Segment 2 Of 5     Previous Hearing Segment(1)   Next Hearing Segment(3)

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House of Representatives,
Committee on Agriculture,
Washington, DC.
    The committee met, pursuant to call, at 10:00 a.m., in room 1300 of the Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
    Present: Representatives Boehner, Goodlatte, Smith, Everett, Lucas of Oklahoma, Chambliss, Moran, Thune, Cooksey, Gutknecht, Simpson, Hayes, Johnson, Osborne, Rehberg, Putnam, Kennedy, Stenholm, Condit, Peterson, Baldacci, Etheridge, Lucas of Kentucky, Phelps, Thompson of California, Baca, and Larsen.
    Staff present: William E. O'Conner, Jr., staff director; Tom Sell, Alan Mackey, Jeff Harrison, Callista Gingrich, Craig Jagger, Anne Simmons, Howard Conley, and Russell Middleton.
    The CHAIRMAN. Good morning. I would like to welcome everyone to this fourth in our series of hearings to explore specific options for future agriculture policy. I would like to thank our members for their interest and participation in these hearings. Farm country is in desperate need and this committee is resolved to do the hard work necessary to create farm policy that will strengthen the economic conditions of American agriculture in the future.
    I have asked each witness that will testify before this committee in the coming months to not provide detailed proposals of where they would go on policy in the future, but how that policy would affect related industries and markets, as well as, the effect on farm program expenditures and our WTO obligations.
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    I recognize that this is not an easy process. It is difficult for any organization to reach consensus about what should be the recommended course of action. But I firmly believe that if we are to produce the best policy for our farmers and ranchers, active participation on the part of all interested parties is essential. As we proceed through these hearings, an interesting dialog is developing. I would expect that the testimony presented today will add a beneficial new dimension to this dialog, and that is exactly what we are looking for in this process.
    The testimony today is presented on behalf of the National Farmers Union. I would like to thank and to welcome Mr. Leland Swenson, who is president of the NFU, and note that this is the second time Mr. Swenson has appeared before this committee, first being a member of the 21st Century Commission on Agriculture.
    Once again, I would like to thank our members for their interest. And would now recognize my good friend and ranking member, Mr. Stenholm, for any opening statement.
    Mr. STENHOLM. No opening statement. Mr. Chairman, I welcome Mr. Swenson and look forward to hearing from his testimony.
    The CHAIRMAN. As always without objection, all members statements will be entered into the record.
    [The prepared statments of Members follows:]
    Chairman Combest, Ranking Member Stenholm, thank you for holding this hearing today to review farm policy recommendations by the National Farmers Union. For the past year we have spent a great deal of time discussing the direction of agriculture policy and the difficult challenges facing our producers. We have heard a wide range of opinions and have yet to arrive at any strong consensus as to the direction we should take. We can, however, agree on one thing: we are all very concerned about the sustainability of an industry that provides food to the American people day in and day out, at the lowest percentage of take home pay and the highest quality in the world. Let us not have to depend on imports for America's food and fiber.
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    I look forward to hearing Mr. Swenson's thoughts today on the direction of agricultural policy in the United States as we work toward formulating the next farm bill. I commend the NFU for its efforts in developing a comprehensive and unique proposal to provide a more stable, predictable safety net for producers. I am interested in learning more about your suggestions on decoupling and a move toward more of a supply-oriented approach that was prominent in earlier farm programs. I agree with many of the points you make, and I am looking forward to a stimulating discussion with you Mr. Swenson. Thank you, Mr. Chairman.
    Mr. Chairman, Ranking Member Stenholm, fellow Members and guests, I welcome the National Farmer's Union to our committee today. Unfortunately, I am afraid that the state of farming in our Nation is not good today.
    The assumptions made in passing the Freedom-to-Farm bill were all incorrect, leading to a crisis for farmers, particularly family farmers, small farmers, and socially and economically disadvantaged farmers. Prices for farmers have dropped while prices for food in the marketplace are beginning to rise without benefiting farmers.
    In my own State and others, this growing disaster for farmers has been greatly exacerbated by 3 years of severe drought, to which the Government has only partially and inadequately responded. These matters link up to create a crisis for those who produce our food and other farm commodities with which we must deal.
    Further, the numbers of small, family, and socially and economically disadvantaged farmers continue to drop, placing the fate of our Nation's food increasingly in the hands of agribusiness. The American agriculture system was created by small and family farmers, and works best when they have their full share of the land and the production system.
    It would be much easier to respond to this growing crisis if we were able to call upon the surplus of funds which the American people have built up in the recent boom year, but the huge tax cut proposed by the administration prevents this, and will work to increase the crisis. The funds we need to restore agriculture to health will not be available under the administration's economic proposal, which makes me deeply pessimistic as to the near future of farming in our great Nation.
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    Mr. Swenson, I want to welcome you to the Agriculture Committee today. The National Farmers Union has long been a friend of small farmers across America. I also want to thank you for your very thorough and very thought provoking testimony. It is quite a departure from the testimony that has thus far come before us and it is sure to stimulate much discussion today.
    We are, of course, in the initial stages of the reauthorization of the farm bill. However, your testimony provides an alternative view to much of the testimony that has so far been presented before this committee and in so doing, starkly poses the question that faces this committee in the 107th Congress, that is, ''What is the direction that American farm policy will take in a era of global food production?'' Will we continue the ''Freedom to Farm'' approach of decoupled AMTA payments and the pursuit of liberalized trade in hopes that we will finally usher in the much hoped-for Golden Age of agriculture? Or will we declare ''Freedom to Farm'' a failure and seek to redress the mistakes of that bill and the flaws of the agricultural market in other ways?
    Important questions to be sure, but probably not the most productive way of framing the matter as this committee moves forward. Your testimony provides, I think, a more important way of approaching the farm bill. It pushes us to ask not whether the FAIR Act was a dazzling success of a stunning failure, but rather questions how we can participate in a global economy in a manner that is fair and just to all American farmers.
    We have started down paths from which we cannot easily stray. The globalization of world agriculture is not coming. It is here. With it come our trade commitments and a need for us to assess the comparative advantages of disadvantages of American agriculture in a world market. However it may be the case that globalization and industrial agriculture are here, that does not mean that we are powerless in the face of it. It is not a historical inevitability to which we must respectfully submit. As our colleague on the Ways and Means Trade Subcommittee, Sandy Levin, said in a speech last week, globalization, including global agriculture, is here. It must be shaped and it must be addressed with constant relentless innovation that enables us to reap the benefits of free trade and to mitigate its excesses by ensuring that it is fair to all.
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    The question of fairness for all farmers and rural America within the context of American and global agriculture is essentially the issue that is posed by your testimony Mr. Swenson. The matters that you discuss of market concentration, conservation, rural development, and small and family farmers are not ancillary or secondary to the farm bill, they are precisely what the farm bill is about. As our chairman has repeatedly said, nobody said that this farm bill would be easy, but the stakes are high and the livelihood and way of life of, not just farmers, but of rural America are at stake.
    Mr. Swenson, I want to thank you and the National Farmers Union for your attention to these matters in your testimony today and for the inventiveness that your testimony exhibits.

    The CHAIRMAN. Mr. Swenson, please proceed.

    Mr. SWENSON. Thank you, Mr. Chairman. And first of all, let me commend you, Mr. Chairman for holding these hearings and the manner in which you are conducting them. I appreciate the tremendous cooperation of the committee staff in working, putting together their recommendations on how to improve the testimony that was to be offered to the committee. So I again commend you for your work.
    In the viewpoint of the National Farmers Union as we take a look at the Freedom to Farm, it's not work. We first of all did not meet the speculative assumptions that were made as the program was laid out in regard to crop prices, exports, farm income. Farmers find themselves in worse shape and more dependent on the Government to try to survive then we have seen. Ad hoc payments has helped sustain agriculture, we don't believe are sustainable long-term. And they should not be the structure of farm policy.
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    So as we take a look at policy recommendations to which we will offer to this committee for consideration. First of all, I would emphasize in the short-term. I want to emphasize and thank the committee for their support the past 3 years for supplemental appropriations to try to assist agriculture in its hard times. That will be necessary again as we take a look at 2001. It is out belief that probably no less than $9 billion of emergency economic assistance will be required in 2001. The economic conditions are no better. And in fact, many cases worse than they were a year ago when we look at higher input costs from fertilizer and energy.
    The long-term, I would say the primary objective of Farmers Union policy as we will share with you today is that producers return should represent the full economic cost of production. That should be the goal or the objective that we have long-term for farm policy.
    What matters is what you keep, not what you gross. And as we take a look at the impacts, as I have already mentioned, of energy and fertilizer costs, those impact producers today. And are we able to offset them with a price and a value of the commodity or the structure of the safety net. So what we are going to emphasize is that we have in the structure of the farm program flexible mechanisms that provide for flexible and adequate economic support.
    Now we don't have a crystal ball to say what's going to happen in the future. We don't know. We can make some assumptions as we did in 1996. And they may materialize or not materialize. And as what happened then, we had ad hoc assistance that was necessary.
    So let me share with you NFU policy. It is developed, No. 1, by the members whose grassroots involvement and our policy adoption, both at the State level and then what is shared up to the national level. We have worked with Dr. Daryll Ray of the University of Tennessee in Knoxville in developing an analysis of which is the basis of the program we will offer for your consideration today. And that analysis is linked to the FAPRI baseline.
    When we got ready to put together our proposal, did we give consideration to other alternatives? Yes, we did. We looked at the potential continuation of the AMTA-type of program, which decouples, of course, the yield and base from that of the assistance. And we really felt it is unrealistic of which to look at continuing AMTA payment. That is based on the production base of 16-plus years ago, or the 6 to 11 years ago and yields from other 16 years ago. So we did not feel it appropriate to look at the consideration of an AMTA structure as part of a program. And because it also has not necessarily distributed the assistance to producers who need the help. And as we take and analyze the AMTA impact we saw increased production costs, especially as we looked at land rental rates and land values. And what we felt encouraged further consolidation and the structure of production agriculture.
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    And it also had impacts on the production of non AMTA crops. And so for those factors, we chose not to include within the proposal we share with you today any type of continuation of AMTA program.
    We looked at the Supplemental Income Assistance Program. As you take a look at the structure of support and tie it to the ''amber box'', it does create increased costs and increased bureaucracy and really does not address price drops and does not impact really cost of production. And so again, as we took a look at that issue we dismissed it in the nature of not really addressing the concerns that we feel are most relevant in the nature of the development of farm policy. So after that considerations, we began to say, what are the components, program crop components on an individual basis that develop together as a policy can best serve the needs or production agriculture, the family farmers and ranchers in this country. And we would like to share with you those points.
    First of all, the belief in the commodity marketing loans and continuing that structure of support. It is counter-cyclical. Marketing loan is the original counter-cyclical program when you look at the structure of when it unfolded and developed. It maintains U.S. price competitiveness in the world market. It's commodity specific. It really will reach actual producers, their current yields, their acreage that they are producing on. And it can provide assistance to those that will suffer losses due to low prices. It is already in place, it is easy to administer, and it is familiar to producers. We do make a recommendation of modification of the marketing loan program. We believe rather than the current system of the structure of the loan rates that we use USDA ERS statistics and have the loan rates on a basis of cost to production. With the rate being set no less than 80 percent of production. And that is what you analysis that we presented to you today for consideration is based on.
    What does that do? It creates equity across program crops. It has a viable relationship; average prices don't. It removes the inequities. And it does have an impact on redistribution of program crop reduction, but little impact on other crops. And the loan rates then can be allowed to adjust for the variable, not only in the cost of production, but productivity as it changes over time.
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    The next component that we encourage to be continued within the farm program is that of planting flexibility, to allow full planting flexibility in fact in the analysis that we have presented. Allow the freedom to plant for the market and not for the Government.
    Another key component in the structure of our individual components of our farm policy is to encourage you to consider the inclusion of limited reserve programs. The first two I draw your attention to is a renewable energy reserve and a humanitarian food assistance reserve dedicated to those specific purposes. They don't overhang the commercial food market. They would be Government owned, their farm stored at local commercial rates. They would be limited. Limited to about 1-year requirement.
    So they would create a dependable supply of renewable energy feed stock so that we address the concern of program critics as we look at the expansion of ethanol that were one drought away from an unreliable supply. We would really begin to address that by the structure of this commodity energy reserve program. We would ensure stocks availability for assistance to programs, especially in the area of humanitarian assistance. We propose within these programs that there is a release level, that when the prices reach 100 percent of the average cost of production at the release mechanism so that again it is not being hoarded over the market to continue to depress market. There is a mechanism of which releases it for their purpose and use.
    Again, they are counter-cyclical when corn prices become profitable to farmers. Ethanol contracts of this would enable the ethanol industry to remain viable and have the supply. It also supports demand growth in the area of hopefully expanded ethanol by diesel. And also in the area of what we hope would be a program to expansion, that is the international school lunch program, as well as, our domestic school lunch program. We believe that you can take a look at the renewable fuel standard program and that could triple the demand for corn to 2 billion bushels per year in 10 years. And the school lunch program, if put in place, would create about 300 million new customers. So we urge you to consider that as a component in the next farm bill.
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    The other component reserves that we would ask you to consider is a farmer-owned, farmer-stored reserve. Limit it. And I again want to emphasize that. Limit it to about 20 percent of actual production. Storage at local, commercial rates. With again some mechanism of which would provide for appropriate release mechanisms. But I would like to offer for your consideration that storage payments may stop at 100 percent of the cost of production with the release mechanism at 110 percent of the cost of production. Again, moving the product into the market without creating the tremendous impact that concern is when you have a farmer-owned reserve.
    It really establishes the United States as a reliable supplier of commodities as we look forward.
    The other element that I would like to emphasize to you to consider in a limited farmer-owned reserve, and that is that the producer could have a release to cover a portion of his crop loss that he may suffer, and not have coverage under crop insurance. Producers currently today who don't have coverage on their first 25 to 35 percent, depending on the level of crop insurance coverage of which they have purchased. But if they so voluntarily choose to participate in the farmer-owned reserve program, we would like you to consider as one of those components as the means of which to take that 10 to 15, 20, 25 percent out of that farmer-owned reserve to make up for what they may suffer in a crop loss in that next year. We think, as you will take a look at the analysis, the cost of implementing that program will have its benefits and what happens to crop insurance, but also in the overall cost of farm programs of what payments would be required under LDPs and et cetera.
    The other factor that we would like you to consider in addition to these reserve programs is the discretionary authority for the Secretary of Agriculture. And I emphasize the term discretionary authority for the Secretary, to offer a voluntary set-aside program. And that set-aside options could range from 5, 10, 15, 20 percent on how the Secretary wanted to structure those types of programs. With a participation incentive of adjustments in the marketing loan rate for the balance of the production that would be equal to 50 percent of the producers set-aside percentage. In other words, if they agreed to set aside 10 percent, they would receive a 5 percent adjustment in the marketing loan or the balance of their commodities.
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    There would be a disincentive for non participation. When you take a look at the national average for those farmers that chose to just continue to produce and produce for the market, the Government would reduce the market loan rate for those producers. Again, equal to the national average incentive of payment participation. In other words, when you look at the percentage of participation they would have that reduction. That way the Government does not continue to encourage via the structure of its support program more and more production at a decreased value. The limit on slippage of participation can also be addressed not only through the incentive but the dealing with off-setting. In other words, require across-the-farm participation so you don't just participate in one farm and not another.
    So as we share those components, individual components of a farm policy, let me talk a little bit about what we see in our analysis of the program crop impact. The combination of these program crop policy recommendations and realizing a higher net income for all producers. In fact, our analysis will show that it's up $19 billion from 2001 to 2004 from the baseline. So it has a significant impact on what will be the net income for farmers from the marketplace. Generally, better average commodity prices. Average export earnings have about a $1 billion increase above the baseline. We have modest adjustments in the impact in the livestock sector. And we have a reduced Federal outlays for most years compared to the baseline and much less from our current level of expenditures.
    As we take a look at the dairy sector, as those components of the Farmers Union Proposal dealt with the commodities program, I share with a couple aspects in regard to dairy. First of all, a great concern over the increased level of milk protein concentrate that is coming into the United States. It currently displaces 4 to 4.6 billion pounds of domestic production, the level of milk protein concentrate that is currently coming into the United States. And the reason is, is that it is not subject to U.S. quotas or tariff rate quotas. And we believe one of the elements is that it should be negotiated to be subject to those quotas or tariff rate quotas.
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    In addition, we should also have enforcement of the prohibition of milk protein concentrates as a component of standardized cheeses. And we also think it is very prudent right now with the increased concerns of disease and the movement of disease from country to country, the review of the health and safely implications of those product moving in.
    In regard to economic assistance, we share with you two options under the dairy sector. One is to take a look at increase the dairy support price to $12.50 per hundredweight with a limit of CCC purchases 3 percent of the utilization of production and establish a producer finance purchase program with a level of exemption. And then if a producer either exceeds that exemption and or increases their production of that that exceeds the average percentage of growth of demand increase, they began to pay an assessment on that increase in production.
    So we believe that the Government also could assist in the purchase and use of humanitarian assistance and nutrition programs of dairy products as we looked at in the area of the commodity products as well.
    When we take a look at option 2, it is to leave a dairy price support approximately the current level of $9.90. And establish a producer finance program as I highlighted under option 1. And establish a target price system that may be associated to that of what we talked about the commodity, such as 80 percent of the average cost of production.
    And that you would have a deficiency payment that would equal the difference then between that target price and the appropriate base for the class III or class IV milk. And again, having that trigger in there that producers who exceed either the 2.6 million pounds of milk or production of the annual market growth rate, be ineligible for the target price protection.
    The impact of the dairy program recommendations that we've laid out is a much improved economic safety net for producers. And as you take a look under option 2, it is our analysis that the program outlays would range from about $2.3 billion to $3.1 billion per year with no negative impact on the cattle sector, and only a modest impact on the increased of WTO aggregate measure of support.
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    It's part of our testimony, Mr. Chairman and members of the committee, we have included what we think are other key components in the area of farm policy. In the area of conservation going to expand our CRP acres up to the 40 million acres.
    One of the new components sort of out-of-the-box thinking that we would like you to consider is a short-term soil rehabilitation program that would target up to about 5 million acres. The purpose of that would be as we see some areas of the country that have scab, for example, and those producers continue to produce crop on that soil, even though they know that they are going to get scabbed the next year because they are concerned of losing that income and they can have insurance protection under the Crop Insurance Program. So what happens is they suffer the yield, they impact their crop insurance program. And we believe that if we really targeted that type of area we could take that land out of production on a short-term basis, restore the productivity quality of that soil. And then enable those producers to bring back in and be a win-win in the nature of protecting the integrity of our crop insurance program, as well as, then the future productivity of that soil to meet needs both domestically and globally.
    We encourage you to authorize and fund the Conservation Security Act to provide technical assistance. Look at providing ''green'' payments to family-sized farmers and ranchers for the application of conservation and environment practices.
And I raise that because as I was in Des Moines, IA this weekend, and I left there Monday morning, I picked up the Des Moines Register, and in it was a headline, ''Polluted Waterways List to Grow.'' It talks about the fact that there are 500 lakes in Iowa that are currently on the list of concern to pollution. That list may grow to 1,000. We will have the appropriate technical assistance and dollars to put in place the appropriate buffer strips and those types of conservation practices that will be good for producers to implement and yet good for what can be the impact on our rivers and our streams in this country. And I think we need to make that as a key component in the nature of the structure of our farm policy.
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    We also encourage the committee to look at the appropriate regulatory framework to foster the development of carbon sequestration, to look at how we can deal with that issue as we move forward to the benefit of family farmers and ranchers.
    As we take a look also at another component, and that is rural development. We need to look at how we can maintain the USDA as a primary agency for rural development. And we have shared with you some ideas within our written testimony of how we think that could be done in areas of rural housing, rural utility service, Federal and State marketing improvement programs, the Farm Service Agency Credit Programs, and all those areas to be of benefit to the whole structure of rural America.
    We also believe that a key component of what is going to be the future of the structure of production agriculture is going to be impacted by concentration. And we believe that the USDA's role in addressing agriculture mergers and the review process that needs to be strengthened, that we need to take a look at the economic impact statements concerning meager effects. And that we look at including poultry within the jurisdiction of GIPSA. And also support on the Federal level a contractor's Bill of Rights to make sure that contracts can be reviewed, are understandable in the terms of which they are written, and that are publicly filed.
    Other issues that are not included within our testimony, I would just briefly like to touch on. And that is the issue of targeting. The Farmers Union believes that in budget reality we must have targeting within the structure of our program. We were unable to get it all put into the analysis to be able to offer it to you, and so we will be glad to share that with you at a future time. But we think it is going to be a necessity as we look at the budget realities. And we also believe that single attribution must be a structure within that targeting mechanism.
    Within the areas of specialty crops we have established a working group within the National Farmers Union. And again, we are unable to complete the full analysis of those programs at this time. But look to seek a way in a program that addresses the economic stability for all those commodities, fruits and vegetables, tobacco, sugar, peanuts, that will equal that with the commitment we're making to other commodities as well. And so we would be willing to share those views with you at a later time.
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    I would also like to share with you in the element of trade. Is that one of the key issues that we think must be addressed as we take a look at our future trade opportunities and expand the trade opportunities, one lies in the area of currency differences and fluctuations. And the other is real sanction reform and the ability to have access to markets. And also the inclusion of we believe is in labor and environmental standards that must be addressed if we are going to level the playing field of the nature of international trade.
    So in conclusion, Mr. Chairman and members of the committee, as we lay out our program to you for consideration, the projected cost of our programs ranges from $4.2 billion to $8.2 billion per year. The average cost equals $5.153 billion a year. The farm prices income exports are all higher than the baseline. Our dairy program costs, under option 2 as I mentioned, range from $2.3 to $3 billion per year with the average cost $2.5 billion. The cost of crop and dairy programs fit within the WTP commitments. We believe the conservation and rural development program outlays $2.6 to $6.2 billion per year will really compliment what we are doing in the area of our commodity programs. So a total cost of recommendations, except for specialty crops, average $13 billion per year. We create more equitable less distorting, fiscally responsible method to provide economic security and opportunity for U.S. farmers and ranchers.
    And we are honored to be with you today and glad to answer any questions you might have. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Swenson appears at the conclusion of the hearing.]
    The CHAIRMAN. Thank you, Mr. Swenson. In your discussion I think you had basically one line talking about limitations in the assumption I think that it would remain. Is that your recommendation or does Farmers Union recommend payment limitations stay as they are?
    Mr. SWENSON. We are in the process of putting together a variety of different targeting mechanisms to put them into the analysis that we have to see how they will impact the cost of the program and the benefit to producers. And we will share those with you as soon as we have those. But we're not just stuck to what the current targeting mechanism is. We are looking at a whole variety of them, Mr. Chairman.
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    The CHAIRMAN. Is the assumption that you will recommend limitation? Pretty much I think everybody has testified up to this point has recommended removing payment limitations. Are you presuming there will be a recommendation that will have some limitation in it?
    Mr. SWENSON. Yes. If we see the year of where the Government must expand significant dollars the targeting mechanisms will kick in. What we have really tried to designed, Mr. Chairman and members of the committee, is a program of which reduces Government outlays. Because if we can reduce Government outlays and have an increase in the price of the market, the need to talk and debate over targeting moves off the table.
    So what we are trying to do, Mr. Chairman, is to, yes, targeting will be a major component when it is necessary.
    The CHAIRMAN. What about cotton, how does it work on your on-farm storage program?
    Mr. SWENSON. Well, in the cotton program you have a mechanism right now which would stay in place with the structure of the program where you have your Step II Program in the structure of which that would operate.
    The CHAIRMAN. So you wouldn't have any on-farm storage for cotton?
    Mr. SWENSON. Not that I am aware of, on our program we don't have any, no.
    The CHAIRMAN. Well, under that would your long would be based the same, based at 80 percent of USDA cost of production estimates?
    Mr. SWENSON. That's correct.
    The CHAIRMAN. Tell me why on-farm storage of grains does not depress the price, depress the market.
