to do, we have stopped it from getting as bad as it could have been if we hadn't been doing anything, but certainly the consolidation and people going out of the textile business has reduced people buying our cotton, and that certainly hurt the price of U.S. cotton.
Mrs. CLAYTON. Thank you.
Mr. MCLENDON. And I think if we could return to a better profitability in the manufacturing segment and they could use more cotton, it would create demand and improve our price.
Mrs. CLAYTON. Thank you, Mr. Chairman.
The CHAIRMAN. I thank the gentlewoman. If there is a group that I need to remind that I was not an early advocate of the current farm program, it is not this group. At the time I talked about the fact that I was very concerned that if things didn't go just perfectly that we did not have an adequate safety net in the program, and that is why I have dedicated my previous 2 years as chairman of this committee to try and work on the safety net side of it. That is why we are having these hearings today. Congress has appropriated in the ballpark of $25 billion in additional money the past 3 years to help agriculture through some tough times.
So it brings me back to where I left off earlier, and it is a question I am going to want to pursue with every group that comes in. My goal in trying to look at where we are today and what it is we may possibly be able to do is driven by the economic conditions in farmland over the past 3 years. And my thought about that is that recognizing there are parts—you have talked about them today—of the program that people like, and that is, you are not farming for government programs, you are not farming based on government acreage allotments or whatever, that you have flexibility, those parts are pretty universally agreed to as being good parts of the program. We have heard that all throughout our hearing process, but obviously we have some deficiencies and those are the areas that we are trying to deal with.
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Well, my contention is if we are going to look at that now to try to see what we can do about that, that if there is a legislative fix that we can address those problems in, it gives a lot better assurance to the producer that is out there that there will be some help, rather than that producer having to wait and depend upon the fact that we may at about harvest time come up with a program that helps them through. It gives their people financing their farming operations a lot better assurance, and I think it is just a better way to do business. I also think strongly that it is something we should have considered in the budget. Let's be budget honest about it and put it out there and know what we have got to work with.
If we do that, then the question becomes, how long do we do that for? Well, if it is good fix, I would say let's do it beyond just another 2 years of the current program, let's make it longer. And if that is the case, basically that becomes the farm bill for the next—let's say we do it for 5 years—that becomes the farm bill, and so really in reality we rewrite it this year.
Well, there are those that will argue, and I think justifiably so, that if we do that we are violating a contract that was made when this farm program passed that there would be 7 years of payments based upon history. Well, we have kind of gone beyond that anyway. Well, in 1999, for example, we had cotton, 7.88 AMTA payment. We doubled that. 2000 was 77.3 cents a pound. We gave that plus the 1999 payment. 2001 is based on 5.99 cents a pound and we don't know where we are going to go with that.
And I want to make for—you know, just because a contract was signed, if it is a bad deal, let's see if we can't change it. But I would like to know your opinion of how much of a credibility or how much of a problem that would cause if we can come with a good solution—and I don't want to do a bad solution—so if we can come with a good solution, some people may say, well, you have violated that contract; well they didn't mind last year when we doubled the payment, which really wasn't a part of the contract either. So how is that going to sell in farm country, if the question finds a solution that substantially increases, substantially improves the deficiencies we have in the current program, how much of a problem is that going to create in people's minds that we are not going to be around in 2002 to give that AMTA payment which is going to be less than 6 cents a pound?
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Mr. MCLENDON. I think if you improve what is offered to the farm, farmers, it will be well received. For those farmers that have that contract got 2 more years on it, and if it is detrimental to them, then you we have got a problem.
Mr. LANGE. Mr. Chairman, I would say the type of program we outlined in our testimony would swing straight off this current program and would simply allow some adjustment in base, if possible, and would be using essentially the same contract base with no harm to producers who are holding current contracts and adds to the safety net that they would be eligible for. I don't think there is a problem of a sale of that kind of program in agriculture.
The CHAIRMAN. Mr. Stenholm.
Mr. STENHOLM. No further questions, really. A comment. Mr. Osborne, regarding your question regarding revenue insurance, that is a concept that I think we really ought to continue to look at as supplemental ideas to our insurance program and perhaps to our overall quest for an adequate price risk insurance or whatever we want to call it. Also, I want to repeat, and again for edification and education, you know, cotton incorporated in our checkoff in which individual producers are making a fairly substantial investment in our own industry I think is key to being able to receive the—at least ask for the kind of Federal help that we ask for. And I hope that all of our checkoff programs will, with due diligence, meet the concerns of the growers, but the growers will also understand the significance of continuing to invest in our own programs as being a good compelling argument for us politically.
The question is this: It is no secret we have got some major problems with cost of electricity, cost of natural gas, irrigation costs, fertilizer cost. I think it is safe to say economically that if the cost of irrigating is too high based on the expected price of the commodity, it would be prudent to shift to a dry land situation for a short period of time rather than irrigate and pump on the fertilizer at a cost in which you will not expect to receive a return on your money. Mr. McLendon.
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Mr. MCLENDON. And I think that will happen this year.
Mr. STENHOLM. I think it is going to happen this year for the reasons that I just mentioned.
Mr. MCLENDON. In the discussions and meetings we have had in the last 60 days with producers, particularly in the West, we have got tremendous increases in energy costs. I think there are going to be shifts, maybe not even farming the land, where people might sell the water rights. That is being discussed, sell the contracts on natural gas.
So it is a tremendous problem for us and that is the reason we need to continue this partnership between you and us because of the things—our cost production looks like it is going to be even up this year over last year because of energy being passed on to us in higher fertilizer costs and diesel prices. And my diesel bill on my farm was doubled in 2000. It cost me twice as much to buy my diesel fuel as it did in 1999 and now I have got diesel prices that are still up now I am going to be faced with fertilizer prices.
Mr. STENHOLM. And here I guess in encouragement to the cotton industry, I have observed that you cannot produce food and fiber without oil and gas. You cannot produce oil and gas without food and fiber. And therefore, there ought to be a natural partnership now. And just as we a