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    Mr. SWENSON. Well, first of all, when you deal with a limitation of the volume of product that can move into an on-farm storage and——
    The CHAIRMAN. But you said about a year's supply, didn't you?
    Mr. SWENSON. No. The farmer-owned reserve is limited to 20 percent of production. And then the national basis 20 percent of national production. So what you're looking at is in the release mechanisms to be able to move that into the market——
    The CHAIRMAN. Well, let's say you were limited to 20 percent of your production and next year it didn't release then you couldn't put anything into your own farm. Or would that be another year and you could 20 percent more in?
    Mr. SWENSON. It would be another year.
    The CHAIRMAN. And you could put 20 percent more in?
    Mr. SWENSON. Yes.
    The CHAIRMAN. And so you wouldn't just have 20 percent, you would have 20 percent, plus 20 percent. And if it was 3 years, plus 20 percent.
    Mr. SWENSON. No.
    The CHAIRMAN. OK. So if you didn't hit that release mechanism then you are already full for the next year?
    Mr. SWENSON. That's correct.
    The CHAIRMAN. And you couldn't put any in until you released? And you couldn't release until it hit a trigger?
    Mr. SWENSON. That's correct.
    The CHAIRMAN. What if it didn't hit the trigger?
    Mr. SWENSON. Well, then you are going to have to hope that with the discretionary authority, of which we have calculated into our program, that the Secretary has implemented other steps of which will create that to happen.
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    The CHAIRMAN. Why?
    Mr. SWENSON. The Secretary would look at a voluntary set-aside program.
    The CHAIRMAN. Well, a voluntary set-aside program with the intent of limiting production?
    Mr. SWENSON. Of reducing production, yes.
    The CHAIRMAN. Well, set-aside does not reduce production. And we have mandatory set-side it did not reduce production. It reduced the number of acres in production, but it does not reduce production. And a voluntary set-aside program is not going to reduce production.
    Mr. SWENSON. Well, in the analysis that we have ran, and I could ask Dr. Ray to address this, it shows that with the components of the reserve with the participation, and I believe in our analysis that we did shows that a 10 percent level of voluntary set-aside with a 50 percent level of participation, we do reach those trigger mechanisms using the FAPRI baseline and how they impact back into the model. Our model does show, Mr. Chairman, that we do reach those places.
    The CHAIRMAN. Well, I would disagree, I am not being disagreeable with you, but I would disagree with the concept that that will work. Because what has traditionally happened with set-aside is that production does not decrease. And that's why some people talked about a flexible fallow. Some people have talked about various types of programs, conservation. If those are intended to be used for income support for a farm, that's one thing. But if the ideal is to see those reduced production, it won't work. Never has. Even when we had mandatory set-asides it did not reduce production. And that is a concern that I have. And in particularly in terms of the storage situation is that if you max out in your first year as producer and put in your 20 percent, then if you have got a 20 percent farmer on reserve and you have got a 20 percent Government on reserve, you have got 40 percent of the crop that's there. And if there's nothing that triggers to release that, then it is just going to sit there, is a concern I have got. And my time's up and we may pursue that some more.
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    Mr. SWENSON. Just for clarification, Mr. Chairman. The initial reserves of the energy and the amount of reserve are not the 20 percent. They are limited to one year's use in those particular commodities. So that is a significant on a different level than the 20 percent of the farmer on reserve.
    The CHAIRMAN. Mr. Peterson.
    Mr. PETERSON. Thank you, Mr. Chairman and thank you, Mr. Swenson, and your folks for doing a lot of work here. I know you put a lot of time into this and we appreciate what you're doing. To follow-up a little bit on the chairman's questions, if the set-aside does work, and I have some questions, some concerns along those lines as the chairman's, but say that it does work and we reduce production, how do you answer the question or the complaint that all we are going to do is allow these other countries to pick it up and that we are not going to really impact the price because with—I understand it in the grain area basically, there is no longer really any restrictions on grain coming or these big companies like Cargill and so forth, being able to buy grain wherever they want. What do you think we are accomplishing by having a set-aside and reducing production if we accomplish that in the marketplace? Aren't these other countries just going to increase production and keep the price down anyway?
    Mr. SWENSON. Well, as we take a look at what has happened in the world under the current program of where we have historically low prices, we have seen continued expansion in other countries of the world anyway. If I can give you one example, is you take a look at Brazil and soybean acreage. They have increased soybean acreage 13 percent from 1996 to 2000. At the same time that the U.S. acreage has increased over 13 million acres. So I am not sure that it is the nature of them increasing just because we implemented a set-aside program. And I am not sure that we can afford either via the direct assistance payments to our producers to just export at well below the cost of production and continue to export our soil and all the other resources that go with the nature of that export expansion. Where we have really seen a growth for demand is in the domestic market. And we believe that that is where we will continue to see a real opportunity for growth and demand. And we think the program we have offered will compliment continued growth and demand on the domestic level.
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    Mr. PETERSON. Well, I agree with part of what you say. I guess I have some concerns and then I want to get onto another question because my time will run out. But that if we get the price up too high given the fact that we have no protection of these trade agreements, from what I understand people that have been to Brazil tell me that if they've got enough land down there to double their production again, and they will, if we get the price up. So if we actually accomplish getting the price up I think the underlying problem we got is with these trade agreements, frankly. I wanted to move to the dairy area. To sum up the same question. You are proposing, as you have, I think for quite a while to put a floor underneath the dairy prices. And would this supply to California even though they are not in the order system? So they would have a floor, too?
    Mr. SWENSON. Yes.
    Mr. PETERSON. And is what I can understand what you're talking about here, you are going to have some kind of a voluntary supply management, kind of, that is——
    Mr. SWENSON. Yes.
    Mr. PETERSON. And you have got modeling that shows that this is going to rain in production out there in the west? Production has finally come down out there. I don't know if it is the energy crisis or it is the low prices that are doing it, I have a real concern about what is going to happen in the west if we put a $13.50 floor underneath the dairy prices. If we don't have some kind of mandatory supply management to go along with it I just think we are asking for trouble. Do you have some information that would prove me wrong?
    Mr. SWENSON. No. In fact, our proposal would concur that when you take a look at the commitment of via the compacts, the way that those compacts will work is if they contain within them a management program on production, will be the way they will be able to sustain themselves. So as you take a look at expanding that type of program on a national basis in the concept of raising the support, you have to have as a key component what will be the mechanisms that try to either trigger on an economic basis to not expand over what real growth is and demand.
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    Mr. PETERSON. What would you think would be the economic disincentive to increase production? Do you have a dollar amount or so much a hundred or do you know in your economic modeling is there any information on that?
    Mr. SWENSON. Is what?
    Mr. PETERSON. Is it like 0.50 a hundredweight or——
    Mr. SWENSON. The model that we have is at 0.25 a hundredweight.
    Mr. PETERSON. You think that's enough to rain in those——
    Mr. SWENSON. That is what the analysis has given us an indication. And that is what we have to go by.
    Mr. PETERSON. Thank you, Mr. Chairman.
    The CHAIRMAN. Mr. Lucas.
    Mr. LUCAS of Oklahoma. Thank you, Mr. Chairman, Mr. Swenson, could you expand for a moment on this concept about a short-term CRP?
    Mr. SWENSON. On the short-term CRP, the one that we talk about in there is a soil restoration program. That is mainly tied to areas of which have a disease problem, of which we are trying to look at taking that land out of production and rehabilitate the soil back to a productivity without the disease.
    Mr. LUCAS of Oklahoma. How would you envision the rental rates on it being in comparison to the more traditional 10-year contract?
    Mr. SWENSON. No. You would have to find the means of which to support them. But you would also have to make sure that it is cleared via the local Farm Service Agency office that this is a problem situation. So that you just don't have the open enrollment of which is trying to take advantage of a program.
    Mr. LUCAS of Oklahoma. And how would you respond to those who would observe that in the recent couple of decades we have had some very intense short-term droughts in some areas, thinking of the State of Texas that went through 3 and 4 extremely dry years. How would you respond to the concept of perhaps using something like that to address a 3-, 4-, 5-year period problem?
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    Mr. SWENSON. Yes. That could easily be brought into the model.
    Mr. LUCAS of Oklahoma. For a moment, if you would, one of the topics that is commonly and frequently discussed in the coffee shops back in the district by your constituents and mine address the CRP rules in general. How do you envision those should be addressed or handled, Lee, in a coming farm bill? There are a lot of folks out there who prefer the pre–1996 CRP rules with the focus on soil and water, and a handful of even rural America who prefer the 1996 ones. But how does the Union view that particular circumstance?
    Mr. SWENSON. Well, I think we have to look at the inclusion of all of the elements of erosion as we take a look at the future of CRP. But one of the things that has been most troubling to many that have enrolled in the program is the crop coverage. The types of grasses that are required have not necessarily suited the land that has gone in. And the cost of it has driven some people from participation. So we do need to take a look at the requirements. But I think we have to have in those requirements you are talking about of what may be wind erosion versus that of water erosion, the right type of application in the nature of what are those qualifications requirement. And not try to blend them all together so what may work in Indiana is not going to work in western Oklahoma.
    Mr. LUCAS of Oklahoma. But you agree one of the primary focuses should be on preserving the soil?
    Mr. SWENSON. Yes.
    Mr. LUCAS of Oklahoma. Let me touch for a moment some earlier discussion you had with the chairman on the concept of potential payment limitations. If you would expand for a moment on how in the proposal by the Union that would work.
    Mr. SWENSON. It will depend on the nature of the final targeting mechanism that, you would, look at applying. And there is a number of models that we are trying to look at.
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    As I sit here today and say this is going to be the one, would be inappropriate. We can look at total payment that could be eligibility under an LDP. That might be one method of targeting. Once you have reached that payment limitation, no further eligibility exists. You could take a look at a payment limitation that ties to gross sales. You could have assistance that is available up to total gross sales. And after that, no more Government assistance. So there is a number of different mechanisms that have to look at into the targeting thing. And we are trying to build them into our model now.
    Mr. LUCAS of Oklahoma. But the goal of the NFU would be to target those resources towards family farms, I would assume/
    Mr. SWENSON. Yes. To look at how we can take and have the sort of highest level of commitment of counter-cyclical support that would be in place in relation to the value of a commodity. And then have that support if it is going to be coming from the Government rather than from the market. Where is the appropriate level to target it. That is not new. We have done this from the early days of the Homestead Act all through the nature of how we expanded irrigation commitments for development. We have had levels that have targeted Government support and Government programs. So what we are trying to is build it into fiscal responsibility of the Government. Especially, when Government outlays are the nature of how we are trying to support the economic well-being of family farmers and ranchers.
    Mr. LUCAS of Oklahoma. Thank you, Mr. Swenson. Thank you, Mr. Chairman.
    The CHAIRMAN. Mr. Cooksey.
    Mr. COOKSEY. Thank you, Mr. Chairman. Lee, first I compliment you. It really appears that you have wrote some economic models, you have thought this out carefully. I think you have got some ideas that have merit and there is some idea—part of it that I question from an economic standpoint. Your goals of trying to lower Government and outlays at the same time increase prices are worthy goals. And we all share that. And even though there are not any democrats here, they are interested in your program and they do share that same objective, too. And, of course, my side certainly supports those ideas. Could you explain to me, you used the term single attribution to target area. What did you mean by that?
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    Mr. SWENSON. We have a number of individuals that may be involved in one or more operations. And so you are singling out that they will be eligible for support under a single rather than lining up three or four different opportunity for participation.
    Mr. COOKSEY. OK.
    Mr. SWENSON. Yes. Single entity-type.
    Mr. COOKSEY. OK. Next question. I am concerned about the changes that we really are in a world market. We are in the information age. And that exists whether we like it or not or whether it is good or bad. How are you going to compensate, and this question has already been asked and alluded to a certain extent. But how are you going to compensate from emerging markets that we don't know about? Now we know about Brazil. I mean, Brazil right now could produce more soybeans, for example, than all of our farmers combined. And we hear that they can double it. Now I understand in Brazil one family owns a lot of that land. But let us say that some of the emerging markets in other parts of the world, in Asia and some of the former Soviet republics or in the Ukraine. And I have never been to the Ukraine, but I understand they have nine feet of good top soil. And if they start using even twentieth century farming technology or even possible twenty-first century farming technology, they come on line and start really producing a lot. That will increase the supply and lower the demand. How will this address that jeopardy that could be created for the price of commodity that you are trying to keep up?
    Mr. SWENSON. Well, I think two things. One is I think those countries will chart their own future in what they may look at for internal investments and the way they're going to try to help build their own economies. Not be driven necessarily by how low we keep the price of our commodities moving into the world market. Theirs is going to be more, especially in the merging markets, what kind of internal commitments they want to make for the development be it their agriculture infrastructure or others. But where we are really going to have to, I believe, continue to have our emphasis is what we continue to do in growth of domestic demand. And that's where we've seen our real growth. If you take a look over the last probably 20, 25 years. And if you would look at the changes that have occurred in exports and look at that median, our demand has been pretty flat. OK. And so our real growth——
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    Mr. COOKSEY. Domestic demand or our total demand?
    Mr. SWENSON. No. On the global exports.
    Mr. COOKSEY. Right. I agree.
    Mr. SWENSON. Our real growth has been domestic. And we have got to continue that kind of commitment. We have to be cognizant of what else is happening. But I think the real threat, the concern that I have in the area of development on the international area is are those countries expanding their production and they are using significantly different standards of production. Chemicals that we are not allowed to use in the United States, the nature of how they produce that product. When we talk and just look at the tech-feed differences and the nature of seed costs. And yet they get the same seeds that our farmers are buying at significantly higher prices. Those are some issues that really confront us in the area of change and the global production, as well as, our competition as we look at export market.
    Mr. COOKSEY. It is my understanding that approximately a third of our commodities are exported and our major markets have been in Asia. And those have been in some what of a decline over the last few years. And of course, a lot of this is problems in Japan. They just cannot get their act together from an economic standpoint. And they are not able to make the hard decisions they need to make toward their banks, their industries, their businesses. I still really think that we are going to have to depend on our export markets and those are markets that are growing. And when you have got growth in countries like Africa and Asia, and really growth is just far more than what we are having here. And I think it is going to impact us no matter what plan we come up with.
    Mr. SWENSON. Well, I think that is the exciting thing about the proposal that you have before you under the marketing loan proposal. It allows us to go full bore in trying to increase export opportunity. Nothing at all holds that back. And if that occurs, that is all the better. It will enhance this program. It will reduce any potential of Government costs.
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    It will then, in fact, even reduce the discretionary authority of the fact the Secretary will never have to look at that implementation of any type of a set-aside program. So the flexibility of this program, to me, is what is exciting. Yet it puts tools in the toolbox that will be able to address those changes that will occur in the global system.
    I mean, if we see the Russian economy come back and exports grow, great opportunity. If the Asian economy comes back, the export opportunities grow, this program allows that to happen. If something arises, and there is some other disruption in the world, this program allows us to deal with that without having to come back to Congress and say, now what are we going to try to do with this crisis. And in fact, puts tools in the tool box for the secretary to be more visionary than it does to be restrictive and to be held back in trying to address the future.
    Mr. COOKSEY. Thank you, Mr. Swenson. Thank you, Mr. Chairman.
    The CHAIRMAN. Mr. Stenholm.
    Mr. STENHOLM. On table No. 11 you talk about exports and you show projections, and also you show in your testimony that exports dollar-wise have declined. Do you have any tables that show what volume of exports of these grains have done and what your projection shows the volume of exports will be in the coming years?
    Mr. SWENSON. If it would be OK, I would ask Daryll Ray, who helped us develop these tables and models, to address that from a technical standpoint.
    Mr. STENHOLM. Sure.
    Mr. RAY. Well, as was mentioned earlier, over the last couple of decades the exports for wheat and corn and most of the grains have been relatively flat. Now there has been some variations that would look like——
    Mr. STENHOLM. What is the period of time in which export of let us just confined it, let us say to wheat and corn.
    Mr. RAY. OK. From mid–1980's, 1985 through the present time, if you graft that, what you see is variation. It looks like this. But if you took a trend of it, it would be totally flat. If you look at wheat, wheat would actually decline somewhat over that time period. The baseline that FAPRI has shows some increase in exports as you are, I am sure, aware as you move through time. And with the program that the NFU has here, there is some reduction in the quantity of exports. I think that the largest reduction is about 140 million bushels in the first year out of about 2 billion. But prices increase by a larger percentage. And so value of exports actually increases. And that has been our experience. That if you plot price of, I am talking about corn now when I was mentioned that, if you plot the price of corn and the value of exports, it follows those two grafts follow one another very, very closely. They are correlated. Which means if you lower the price you don't get enough increase in the quantity to cause the value to go up. The value actually goes down, if you look——
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    Mr. STENHOLM. Why do you believe that is a factual statement? Normally, in a market situation you lower the price, you increase your sales.
    Mr. RAY. That is exactly right. And that is not to say that you don't get some, some impact. But what if a price goes down by 10 percent the quantity demanded does not increase by 10 percent or more. It increases by much less, maybe 2 percent. So when you multiply the two together, the value goes down.
    Mr. STENHOLM. A question that has bothered me now for quite some time under the Freedom to Farm concept with marketing loans, theoretically the price that we producers get, again let us use corn. Theoretically, the bottom price is zero, theoretically.
    Mr. RAY. That is right.
    Mr. STENHOLM. But if we were truly being competitive under a market load concept in the international marketplace, we would be offering that and we would be very competitive. And theoretically, at least under the concept, we would have increased our volume because we would have been very tough competitors. That seemingly has not happened.
    Mr. RAY. That is right. And I will tell you what I have discovered in the last month or two as we looked at this data. At one time we used to say that wheat and rice, we were the residual exporters, where everybody else got their exports in and we exported what was left. I think that we are in that position for corn and soybeans, as well. And so what we have other countries, with the exception of China. China you can't predict. You don't know what they are going to do. But if you look at Brazil for soybeans, for example, or if you look at Canada for wheat or you look at Argentina for corn, what they do is they ship out to ports anything they can't use domestically. If their production is good this year and they are using their usual amount of domestic, they are export—domestic amount, their exports increase. And that goes out and then we get what is left.
    Mr. STENHOLM. Now I can understand residual supplier very easily under the concept that, quite frankly, National Farmers Union used to advocate a high loan. Period. Non recourse. Now I can understand the concept of being a residual supplier if we have priced ourselves out of the market by Government. But I am having a difficult time understanding is how are we still maintaining a residual supplier relationship when we have a market loan in which we should be more competitive? But it doesn't seem to be working to increase volume.
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    Mr. RAY. That is right. In the short run I would argue that our competitors will export anything they can't use domestically, just as I was saying. And in the longer run I would argue that these countries are as reluctant to reduce their production as U.S. farmers are. And so just because we reduce our price of corn and soybeans and wheat, that doesn't necessarily mean that they are going to be reducing their acreage and, therefore, giving us the market. So I would argue that both in the short run and the long run there are reasons to believe that that is happening. Now would that happen in other industries? No. I argue that the agriculture sector is a very unique industry. And it reacts much differently on both the demand and the supply side.
    The CHAIRMAN. Mr. Osborne.
    Mr. SWENSON. Mr. Chairman, if I may. One factor also that I think impacts this, and that is what happens to currency. Because I think Brazil is making its decision not just on what it potentially can do and how low we will go in price. But also in relation to what they have done to their currency and access to the market.
    The CHAIRMAN. Mr. Osborne.
    Mr. OSBORNE. Thank you, Mr. Chairman. Thank you, Mr. Swenson and others for being here today. First of all, just a question on your set-asides. And as I see it, it is primarily a flex-fallow concept to some degree. Is that correct?
    Mr. SWENSON. The concept of creating the incentive up is based on the same concept as flex-fallow. We just add the concept of also having the Government decrease its support for those that choose not to participate.
    Mr. OSBORNE. Right. The question I have is if you are going to increase the loan rate by 5 percent for taking 10 percent land out of the production, it seems like there might be some inequities there. Let us say your farming marginal land, it is pretty easy to take 10 percent out and really doesn't affect at all your production. Where if you are in the middle of Iowa and all of your land is pretty much the same and it is all high quality, I just see some potential inequities there. Do you have any solution or any way you would address that, that problem?
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    Mr. SWENSON. Well, I think there is a couple things, Congressman. One is the implementation of other conservation programs of which we hope will address some of those marginal lands and not have them considered for production at all. But second is within the analysis, the calculation of slippage that is built into our analysis already. Taking the point that you raised in the consideration. And so we have built that already into our model and the impact it will have on prices.
    Mr. OSBORNE. And you don't think this program would encourage the purchase development of land that might be marginal with the idea that you might be able to have it qualify as a set-aside property and receive payments for it?
    Mr. SWENSON. No. I don't think the payments would be enough of a return to make that economic investment in today's volatile market.
    Mr. OSBORNE. OK. Just a couple other questions I have. On the Government owned reserve, first of all, you are talking about the renewable energy reserve?
    Mr. SWENSON. Yes.
    Mr. OSBORNE. And in there it says quantities would be sold to eligible renewable fuel bio-energy enterprises at the Government procurement price. And I just wondered how you would determine that Government procurement price, is that arbitrary or is there some formula that the Government would use to decide what that price would be?
    Mr. SWENSON. It would be the average of what they bought it at of which would probably relate to where the loan rate would be, the support price would be.
    Mr. OSBORNE. OK. So you are saying that would be equivalent to the loan rate?
    Mr. SWENSON. Yes. That is most likely what the cost of procurement would be.
    Mr. OSBORNE. OK.
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    Mr. SWENSON. Of which to move product into a reserve program. Otherwise, it is going to move into the market.
    Mr. OSBORNE. OK. And then in regard to your humanitarian food assistance reserve, it says the Secretary authorized to release stocks when market prices for those crops exceed 100 percent of the farmer's full economic cost to production. Again, that seems like it might be a little nebulas. What is the cost of production for one farmer as opposed to another. How would you determine that cost of production?
    Mr. SWENSON. We are using USDA ERS standards so that we don't have one farmer pitted against another.
    Mr. OSBORNE. There are a lot of regional differences.
    Mr. SWENSON. Oh, absolutely.
    Mr. OSBORNE. I mean, some guys have to run a sprinkler system 24 hours a day and some don't have that problem at all. And so there are some inequities there, it seems like it.
    Mr. SWENSON. Actually, and, Congressman, the USDA formed a task force not too many years ago which spent considerable time looking at all the factors and all the elements coming up with the cost of production. And I think it has done a fairly decent job of which to look at it on a national basis. Now you are going to have that will not fit within that average. Some are going to be higher and some are going to be lower. What you have to do, just as we have done in the past of picking an arbitrary number of which we plugged in the support, we felt it best serves the long-term interest of the farmers to tie it to a percentage of cost to production than it does to try to deal with the inequities of what the market is presenting to us today.
    Mr. OSBORNE. OK. One last question. When you are talking about producers who don't voluntarily participate in the set-aside program, that they are penalized. It seems like they are getting a double-whammy. I mean, you are giving an incentive to those who do participate and then you are also punishing those who don't. You are almost forcing them to participate. Is that correct?
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    Mr. SWENSON. Well, the Government today under the current farm program structure, the Secretary of Agriculture has a discretion of when they feel that either stocks are to the level of where price is low. They can reduce the loan rate. The Secretary has the discretion of which to reduce loan rates today. Now that is the nature of the level that the Government is going to support the price of those commodities. But we are saying here is if the Secretary chooses on a discretionary basis to implement the program, what is the incentive to participate to hopefully bring up market prices, reduce the cost of the program to the Government. And should the Government provide an incentive to stay outside and only let those that participate help bring up the price. What we are saying is that if Secretary chooses to put into place the voluntary program the Government shouldn't provide the economic incentive to stay outside hoping that someone else solves the price problem and I can sit here and have the Government provide me the protection so I can take advantage of it. So we are just saying we will have the Government play its role of not creating this over production.
    Mr. OSBORNE. Thank you.
    The CHAIRMAN. Mr. Rehberg.
    Mr. REHBERG. Thank you, Mr. Chairman. In listening to your testimony, I didn't hear any mention made of the dollars that were still on account in the EEP. Do you believe that the money was wisely spent or could have in fact improved our export opportunities?
    Mr. SWENSON. Well, Farmers Union has not supported the export enhancement program as we look at it as a way that we are dumping surplus commodities into a world market. And you create sort of a war, if you want to, on a long-term basis on international trade. That—and then who has got the biggest war chest of which to continue to compete.
    What we have seen and do support is when humanitarian assistance may provide the opportunity for a country of which to turn its economy around and then become a cash customer. If we can assist with more humanitarian assistance in that manner, we think that your culture would be better serve long-term. So I have not really seen a real benefit. We do not believe, farmers, in the Export Enhancement Program.
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    Mr. REHBERG. If following line under NAFTA, a lot of my farmers in Montana are critical of the enforcement of NAFTA, most recently with the molasses issue coming across the Canadian border. Again, I didn't hear anything in your testimony talking about revisiting or trying to improve the enforcement by our Government of those trade pacts.
    Mr. SWENSON. We would agree with you 100 percent in the area. If we were going to expand our trade testimony as part of this component, it would be quite extensive. Because we, too, are very concerned of what is happening in circumventing what we think is the intent of—under NAFTA and to deal with components, and not only with molasses. And what we have seen happen to the peanut area. And you can take other commodities as well. Another area of major concern in international trade is what's happening right now in the area of livestock. In the United States we took, and this committee played a role in it, aggressive action in making sure we did not use rubrician nature of our feed product that we are feeding to our livestock to protect not only the livestock producers but consumers and the concern of mad cow disease. Yet we see now that consumers in this country are eating about 12 percent of their meat imported meat. Yes, it is processed through a USDA approved slaughter plant. But what kind of feed has been fed to that livestock. Have they met the same standards in the mixing of their feed that our producers have.
    So there is a number of concerns that we have in the area of trade that come back to impact us in the whole structure of farm policy. But we were not asked of which to trade a lot of detail on that. But we would sure be glad to visit with you about those.
    Mr. REHBERG. Well, Mr. Chairman, I probably disagree with you on the EEP and agree with you on NAFTA, I also have a real recollection of the discretion of the administration with the whole herd dairy buy-out because I was on the wrong end of that. Understanding those three issues that were all under the discretion of the administration, can you give me any confidence that if we leave the repurchase of the renewable fuels up to the discretion of the administration that we are not going to end up in the same kind of a situation where it ends up costing us money because the Government ends up in competition with the us driving down the price and leaving a lot of us left to hold the bag. The best intentions, but unfortunately, very costly to those of us in the business.
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    Mr. SWENSON. I believe that the system can work if the right sort of triggers are put in place, and not unrealistic triggers. Ones that will let the product move into the market at reasonable and reflective prices of which can be brought about the full function of the program. That is what our analysis shows. That is what we hope would be the structure of the program. If it was mismanaged, those that mismanaged the program need to be held accountable. And we would support that kind of action by this committee. And we would aggressively provide that from our role as a farm organization.
    Mr. REHBERG. One last question. As I have traveled around Montana, and I don't know if I am talking Farm Bureau members, Farm Union, wheat growers and such, but you have concerns with the crop insurance programs and the changes. And the question I have is if AMTA payment are eliminated and crop insurance provide—proves to be inadequate, we believe in our particulate case in northeast Montana, they will be. How will your proposal of an increased loan rate help those producers?
    Mr. SWENSON. I think two things, Congressman. Number 1 is we spent a lot of tax payers dollars of trying to enhance and improve the crop insurance program by increasing the premium subsidy to encourage producers to buy the product.
    Our program, because they are still not covered on that first 20 to 25 percent loss, in the voluntary FOR farmers have a choice to voluntarily participate in that program. It is not mandated. of which they then can ensure themselves with some potential loss. We think that is a compliment to farmers participation in the crop insurance program, which right now we believe is subsidized really to the benefit of the banking interest and the insurance delivery system.
    This would really compliment its coverage and benefit to the producers. So that is one of the ways that we think it will improve the crop insurance program
    Mr. REHBERG. Thank you, Mr. Chairman.
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    The CHAIRMAN. Mr. Thune.
    Mr. THUNE. Thank you, Mr. Chairman. And Mr. Swenson, thank you and welcome to the committee. And I appreciate very much your comprehensive and detailed proposal and analysis. And I would inform you if you have not been back there lately, that your farm in South Dakota is still under snow. So there is no need to rush back. You are not going to be able to get in the field anytime soon anyway. Probably will be for some time. But just a couple of questions. One of the things I noted in you testimony you observed is that a lot of your proposals will fall in the ''amber box'' under WTO. Do you foresee that being a problem with respect to our commitments, trade commitments and our WTO?
    Mr. SWENSON. No, we do not.
    Mr. THUNE. Because it would fall below the cap and the one thing that I would compliment you on, too, the proposal that you put together actually cost less than many that we have heard in the hearing that we have had in terms of the budgetary impact that it has.
    Coming back to the question that was asked earlier by the gentleman from Nebraska. And that has to do with computing this sort of cost to production. And you said that you rely on USDA ERS numbers. I assume that is some sort of an aggregate national-type deal. And as Mr. Osborne mentioned, obviously the regional differences. There are individual producer differences. How do you avoid the argument that in effect what you might be doing is rewarding inefficient production techniques, farmers and penalizing those who perhaps might be more efficient?
    Mr. SWENSON. Well, using the national aggregate, if a producer is inefficient and not, and I don't know what the term inefficient might be as I—but in term, an inefficient operator would be one that would run with high cost of production. Would probably run a high debt to asset ratio without managing that their future is going to hold. And would not be able to survive under this program. If an efficient producer is one which tries to manage their operation in good crop management, watching their expenses, working in cooperation with their landlord of what rental costs are and what rates can they afford, then they are going to be able to be sustained under this program.
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    They are not going to be over-rewarded. Because this program does not drive prices artificially high. The components of the programs have the release mechanisms not to enable that to happen. And so what this program does is put in place appropriate counter-cyclical tied to what the producer is producing at that time. So we do not reward inefficient nor do we reward those that have gotten ahead with good management and have lowered their debt to asset ratio.
    I always kind of compare it to, we do not penalize a worker that has been in the work force for 30 years and create a lot of experience and really knowledge is carrying out their work by saying, well, but we can bring someone in new on the job and we can pay them $8 an hour versus you are now earning $15 an hour. So we're going to lower your wage. If the farm program is designed to which to be counter-cyclical you got to plug it in somewhere. And what we are saying is on an average national cost to production, you are not going to create the discrepancies of which we think occur in the current program.
    Mr. THUNE. But in your judgment using a national sort of aggregate average is the best way to do that.
    Mr. SWENSON. That is where we have begun. We can look at models, and we would be glad to furnish them to you and work with the university. Because regional cost to productions are available.
    Mr. THUNE. Right.
    Mr. SWENSON. What we tried to do by using national was not to create a concern that if you use regional will you try to entice production from moving from one region to another. What we tried to say is if we plug it in a national cost to production, you don't create a lot of these sort of concerns of, well, are you going to move production over here or production over there.
    Mr. THUNE. Based on?
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    Mr. SWENSON. Based on what that support might be. But we can, and we would be glad to, Congressman, do some regional cost to production runs and share that information with you.
    Mr. THUNE. Yes. I would be interested in that. One last question. One the farmer owned reserve concept, the assumption is that the farmer has in reserve on the farm and takes it sort of out of the market, so to speak, and that will have an upward impact on prices. The market not recognizing that the surplus commodities exist even though they are on the farm and take that into consideration? I mean, how would that work in terms of having an upward positive impact on price?
    Mr. SWENSON. It is just like you said. The market, I think, would recognize that the farmers are holding those rather than the market. Currently our stock levels are not that great. But the market is not recognizing stock levels today in raising prices. Because the market has the control over whatever level of stocks exist. What we are saying is take a percentage or a component of that production and be able to put it in the hands of the farmers and let them market it, at their best knowledge and their intent and all the tools available to them. And we think it can influence the market. At least, the model shows that it can insignificantly influence the market.
    Mr. THUNE. Mr. Chairman, thank you. Thanks, Lee.
    The CHAIRMAN. Mr. Boehner.
    Mr. BOEHNER. Thank you, Mr. Chairman. I will thank Mr. Simpson from Idaho for allowing me to jump in front of him. I am already late for another appointment. But I didn't want to miss this opportunity to say, Lee, we are glad that you are here. You are an effective and a courageous advocate on the part of your members, even though we often disagree about the direction of Federal farm policy.
    As I sit back and I look, take the broad view of your testimony and what you are calling for, it looks like what we did from 1935 to 1995. Higher loan rates resulting, at least in my view, in higher production. And because we got higher production and higher loan rates we got to figure out what to do with it. So we are going to have commodity reserve program. We are going to bring back the farmer-owned reserve. We are going to give a discretion to the Secretary for voluntary set-asides in order to find some way to make this work. Now tell me or help me understand how this can be anything other than a Government rubric that we have for 60 years that didn't work any better than I think it would work in the future.
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    Mr. SWENSON. Well, thank you, Congressman. And I would like to take a point that the components of our program are significantly different, significantly different, than what existed from that period of 1935 to 1995. What we have tried to do is really think outside the box. We look back at what has worked from 1996 to 2000 and what has not worked. What has worked from 1935 to 1995 and what didn't work. And what components of all of those that worked can we bring together. And if you take a look at your proposal, No. 1, it retains planting flexibility. It retains the marketing loan program, all which were not part of the 1935 act, but were part of an act from 1995 forward. So there is two significant different components. When you take a look at how support is going to be directed out to producers, in 1996 to 2000 we spent more money than we did anytime in the history of the act from 1935 to 1985. What we are saying is that Government farmers do not want to rely on the Government to try to sustain themselves. So what kind of mechanisms or counter-cyclical support when prices are low can we put in place. Leaving in place the marketing loan program, but now raising that target of support via the marketing loan loan rate to, as our model shows, 80 percent of the cost of production. And I will tell you, I will have as many farmers when I leave here complain that we set the bar too low, as I will say that we set it too high. I won't be as popular among the farmers as I would like to be if I wanted to say we should set it at 100 percent.
    Mr. BOEHNER. Yes. But, Lee——
    Mr. SWENSON [continuing]. Taking those components and bringing forward. The same in the farrow. It is a limited farmer-owned reserve compared to the ever-normal granary. We are targeted to some assistance. The trigger mechanisms are comparable to that of the 1990 act, not the 1940's or 1950's or 1960's act. So there is some real significant, I would say, out-of-the-box thinking in the proposal that lies before you. It is not a return to the failed policies of the present, nor is it a return to the failed policies of the past.
    Mr. BOEHNER. But you and I both know that if you look at the loan rates that would be in effect based on what you are calling for, you are talking about significantly higher loan rates that are going to lead to additional production. And then we are going to store which is going to act as a wet blanket over the market. I don't see this Rube Goldberg of a Government program working.
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    Let me move quickly to the dairy part of your testimony. It starts to look to me a lot like the two-tiered dairy program that we debated here for 5 or 6 years where your smaller producer, and you don't produce beyond X, we are going to give you a bump. And yet you are calling for the support level at $12.30 or $12.60, which will do nothing more, in my view, than to encourage California and the mountain States to continue to over produce.
    You could look at the current dairy program, and we probably could have predicted 25 or 30 years ago what was going to happen. Because California wasn't it in. Because some of the other western States, my good friend from Idaho. Because they are a good distance from Eau Claire, WI, get a nice price for their product, that the program itself generated the economic fact that resulted in this mega-dairy farms. And if we go and raise the support price to the levels that you are calling for without some kind of control, we are just going to create even bigger dairies out west. What does that do for the small farmer? And what are we going to do with all this milk?
    Mr. SWENSON. Well, Congressman, you sort of answered the question. And what is offered in our testimony is that the support price does have a target, a limit. And for those that would expand their production over the natural growth and demand within the market there is a penalty, there is a disincentive for that type of continued expansion. And so we have tried to design a program that sort of fits what is the structure of today and it doesn't have the Government create this incentive for greater expansion of production at the Government's copiers. So we tried to address the very points that you have raised by the structure of our program. And I think it comes back to the same that we have done in the commodities program. We have tried to structure this program via the loan of the marketing loan. The commodity is still clear, whatever the price wants to be in the market. The counter-cyclical support is tied between whatever that market price clearing price is and where you set the support price. But it only applies to those that may be affected by lower prices. It isn't just across the board giving money to whoever. So we tried to address both in the dairy and the grains. Thank you.
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    Mr. BOEHNER. Thank you, Lee. Thank you, Mr. Chairman.
    The CHAIRMAN. Mr. Simpson.
    Mr. SIMPSON. Thank you, Mr. Chairman. And thank you, Mr. Swenson, for your testimony. You certainly come at from a different perspective and there is some things in there that I think are interesting that I look forward to talking with you about over the coming months as we work on the farm bill. One of the, I guess it is not so much a question as concern I have that has been raised by several other people around the room. And that is, we have a variety of programs, Government-owned reserve, the farmer-owned reserve, the renewable energy reserve, the humanitarian reserve, increase in the CRP set-aside programs. And the design of all those is to, hopefully increase the commodity price. And I am not sure that works in a world market. I am not even sure it works within the United States. If we were to stop planting all the potatoes in Idaho, I am not sure that that would increase the price of potatoes, because everybody would go to Mr. Osborne's district in Nebraska and start planting potatoes. And I am not sure it would affect the price. Probably affect the quality, but I don't know that it would affect the price. But we are a little particular about our potatoes.
    But I just don't know that we can control the price by setting aside land. Because obviously, the price rises and other countries are going to fill in that gap. And with the trade agreements we currently have I don't see how that is going to keep the commodity prices up.
    Mr. SWENSON. Well, first of all, low prices haven't discouraged us from producing either. And so the statement that high prices are going to drive production, I am not sure that that especially when we are not putting them artificially high.
    Mr. SIMPSON. Well, let me interrupt you for just a second there. In Idaho whenever we have high grain prices we also have high potato prices, because generally people plant grain and not as much in potatoes and, consequently, it drives potatoes is up. So, I mean, higher prices in an area do drive production.
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    Mr. SWENSON. But see, we have tried to take care of that very thing by getting where all commodities can be treated on an equal basis in the nature of support, rather than trying to say we are not going to create this equity. And so that is a first, what I think, is a failure of the current program. And the past programs that we have inequities in the nature of where we set the support prices. And so again, I would quickly call on Daryll Ray to comment. But what we have seen is when you equalize those supports is that, yes, you are going to have some changes in production. But you don't have the dramatic effect on potatoes and alfalfa and some of other commodities that the current AMTA program is creating.
    Mr. RAY. If I could just make a comment there. I agree with you totally that if the change was just made in the potato market what you say would exactly happen.
    Mr. SWENSON. Sure.
    Mr. RAY. But if there is a change in either up or down in all prices for all commodities, that is a much different situation. Because otherwise it implies that that land is not being used for something right now. But what happens is is that the land is still used. And whether prices are high or not it is just the matter of the mix. And if you get then out of alignment, the mix changes and causes disequilibrium. But on the other hand, if you are treating all the commodities alike, which is what has been happening. The last 4 years the prices of all commodities have come down. And, therefore, the cash receipts are all down. If we had a price spike in corn, well, you can bet that there would be a tremendous increase in acreage of corn. But that wouldn't change the total acreage that planted the crops. It is used for something.
    And that is the same way when we talk about the effect of set-aside, too, and looking at what happens when prices go up as was discussed earlier. That we think of the supply curve for individual commodities as having some slope, just like in the textbook. But if we look at all commodities, I think we have been pretty well shown the last 4 years that when you look at the supply curve for all commodities it is pretty straight up and down. That whether the price is where it was in 1996 or where it is now, we don't change the production of all commodities very much.
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    And so that is why I would argue that it isn't as much of a problem when you look at all commodities as when you look at one.
    Mr. SIMPSON. I would agree with you if you assume that the acreage is custom. But the acreage is not custom. I mean, they are breaking out new ground everywhere.
    Mr. RAY. In this country or around the world?
    Mr. SIMPSON. Around the world.
    Mr. RAY. Yes. And I don't think we can prevent that. I mean, I think that when we look at Brazil, and Ukraine was mentioned at one time, and other places around the world, I think that that probably is very similar to the way we were in the 1800's and England saying, hey, you shouldn't be increasing your acreage so much. They are going to do what they are going to do for their own reasons. And I don't think we are going to have much impact on it, frankly.
    Whether the price of soybeans is $4.25 or $6.50, they have a plan in mind and they are going to pursue it. The rate at which they pursue it could be different. If we had $10 soybeans or if we have $2 soybeans. But there is a range, I would argue, in which they are going to pretty well do what they want to do. I mean, that is my view.
    Mr. SIMPSON. Thank you.
    The CHAIRMAN. Mr. Stenholm.
    Mr. STENHOLM. I would yield to the gentleman from Nebraska for any response to the gentleman from Idaho's rather disparaging comments about the quality of Nebraska potatoes, if he would like.
    Mr. OSBORNE. I am speechless.
    Mr. STENHOLM. Regarding the energy reserve, do you have number that might tell us at what price does corn need to be priced in order to maintain a competitive stance with gasoline produced by oil at, let's say $20, $25 a barrel? What price would a corn producer or this energy reserve need to price the corn in order to be competitive with $25 oil?
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    Mr. SWENSON. Well, no, I don't have off the top of my head. And we can try to get that model.
    Mr. STENHOLM. Thinking outside the box, I like the concept of an energy reserve. But I really wonder whether it is realistic to price the corn at the loan price.
    And I think that these energy reserves, whether it be corn or any other of our alternative energy sources, which I think need to be fully developed. And I think they can be used as a true reserve if in fact we price them at a price that perhaps will be below the cost to production. But that they will remove inventory from the marketplace so that farmers may sell the rest of their production at a higher price.
    I like that concept. And I wished you would pursue that instead of asking the tax payer to subsidize ethanol as to whether or not we might have a team approach in which producers participate in the subsidization and develop ethanol production plants that will stay competitive year end/year out. In fact, I think that is going to be critical to the average loan rate or will there only be one national rate based on the average national cost to production?
    Mr. SWENSON. We keep in our model the county rates. And we know there is a lot of frustration with those and we haven't figured out how to deal with it.
    Mr. STENHOLM. Well, we will give you a little more time to come up with the answer. So how would you determine the total program crop production acreage that would be utilized in determining the set-aside? Have you had any discussions with the Farm Service Agency to determine whether records are available to establish such a base?
    Mr. SWENSON. Yes. We would use the prior year and that information is available.
    Mr. STENHOLM. So you would use 1-year prior?
    Mr. SWENSON. That is correct.
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    Mr. STENHOLM. I appreciate the fact that you have dropped the word ''supply management'' from your testimony. I think we also need to drop the word set-aside. That seems to be a four-letter word for folks, too. Let us start working on inventory management. That has a good all-American ring to it. And in light of the previous question of Mr. Simpson regarding world and all as we grapple with how we are going to fit our producers within the international marketplace, that in spite of all the rhetoric is not a free market. It never has been. Probably, I hate to say, never will be. I can't predict tomorrow. But somehow, some way—and that is why I am asking you and others who are interested in alternative fuels, which I am, that we look at how we truly develop a competitive alternative energy source. Competitive, meaning, you have got to compete with the marketplace on oil. But be willing to do that and use that as an inventory management tool. I think it can be done. The New Zealander's discovered along time ago that casein can be a good loss leader or inventory management. And they have used that. I have longed for us to do similar in all crops and commodities in this country. But final question. In your proposal, do you see market signals playing a role in farmers planting decisions?
    Mr. SWENSON. Absolutely.
    Mr. STENHOLM. Why?
    Mr. SWENSON. Well, first of all, is that this program—first of all, it is really geared around trying to expand demand. It is not trying to curtail demand at all. It is trying to expand demand. I don't care if it is in the global market or in the domestic market. And we have got some special emphasis in our program in the domestic market, but also in the international market. Both in the context of, hopefully, expanding export opportunities directly, but as well as, direct assistance through humanitarian assistance. So if that type of initiatives are successful and prices rise, that sends market signals to producers in what they are going to plant. And we retain planting flexibility.
    So I emphasize that I think this program has tremendous flexibility, but also in allowing farmers to respond to the market. What it does is has as components the very thing that you talked about. And that is some inventory management programs that will be available in those times in which other situations present themselves. If there is one thing we lack in the current structure of farm policy is tools of which to work with to be sort of more visionary or react to situations that we don't know what will arise in 2 or 3 or 4 years. So that is what we are really trying to encompass.
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    The nature of the loan rate to where we have it targeted in our analysis serves as that counter-cyclical protection. It is not designed of which to try to encourage farmers to plant one commodity over another, because we got the equity among the different commodities. So we are not pitting one commodity against another. We are not even trying to encourage a producer to take the AMTA payment and go out and start raising alfalfa, for an example. We are really trying to say, use your land that you have for production in its best means. And if we compliment that with good conservation programs, we really compliment the future of what could be good production methods in the hands of the farmers. Allowing them to make the decision.
    So I really do believe that, Congressman, that we do allow farmers to plant for the market signals.
    The CHAIRMAN. Are there other members who have questions?
    Mr. THUNE. Just one follow-up question on that.
    Lee, you had said in your testimony on page 10, you talked about planting flexibility and that we believe the limited planting flexibility provided the Fair Act can be expanded to allow full planting flexibility to producers. And you are arguing that the AMTA's—the decoupled payment system is distorting decisions about what producers might plant. Can you just expand on that thought a little bit?
    Mr. SWENSON. Well, currently, there is only one exclusion in the area of AMTA, and that is in the area of fruits and vegetables. And what we are just saying is if we are going to have planting flexibility we will have it across the board, create equity across the board. And we won't see some of the distortions that are occurring today.
    And again, we are just trying to again think outside the box of what can be visionary and get the structure of agriculture. We see, for example, this current year people receiving AMTA payments in the nature of their corn and wheat now planting soybeans. Because that is where the best return of support, even though soybean prices are low. Even though Brazil is expanding soybean production. So we think the restructuring and taking away any limits begins to create this balance.
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    Mr. THUNE. The soybean issue though kind of—they are sort of chasing the higher marketing loan rate for soybeans. I mean, that is—and you would fix that by equalizing that among commodity.
    Mr. SWENSON. Sure, we do.
    Mr. THUNE. Right. OK. I was just curious as to——
    Mr. SWENSON. But the AMTA compliments that drive as well. Compared to a soybean producer historically, but now doesn't have an AMTA payment is just having to depend on reality.
    Mr. THUNE. OK. Thanks, Mr. Chairman.
    Mr. SWENSON. Plus the supplemental that the Congress may approve and target toward soybean producers.
    Mr. THUNE. Right.
    The CHAIRMAN. Mr. Osborne.
    Mr. OSBORNE. I have one quick question. We have spent $28 to $32 billion past year depending on how you account. And your program is talking $2, $13 billion total. And as I have talked to folks around the country in agriculture some would say, well, $28 billion or $30 billion wasn't enough. And so I am having a hard time reconciling how you feel agriculture can be profitable. And you have got some good ideas and some unique ideas. But it seems like quite a discrepancy. And the big concern I have as I have been here a short time, it seems that we probably aren't going to be to continue to back and say, well, this isn't working. We are going to have to give some emergency payments. And do you feel you have got a model here that will eliminate the need for emergency payments? Because there is quite a discrepancy in the dollar amounts.
    Mr. SWENSON. Absolutely. When we began this process, Congressman and members of the committee, we did not feel that we could sustain continuing to come back to Congress and ask for supplemental appropriations to try to shore-up the short-fall of the market. And farmers really want to get their income in the market. They really-they do. They don't want to have to depend upon Government payments. So that is where we have begun. And as the process went through, we tried to say how do we provide that safety net based on what the flexibility isn't what they are going to produce and what the price might end up being.
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    And so that is why we designed the structure of the safety net in the manner in which we have. And we also feel that you have got to put some tools in the tool box in the area of inventory management, if you want to call it, that if necessary to use they are there to use. If not, if the demand both in the domestic market and the international market creates no requirement of which to use those tools, then the price will show in the market. And the cost comes down to the Government. That is where this model came from.
    And we looked at what are the best uses of that product. Number 1, is it in the area of food and feed for our livestock industry? Yes. Is it in the area of expanded export markets? Yes. Is it in the area of how we can expand our domestic market and create jobs in our rural communities? Yes. And so all of those are components of this program in reducing the cost of Government programs to the Government.
    Do we thank you for what you have done in 1998 and 1999, 2000, will it be necessary in 2001? From the bottom of our heart. The Chairman will know, the Farmers Union was one of the first line 1998 to come forward and say, supplemental appropriation will be necessary to try to shore-up the short-fall in the market. We pushed hard in 1998 to get that done.
    Did we have disagreements over the manner of distribution? Yes. Though we did them respectfully and the Congress decided how they were going to distribute them. But I commend the Congress for their action. But we need to find a new method, a new mechanism as we look forward to provide the adequate safety net, but do it in the manner of what is a short-fall in the market and appropriate commodities and not just a blanket, here is a check. Go take it to the bank and give it to the banker.
    Mr. OSBORNE. Thank you. No further questions, Mr. Chairman.
    The CHAIRMAN. Mr. Swenson, thank you for your testimony. As it indicated with all of the other witnesses, I am sure there will be some follow-up questions. You had also indicated there is some things you are still developing and we would look forward to having those. We appreciate your interest in this and all the members attention. The hearing is adjourned.
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    Mr. SWENSON. Thank you.
    [Whereupon, at 11:50 a.m., the committee was adjourned, subject to the call of the Chair.]
    [Material submitted for inclusion in the record follows:]
    (1) Since a marketing loan program at 80 percent of the full economic cost of production address's price, do you believe the reformed crop insurance program adequately address's production losses? If not, how does your marketing loan program help those who suffer significant loss of production?
    No. Our proposal for a limited Farmer Owned Reserve program addresses the major inadequacy of the crop insurance program that is due to the level of loss that must occur before a producer receives any indemnification.
    The reformed crop insurance program provides additional incentives to purchase higher coverage levels over the old program through an inverted premium subsidy structure, but realistically limits most producers to a 75 percent coverage level.
    Through the limited Farmer Owned Reserve component, a producer would be allowed to redeem at a discount, a portion of his reserve grain to replace part of his actual production loss that was not covered by insurance.
    In addition, we would support an optional price election for MPCI that is set equal to the marketing loan rate to provide an income for insured production comparable to the safety provided under the program during those periods when USDA's announced established price falls below the marketing loan rate.
    (2) Assuming adequate price protection was afforded through loan rates established at not less than 80 percent of full economic cost of production, is it important that crop insurance continue to offer revenue products such as Crop Revenue Coverage?
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    Yes. We support providing as many risk management options as possible for producers. Concerning Crop Revenue Coverage (CRC), our analysis shows that season average commodity prices will exceed the loan rate at various times for many crops throughout the 10-year period. It is therefore likely the initial or final CRC price will also exceed the loan rate, thus CRC can remain a valuable tool to manage a combination of price and production risks.
    (3) If the Government tied up about 1 billion bushels of on-farm storage with government owed commodities in the renewable energy and humanitarian reserve, what impact would this have on a farmer's ability to store current year production on the farm?
    USDA's Farm Storage Facility Loan Program provides the opportunity for producers to invest in new capacity and infrastructure that would complement the reserve and be a more secure investment with the commitment to a reserve program until prices increased. We believe that farmers should have the first opportunity to store, at local commercial rates the stocks dedicated to the renewable energy and humanitarian reserve programs, followed by farmer-owned cooperatives and then, to the extent needed by private, commercial warehouses.
    (4) Would you require producers storing government-owned grain on their farms to meet the same requirements as required by commercial facilities storing CCC grain? If not, how would you ensure that the taxpayer investment in these commodities is adequately protected?
    Mechanisms and regulations are already in place through the current commodity loan programs to protect the taxpayers investment in commodities. Farmers storing government-owned grain should be required to maintain the quality and condition of the grain under a contractual obligation to the government. Similar to commercial storage operations, they should be subject to periodic audits to ensure compliance. We believe this is adequate justification for providing farmers with storage compensation payments equal to those allowed commercial facilities.
    (5) How many years do you believe it will take before the FOR reached the 20 percent cap? What impact would this have on adequate storage, particularly at harvest time, for current year crop production 5 years from now?
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    We expect significant producer interest in the program as long as prices remain depressed and below the local marketing loan rates. While the reserve could likely be filled in 2 to 3 years, the release for production losses should result in fluctuating reserve levels over time.
    Both the Farm Storage Facility Loan Program and consideration of provisions that would allow producer's to ''roll'' their stocks would reduce the potential harvest pressure on storage capacity.
    (6) Comparing table 7 commodity loan rates with table 10 projected average prices for the years 2001–10, average prices for corn and soybeans do not equal or exceed 100 percent of the full economic cost of production. In each of the proposed reserves, NFU establishes a trigger for releasing reserves into the market when market prices exceed 100 percent of the farmer's full economic cost of production. Does your analysis show that with full implementation of all your program components that market prices will exceed 100 percent of the full economic cost of production in any year?
    Our initial analysis utilized a deterministic model that incorporated specific macroeconomic and commodity specific supply/demand assumptions. We are also engaged in analyzing the program components stochastically. This analysis will incorporate the probability of deviations from the baseline assumptions. Although that analysis is not yet complete, we believe it will demonstrate that the release triggers could in fact be achieved. Once that analysis is complete, we will be pleased to share the results with the committee.
    (7) Does your cost analysis of the marketing loan program, either as a stand-alone feature or interacting with your other programs assume that all production would be eligible for loan deficiency payments or marketing loan gains?
    Our analysis and cost projections assume that all production of program participants is eligible for loan deficiency payments and/or marketing loan gains. NFU supports implementation of a benefit targeting mechanism and we are currently reviewing a number of potential options to accomplish this objective.
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    (8) Does your marketing loan program maintain the commodity certification redemption feature along with a $75,000 limitation?
    No. We believe the commodity certificate program negates the effectiveness of benefit targeting, increases program costs, encourages farm consolidations by allowing the largest operations to avoid the effect of payment limitations on loan deficiency payments.
    We have not endorsed a $75,000 limitation on LDP/MLG. The level and application of several alternative program payment limitation options is still under review by our organization.
    (9) NFU believes higher loan rates result in significant redistribution of acreage across the eight program crops, however the US has little additional acreage that is likely to shift into program crop production even at the improved safety net levels. How many acres are you talking about when you say ''little additional acreage''?
    The analysis suggests the increase in program crop acreage average about 100,000 acres. This appears consistent with both recent as well as historic patterns. Significant shifting of acreage into program crops is limited due to several factors including the fixed investment in specialty crop production technology and the fact that crop prices tend to correlate relatively closely across program and non-program crops. For example, the acreage planted to fruits, vegetables and nuts exhibited steady, modest growth throughout the 1990's even though program crop prices varied from record nominal highs in the 1995–96 period to near record lows in the 1998–2000 period. For other crops, the experience is similar.
    The largest acreage allocated in the major 8 crops has been 260 million acres in 1996. It is likely that without a voluntary set aside program, that would be the potential amount at which the planted acreage to the 8 major crops could level not considering the future effect of the Conservation Reserve Program or conversion of farmland to other uses such as for development.
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    (10) Given what has occurred with respect to wheat acreage since 1996, do you believe ending stocks will continue to increase even while acreage is decreasing and in your opinion, what factor is the largest contributor to rising ending stocks?
    It is possible for ending stocks of a commodity, such as wheat, to increase while planted acreage declines for a number of reasons. These include: yield enhancement due to weather or technology that offset acreage reductions, global competitive pressures including exchange rate issues that cause diminished commercial demand for U.S. grain and/or increase the level of imports. In addition, reductions in Federal export assistance, particularly humanitarian assistance, may cause a build up of stocks even though acreage is reduced. In terms of total stocks of program crops, a reduction of acreage and/or production of one major crop is usually reflected in an increase in alternate program crop output.
    (11) Approximately what percentage of the acreage does your model show would voluntarily participate in the set-aside program?
    The analysis projects that about 51 percent of the total program crop acreage would participate in the voluntary set aside program. At a national average set aside percentage rate of 10 percent, the effective acreage reduction amount to approximately 5 percent of the participating total program crop acreage.
    (12) How would you determine the reduction in loan rate for those who choose not to participate? Would they know at the beginning of the crop year, or after planting has occurred? If non-participators would not know what their loan rate would be until after-the-fact, is the practical affect that producers would be forced to participate?
    We believe the Secretary should have the authority to allow or require a pre-planting sign-up or participation commitment in the production management program, thus providing the opportunity to announce the loan rate reduction for those who voluntarily decide not to participate.
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    As an alternative, the Secretary could reasonably announce a range of the percentage loan rate reductions that would be applied to non-participants with a final determination to be announced once the average participation levels were known. Given the limited range, 5,10,15, and 20 percent, of participation options, the Secretary should be able to further narrow the reduction percentage range significantly allowing producers to make their own management decisions.
    (13) Given that the only consensus that came out of the Ag Committee's hearings around the country last year was to retain planting flexibility and that imposing a voluntary set aside will reduce the loan rate for producers who choose to not to participate, why do you assume that the Secretary will use her discretionary authority to impose voluntary set asides and lower support to non-participating producers?
    Our proposal provides for full planting flexibility, an expansion of the limited flexibility provisions of current law. We assume the use of the discretionary set aside authority would be limited to those periods when commercial stocks and production exceed reasonable demand expectations. Under this situation, producer commodity prices will be reduced in the short-term, stocks are likely to increase creating long-term price pressure, and government program payments are likely to increase. By providing a disincentive to those who choose not to participate in the set aside program, the Secretary is accomplishing three things. First, she would be encouraging program participation to more rapidly bring supply and demand into a better balance. Second, the application of a disincentive reduces costs while ensuring the government is not rewarding producer actions that are counter to the production adjustments undertaken by others that are deemed necessary. Third, she would be continuing to maintain an economic safety net, albeit a lower levels for all eligible producers.
    (14) In 1996 with higher expected prices, planted acres of the eight major crops used in your analysis were 6 million acres higher than in 2000. In the FAPRI baseline, projected prices in 2008 are relatively comparable to your support prices and planted acres for the eight major crops are 2 million acres higher than in 2000 even with almost 5 million more acres in the CRP than in 2000. In table 9 of your summary, looking at the impacts of only increasing marketing loan rates, you show an increase over the baseline by only 400,000 acres in 2001 and 200,000 acres in 2002 despite providing significantly higher loan rates. Given what we've seen in the past and given your baseline projections for the future, why doesn't your analysis show more of an acreage response to higher loan rates?
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    A large share of the gain in acres in 1996 came from acreage enrolled in the 0/92–0/85 program, since then acreage has been moving away from the eight major crops, specially sorghum and barley, and towards other crops. Also, as the 10 percent voluntary set-aside is implemented, there is an effective number of acres set aside of 6.8 million acres, and the total planted acreage fluctuates between 247 and 250 million acres. Considering the assumption used of a 50 percent average acreage slippage rate, the analysis allowed for the potential total acreage to be as high as 264.3 million acres, which would include acreage from minor crops and actual acreage idle converted into the voluntary set-aside program. The incorporation of the acreage under minor corps into POLYSYS, the analytical tool utilized in the analysis, will help make the changes in total acreage and its allocation more explicit.
    (15) Are you opposed to the manner in which emergency assistance Market Loss Assistance payments have been delivered the past three years?
    Yes. The Market Loss Assistance program was proportionately based on the de-coupled AMTA payments provided in the 1996 farm bill. This payment mechanism does not address changes in production and cropping practices, productivity, or in any way measure the relative need of eligible recipients who may not have even raised a crop or suffered a market loss.
    (16) What impact would a $75,000 marketing loan program payment limitation have on producers if loan rates were raised to 80 percent of the full economic cost of production?
    Under our proposal, the combined commodity marketing loans, limited reserve policy and voluntary acreage management programs, results in commodity prices that rise to a level that reduces aggregate loan deficiency payments/marketing loan gains of recent years indicating that individual payments per commodity unit are reduced. This means that a payment limitation established at the current $75,000 level would effectively cover a larger amount of production than occurs under current conditions.
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    (17) If permanent legislation containing your counter cyclical proposal was enacted as a part of a 5-year bill and assuming your counter-cyclical program was determined to fit in the ''amber'' box, what do you propose should happen if government expenditures exceed the WTO ''amber'' box ceiling at any time during the 5-year period?
    We would expect the U.S. and our WTO partners would take the same action as currently exists within the WTO rules. We do not know if the U.S. actually exceeded its ''amber box'' commitments in recent years since notification concerning some programs and expenditures has yet to be made to the WTO. However, it is certainly within the realm of possibility that under the current program, particularly without effective payment limitations, we may have exceeded our expenditure ceiling under the WTO.
    (18) If permanent legislation authorizing economic assistance for fruits and vegetables was authorized, should there remain a restriction on the planting of fruits and vegetables on AMTA contract acres?
    We believe an economic safety net for fruit and vegetable producers should be counter-cyclical and based on actual production, similar to our proposal for program crops. Such a program is compatible with full planting flexibility and negates the need for the planting restrictions that were imposed as result of the AMTA contract payments that could cross-subsidize the production of other commodities to the detriment of traditional producers
    (19) Are currency exchange rates the single largest factor that impacts our ability to competitively export agriculture products? If not, what is?
    We believe that the impact of exchange rates, on both our ability to compete in the export market as well as encouraging the importation of agricultural products, many of which we already produce in surplus is significant. The impact of exchange rates on our ability to be competitive in the agricultural export market is more important than many of the other trade and domestic program issues that currently receive the greatest attention.
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    (20) What domestic or world factors have the most impact on the profitability on the group of producers you represent?
    (1) Lack of consistent and equitable domestic and international policies to achieve a balance of supply and demand at profitable price levels for producers, including economic safety net programs. (2) Increased concentration of market power domestically and globally among a few highly integrated firms. (3) Trade agreements and domestic policies that encourage full production in excess of available demand to stimulate destructive competition among producers and market distorting activities among governments.
    (21) If applicable, what percent of producers in your organization purchase a ''buy-up'' crop insurance policy?
    We have no statistical basis to answer this question. Anecdotally, for our members who produce crops for which ''buy up'' crop insurance is available and affordable, we believe the number participating in the crop insurance program is quite high, likely exceeding the national average.
    (22) What position has your industry taken with respect to entitlements of disaster benefits for producers who don't buy crop insurance?
    We believe the risk management programs, including crop insurance, need to be improved to the point where, in combination with a counter-cyclical domestic safety net program eliminates the need for disaster programs. The crop insurance improvement legislation has provided a base for progress in this area.
    Until such action occurs, the Secretary should have permanent disaster authority and funding to address, in a consistent and equitable fashion, economic losses of farmers and ranchers that were beyond their control, taking into account the issue of producer participation in risk management programs.
    (23) Since the Agriculture Risk Protection Act of 2000 provided substantial improvements to crop insurance, do you believe that ad hoc disaster legislation should be authorized for crops currently covered by insurance? If yes, why?
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    Yes. Although the crop insurance program has been significantly improved and expanded, the production losses that must be realized before insurance protection is provided continues to place producers at great financial risk. In addition, the ability to protect commodity prices or farm income with the current revenue products remains inadequate for many producers. We have suggested policy options for consideration by Congress that could address this issue as a supplement to the crop insurance program, further reducing the need for ad hoc disaster legislation.
    (24) Do you believe it is important that any counter cyclical program benefits are targeted towards those producers actually sharing in the risk of the production of major crops (cotton, corn, wheat, rice, grain sorghum, barley, oats and oilseeds)?
    We believe that program benefits should be targeted to those who undertake the risk of production and marketing up to a reasonable level. Government programs however should not be utilized to encourage greater consolidation of farms by eliminating or reducing the risk for all producers, regardless of operational size or structure. If a producer wishes to expand his operation beyond a certain limited level, he should be allowed to do so based on his personal assumption of market and production risk.
    (25) Would a $40,000 counter cyclical payment limitation have a significant impact on your programs ability to function as a reasonable safety net?
    We believe such a limitation would have less impact on producers under our program than a similar limitation would have on producers under current law. Our test of the adequacy of a payment limitation is its ability to provide an effective economic safety net for average, full-time commercial family farm operations during periods when commodity prices fall below the loan rate. It is our goal to encourage demand growth supplemented by inventory management programs that will provide greater market returns to producers reducing the impact of payment limitations regardless of their level or form.
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    (26) Do you believe your counter cyclical program distorts market signals and causes producers to grow crops that they might not otherwise grow in the absence of the program?
    No. Our counter-cyclical program, based on an equitable commodity marketing loan, allows the marketplace to determine the value of commodities based on supply, demand and other commercial market considerations providing production signals to producers.
    (27) At the time a borrower is arranging financing for the upcoming crop, do you believe that with some reasonable degree of certainty a lender could determine what a producer might expect to receive in counter-cyclical payments on a per unit basis assuming your concept for the major commodities was enacted into law?
    Yes. Under the cost of production marketing loan concept, a producer's loan repayment capacity for a given crop would be a minimum of the local loan rate times expected production. The actual amount of loan deficiency payment per unit would not be a significant factor in lending decisions since the grower would either receive at least the loan value through the commodity market or through a combination of actual market prices and loan deficiency payments.
    (28) Do you believe that the loan deficiency component of the marketing loan program keeps prices at a level lower than they would otherwise climb in the absence of the loan deficiency component of the program?
    The loan deficiency payment is probably less price distorting than many other factors. While it may be argued that a purely free market would cause supply and demand adjustments ultimately producing different prices than exist under this or other types of farm policies, this adjustment ''cure'' for the majority of producers may likely be worse than the current ''illness''. The likely de-capitalization of agricultural assets and structural change throughout rural America would be devastating not only to family farmers but also rural businesses and communities.
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    (29) Do you believe the elimination of payment limits would encourage producers to expand their farming operation, encourage overproduction, cause a shift from one crop to another, et cetera?
    Yes. We believe elimination or ineffectively applied limitations on government program benefits results in producer decisions to expand the size of operations, encourages overproduction and may cause shifts in crop production in order to maximize farm program receipts. Due to the limitations on available funding for program benefits, the effect of eliminating payment limitations results in an across-the-board reduction in per unit assistance that disproportionately would harm smaller producers.
    (30) From a practical standpoint, when is the earliest date you believe any changes in permanent farm law should become effective?
    We believe the current farm bill should be modified as soon as possible. We oppose any changes in the underlying, permanent farm legislation contained in the Agricultual Adjustment Act of 1938, other than a temporary suspension covering the authorization period for new legislation. Realistically, modifications could be in place for the 2002 crop.
    (31) The FAIR Act covered 7 crop years. How many years do you think the next farm bill should cover?
    We support a farm bill authorization, and temporary suspension of the Agricultural Adjustment Act of 1938, that covers 5 crop years, with a requirement that the authorizing committees of the House and Senate provide oversight of program implementation and operations through an annual outlook and review of the program's operation.

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House of Representatives,
Committee on Agriculture,
Washington, DC.

    The committee met, pursuant to call, at 10:50 a.m., in room 1300, Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
    Present: Representatives Goodlatte, Pombo, Smith, Everett, Lucas of Oklahoma, Chambliss, Moran, Schaffer, Thune, Jenkins, Gutknecht, Riley, Simpson, Hayes, Fletcher, Johnson, Osborne, Pence, Rehberg, Graves, Putnam, Kennedy, Stenholm, Condit, Peterson, Dooley, Holden, Baldacci, Berry, Etheridge, Boswell, Phelps, Lucas of Kentucky, Thompson of California, Hill, Baca, Larsen, Ross, Kind, and Shows.
    Staff present: Tom Sell, Alan Mackey, Callista Gingrich, Craig Jagger, Jeff Harrison, Elizabeth Parker, Brent Gattis, Anne Simmons, Howard Conley, and Russell Middleton.

    The CHAIRMAN. This is a hearing of the House Committee on iculture to review Federal farm programs, and the meeting will come to order.
    This morning we are returning to our exploration of future farm policy with the fifth in a series of hearings.
    The goal in this series of hearings is to put our commodity programs under the magnifying glass. Who better to do that than the producers, who are directly affected by the law? After a long, thoughtful examination of the relative strengths and weaknesses of current farm policy, it is my intention that this committee will find the best answer for the problems facing U.S. agriculture today.
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    Witnesses have been asked to provide detailed proposals of where they would go on policy in the future and how that policy would affect related industries and the ability to move product in the export market, the effect on farm program expenditures, and our WTO obligations.
    Today's testimony will be presented on behalf of the wheat industry by Mr. Dusty Tallman, president of the National Association of Wheat Growers. Joining Mr. Tallman at the table will be Mr. Allan Skogen, chairman of Domestic Policy, National Association of Wheat Growers, and Mr. Wayne Hammon, director of Government Relations, National Association of Wheat Growers, and I would welcome those individuals to the committee and ask you to take your seat at the witness table. I appreciate your participation in this process, and we will recognize Mr. Stenholm for any comments.
    Mr. STENHOLM. Thank you, Mr. Chairman. I join in welcoming the wheat growers to the committee this morning. I look forward to hearing your testimony.
    The CHAIRMAN. As always, any statements by Members will be included in the record.
    [The prepared statement of Mr. Etheridge follows:]

    Mr. Chairman, I want to thank you for holding this hearing, and I particularly want to applaud you for holding witnesses' feet to the fire to produce detailed proposals for helping farmers that include hard budget numbers.
    The testimony received today is certainly very detailed and specific; and you, Mr. Chairman, are to be commended for requiring such thorough detail.
    I have no questions today, but I do want to thank Mr. Tallman for testifying this morning.
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    According to the 1997 USDA Census of Agriculture, North Carolina ranks 18th in the Nation for production of wheat for grain. Therefore, I appreciate your bringing to us the perspective of wheat farmers in this debate concerning U.S. farm policy.
Thank you Mr. Chairman.
    The CHAIRMAN. Please proceed.

    Mr. TALLMAN. Let me begin by thanking the chairman, the ranking member and the rest of the committee for the opportunity to appear before you today. My name is Dusty Tallman, and it is an honor for me to present testimony on behalf of the Nation's wheat producers. I currently serve as the President of the National Association of Wheat Growers, or NAWG. My family and I operate a wheat farmer in eastern Colorado.
    NAWG is a grassroots organization of 23 State associations, representing American producers of all classes from across all regions of the Nation.
    Today I will present our views on how the Commodity Program section of the farm bill can best be improved to meet the needs of the Nation's agricultural producers. My prepared testimony contains numerous details, budget estimates and proposals that I will only summarize here today.
    With me are the chairman of the NAWG's Domestic Policy Committee, North Dakota wheat producer Allan Skogen, and NAWG's director of Government Relations, Wayne Hammon. They will be available to assist in answering any questions you might have.
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    I would like to inform the committee that the analysis of the recommendations made in the NAWG testimony was conducted by NAWG staff with input from the staff at FAPRI and is based on FAPRI preliminary estimates. FAPRI is currently working on a more complete analysis of the NAWG plan and it should be available by the end of March. The FAPRI analysis is in response to a request from Congressmen Mike Simpson and Earl Pomeroy and Senators Larry Craig and Max Baucus.
    Despite the economic hardships that have befallen rural America over the last 3 years, NAWG remains confident that the path outlined in the 1996 FAIR Act continues to serve America's farmers and ranchers well. In the case of wheat, lower prices can be directly related to economic troubles in major exporting nations, especially those in Asia, good weather and record levels of production across the globe for 5 straight years, as well as the unfair trading practices of our major competitors. Likewise, agricultural exports continue to suffer in a world dominated by a strong U.S. dollar. None of this can be blamed on the 1996 FAIR Act.
    Indeed, without the Freedom to Farm elements of the 1996 FAIR Act, the conditions of the Nation's wheat producers would be worse. NAWG's first recommendation is to maintain the flexibility afforded farmers in the current farm bill.
    Second, wheat producers feel that maintaining a guaranteed fixed payment based on current AMTA contracts in the next farm bill is critical to their ability to conduct business.
    NAWG believes that such payments should be frozen at the 1999 level to ensure adequate support. Doing so would require $5.5 billion in annual budget authority, or $1.5 billion more than the current baseline projections.
    In addition to the crops currently eligible for fixed payments, wheat producers support expanding eligibility to oilseed producers should they seek such a payment. However, this support is predicated on changes being made to equalize the commodity marketing loans as outlined in the prepared testimony. Extending fixed payments to oilseed producers would cost just over $800 million each year.
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    Of course, adding oilseed producers to the fixed payment equation would require the establishment of additional base. NAWG believes the committee should address this concern by employing the same base used to calculate the 1999 crop year ad hoc financial assistance that was distributed to these producers. Once established, this base should not be updated each year, as is the current practice. With only this one exception, NAWG believes that the existing historic basis for current program crops should remain in place throughout the term of the next farm bill.
    The third element of the NAWG plan is a marketing loan program which maintains the current loan formula. In an effort to meet what were at the time agreed upon budget limits, caps were established on each marketing loan, including a $2.58 cap on wheat. NAWG believes that the next farm bill must establish more equitable caps. A proposed schedule appears on page 14 of the prepared testimony.
    Given projected prices over the next 10 years, none of the commodity marketing loans will reach the new caps. This factor, when combined with the NAWG suggestion to repeal the Secretary's discretionary authority to set loan rates, eliminates any costs associated with these caps.
    In addition to the caps, many marketing loans currently have a floor. No floor was created for the wheat marketing loan. Wheat producers continue to view this inequity as unfair and believe that all formulas should be reestablished to provide a minimum guaranteed amount to better protect them in years of low commodity prices.
    Accordingly, NAWG has calculated the new floors for each marketing loan and believes that the schedule contained on page 15 of the prepared testimony reflects a wide range of grower concerns. Taken as a whole, we believe they accomplish our goal of providing equitable market support.
    Preliminary analysis shows that these loan adjustments, including the changes to barley and grain sorghum loans explained in the prepared testimony, would save $727 million annually in marketing loan gains and LDPs. In total, an average of $1 billion in budget authority will be needed each year of the next farm bill to fully implement these reforms.
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    Fourth, the NAWG plan includes counter-cyclical payments that would be made only when prices fall so low as to create real need across the agricultural community. In other words, NAWG does not seek to establish a safety net so expensive and so complex that it would guarantee the success of each producer across the country. NAWG seeks only modest support that would only meet producers' most pressing needs.
    The NAWG plan for counter-cyclical payments is based upon the establishment of a commodity specific market support level for each crop. A schedule of these support levels is included on page 20 of the prepared testimony. Each was calculated by taking the average total crop gross income and program support for each commodity as calculated by FAPRI and dividing it by the average production for each commodity over the 1995 to 1999 period. These amounts were then adjusted to reflect historical inequities among crops that are driven primarily by the Commodity Marketing Loan Program as explained above.
    For example, the above calculation for wheat resulted in a $4.25 average and became the base for which all other market support levels were compared. The soybean average was $6.15. This inflated soybean number is symptomatic of the high levels of inequity among marketing loan values and dramatic increases in production since the adoption of the 1996 FAIR Act. Accordingly, the soybean number was reduced to make the comparative levels of support across commodities equitable. Other commodities were adjusted in a similar manner but none to the extent of this particular example.
    This chart, which is included in appendix G of the prepared testimony, shows how under the NAWG plan the counter-cyclical payment would be calculated by subtracting the fixed payment and the higher of either the national average cash price or the national average marketing loan rate from the market support level on a commodity-by-commodity basis. That figure is then applied to the producers' existing base and yield. Under the NAWG plan payment plan payments for commodities will be made in years that producers of other commodities did not quality.
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    Preliminary estimates by FAPRI indicate that an average of $3.5 billion annually will be needed to fund the NAWG counter-cyclical plan.
    NAWG is aware that other organizations and individuals have provided testimony to the committee regarding the support for the creation of a counter-cyclical program based upon whole farm income or other noncommodity specific criteria. An outline for such a payment was presented as a part of the majority opinion of the Commission on 21st Century Production Agriculture.
    NAWG opposes these efforts. As we learned in 1997 and 1998, forces in the wheat market do not always follow those that impact other commodities. This is due to several factors outside the control of wheat producers, such as foreign market demand and unfair trading practices.
    NAWG believes that the implementation of its plan for the next farm bill would have only very limited impact on other agricultural industries, including livestock producers. While the final FAPRI study will confirm this, the preliminary work suggested that the adoption of the NAWG plan could result in limited increases in planted grain acres and a corresponding decrease in planted soybean acres. It is anticipated that neither would have a significant impact on commodity prices.
    Similarly, since the NAWG plan retains most of the key elements of the 1996 act and grain prices are expected to change only slightly, the impact on livestock producers would also be minimal.
    This chart shows the total costs of the NAWG plan are relatively modest when compared to the costs of providing emergency relief for farmers. On average, the NAWG plan would cost $14.5 billion in total CCC outlays each year, or just over $5 billion above the current baseline. As prices improve over time, the cost would decline.
    Finally, I would like to draw your attention to a handful of issues that simply cannot wait until the next farm bill is drafted to be addressed. NAWG firmly believes there are several pressing issues that Congress should address this year. These issues are discussed at length in my prepared testimony and include increasing the USDA budget baseline in preparation for the next farm bill, freezing all remaining AMTA payments at the 1999 level, providing a market loss assistance payment to producers again this year, passage of meaningful tax reform, approval of presidential trade promotion authority, and further reform of U.S. sanctions policy.
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    On behalf of the Nation's wheat producers, I wish to express our sincere appreciation for this committee's efforts on our behalf. We know that if it were not for your hard work and that of your staffs, many more of us would no longer be farming.
    In addition to the recommendations made by NAWG today, wheat producers are ready to provide assistance and opinions on the other titles of the next farm bill when the committee decides to tackle them.
    NAWG strongly believes that the farm program changes it has outlined would address the most pressing needs of the Nation's agricultural producers. Wheat producers support these changes and believe they are equitable, financially responsible, counter-cyclical and WTO compliant.
    It has been an honor for me to appear before you today. NAWG and its 23 State associations stand ready to provide further assistance in this matter, and I would welcome any questions you might have.
    [The prepared statement of Mr. Tallman appears at the conclusion of the hearing.]
    The CHAIRMAN. Thank you very much for being here today and your very thorough testimony. The committee obviously is interested in looking at ways that we can come up with a policy change so that farmer's can make some anticipation—well, this probably is not true in your case. You get your wheat planted earlier in the year so that a time when the farmer is trying to go in and do the financing, as they are now in many crops, they have some way in which they can express to their lenders what their anticipations are for the year. So in long-term farm policy we are trying to make those changes, giving some assurances rather than questions that there may or may not be a program coming.
    One of the first things this committee did in the last Congress was to undertake a major change in risk management or crop insurance, in fact made the most sweeping changes that ever occurred in the 60-plus years of the program. And it was not quite everything we wanted and I think we will be looking at some more of those essential changes in the future, but it was a substantial change and as we are visiting with the groups that are either into this new crop year in which the new revisions in crop insurance are effective.
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     The first crop we have seen that is actually under has been wheat, and the early on indications last fall were quite encouraging. We are beginning to see now some preliminary numbers in participation in crop insurance, and I will again point out to members that this is preliminary data, but that we have seen a nearly 40 percent jump in the purchase of CRC or revenue assurance policies in wheat and purchases of CRC and revenue insurance policies at the 70 to 75 percent coverage level have nearly tripled from what they had been.     That to me is encouraging news and I think all the Members that spent all of the time over about a year and a half seeing the risk management program change should be proud of the actions that they have taken.
    One of the things that I am hopeful that we can continue to do, and probably wheat will be the first commodity which will be able to give us these indicators as that is the first crop under the new crop year, is that as we go through this and as you talk to your membership, we would like very much for you to give us your thoughts and comments, the areas that seem to be working better than they did or even maybe we could say the areas that are working good and the areas that you are hearing from your farmers that or from your wheat producers that we can put additional attention to. That is something I am going to want to spend a great deal of energy on in this next year as we will have been able to see the entire crops come in under that. Obviously, the goal of that is to try to determine how much better the program may be and if we can come up with a workable program in risk management then it helps us tremendously from the side of having to find enough of our colleagues to come up with a disaster program, and that is the whole intent of this.
    So I would just ask that of you as the first commodity which is planted under a new farm year and the first commodity which is now cooperating under the new risk management program as you move forward. How much of what you are proposing would change if we are assuming a $40,000 payment limitation? How substantially does that change what your recommendations are of this committee?
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    Mr. SKOGEN. Mr. Chairman, our study was based on no payment limitations and we were advised by FAPRI that the studies that they have done in the past indicate that there is a very little cost difference in farm programs, whether there is or is not payment limitations within the program. So our study is based on no payment limitations.
    The CHAIRMAN. I understand that it is based on that and you say that in your testimony, but I am just trying to get an idea from you how much of what you are proposing would change if in fact there was a lower payment limitation.
    Mr. SKOGEN. As indicated, I don't think there would be any change in our final numbers.
    Mr. HAMMON. There would be no change in the cost; however, we may want to be asking for something else.
    The CHAIRMAN. That is right. I am going from a policy side rather than cost. I recognize the cost you are proposing would not change. That is where I was going with the workability of your program, and we don't know what that is going to be but as we do move forward we will seek some additional guidance.
    Mr. Stenholm.
    Mr. STENHOLM. I want to pursue that same line of questioning in a little different tact. Some of us have argued quite strongly that we ought to have a budget before we have tax cuts. We are for tax cuts but we want a budget first. Most estimates right now show that the amount of the tax cut that is being proposed in its different pieces is approaching 2.6, probably $3 trillion will be the number when all of the pieces that are being talked about eventually get to the floor and I assume will pass. That raises a question and that is why in the letter that this committee sent to the Budget Committee we are asking for a budget amount above the baseline.     Because if you assume that there will be payments out of some transition fund or something of that nature, if that fund is not there, then the only place that agriculture can get emergency funds for drought or for price is from the Social Security and Medicare Trust Fund, period. There is no other, and I am saying this to lead up to a question because if in fact that is what happens, will your testimony to this committee still be the same? If there is no increase in baseline, do you still like the Freedom to Farm bill, as you testified, or would you be coming back to this committee recommending a different policy, as you have stated to the chairman's question?
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    Mr. HAMMON. I believe in discussions we have had with wheat growers across the country that they believe that the core elements of freedom to farm that are included in the testimony would stay the same. However, your question does raise a very good point. If there is no increase in baseline, then obviously our counter-cyclical program would not work. It costs money to implement. So we would have to reevaluate that. However, I would believe that based upon our conversations over the last couple of years the wheat growers would continue to support flexibility in those type of programs.
    Mr. TALLMAN. It seems that anything we ask for to improve the safety net is going to cost some more money. So we are going to have to figure out a way to either increase the baseline or set funding up another way. We don't want to return for ad hoc funding year after year if we can help it.
    Mr. STENHOLM. Aren't your members telling us and you are telling us that you like freedom to farm but really you like the additional payments that the Congress has sent you over the last 2 or 3 years as a part of Freedom to Farm? Isn't that what your farmer members are really saying? Flexibility we all like but the flexibility without the payments would have been disastrous, right?
    Mr. SKOGEN. Congressman Stenholm, the flexibility has afforded the opportunity for us in different regions of the country to maximize our profitability on our farm, and I think in my area especially. At least in my area, it is a general understanding that had we not had the ability to do so, the cost of keeping agriculture viable in the United States would have been considerably more because through ability to vary our crop rotations with economic and agronomic direction we have been able to maximize our profitability more so than when we were in a position where we had to plant the crop that gave us the highest Government payment, so to speak.
    Mr. STENHOLM. Do you believe that your proposal that you make to us today sends appropriate market signals to wheat producers to adjust their plantings based on opportunity to sell that which you are producing?
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    Mr. SKOGEN. Yes, again, Congressman Stenholm, I do believe that. This proposal will leave the planning decision making up to the producer based on the market signals that he would be getting.
    Mr. STENHOLM. It seems to me that one of your recommendations is awfully close to the old target price system in which you get paid on every acre that you plant a fixed payment, regardless of whether you have planted for a market or not and that your increased yield accrues to your benefit and the Government payment goes along with the increased yield. That is my understanding of your proposal.
    Mr. SKOGEN. I would like to point out and remind you that both the AMTA payments, or the fixed payments, excuse me, and the counter-cyclical payments are paid on historical basis and yield. So they have no reflection on what the market signals are telling us to plant for crops.
    Mr. STENHOLM. Thank you.
    The CHAIRMAN. Mr. Smith.
    Mr. SMITH. Maybe just a little continuation of what I hear Congressman Stenholm suggesting. If it is not in the short term, we are pressed to consider whether or not to increase funding by using the Social Security and Medicare surplus. Certainly, it is in the long term and so starting in 2008, when the baby boomers retire, and soon after the Social Security receipts coming in from the payroll tax are not going to accommodate promised benefits and when push comes to shove, whether it is keeping the subsidies going for agriculture or paying the Medicare and Social Security payments, I think most of us would agree that Social Security and Medicare are going to prevail. So therefore my question would be, do you see in the long range in terms of the future wheat farmers that we can move away from the kind of subsidies that we have seen in the past, especially what we have experienced in the last three or 4 years? Do you think that we can develop the kind of marketing system, the kind of export promotion and enhancement, maybe the kind of tariff-free quotas or whatever so that you can, agriculture, including wheat farmers, can be more independent of Federal subsidies 10 years from now when it becomes very clear that money is going to be needed for Social Security?
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    Mr. HAMMON. Yes, Mr. Smith, I think we do. In our policy discussions our farmers looked at that future date as something. We don't believe we can reach it in the next farm bill. But the NAWG plan kind of takes that into effect. Since our counter-cyclical payments go down when prices increase, more and more of the base support would be gained from the marketplace and so therefore the plan gets cheaper as prices increase, and the USDA baseline has them steadily increasing over the next 10 years. Each year it would cost less and less Government payments.
    Now we believe through FMD and MAP and those type of market promotion programs we can build overseas sales. At one time the United States provided 50 percent of the world wheat trade. That has now shrunk to 30 percent. While it has increased each year over the last 3, those increases have been very slow. We believe if those continue and prices continue to track along the same way, we will be more and more market efficient.
    Mr. SMITH. In terms of the consideration of continuation of an AMTA payment or a special market loss AMTA payment, do you think it would be more fair to wheat farmers to update the basis for that AMTA payment for more recent production history rather than going back to the 1980's acreage history?
    Mr. SKOGEN. One of the risks that you run when you start to sort of update or leave the impression that you are going to update as you go along basis and yields are that producers will tend then to anticipate that and they will learn to plan in anticipation of that becoming a future base. So that is one of the reasons that there may some danger in that, and also frankly some of what we do here are driven by the admirable idea that we want to become more major players in the world market and we want to operate within established guidelines of the World Trade Organization and other organizations.
    Mr. SMITH. So farmers are getting their AMTA payment even though they don't grow any wheat anymore. I mean they could have their farm idled and they still get that payment and, on the flip side, new farmers coming in that are trying to get started without a history base are deprived of that extra payment that other farmers might get on a relatively old and I suggest somewhat obsolete basis of the 1980's.
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    Let me ask another question. Do you see any possibility, Mr. Tallman or others, somehow sometime some way the marketplace has to have a greater influence. The fact is we are overproducing most of our commodities. Do you see a possibility of a farm program that would allow for an exceptional payment, an exceptional payment for that part of your production or your history base, that percentage that would go into domestic consumption where the market factors and the risk of additional production that goes into export would simply be based on a world market price without the Government subsidies? And I see, Mr. Chairman. Maybe a quick answer.
    The CHAIRMAN. The gentleman can certainly answer.
    Mr. TALLMAN. I don't think we have investigated that at all. It would be an interesting idea and I think we would welcome the discussion of it, though.
    Mr. SMITH. Thank you, Mr. Chairman.
    The CHAIRMAN. Mr. Peterson.
    Mr. PETERSON. Thank you, Mr. Chairman, and I thank the gentlemen for your testimony. I am trying to figure out how this new counter-cyclical thing works, but it looks to me like what you are doing—well, maybe I should ask this. What are you using for the base, to base these new payments?
    Mr. HAMMON. The base is in the number or the history. We were using each individual producer's current AMTA contract.
    Mr. PETERSON. Well, that is all you are using is 1986 base then.
    Mr. HAMMON. Yes.
    Mr. PETERSON. This is just another kind of form of the AMTA payment basically?
    Mr. HAMMON. It would be except for as price increases the counter-cyclical payment would decrease, and so it is, for example, another AMTA payment. However, it gets smaller as prices increase.
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    Mr. PETERSON. If the prices improve. So there is a little bit of protection there on the bottom side, but it is really not counter-cyclical in terms of relating to your current production?
    Mr. HAMMON. That is right. It has no connection with the current production figure.
    Mr. PETERSON. Following up on Mr. Stenholm's questions of whether we are really planting for the marketplace or whether we are kidding ourselves on some of this stuff, because it seems to me that if you have this kind of a system based on a base that is not really relevant anymore, you are going to have producers planting for whatever they can get the most bushels out of the most, and think we are going to have the rest of this guaranteed. One of the problems I have with the current system is that if you have got a lot of production it works great. If you don't have a lot of production it doesn't work so good, and I am not sure this is good policy.
    Mr. TALLMAN. We have had very, very good production the last 5 years. Now that has been part of our problem, that good production worldwide has driven down the price in wheat especially. The reason, and I think it is pointed out in our testimony, the reason to remain with historical base, part of the reason, is because of the inequities in the loan program. They affect planning decisions. We feel they may have pulled some of the acres away from wheat into soybeans or into oilseed.
    Mr. PETERSON. I don't think there is any question about that, and I think that change in the loan rates will see if that changes it or not or if that is really what is going on. But part of the problem up in our part of the world is we don't have a lot of options. I mean you can set up whatever plan you want to set up and you get up to Kittson County, they don't have a lot of options about what they are going to do up there. So that is where some of the problem I have with some of these ideas. I mean it sounds good in theory, but the reality, what those guys are actually going to do is they are going to plant whatever they can get the most bushels and the most dollars and you are guaranteeing them some other kind of income and they are going to try to cobble this altogether and stay in business, and maybe this is the best we can do. I don't know if I have the answer to this either.
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    Mr. SKOGEN. Congressman Peterson, if I may give an example on my own farm. I live in what was traditionally a malt barley region in Barnes County, ND, and the importance of our county in the past is evidenced by the fact that the Lattish Malt plant is 8 miles from my farm, and we ran into weather conditions in the eighties that hurt the quality of our malt barley. Consequently, we are in a period of time where we cannot raise it. With the payment that was coupled specifically to that crop I would be in the position where I would need to continue raising malt barley, although aside from assistance it would not be profitable on my farm. In this period of poor quality problems I have had the ability to shift without losing the protection of the program.
    Mr. PETERSON. And I don't advocate going back to the old system of tying it to the crops. That is not what I am talking about. The other question before my time runs out, apparently you are saying that we should do some of these things this year, but apparently you are saying that we should not do the counter-cyclical this year. That wasn't on your list of things that you think need to be done this year and why is that?
    Mr. HAMMON. In response to the invitation from the committee, we were preparing plans for the next farm bill. If the next farm bill is implemented next year, we would hope that our counter-cyclical plan would be part of that. If it is not, then there is something that Congress should do before the next farm bill, and that is the second element of Dusty's testimony.
    Mr. PETERSON. OK. Thank you, Mr. Chairman.
    The CHAIRMAN. Mr. Chambliss.
    Mr. CHAMBLISS. Mr. Hammon, you would be glad for us to rewrite the farm bill this year if we incorporate these proposals?
    Mr. HAMMON. Yes, sir, the sooner the better.
    Mr. CHAMBLISS. Obviously, as we have had some previous discussion on and you have heard this morning, this issue of base acres, what is base acres, is going to be very much discussed and debated as we get into the actual writing of the farm bill. So I want to kind of follow up on that a little bit because under your sections on base acres of total base on page 9 of your testimony you support using historic basis for current program crops but you also support a pooling of base acres of producers who are afforded more base acres than he actually farms, and I would like for you to elaborate on that a little bit more, please.
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    Mr. SKOGEN. Congressman, our study that FAPRI is working on is based on the assumption that nobody maxes out on their base acres, and the reason that we did that is for consideration of using excess base acres; in other words if my farm on all my base were added up, including the oilseeds, gave me a base that was a total base above my cropland base that those extra bases would be put into a pool and redistributed to counties that have the lowest percentage of program based or cropland base, and the reason we did that was to address the issue that we have heard on occasion that some people were basically caught in a black hole when bases were distributed in the 1999 farm bill. So it is our attempt to in some way correct that problem.
    Now we don't have any idea how many excess base acres may be created, but it is our attempt to offer up one solution for that.
    Mr. CHAMBLISS. And that solution to that problem assumes that we use the current base program of the 1996 farm bill and if we change and update those bases then we would take care of the problem that you are talking about of these folks falling in the black hole.
    Under your section on oilseeds you suggest that you support eligibility to oilseed producers for fixed payments but the support is predicated on changes being made to equalize the commodity marketing loans. Would you explain why the support hinges on equalizing the marketing loan?
    Mr. HAMMON. If, for example, the commodity loans are not equalized and the soybean loan rate and other oilseed loan rates stay so much higher than the grain ones, then they are being compensated for the fact that they are not receiving a fixed payment. However, if those things are equalized and they are receiving the same type of percentages we are, as we propose all the loan rates would be set at 85 percent of the average, if everyone is receiving that then they should receive the same type of fixed payments that the current program crops are receiving.
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    Mr. CHAMBLISS. Thank you, Mr. Chairman.
    The CHAIRMAN. Mr. Dooley.
    Mr. DOOLEY. Thank you. I just want to make sure I understand. You are supporting the increase in the AMTA payments to the tune of about the 6 preponderance, I guess 3, $4 billion annually, that is based on the 1986 basis. You are supporting another $3.5 billion in counter-cyclical payments also based on 1986 basis.
    Mr. TALLMAN. This is correct.
    Mr. DOOLEY. So then you are supporting policy where we are going to be allocating $10 billion annually to producers that are farming on property that have a base from 1986.
    Mr. HAMMON. That is correct, as it is written out. Several of the committee members have brought up this issue of base and we realize that is going to be a very complicated decision the committee has to attack. If there is a better way to establish base, then we are willing to look at that. However, we believe that the bulk of the payments ought to be attributed to some base and not on the current year's production.
    Mr. DOOLEY. And why is that?
    Mr. HAMMON. As Mr. Skogen pointed out earlier, the more you link payments to current production the more you influence the farmers' decision making process.
    Mr. DOOLEY. If those payments are above the market prices, surely, that would be the case, but I guess my concern is that when we are stepping back and looking at this from a Federal policy standpoint, it is getting a little bit, I guess, more difficult for me to make an argument that we ought to be allocating $10 billion in Federal taxpayer dollars based on what was grown on property which is over 15 years ago. The concern that many of us have is when we are seeing some, a lot of our program payments being capitalized into land values and land rents.
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    This looks like it is bad enough the way it is now but now we are adding another $3.5 billion on top of that that is going not to necessarily current producers but—well, it is going to current producers but not necessarily that commodity, but only solely because of what was growing on that property 15 years ago.
    Mr. HAMMON. You are correct, and you know as well as we do that there are producers out there who would go one way completely or the other way completely, but oftentimes what that tries to do is split that. Our creditors or suppliers have told us that keeping a fixed payment is very important to our ability to do business with them, and so we have tried to put part of the payments in a guaranteed fix payment and then put part of it in a market driven one. However, we are trying to keep it away from the current production as much as possible.
    Mr. DOOLEY. What I am struggling with here is when you create a market support as you have in this, you know, which is $4.25, which I think most people would accept is a pretty high or pretty good rate of return per bushel, is that we are now going to be guaranteeing those wheat producers that have a 1986 base that they are going to get a minimum of $4.25 on their base. In terms of that, why we should be going to that level, which we are then allocating this $10 billion, and why we shouldn't be trying to find a way that we are giving the assurances to the financial community that we are going to provide a safety net that is more a function of what current production is. I mean I support this decoupling to some extent, but what it looks like to me is we are having a program here that I don't know how politically we are going to be able to continue to make a case to a lot of our colleagues and the general public out here that we are going to be providing $10 billion a year in Federal taxpayer dollars going to land that is based on what was produced on it over 15 years ago, and I hope we get a little more creative when we move through this because I look at this 4.25 as not a market-oriented program.     This is basically a formula to figure out how to distribute a whole lot of money that I am not convinced really has any real market orientation to it. The flexibility it provides—because we are providing all this cash out there provides flexibility, but I think flexibility and being market oriented are two different things here and we have got a lot more work to do on this.
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    The CHAIRMAN. Mr. Moran.
    Mr. MORAN. Mr. Chairman, thank you. The counter-cyclical payment that the National Association of Wheat Growers proposes—it seems to me farmers face two problems. One can be related to low prices, the other related to lack of yield, lack of production, but your counter-cyclical payment, if I understand your proposal correctly, really addresses the problem created by, one, low prices. It does not address the issue if the farmer produces a poor crop, has low yields or no crop at all. Do you have any suggestions about improving either your counter-cyclical payment or the LDP aspect of the farm bill, farm program to address the disaster that occurs with lack of production?
    This is perhaps complicated by WTO rules and perhaps you will tell me that the thought is that those problems are solved by adequate crop insurance but I would be interested in knowing if you believe that there is a way to improve the delivery of assistance to farmers when the production levels are not the norm, such as countywide average, historical basis on the LDP payment. Any suggestions?
    Mr. HAMMON. I would just point out that the answer to your question is exactly what Mr. Dooley has the biggest problem with. The fact that we are making these counter-cyclical payments based upon a historic base and not the current production addresses that. If the farmer doesn't make a crop, then he would still be eligible for a counter-cyclical payment because it is a national trigger. All wheat producers with a wheat base would get that. That is exactly the situation we are trying to reach.
    Now the answer to the second part of your question is exactly that. We believe, as the chairman indicated earlier, the improved crop insurance plan with the improved enrollment that we have seen will address a lot of those concerns on a disaster basis.
    Mr. MORAN. So your proposal would be that we address problems created by lack of production through crop insurance, not through a farm bill; is that accurate?
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    Mr. HAMMON. Yes, sir.
    Mr. TALLMAN. We have encouraged our producers to use crop insurance and I know NAWG people have worked very hard in improving the crop insurance situation, and unfortunately this means in Colorado we may know in about another month how good it is going to be because situation is not very good out there.
    Mr. MORAN. I was in Goodland on Saturday and I made the mistake of suggesting you surely had enough moisture, and Goodland in western Kansas is one of the places that has not, and we of course at home have faced not only low prices but poor production, which has been a recent occurrence for us. We have been blessed with tremendous yields in past years until this last year. You also indicate, let me just mention that if NAWG has any suggestions of what I think is a significant issue about the disparity or the consequences of the exchange rate, comparison of our currency to foreign currency and its impact upon our ability to export, I am interested in this topic as to whether or not we try to address that through assistance domestically or through assistance in exports, and perhaps the answer again is both but it is probably, perhaps is outside the scope of your testimony today, but if NAWG has an opinion about how to address this inability to export because of exchange rates. It is the top that I am very interested in.
    I also noticed that you expressed your opposition to a farmer owned reserve component and would like to give you the opportunity to express your opinion as to why that is not desirable.
    Mr. SKOGEN. Congressman, in preparation for what we have forwarded as our proposal, we have done an extensive study of previous farm plans and proposals and their effect on profitability and Government outlays and on world trade, and one of things we have noticed, particularly in wheat, is there was some dramatic periods in our history, or there were some periods in our history where we had a dramatic loss in market share and one of those most prevalent is in the early eighties when we were faced with a situation where because of high prices in the seventies we did a couple of things.
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     One was we raised loan rates up to an extremely high level, which then priced us basically out of the world market in the early eighties. The second thing that we did was now that we have created this abundance of grain we did two things. We built a storage program that made sure that it stayed there and then we also increased the set-aside in the country, and that is the period of time in which our market share dramatically decreased from the 50 percent level that Wayne was talking about down to actually the high twenties. So that has been evidence to us that storing grain in abundance and idling acres is not necessarily good export policy.
    Mr. MORAN. Mr. Chairman, thank you.
    The CHAIRMAN. I thank the gentleman. Mr. Condit.
    Mr. CONDIT. I have no questions, Mr. Chairman.
    The CHAIRMAN. Mr. Thune.
    Mr. THUNE. Thank you, Mr. Chairman. Most of the testimony that we have heard from other organizations has been somewhat different in the way that they have proposed doing the counter-cyclical. Everybody has a little bit of a different take on that but everybody agrees that that is something we ought to have in place in addition to some of the other tools to support our producers. But is yours the only organization that is proposing not using recent production history in computation of the counter-cyclical payment?
    Mr. SKOGEN. I think to my knowledge there is probably only one other that is talking about using recent history, that being the proposal you heard yesterday. Other than that, I think to my knowledge most proposals are based on some sort of historical data when it comes to bases and yield.
    Mr. THUNE. Yes, but going back to 1986, I think as I recollect, maybe I am wrong about this—we have heard a lot of testimony from a lot of organizations—I was thinking that not just the farmers but the Farm Bureau also was talking about using, although the proposals vary as to whether or not you aggregate the national average income and then determine whether based upon what prices are at the time, what the counter-cyclical payment would be, but my understanding was that in those cases they were talking about recent years history, like an average in the last couple of years or 4 or 5 years, or whatever, as opposed to going back to 1986. I mean your proposal in that respect seems somewhat novel to me compared with others that we have heard, and I was curious if that is your understanding.
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    Mr. TALLMAN. Part of our reasoning again is the fact is when you go away from the historic basis and yields, the last 10 years, some farmers have made decisions based on loan rates and also crop insurance because some of those programs favored one crop over another and they changed their cropping patterns based on what they could receive either through their crop insurance program or through their loan rate. That does hurt wheat in the last 7 or 8 years of history. We lose some acres there. We don't know how to protect our base that we had from those days and still bring it up to date.
    Mr. THUNE. OK. I thought I had read somewhere earlier, too, that initially your proposal was going to include doing something along the lines—and again maybe, I say I have had a lot of different information from different organizations about raising marketing loan rates to some level of the cost production, something along the lines of what we heard yesterday from the Farmers Union group. Is that something your organization has contemplated in your discussions?
    Mr. HAMMON. In preparing for the testimony today, we have been working for 3 years and we have thrown a lot of things against the wall. There is a lot of talk in wheat country about some type of cost production figure; however, that is not our current policy. It is not something we are contemplating still. We have looked at those type of examples in the past but are not examining them any longer.
    Mr. THUNE. So in effect what you would be looking at as far as income support would be continuation of some sort of AMTA-decoupled type payment, counter-cyclical, which you say would be WTO compliant, green boxed, and then continuation of marketing loan LDP, but some adjustment there, right? I mean you raised, is that correct, in your testimony, that the marketing loan rates on——
    Mr. TALLMAN. Yes, they would be adjusted, make more equitable across all commodities.
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    Mr. THUNE. And I think the soybeans folks would appreciate that, that you want to raise yours, not lower theirs. I appreciate your presentation this morning and the opportunity to become more acquainted with the details of what you are suggesting and appreciate the opportunity to kind of factor that into the mix. We have got a lot of stuff on the table but I thank you for your testimony.
    Thank you, Mr. Chairman.
    The CHAIRMAN. Mr. Simpson.
    Mr. SIMPSON. Thank you, Mr. Chairman. First, I want to make note that last week when the barley growers were here, Steve Johnson from the barley growers of the Wheat Commission testified. Wayne Hammon is not only from my district but my hometown, and next week when the sheep industry testifies we will have a lady from my district here. So we get involved in everything, except we try to stay out of cotton and rice. So I want you to know we are not going to tell you how to run your cotton program.
    As far as I understand to the last questions, your program will be in fact WTO compliant; is that right?
    Mr. SKOGEN. When you take the components of the program, you have the marketing loan, the fixed payment and the counter-cyclical place of employment, we believe that the fixed payment portion is green boxed. We also believe that there is good justification for the fact that the counter-cyclical portion would be blue or green boxed. So for the most part, yes, we believe that we are outside of the aggregate limit. However, if it was determined that the counter-cyclical portion would be amber, we are still well within the limitations as outlined by the WTO.
    Mr. SIMPSON. Are there other issues relative to trade that you think we ought to be addressing? I mean that obviously something like 50 percent of the wheat in this country is exported. Obviously exports are a big deal with your industry. Are there things we need to be doing in terms of trade besides just making sure we look at sanction reform, things with enforcement, transparency of markets and those types of things we ought to be addressing?
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    Mr. TALLMAN. Yes, definitely. We constantly have discussions with Canadian growers, the Australian, all the world market, the EU, and trade is again 50 percent of our business. I know in Colorado I think somewhere in the neighborhood of 80 percent of our wheat goes out of the State and it is very important to us. We didn't get very specific with this in the trade because we were told to concentrate on domestic policy.
    Mr. SIMPSON. Trade issues are something I would like to discuss with you at some point in the future. We have a trade caucus that is dealing with that and we are going to be having some meetings on that. So I would like to discuss that with you sometime in the future.
    As you know, yesterday the National Farmers Union talked about a program that was somewhat different than what all the other groups have testified to, creating different reserves and renewable energy reserve, humanitarian reserve, farmer-owned reserve, Government reserve, those types of programs. Their idea is to essentially take acreage out of production and thereby stimulate increase in prices. My concern with that was, and I would like to hear your response, is that in a global market, if we take something out of production, that is not necessarily going to affect price because it is going to be picked up somewhere else in the world. Is that your analysis?
    Mr. TALLMAN. Yes, we agree with that. It seems to me if we take acres out of production they are picked up somewhere else in the world. The same amount of grain is produced. It is just produced elsewhere.
    Mr. SIMPSON. One other thing, some groups have—and you mentioned this in your testimony. I would like for you to explain it to me a little bit. Some groups have mentioned that counter-cyclical payments should be about a whole farm income rather than by a commodity-by-commodity basis of your plan. Explain that difference to me and why you suggest your plan again, if you would.
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    Mr. SKOGEN. Yes, every year different commodities are affected different ways by the market, supply and demand, weather, and so on and so forth, and as has been proven in the years, I believe it was 1997 and 1998, where the value of wheat had dropped precipitously prior to the time that corn and soybeans and other crops had dropped, so that there is a disparity as to when sometimes there is a problem between crops, and if you did a whole farm situation, you may have a problem whereby if I am primarily a wheat grower, for example, and I have a whole farm program, there is a problem in the wheat price, I may be penalized because other commodities are doing OK in that particular year.
    So to bring true fairness and equity between commodities we believe they should all be separated.
    Mr. SIMPSON. Thank you for your testimony today. I appreciate it. It is concise in the recommendations that you have. Thank you.
    The CHAIRMAN. Mr. Osborne.
    Mr. OSBORNE. Thank you for coming today. I am sorry I was in and out of here. I know how frustrating it must be to give your testimony and then have people bounce in and out, and my first question may have been answered and, if so, please let me know.
     I know you haven't hit heavily on issues of trade, but one of the most common complaints I hear from wheat growers has to do with the standards, the wheat cleaning issues at our ports, and I would be interested in your viewpoint because it is my understanding that the general quality of our wheat sometimes hurts our ability in foreign markets, and is this something that you find is valid and, if so, do you have any possible recommendations?
    Mr. HAMMON. It is definitely, Congressman, a problem that the U.S. wheat industry faces. In many of our foreign competitors the government cleans the wheat before it is marketed and does so at no cost to the producer. Therefore, if you are a foreign buyer and you tender an offer and you have a U.S. bid on it, it will meet the standards you imply, but for example, the Canadian counter-offer may come and they will say we will give you this much extra cleanliness free. If you are paying to ship that commodity across an ocean you don't want to haul any extra dirt. You want to move just the grain, and so it does hurt us abroad.
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    We have been working with USDA and Senator Grassley in the Senate to use existing funds to help provide some type of cleaning program, either in the Gulf along the Texas coast or even upriver somewhere, before that grain is shipped to the port so that we can compete on an international scale. But since it is being subsidized abroad by their governments, it is hard for our individual producers to compete.
    Mr. OSBORNE. Of course from time to time I have heard producers say that the quality of the wheat they send to the elevator is better than what is being shipped out of the ports and that there is sometimes extraneous material has been mixed with the wheat that has maybe added to some profit at the port but has certainly hurt our producers, and if that is the case, do you see any solution other than just talking to USDA? Do you see if there is any need for the Congress to get involved in something like that or do you have any solution?
    Mr. SKOGEN. Congressman Osborne, I actually think that you have touched on an issue that actually is one of the things we feel is a sort of hidden subsidy in cases, is this issue of cleanliness and delivered product, and in an open market system like the United States. If we have a foreign customer that comes in and says they their contract will accept no more than 1 percent dockage in their grain, that is what they will get, and that allows other countries who trade in a single best status to give them more, so to speak, under the table without it being part of the bid process. So I think we have been, in the U.S. Wheat Association certainly have been forward in saying that the country should bid for the product and the quality that they want to receive, and that would help considerably.
    Mr. OSBORNE. OK. Thank you. One last question. It seems like the market support level is pretty much at the heart of your counter-cyclical payment, and I see you got some description there of how you arrive at it. Is this somewhat arbitrary or do you feel that you have sound basis for those figures?
    Mr. SKOGEN. When we began doing calculations to determine our market support levels, as I said earlier, we started us ing a formula that had already been devised, which has taken a 5-year average of gross revenue, total gross revenue per crop. That is the income that the revenue of the crop itself, the AMTA payment, the market loss payment, and the LDP gain, and you add all that together and you come up with a gross number over the last 5 years and then we came up with an average and then per crop we divided that average by the average production over that period of time, and that is how we arrived at, for example, the $4.25 in wheat. From there we recognized some disparity, primarily driven by the inequity in loan rates these last years, and we set about through conversations with wheat producers and producers of other crops from across the country of economic conditions and just a whole basket of things—we set up to level those prices so that they would be equitable between crops. But the basis is that formula I just mentioned.
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    Mr. OSBORNE. OK. Thank you, I appreciate it.
    The CHAIRMAN. Mr. Kennedy.
    Mr. KENNEDY. Thank you and thank you for your testimony. I was interested in reading your testimony on CRP, that although you support the existing CRP acres, that you are not supporting an expansion of CRP, and could you maybe expound upon that rationale, please?
    Mr. TALLMAN. We would be glad to. Part of the reasoning for that would be in some States, and Montana seemed extremely interested in this, CRP has become the rental rate for land in our country and if you can put your property in CRP rather than rent it out to someone to farm, the Government has almost automatically become the farmer out there. It has become extremely hard in some places for people to find land to rent because it is going into the CRP program. It is a great program. It is a great environmental success for agriculture.
    Mr. KENNEDY. Is that driven by a function that the CRP rates appear to be set at levels above what farmers would otherwise be able to rent it for?
    Mr. TALLMAN. There are places they are and places they aren't.
    Mr. SKOGEN. I think it does vary by region. In our region, for example, there is the case where the CRP rents are at levels that are inciting prime cropland to be put into CRP and it has become one of the leading competitors for young folks who want to come into the farming business or to continue to farm. In the land rent area, the CRP has become one of their competitors. So we feel like there should be some look at the formula for addressing CRP rates so that the top CRP rent in a given county should be no higher than the average rent in a county, and that would alleviate this problem, we believe.
    Mr. KENNEDY. That is all the questions I have. I will yield back my time. Thank you.
    The CHAIRMAN. Mr. Schaffer.
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    Mr. SCHAFFER. Thank you, Mr. Chairman. I apologize for being late, especially when one of my constituents, Dusty Tallman, is here and, Dusty, I am sorry I wasn't here to introduce you to the committee. But for those who are left, Mr. Chairman, and others, I just want you to know Dusty is one of our star Coloradans, a real leader in agriculture not only for the Nation but certainly—or not only in the State but certainly for the country as well. Appreciate you being here and I have had a chance to read through a little bit of the testimony.
    Just one general question I suppose I have is in terms of broadening markets for wheat, domestically and in export markets as well. I think that is really the heart of long-term success of wheat production in the country, and I would like for you to talk, if you would, just about what we can do, what the Congress might be able to do to expand markets. You have touched on exports in relation to Mr. Osborne's questions, but I am thinking more in terms of alternative uses for wheat production.
    The Corn Growers have been pretty aggressive and we hear from them in the committee a lot on everything from methanol to plastics to uses for starch. I know Wheat Growers are spending more and more time and we are involved in more and more research opportunities in that same direction. I would like you to comment on that if you could.
    Mr. TALLMAN. That has probably been one of our weaker areas, that we have not concentrated as much on research as we should have in the last 20 or 30 years. We had a presentation yesterday from a company in eastern Kansas who is finding more uses for wheat as food additives, also making plastics out of it. I know ethanol can be made with wheat just as it can with other crops. So we think that all these probably need some more research and probably need some more research dollars to go to them.
    Mr. HAMMON. I would just point out, in addition, that over the last 4 or 5 years new research is coming on board. It has been helped tremendously by a current trade rule that was put in place by the Clinton administration regarding the importation of wheat gluten. However, that rule is expected to expire this year. The ITC had recommended a 4-year tariff be put into place and the Clinton administration approved 3 years. We are currently asking the current administration to expand that and give us the fourth year that the ITC said was needed. If the tariff on imported wheat gluten is removed, the research that is currently going on in new uses of wheat will pretty much dry up because our market will be flooded by overseas wheat gluten, and it would have a tremendous impact on our industry as well as our attempts to provide more research. Once we get new products out there, where the gluten comes from will be less of an issue, but in this development stage the fact that in a few months our market is going to be flooded by overseas wheat gluten is going to impact us tremendously.
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    Mr. SCHAFFER. I don't have any other questions, Mr. Chairman. Thank you.
    The CHAIRMAN. In section 7.2 of your statement or your testimony in regard to freezing fixed payments, your recommendation is that AMTA payments be frozen at 1999 levels for the remainder of the 1996 FAIR Act. For example, on wheat a 1999 payment was 63 cents and in 2001 it is 47 cents. Are you suggesting the double payment as we have done in the last 3 years, the 2001 payment plus the 1999 payment? Are you saying the 1999 payment should replace the 2001 payment?
    Mr. HAMMON. The latter. We would prefer that the 2002 payment be 64 cents. If that is not possible, then we do what we did last year and provide the total level of support. If the AMTA payment goes down, then we will call for an increase in the market loss support payment. So a total level of support would be the same as it was in 1999.
    The CHAIRMAN. Sixty-four cents.
    Mr. HAMMON. Right.
    Mr. TALLMAN. Yes.
    The CHAIRMAN. What do you propose how we deal with a situation where we have major disaster?
    Mr. HAMMON. We believe, as you pointed out, that the increase in crop insurance is a first step. We would like to get price support and disaster support separated, as it was earlier. We have encouraged as many producers as possible to participate in the program. We believe the figures you shared earlier will show that that happens. If they have insurance, then the need for ad hoc disaster assistance will be less. However, as well, the reason we have appointed the counter-cyclical plan to historic basis of current yields will provide a payment if a disaster happened. Every producer would receive a counter-cyclical payment whether or not you had production.
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    The CHAIRMAN. When we are using a historical basis for determining payments, whatever, however the payment might be crafted, how often should that be updated?
    Mr. SKOGEN. Are we talking about basis? I am sorry, I guess that is a good question, Mr. Chairman. As things sit now we are recommending that we continue the historical basis and yields that are established, and I think I recall a comment earlier in other testimony where you had said when something better comes along we need to consider it, and I think that we believe that way also but at this point——
    The CHAIRMAN. That is why you are here?
    Mr. SKOGEN. And frankly, we have talked about this in all our wheat States for a year and a half at least and the base issue has been a big issue and we have not heard a satisfactory solution, and that is why we are referring to historical bases and yields at that time. It does maintain a certain amount of equity in that the support that has been allowed to each farm over this base and yield history is and will be over time built into the value of that particular farm. So it is sort of adjusted on that matter, and that is not to say it is to drive prices up because it is profitability itself that drives up the cost of the land, plus of course urban sprawl. But the disparity, which we think is rather minimal, between farms and between crops is adjusted also in that manner.
    The CHAIRMAN. We hear one criticism from people who indicate that the way the payments were made, where we have done the additional AMTA payment over the past 3 years, is not realistic in terms of it does not reflect what the producer may be producing this particular year. We also hear from farmers a great deal about the fact that if you are using older historical data to determine program participation, that it doesn't reflect their current farming operation and it may not reflect their current ability to produce, and that is why I was asking what your opinion is on how often we should update that to make it more reflective either of what they are producing or how much they are producing.
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    Many producers feel that if they are basing a payment on past history, farms may have changed or ownership may have changed, or whatever, that it doesn't truly reflect what they are capable of producing, and we tried to address that somewhat in crop insurance, looking at it on a more realistic basis rather than an historical basis, and that continues to be a challenge and continues to be a contentious issue. I would encourage you to continue to think about that and how we might address that.
    Mr. Stenholm.
    Mr. STENHOLM. I have got a chart that I have been looking at for a long time now that shows a gradual steady trend of world wheat production going up and a gradual steady trend of the price in the United States going down, and one of the puzzling questions to me that I am going to keep asking all of our witnesses is theoretically under Freedom to Farm we ought to be competitive with our wheat sales in the world market.
     Theoretically at least we could drive our price to zero, give it away and reimburse with a farmer with an LDP, theoretically, but yet we do not seem to have been able to gain any market share. We have run fast, spent a lot of money, and we are basically selling the same amount of wheat today in the world market, we the U.S. producers, as we were at any other period of time in the history of us keeping records. Why have we not been able to gain market share with a market loan?
    Mr. SKOGEN. Congressman Stenholm, as I said earlier, we have explored and we have taken a look at past historical market share patterns also, and one of the things that we probably need to come to grips with is the fact that it doesn't happen overnight. I think that we have moved in the right direction.
     We have allowed the forces of the world market to determine market share and exports and trade and price, but when we started in 1995 sort of charting a new course in farm policy that was going to focus more on world markets, we may have made an assumption that could have happened fairly fast, and I think after 5 years of operating in that arena and understanding what the poor economies in different parts of the country, value of the dollar and the whole basket of other things, to say nothing of trade distortions from other countries, we realize that it is a long-term proposition. What we have offered is a plan to keep America's agriculture whole in that transition period and it is a bit puzzling as to know why the wheat doesn't in fact go to absolute zero or whatever level it needs to do to be sold.
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    On the other hand, we still have export competitors who are giving quality away. We have export competitors who are still subsidizing their exports after the final bid price has been made. So there are a lot of things in the world arena that still enter into that, and probably one other thing is the fact that the American farmer has been marketing and been allowed to market in a free market system much longer than the rest of the world. So he has probably a more forward look at where he thinks prices should go, and that may be the reason that he himself has a tendency to hold on to grain a little longer than the rest of the country.
    Mr. STENHOLM. And I think also we have to acknowledge that much of the rest of the world is beginning to avail themselves of the technology that we in this country have been using for a long time and, therefore, as they get more competitive by using the same technology we do, that will be a natural market force. In some cases a government has nothing to do with that. In other cases government does, and that is what makes it difficult to sift through.
    And my first question continues to bother me because and should you too because we are assuming that we are going to be able to ride this horse out until we do have the kind of market signals, particularly those other governments that are involved, and that gets bothersome right now but we will cross that bridge when we come to it.
    Exchange rates, how significant are exchange rates in our inability to gain market share?
    Mr. TALLMAN. They seem to be fairly significant when you combine them with some of the trading practices of our competitors. They seem to have an effect on our ability to move grain. The Asian money crisis was a prime example. When that happened and the exchange rate was the dollar strong we just had a heck of a time trying to get anything over there.
    Mr. STENHOLM. What about our neighbor Canada and the United States, which we continue to have some real differences of opinion?
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    Mr. SKOGEN. Living along the Canadian border, I have been accused of being a little paranoid about our relationship and the trading relationship with Canada, and one of the issues is exchange rates itself. It almost appears that there is a concerted effort in the Canadian Government to see to it that this exchange rate is always advantage Canada. I am not at the level of economic understanding to know how it all works, but I have asked several economists to explain it and they have a very difficult time explaining the absolute value or the absolute cost of exchange rates when it comes to exporting American grains.
    The CHAIRMAN. Mr. Peterson.
    Mr. PETERSON. Thank you, Mr. Chairman.
    Following up on this a little bit, we had an agriculture economist come in here 3 weeks ago and I think what he said was looking at our exports the last 20, 30 years they haven't really changed in spite of whatever we did, by whether the dollar was up or down or whether we used DEIP or not and whatever else. And that in his judgment, one of the reasons was that these other countries want to be self-sufficient and they don't want to buy from us if they don't have to, and the only time they want to is when the price is so cheap that they can really afford not to. Do you agree or disagree with that statement?
    Mr. TALLMAN. I agree with it to a great extent. A lot of the countries do want to be self-sufficient, especially, I think, the European countries. They have been in conditions that we haven't ever been with the wars and everything that have gone on over there. I think our commitment has to be that we need to be self-sufficient also and we also need to be a supplier for the world, because again we have had several years of worldwide production that has been unheard of. But I don't think that will continue and if it doesn't continue. I think we are down to about a 60-day supply of wheat in the world right now. If the United States crop is not a real good crop, that will reduce that drastically. But I think they do want to be self-sufficient, most of those countries, and most of them don't store wheat very long. Most of them don't have the storage available and don't keep wheat very long in their country.
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    Mr. HAMMON. An exception might be made in Asia, where they have gone through problems economically the last few years. If you take that section of the world out of the equation, however, the world grain trade has remained pretty constant. So they are buying wheat from somebody. They are just not buying it from us anymore. As the Asian economy strengthens, we would expect our exports to strengthen as well.
    Mr. PETERSON. In your testimony I see that you are against increasing the CRP. Does that mean you are in favor of keeping it at 36.4 million acres?
    Mr. TALLMAN. Yes, the policy we have adopted is to keep the CRP program at the 36.4 million acres, or whatever it is, and not expand it.
    Mr. PETERSON. Have you talked within your group about the 5 million acres that have been kind of set aside kind of for the environmentalists for continuous sign-up, that I think they have only been able to enroll about 800,000 acres because of the way the program is designed? Have you talked about that and whether you support keeping that 5 million acres set aside for those kind of things?
    Mr. HAMMON. The program itself is exactly the reason that they have had trouble signing up acres. It is not designed very well for wheat countries because wheat countries tend to be drier than some of the other crops. We don't have exactly all the problems we are looking for for them to sign up. You have to look at the cap in that. We would support continuing that program. The land that they are enrolling should be enrolled. However, I don't know if they are ever going to reach the total amount that has been set aside.
    Mr. PETERSON. What about, do you support any other kind of conservation programs?
    Mr. HAMMON. In one of the appendixes to the testimony we touched on a couple of them. We support equipment and those type of things that allow producers to implement conservation on their farm. We have also been working with Senator Harkin and others on his Conservation Security Act. We don't believe that we are ready to place the burden of farm support and the safety net on a conservation payment. However, we would like to look at perhaps some type of whole farm conservation program if extra money is available. However, given all the things that Mr. Stenholm has pointed out, there is not going to be a lot of extra money available.
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    Mr. PETERSON. Do you support this conservation security idea?
    Mr. HAMMON. We support the idea. We have been working with them to improve the bill and make it better.
    Mr. PETERSON. Why do you think we need to have a new Government bureaucracy for conservation? I hear back home all the time we don't have enough NRCS people out there to do the technical work, we aren't funding these programs that are already in place. So why do we need to set up some other new deal and come with a whole other set of rules when we haven't dealt with what is already out there?
    Mr. HAMMON. I would say wheat growers have two continuous concerns that are expressed. That is the first one, that we are creating new rules and a new bureaucracy. The second one is that what is voluntary today may become mandatory in the future, and I believe that probably those two factors have kept us from endorsing the bill and seeking it. We are supportive of the idea; however, a lot of work still needs to be done.
    Mr. PETERSON. I thank you for that answer, and I hope that you will continue to give it a good scrutiny.
    Mr. HAMMON. We will.
    The CHAIRMAN. I have one additional comment. Mr. Stenholm I think has an interest in the question, and I think we can finish this up before we have to leave and take this vote. We can get you out of here if you want to go out. Our good friend from Texas talks to us sometimes about thinking outside the box. This is not his thought, outside the box. I just want to toss this out and see if you have ever thought about this.
    In the discussions that are ongoing about a free trade zone of the Americas, I have also heard some people mention the fact that we may want to look at that region going to a common currency. Have you ever thought about that in terms of that difference in currency values as to whether that might be a good or bad idea?
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    Mr. SKOGEN. I would have to say we probably have not spent a lot of time on that. Maybe we need to see how it is going to work for our friends in the EU and see some of the problems they are having with it over there, and again I don't think we have spent a lot of time about that issue. We are concerned about currency issues. Frankly, I am not sure we have a lot of solutions at this point.
    The CHAIRMAN. Mr. Stenholm.
    Mr. STENHOLM. I am not sure I want to associate with that thought, outside the box, myself, Mr. Chairman, but it is an interesting thought. And that is what we do need to do is think outside the box.
    I guess on your CRP problem that you ascertain there is a little breakdown in our system, and it is not just in the upper northern States, but whenever you have a rental for CRP that is higher than the going market rate for a renter in producing a crop, somebody has made an error in the administration of a CRP program, and I would hope that we would call attention to that and that we would do some adjusting to that, because I think there is going to be a pretty strong effort as part of the conservation title of the farm bill and wildlife needs of this country, as we have gone to full production, to expand the CRP, and I think we better be ready for that and, if so, it ought to be done in a way that is not counterproductive to the producers, and that was your testimony and I agree with you in that area.
    Just to help you with the arithmetic, and others, one other comment. The chairman asked a question earlier about the limitation of payments and everyone that has testified before the committee has said eliminate the payment limitation, but is there anybody that really believes that we can appropriate the kind of money that all of you are recommending to us and not have a limitation on that which we pay to individual producers? It cannot be done, folks, and we had better start thinking about that and get realistic with this and also think in terms of how we get a little more market signals to our producers in regard to this, because we built up some false expectation. And let me just give you the numbers.
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     We hear a lot about $5.6 trillion in projected surplus: 2.5 is Social Security; 0.6 is Medicare; and 0.4 is military and civil service retirees, a large amount of which we already owe them. Therefore, if you take that off, that leaves $2.1 trillion left for tax cuts and additional above baseline spending. And take a good hard look at what we are voting on, we are already past the 2.1 so we are already, already saying there is no additional money for agriculture baseline and yet we have our producers and producer organizations and many Members of this body that continue to believe that we can.
    I don't expect you to answer that question today, but I do expect you to help begin to weigh in and help those of us who are trying to find this baseline, how we are going to do it in the real world. I like the counter-cyclical approach. I think we have got to move as much and as far and even faster than you are recommending from getting away from whatever price enhancement being tied back to the value of land, capitalized into land. That does nothing to help us in our competitiveness in the world market. We all know that and we have got to think outside the box as to how we do it. But counter-cyclical payments, taking the tie away from it baseline, Mr. Dooley adequately explained the problems with your recommendation that has got a lot of it is hard to argue with, but we will work on some of that, too.
    Thank you, Mr. Chairman.
    The CHAIRMAN. As we have with others, I am sure there will be some follow-up questions and we would invite you as well, as these thoughts continue to be developed, to please don't hesitate to give us additional comments. Thank you very much for your time. The hearing is adjourned.
    [Whereupon, at 11:23 a.m., the committee was adjourned, subject to the call of the Chair.]
    [Material submitted for inclusion in the recrod follows:]
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    In your testimony you propose new floors and caps for national loan rates. Do you intend to realign county loan rates, and, if so, how would you do that?
    NAWG believes that current methodology for determining county loan rates is, for the most part, sufficient. However, in a limited number of cases, large discrepancies exist between neighboring counties—mostly across state lines. USDA should evaluate these areas and make adjustments where needed to ensure that all farmers are treated equitably.
    Given that Congress will have spent over $14 billion on the marketing loan program over the last 2 years, do you believe NAWG's projected marketing loan expenditures of about $2 billion in 2003, even after adjusting the soybean loan rate as you have proposed, are overly optimistic?
    No. NAWG's calculations are based upon price estimates calculated by FAPRI, which indicates a gradual rise in all commodity prices. USDA projections confirm this trend. In addition, NAWG asked FAPRI to consider what would happen if prices were a full ten- percent lower than their projected baseline. In this case, outlays from the marketing loan program increase and the NAWG plan would save only $291 million annually, compared to the $727 million savings included in the testimony.
    You say that given the projected prices in the baseline, none of the commodity marketing loans will reach the new caps, so there will be no government cost to raising the caps. Why then do you want to raise the caps? Isn't it possible that actual prices will be different than prices projected in the FAPRI baseline and that under some sequence of prices, there would be a government cost?
    Yes. Should prices increase faster than anticipated, the NAWG plan would allow for commodity marketing loans to rise according to the farm bill's formula. Lower caps would restrict such movement.
    In some of the later years in the baseline, you show no cost for corn and soybeans for your counter-cyclical payment plan. If prices turn out to be lower than those in the FAPRI baseline, won't there be a cost for this program in these years?
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    Yes. Under the same analysis as described above, using estimates ten percent lower than FAPRI's projections, payments would increase should prices be lower than anticipated and payments would be made for corn and soybeans (For example, the 2010 payments for soybeans would total $1.6 billion and corn payments would total just under $1.7 billion).
    Would the national average cash price in your counter cyclical plan be calculated in a manner similar to how national average prices were calculated under the old target price concept?
    NAWG anticipates the plan using the existing USDA calculations to establish the national average cash price.
    When would counter cyclical payments be made? Would these payments be made at different times of the year for different commodities?
    NAWG anticipates that the counter-cyclical payments would be made at the end of each crop's marketing year. The timing of payments would differ depending upon the commodity.
    If we calculated loan rates as you proposed, with floors and caps, do you think wheat acreage will increase and, if so, by how much and what impact will this have on prices?
    Yes. Preliminary analysis by FAPRI has indicated that the NAWG loan rates would result in a limited increase in wheat planted acres. While the full impact will not be determined until the FAPRI study is completed next month, we believe that it would have only a very small impact on prices.
    Based on counter cyclical program expenditures of about $5 billion in 2003 and 2004, if a payment limitation was applicable to your proposed counter cyclical program, how many producers would exceed $40,000, $50,000 and $75,000?
    While NAWG has not been able to calculate exact numbers for each payment limitation estimate, we believe that the number of producers that would exceed each limit would be comparable to the number impacted by corresponding limits on fixed AMTA-style payments. Of course, there are important differences, such as a producer receiving a counter-cyclical payment on only part of his base in years in which some crops do not qualify for assistance. However, for the most part, the average counter-cyclical payment made under the NAWG plan closely resembles the average fixed payment already in the FAPRI baseline. For example, the FAPRI estimated fixed payment for wheat is $0.42 per contract bushel while the average wheat counter-cyclical payment would be $0.48. Similarly, the grain sorghum fixed payment is estimated to be $0.31 and the corresponding counter-cyclical payment would be $0.21.
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    What is NAWG's position with respect to the planting of fruits and vegetables on AMTA contract acreage?
    NAWG supports allowing producers to plant fruits and vegetables on contract acreage.
    Under your plan, would a farmer with wheat base who is farming potatoes receive a counter cyclical payment if one were triggered for wheat?
    Yes. Because the NAWG counter-cyclical payment is based on established base acres and yields and is de-coupled from any current production, payments would be made to anyone with a valid base for the eligible commodity.
    Why did you choose to redistribute extra base acreage to counties that have the lowest base to planted acre ratio? How do you propose to redistribute to farms within the county? Do you believe your proposal is more equitable than allowing a producer to reduce the aggregate base acreage on a farm to the cropland acreage and allowing the associated benefits to be allocated back to all producers, which is what happens when acreage is reduced because of CRP?
    NAWG believes that inequities in the current commodity loan program have created conditions that would distort any effort to apply recent acreage to Federal farm programs. However, several non-program related production changes, such as the adoption of no-till farming and continuous cropping, have resulted in many producers farming much more acreage then they have base. Under the NAWG plan of redistribution of base, those are the areas of the country with such conditions would benefit and the concerns of these producers, most of which favor updating bases, would be addressed.
    How do you justify allowing oilseed crops to ''build'' base on acreage that was not historically planted to oilseeds during the historical AMTA contract period, and not allow producers of other crops who plant AMTA contract commodities the same option?
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    The NAWG plan would allow for oilseed producers to build base just once. While we realize that this is an imperfect model, it is a necessary consequence of extending guaranteed fixed payments to these producers. The NAWG plan is designed in such a way that this one interruption is kept as minimal as possible. In addition, allowing for a small amount of base building may ease some of the pressure to update all base contracts—which we continue to oppose.
    Do you have any idea as to what the per bushel/pound reduction in AMTA payment will be for each of the respective commodities if the limitation was removed?
    Do you know how many producers were affected by the $40,000 AMTA payment limitation in fiscal year 1999?
    No. NAWG has no reliable estimate to provide.
    What are the mathematical calculations that resulted in wheat's cap being established at $3.05 per bushel?
    As outlined in the prepared testimony, NAWG arrived at these new caps by calculating the uncapped commodity marketing loan value for each crop and averaging them over the life of the current farm bill. For example, had there been no cap on the soybean marketing loan rate, the loan would have averaged $5.25 or 99.81 percent of the current cap. Each commodity's average was then multiplied by 1.0019 to reflect an unchanged soybean loan. The results are listed as the proposed caps with the following exceptions: (1) the historic relationship between sunflowers and other oilseeds to the soybean marketing loan was maintained; (2) the historic relationship between oats and the corn marketing loan was maintained; (3) the grain sorghum cap was made equal to the corn cap; and (4) the barley cap was set at the pound-per-pound relationship between the feed barley price and the corn price (or $1.80) plus the long term average premium for all barley assuming an even division between food and feed uses (or $0.28).
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    Some organizations have proposed rebalancing commodity loan rates to be in historical alignment with the current $5.26 for soybeans. Based on those realigned rates, why is the floor for wheat 98.96 percent of the USDA realigned wheat loan rate and for the crops of corn, cotton and soybeans the applicable commodities loan rate floor hovers between 93.54 percent and 94.53 percent of the USDA realigned loan rate?
    As outlined in the prepared testimony, the commodity marketing loan rate floors are the outcome of NAWG's lengthy work to provide equality across commodity programs. In preparing these recommendations, NAWG considered historical pricing patterns, the policy statements of national commodity and farm organizations, current Federal farm policy and practices, reform efforts introduced by Members of Congress, grower concerns and perspectives, comparative production costs, changes in historical production patterns and other factors. Taken as a whole, we believe they accomplish our goal of providing equitable market support.
    Are you opposed to the manner in which emergency assistance Market Loss Assistance payments have been delivered the past three years?
    What impact would a $75,000 marketing loan program payment limitation have on producers if loan rates were rebalanced?
    Given that a majority of producers surpassed the $75,000 level this past year such a limitation would have a significant impact. Indeed, balancing loan rates would have no real benefit without an increase in the payment limitation.
    If permanent legislation containing your counter cyclical proposal was enacted as a part of a 5-year bill and assuming your counter-cyclical program was determined to fit in the ''amber'' box, what do you propose should happen if government expenditures exceed the WTO ''amber'' box ceiling at any time during the 5-year period?
    NAWG would argue that if our counter-cyclical program was enacted as part of a 5-year bill that U.S. negotiators should redouble their efforts to win approval of the U.S. WTO reform proposal and secure appropriate limits.
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    If permanent legislation authorizing economic assistance for fruits and vegetables was authorized, should there remain a restriction on the planting of fruits and vegetables on AMTA contract acres?
    Yes. While current NAWG policy supports allowing producers to grow fruits and vegetables on contract acres, this policy would undoubtedly be modified should permanent economic assistance for such crops be enacted. Any such permanent assistance should be restricted, as is the current practice, to historical base acres and yields.
    Are currency exchange rates the single largest factor that impacts our ability to competitively export agriculture products? If not, what is?
    No. While currency exchange rates does directly impact the purchasing ability of our export customers other factors, such as the government funded export programs and monopoly trading practices, have a greater impact on our exports. For example, the European Union funds its export promotion programs at a level at least 20 times more than the United States.
    What domestic or world factors have the most impact on the profitability on the group of producers you represent?
    Many factors, both domestic and international, have combined to make the production of wheat in the U.S. less profitable. For example, domestic challenges such as an ever increasingly consolidated transportation system—especially in the rail sector—have had tremendous impact. Likewise, profitability has been effected by dramatic increases in the costs of fuel, equipment, fertilizer and other inputs. In addition, international factors such as U.S. sanction policy, the use of non-tariff barriers by importing nations, export subsidies and monopoly trading practices of our competitors and the continuing financial troubles of our trading partners continue to impact the profitability of U.S. producers.
    If applicable, what percent of producers in your organization purchase a ''buy-up'' crop insurance policy?
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    Early estimates from RMA suggest that ''buy-up'' rates among all wheat producers have increase significantly. NAWG has no way of estimating the participation of its member growers apart from the entire wheat industry as a whole.
    What position has your industry taken with respect to entitlements of disaster benefits for producers who don't buy crop insurance?
    NAWG has no policy on this subject.
    Since the Agriculture Risk Protection Act of 2000 provided substantial improvements to crop insurance, do you believe that ad hoc disaster legislation should be authorized for crops currently covered by insurance? If yes, why?
    While NAWG has no policy on this specific subject, it believes that the improvements made as part of the Agriculture Risk Protection Act of 2000 was the first step towards a reliable farm policy that would make such ad hoc assistance unnecessary at some future time. The completion of a reliable counter-cyclical reauthorization of the commodity title of the farm bill would be the second step towards this ultimate goal.
    Do you believe it is important that any counter cyclical program benefits are targeted towards those producers actually sharing in the risk of the production of major crops (cotton, corn, wheat, rice, grain sorghum, barley, oats and oilseeds)?
    NAWG believes that any counter-cyclical program authorized by Congress should be de-coupled from current production, limited to those commodities currently eligible for farm programs and established on a commodity-by-commodity basis.
    Would a $40,000 counter cyclical payment limitation have a significant impact on your program's ability to function as a reasonable safety net?
    NAWG believes that any payment limitation would significantly impact the farm safety net.
    Do you believe your counter cyclical program distorts market signals and causes producers to grow crops that they might not otherwise grow in the absence of the program?
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    No. The NAWG plan, with its de-coupled fixed and counter-cyclical payments, allows producers to make planting decisions on the basis of market signals and best agronomic practices. In addition, equitable marketing loans would further reduce any such distortion.
    At the time a borrower is arranging financing for the upcoming crop, do you believe that with some reasonable degree of certainty a lender could determine what a producer might expect to receive in counter-cyclical payments on a per unit basis assuming your concept for the major commodities was enacted into law?
    While it may be possible for producers, lenders and others to estimate payment rates almost one full year ahead of their calculation, NAWG believes that such estimates would be highly unreliable.
    Do you believe that the loan deficiency component of the marketing loan program keeps prices at a level lower than they would otherwise climb in the absence of the loan deficiency component of the program?
    Do you believe the elimination of payment limits would encourage producers to expand their farming operation, encourage overproduction, and cause a shift from one crop to another, et cetera?
    From a practical standpoint, when is the earliest date you believe any changes in permanent farm law should become effective?
    NAWG believes that the recommended changes in current law should be implemented as soon as possible, conceivably for the 2002 crop year.
    The FAIR Act covered 7 crop years. How many years do you think the next farm bill should cover?
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    NAWG supports extending the next farm bill to include the 2010 crop year.
    Some Members of Congress are concerned the President's proposed $1.6 trillion tax cut could become $2.5 or $2.7 trillion tax cut, using all or nearly all, of the on-budget surplus. This raises a question that, however disturbing, we must consider: How would you modify your proposal if there is no more additional money for agriculture after 2002, if there is only the current CBO baseline of $4 billion for annual AMTA payments, varying amounts under the commodity loan program at current loan rates, and projected expenditures for current dairy, tobacco, peanut, sugar and export programs?
    Should such a scenario arise, NAWG would support the elimination of all ''specialty crop'' provisions and the focusing of available funds in AMTA-style fixed payments to the currently eligible crops. In addition, commodity marketing loans would need to be equalized on a no-new-cost basis.
    This is also by way of asking, is your proposed program scalable? Can it be adjusted to meet a reduced level of expenditures, even as little as no additional funding? Or does your proposal need to be completely rethought beyond some level of minimal additional funding?
    NAWG believes that the plan outlined in its testimony is very financially responsible—a fact confirmed when compared to the testimonies of most other commodity groups. However, should reductions be necessary, the NAWG plan could be scaled back and still provide relief to the Nation's farmers. However, should no new money be available, NAWG would support the program changes outlined in the previous answer.
    The original Agricultural Market Transition Act payments were designed as transition payments, in both amounts and beneficiaries, to a market with no government involvement. In your testimony, you propose a combination of counter cyclical income assistance, potentially increased loan rates and well as a continuation, and increase, of the current transition payments. What is your justification for these payments since there is clearly no transition involved? If these payments were continued, they would apply even when wheat prices rose above $4.25. What is the justification of producer need under these circumstances?
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    The continuation of a guaranteed fixed payment is essential to the ability of most producers to receive operating credit on an annual basis. In addition, such payments are consistent with our WTO obligations. It is also important to note that no creditable forecast currently available (neither by USDA, FAPRI or other scholarly sources) project prices rising to the levels proposed in this question.
    You claim that the Nation's wheat producers would be considerably worse off without elements of 1996 FAIR Act. Don't you mean to say wheat producers would be considerably worse off with the ad hoc disaster assistance that Congress provided the last 3 years?
    While the disaster assistance has been a significant factor in keeping the Nation's wheat producers on the farm, most of our growers would agree that the greatest single advantage for wheat operations has been the freedom to produce the crops that maximizes the profitability of the individual operation. Flexibility has provided the opportunity to respond to world market signals and gain additional income that otherwise would have to be provided by even more government assistance.
    You mention in your discussion of payment limitations to the Freedom to Farm contracts that ''such limits are a necessity in the preservation of some romantic vision of the 'family farm.' '' Do you ever envision a need to utilize payments limitations in a situation where there may not be enough Federal resources to operate the type of commodity program at the funding level you'd like to see?
    No. Analysis continues to show such limitations do not save money, only make programs more complicated to administer.
    Since wheat accounted for largest certificate gain and the second largest usage of the commodity certificate program, do you still feel the need to eliminate the current $150,000/three entity limitation if the certificate program remained in place?
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    While this year's certificate program was very helpful to wheat producers, many have commented that the administration of the program was unnecessarily burdensome. NAWG believes that abolishing the payment limitation is better public policy than the current approach of inventing new, more complicated methods of avoiding it. Additionally, it is important to note that many wheat producers who participated in the certificate program last year did not reach the $150,000 limit as they had anticipated. Yet, because wheat is the first crop harvested and marketed in a given year, many took the certificate either before the limitation was increased or as a preventive measure to ensure room for gains on their oilseed production which came later in the year when the need for cash was more significant.
    While the existing program and loan rate structure is kept intact, your testimony raises some questions of consistency. For example, you state the need to maintain the integrity of the commodity loan system, including the non-recourse provision for loan forfeiture that provides price support. Yet, you recommend changes that have nothing to do with this integrity. You recommend that producers be able to collect LDP's on grain that is not eligible for price support because it has not been harvested. You recommend grazed-out wheat also be eligible for LDP's even though it is ineligible for price support because it will never be grain. You recommend elimination of payment limits even though they are not an impediment to grain forfeiture or movement of grain onto the market by way of the certificate program. How do you explain this apparent inconsistency with your integrity principle?
    NAWG's suggested improvements to the commodity marketing loan do not contradict our belief that the program's integrity should be protected. For example, allowing producers, especially those in northern states, to lock in LDP rates at the same time as other producers who happen to harvest their crops earlier is simply a matter of equity. The NAWG plan further protects the integrity of the program by requiring that the grain to be harvested before an LDP is actually paid. Likewise, NAWG's support for a payment in lieu of an LDP on grazed-out acres is not inconsistent. Without such a payment, many producers felt compelled to harvest their production in order to gain a government payment even when it was not the most efficient use of their crop.
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    Another question of consistency arises from the recommendation to raise the cap on loan rate to the level that would have been attained during 1996 farm bill period absent the cap. However, you set a floor at current loan rate levels rather than allow the same period to set the lower level of loan rates. If the 85% average of historical prices is the correct formula, why not allow it to determine both higher and lower caps and floors? What is your justification?
    The floors included in the NAWG plan are established to provide equity across commodities. Should it more advantageous to have no floors, then NAWG would recommend that the marketing loan be established at 100 percent of the five year real average.
    Basically what your are saying is that planting flexibility allowed producers, in this case wheat farmers, to grow commodities with more attractive loan rates to maximize returns. Freedom to Farm was based on the theory that producers should grow crops based on market signals and not for government programs. Explain to me again how wheat producers benefited from Freedom to Farm?
    Producers of all crops benefit from the freedom to plant the crops that provide the greatest return from all sources—including the market, LDPs and other programs. Such freedom encourages creativity, experimentation with new crops and products and a greater focus on marketing.
    Maybe it is a lost cause since we've pretty much seen the oat industry disappear in this country, but since many of your state organizations represent other small grains in addition to wheat, why didn't you adjust the oat loan level to get away from its feed value to corn relationship? Shouldn't it stand on its own as well because of the huge increase in demand for oats in food products over the last decade?
    While NAWG has no specific policy on oats, it would support further work in this area, such as studying the proposal included in this question. The analysis of the NAWG plan included the changes in other feed grains (barley and grain sorghum) on the recommendation of national organizations that represent those growers. NAWG will further explore the possibility of modifying the oat marketing loan with those member states that represent oat producers.
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    Your counter cyclical program, as described in your testimony, appears to function much like the target price/deficiency payment program of earlier farm bills. Because you do not state a recommendation on payment yields or acreage, I assume all production would be eligible for these payments.
    As the testimony outlines, counter-cyclical payments would be based on established contract bases and yields.
    In your testimony, you seek to avoid the problems of the restrictive planting bases created in the 1985 farm bill, but your counter cyclical payments appear to create the problems the 1981 farm bill: (1) producers would be free to plant those crops that gave them the greatest payments; (2) they could increase their payments by increasing yields through greater input use or increase their planted acreage; and (3) the Government would be exposed to increasing levels of payments as increased production drove prices lower. How do you respond?
    As the testimony outlines, counter-cyclical payments would be based on established contract bases and yields.
    It sounds as if your counter cyclical payment may create new perceived or real inequities among commodities because you've jiggered the levels to take care of perceived inequities faced by wheat. Did you discuss a more straightforward way to come up with your Market Support Level?
    NAWG disagrees with any characterization of its efforts as an attempt to ''jigger'' the outcome to favor wheat producers. Market Support Levels were derived from a blend of several factors including a gross revenue formula as calculated by FAPRI for the Commission on 21st Century Production Agriculture divided by the average production for the same years. From this starting point, NAWG based its adjustments on discussions with growers across commodities and various growing regions of the country. Other factors taken into consideration included a comparison of acreage shifts, comparative variable production costs, land values by region and by crop, commodity use dynamics, both domestic and world wide, and regional economic conditions. All of these were considered in an effort to establish a system that is fair for all producers.
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    Has your organization discussed your priorities in regarding to funding conservation incentive payments, in other words, have you talked about how much funding you would like to see spent on these type of payments and whether this funding is less important or just as important as the commodity program funding you've laid out?
    Our thoughts on these issues are thoroughly discussed on pages 42 through 44 of the prepared testimony.

House of Representatives
Committee on Agriculture,
Washington, DC.

    The committee met, pursuant to call, at 10:02 a.m., in room 1300, Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
    Present: Representatives Goodlatte, Smith, Chambliss, Thune, Jenkins, Gutknecht, Ose, Johnson, Osborne, Pence, Rehberg, Graves, Putnam, Kennedy, Stenholm, Condit, Peterson, Dooley, Berry, McIntyre, Etheridge, Boswell, Phelps, Lucas of Kentucky, Thompson of California, Baca, Ross, Acevedo-Vilá, Kind, and Shows.
    Staff present: Tom Sell, deputy staff director; Alan Mackey, Callista Gingrich, scheduler/clerk; Jeff Harrison, Craig Jagger, Christy Cromley, Elizabeth Parker, and Russell Middleton.
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    The CHAIRMAN. The hearing of House Committee on Agriculture to review Federal commodity programs with the rice industry will come to order. Good morning.
    A little more than a month ago we began an exciting series of hearings designed to take a good hard look at America's farm economy. Today we will convene our sixth in this series. I would like to thank members for their continued interest and active participation as we move through the process.
    Our producers have not been shy in expressing their concern over the dismal conditions facing the farm economy today. It is our responsibility to do all we can to provide relief, which is exactly what I intend to do.
    To help the committee in this undertaking, I have challenged our witnesses to provide detailed proposals of where they would go on farm policy in the future and how that policy would affect related industries and the ability to move product in the export market, the effect on farm program expenditures, and our WTO obligations.
    I expected this challenge to produce a variety of proposals and have not been disappointed. As the hearings progress, I expect to see new ideas as well as reoccurring themes. It is important for us to find areas of consensus so that when we reach the end of this road we will know we have achieved the best result for the American farmer.
    Today's testimony will be presented on behalf of the rice industry by Mr. Nolen Canon, who is chairman of the U.S. Rice Producers Association. Joining Mr. Canon at the witness table is Mr. John Denison, who is chairman of the Rice Federation. I would like to welcome you to the committee.
    I thank our members for their contributions to the process. We will be happy now to recognize Mr. Stenholm.
    Mr. STENHOLM. No statement, just welcome the witnesses, and I look forward to hearing from you.
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    The CHAIRMAN. I thank the gentleman. As normal, without objection, all members' opening statements will be made a part of the record.
    The witnesses are at the table. Mr. Canon, please proceed.

    Mr. CANON. Thank you, Mr. Chairman, other members of the committee. My name is Nolen Canon. I am a rice and soybean farmer from Tunica, MS. I currently serve as chairman of the U.S. Rice Producers Association. I am joined today by Mr. John Denison, a rice, soybean and cattle farmer from Iowa, LA. He currently serves as chairman of the Rice Foundation and is the immediate past chairman of the U.S.A. Rice Federation.
    I am pleased to appear before the committee today on behalf of the Rice Producers Association and the U.S. Rice Producers Group. Together, these organizations represent virtually all of the Nation's rice producers. My testimony represents a consensus opinion on domestic agricultural commodity programs developed during a series of meetings among our producer representatives held over the past several months.
    Mr. Chairman, prior to presenting our initial recommendations for the committee's consideration in drafting a new farm bill, I would like to discuss the critical need for additional economic assistance for the crop years 2001 and 2002.
    U.S. agriculture in general, and rice producers in particular, are facing continued low prices and declining income. Prices for energy-related products, including fuel, natural gas and fertilizer, have increased substantially, placing rice producers in a further cost-price squeeze. This is occurring while aggregate rice exports remain stagnant and farmers face growing costs due to increased environmental and pesticide use regulations.
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    Negative cash flow projections are currently causing bankers to reduce or even refuse credit for spring rice planting. This hesitancy on the part of the lenders is not unfounded. Our economic analyses indicates that rice is the only major commodity for which net market returns after variable costs for the 2001 crop will be negative if Government payments are excluded.
    In short, if Congress does not provide rice producers with further immediate assistance, consideration of any long-term farm policy will in all likelihood be unnecessary for many rice farmers who may be forced out of business before the new policy can take effect.
    Mr. Chairman, it is for these reasons that we strongly urge Congress to enact immediate additional farm assistance this year for crop year 2001 and to seriously consider providing the same assistance for crop year 2002. The additional farm assistance for both 2001 and 2002 crops should be in an amount that total Federal income assistance to rice farmers is no less than that provided to the 2000 crop. This additional financial assistance is critical to help rice farmers through this difficult economic period. It will also provide Congress sufficient time over the next 2 years to fully consider and debate all aspects of the new farm bill.
    Mr. Chairman, rice producers applaud this committee for the action you took last week, specifically endorsing a baseline increase in the committee's recommendation to the Committee on the Budget. Enacting a permanent increase in the Commodity Credit Corporation baseline for commodity program spending is a key objective for the U.S. rice industry. The baseline should be increased to a level that will allow the Congress to design and enact an adequate farm program safety net, one that will not require a later Congress to resort to ad hoc emergency initiatives.
    The current projected budget levels are insufficient to meet this need. In fact, even the farm program outlays as increased by emergency spending for fiscal years 1998 through 2000 was only minimally sufficient to keep farmers afloat. We recommend that the CCC budget baseline should be permanently increased to a level that will allow the enactment of farm programs that can respond by design to the type of economic stress currently facing agriculture.
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    Crop producers should not have to stake their livelihood in such a difficult time on uncertain, ad hoc assistance.
    Beyond securing an increase in the budget baseline for farm programs, U.S. rice producers recommend the specific proposals outlined for inclusion in the new farm bill.
    Maintain the planting flexibility provisions in the 1996 FAIR Act. Prior to the enactment of the 1996 farm bill, farmers had to plant their base acreage to a specific crop in order to receive program benefits. The planting flexibility provisions enacted in the 1996 farm bill are strongly supported by U.S. rice producers and should be continued in any new farm legislation.
    Continue the marketing loan and loan deficiency payment structure as currently administered under the 1996 FAIR Act. Loan deficiency payments and marketing loans provide rice producers with critically important income protection while keeping the U.S. rice industry competitive in international markets.
    Third, rice producers strongly support maintaining the option for producers to redeem their loans with generic commodity certificates. This option has enhanced the marketing flexibility available to producers, empowering them to more effectively market their rice both here and abroad.
    Continue to establish rice loan rates at no less than $6.50 per hundredweight. The loan program provides much needed liquidity for rice producers. The Secretary of Agriculture should be given the discretionary authority to raise the loan rate above this base level. If Congress increases other commodity loan rates, we support alignment of the rice loan rate with the higher loan rates.
    The marketing loan program for rice, as we have proposed, would provide rice producers with support ranging from 95 cents to $1.94 per hundredweight. This compares to LDPs of $2.89 a hundredweight in 2000. For rice the LDPs would result in Government costs ranging from $190 million to $340 million per year, with a total budget cost of rice of $1.31 billion over the 5 years 2003 through 2007.
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    Continue to ensure that basic commodity programs are not contingent upon mandatory idled acreage. Mandatory production controls raise our own cost of production and reduce our export competitiveness, while allowing foreign competitors to increase their share of the global rice market.
    Provide ''decoupled'' PFC-type payments. The 1996 farm bill created a new fixed payment system for providing direct income support to rice producers that is decoupled from production. Rice producers recommend that a similar fixed payment be provided over the fiscal year 2003–07 period at the fiscal year 2002 level of approximately $4.01 billion for the eight major program crops. To the extent that budget resources are available, we would also urge the committee to consider providing these payments at the 1999 payment rate.
    Many rice producers continue to be concerned regarding the effects that the current Production Flexibility Contract payments are having on the rice farming infrastructure. Because these payments are currently decoupled from rice production, some tenant farmers have been faced with situations where landlords make the economic decision to accept the PFC payments, while declining to produce a crop, or even to accept any risk associated with the production of a rice crop.
    Rice producers will continue to work toward suggested resolutions to this issue in the months ahead and will be pleased to provide the committee with those suggestions when appropriate.
    Provide a more effective income safety net for producers through a countercyclical income support payment in addition to the current program mechanisms. While the program structure of PFC payments coupled with LDPs has generally served the rice industry well, it has provided inadequate income support in periods of low prices. This has necessitated the enactment of emergency farm assistance in each of the last 3 years.
    To address this inadequacy, U.S. rice producers believe that producer income would be supplemented by a countercyclical Gross Revenue Program payment. We suggest that this countercyclical payment could be based on the difference between a producer's gross returns each crop year, compared to the average of a producer's gross returns in a 5-year base period.
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    In our prepared testimony we suggest that a producer could establish a GRP acreage base and yields based on his or her average plantings of each program commodity during the 1996 through 2000 base period, or their previous historical base. Payments could be triggered when national gross returns for the crop fall below the national returns during the base period. Payments would then be allocated to producers on a per unit basis, with adjustments made to provide for production shortfalls due to disaster. No payment limitation would be applicable to these payments.
    Our analysis indicates that such a Gross Revenue Program would result in Government outlays for rice of $650 million over the 5 years, 2003 through 2007. Outlays for all eight major program commodities would total $2.06 billion over the 5 years.
    Mr. Chairman, we have discovered what you already know, that there are an almost infinite number of policy and administrative details that must be addressed in writing such a new program. Inevitably, a new proposal such as this raises as many of these issues as it answers. We have suggested one way to administer such a program, but we are not so bold as to suggest that this is the only way to do so. We look forward to working with this committee and others to improve upon our suggestions for adding an effective countercyclical program to our safety net.
    Eliminate the payment limitations for income support and marketing loan/loan deficiency payments. The 1996 farm bill imposes arbitrary limitations on PFC payments, loan deficiency payments and marketing loan gains. While Congress has wisely increased the limits on LDPs and marketing loan gains on an annual basis each of the past 3 years, the payment limit will once again revert to $75,000 for the 2001 crop year unless Congress acts.
    Compensate producers for current and future conservation and environmental practices that enhance water, soil and air quality and wildlife habitat. Rice growers currently provide about a million acres of enhanced waterfowl and wildlife habitat at their own expense. The new farm bill should encourage producers to establish and maintain wildlife habitat by offering incentive payments to farmers who voluntarily implement approved practices.
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    And lastly, comply with U.S. domestic support commitments under the WTO. Our economic analysis indicates that the programs we are recommending, if enacted for all major commodities, would not be expected to spend more than $9 billion in any one year through 2007, well below U.S. commitments in the WTO.
    In conclusion, we urge the Congress to pass legislation this year to provide additional income assistance for the crop years 2001 and 2002 in amounts that will bring total Government assistance to the same level as that provided by Congress for the year 2000 crop.
    The Nation's rice producers also urge the Congress to move rapidly to enact a new farm bill that addresses the fundamental issues of an approved safety net through the combination of a fixed PFC-type payment, extension of the current marketing loan mechanisms, and a countercyclical income support payment. The possible increase of loan rates to keep the rice loan rate aligned with the other commodity loan rates should also be carefully reviewed.
    The new farm bill should maintain the 1996 FAIR Act's planting flexibility and refrain from any return to annual supply controls. The bill should also provide for incentive payments for wildlife habitat and other environmental benefits voluntarily provided by producers.
    It is also important for Congress to develop a new long-term farm bill that targets payments to those who have actually produced, or shared in the risk of producing, the crop, while maintaining consistency with our domestic support obligations under the WTO.
    Adequate funding for these initiatives must be provided in the fiscal year 2002 budget resolution to allow this committee and the Congress to fashion an adequate farm program safety net.
    We are looking forward to working with you toward this important goal. Again on behalf of the Nation's rice producers, I wanted to thank you and the members of the committee for your interest in these important issues and for the opportunity to testify. John and I would be glad to answer any questions that you may have.
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    [The prepared statement of Mr. Canon appears at the conclusion of the hearing.]
    The CHAIRMAN. Thank you very much. Under your estimate, gross revenue payments for all of the eight major program commodities would range from $1.48 billion in 2003 to $80 million by 2007.
     Do you believe that there will be a major rebound in prices for most commodities in 2003?
    Mr. CANON. Gee, I hope so.
    The CHAIRMAN. Is that what you are basing that on?
    Mr. CANON. These predictions were given to us by Spark's Commodities, and it is just the best information that we have available at this time.
    The CHAIRMAN. And on page 9 in your chart, the rice and oats are projected to spend money in all of the years from 2003 to 2007; cotton, soybeans, wheat, barley are projected to spend money only in 2003; corn is not projected to spend money any year. Do you have any idea for the 2001 and 2002 what the gross expenditures would be for your program and how would that translate into price per pound for cotton and rice?
    Mr. DENISON. Mr. Chairman, you are talking about the Gross Revenue Program.
    The CHAIRMAN. Yes, sir.
    Mr. DENISON. In looking under that table on page 7, it shows—you are correct, it shows no payments to corn. It shows no payments to sorghum, no payments to barley, no payments, slight payments to barley, slight payments for oats. Thank you. I am sorry, you were correct in what we are using from Spark's, it does not show any payments for corn, sorghum and barley. These I understand were made upon the models that are projecting somewhat more optimistic prices for marketing prices for corn, showing corn moving from $2.23 to $2.30 during the 2003 to 2007; whereas rice is expected to maintain a fairly low price in that same area. We are looking at 2003 at $6.45, only rising to $7.20 in 2007, which is substantially below the 5-year average of $8.14 in our original base program—business years of which this baseline is computed from.
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    I can't tell you how Spark's came up with this. Nolen and I have been back on the farm trying to get another year started. We have relied on our Washington staff to work with Spark's Commodities, but I think they are using comparable models by USDA as well as FABRI.
    The CHAIRMAN. Well, obviously when you look at your proposed expenditures over from 2003 to 2007 it is a major reduction over what we have been spending in the last 3 years, and I hope you are right too. But if we were basing a program on anticipated expenditures, and we are agriculture, that corn and sorghum would have no payments at all, barley would only have one in 2003, wheat would only have one in 2003, cotton would only have one in 2003, soybeans would only have one in 2003. Out of eight major commodities we are only looking at two that would receive any payments, I don't understand, 2003.
    Mr. DENISON. Mr. Combest, I commend you for picking that out. I only got to town yesterday. I am pinch hitting for other leadership, but I picked up on that also, and I had questions about that with our staff this morning. I think that we are probably on the very conservative side as far as expenditures needed as well as price projections being somewhat optimistic.
    The CHAIRMAN. I hope you are right. I agree you are being a little optimistic. I hope the projections are right. I guess some day we can look back.
    On the payment limitation question, the way we have figured it, and you for the record had proposed there be no limitation. Average Mississippi rice yield in 2000 was 5,900 pounds. In 2003 a rice producer would be eligible for $61.36. A producer would top the limitation at 651 acres of rice. How dramatically would your program review or proposals change if there was a $40,000 limitation?
    Mr. DENISON. I think it probably depends upon the area of the rice country you are coming from. In the Delta is a very diversified agriculture, farming three or four program crops. As you move into some of the other areas like Texas and Louisiana and even California it is solely rice produced. It may not have as much of a problem coping with this. But in general our organization just does not see the equity from production agriculture of having limitations. We do understand that some Congressional Members look at it differently, particularly from the urban areas, and we would do our best to cope with whatever Congress passes. But generally our organization is against the limitations and particularly we think if we have different types of Government programs you need to have separate limitations for each, which you currently have.
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    I will defer to Nolen because he represents a State where it would impact more negatively.
    Mr. CANON. One of the issues the committee is well aware of, I am sure, that one time, 12 or 15 years ago, one time it was a $15,000 limit and now it is a $40,000 limit. If you apply the cost of living to that figure, that money is half of what it used to be. So in real terms we are getting 1985 payment rights or payment limits. One of the misconceptions that many people have about that money is it goes into a farmers CD. Most of that money supports an agribusiness industry of bankers and suppliers and implement dealers, and we are dealing in 1980 something dollars, not 2000 dollars.
    The CHAIRMAN. If the committee would just indulge the Chair for an additional moment.
     I understand that. We have been around this thing for a while. At one time there was no limitation at all, when we go back just a few years beyond that. But one of the things I have been trying to have each of the groups that have come before us look at and every one so far with the exception of one, and that one was sort of gray in the area of limitation, but have proposed no limitation and have presented a program, which we asked them to do.
    But it is very important for us to recognize and to know what the implications would be if a person is proposing a program based on an assumption of no payment limitations and then if there is a payment limitation proposed how dramatically that changes the anticipation of what the groups anticipate would be the impact to the producers, and it is something that we will have to look at.
    We are somewhat working from hypotheticals here, but on the other hand, we are also looking at the reality. So let me close by saying that as we go forward and as we have to deal with some of those other potential issues, limitations or whatever, we may obviously all need to sit down and sort of rethink how this has an impact.
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    Mr. Stenholm.
    Mr. STENHOLM. In your testimony you point out that even though the United States is the third largest exporter of rice, since 1986 we have lost 50 percent of our export markets. We have gone from 30 percent of the exports to 15 percent. Even when you take the experience since the current farm bill began, the numbers that I see, we are still not increasing the amount of rice that we are able to export. That suggests that the marketing loan is not working. Is it or is it not? Why under a marketing loan, which theoretically we could be pricing our rice another zero and to an LDP compensating our producers, theoretically, why are we still not able to gain market share?
    Mr. CANON. We feel like the marketing loan is one of the backbones of the farm program, and we do feel like it is working. This year Argentina's rice is down a third. Uruguay is down, Brazil is down. So I think this is a result of the actual price of rice being low. Uncharacteristically good weather in the Far East for a number of years has caused uncharacteristically overproduction of rice in that area, and that has had a huge effect on the world market for rice. We have had to compete against some governments which are just extremely low cost producers.
    I also might mention low quality and very little oversight and safety in the production of their commodities as well. The stars are kind of lined up against us in the rice business. We are also subject to probably more trade restrictions than any other single commodity that I can think of. In the 1950's the largest export market for rice was Cuba in the United States. In the 1970's it was Iran. In the 1980's the largest export market was Iraq. We lost all three of those markets. And it has just been uncharacteristically unlucky for rice producers that have lost their markets because of factors beyond their control. If we could have kept these particular countries' business, we wouldn't be asking for near this much money.
    Mr. DENISON. Mr. Stenholm, if I could add to that. Unfortunately we are competing, our three biggest competitors are primarily Third World countries, Thailand, Vietnam, Pakistan and India. As Mr. Canon said, their cost of production, particularly labor costs, their sanitary and food oversight restrictions are almost nil. I had the opportunity of appearing in both those countries in 1994. Instead of running rice to be dried through technology, the latest there is on rice dryers, they put it out on a concrete slab to let the environment, sun dry it. In Vietnam we have saw rice being scattered along the roadsides which was subject to all the varmints that were there. They are producing a very, very low quality product compared to the highest quality rice produced in the United States.
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    We can still be competitive if we can stay below $50 premium, but our greatest problem is the three most prosperous produce markets, two are completely, pretty much still closed to Japan and Europe with tariff problems. It is only since 1996 that we have been allowed to have minimum access into Japan. And if we had the kind of access to those two trade areas that they have in the automobile and appliance market here in the United States, I think it would be far greater.
    Mr. STENHOLM. But you were describing the hindrances of getting into markets. What I was specifically asking is theoretically under the market loan, even where you are competing with people who can produce it cheaper, we ought to still be able to compete a little better theoretically under the market loan with the LDP than we seem to. It is not just rice. It is in cotton, corn, all of it.
    I have been trying to find out what it is about the LDP or the market loan why we are not able to be a little bit more competitive under that theory. I understand that, and certainly this committee voted overwhelmingly to lift the embargoes on Cuba and Iran and Iraq. That just needs to be done. But we have had a little problem getting that done. But I will have a follow-up question in a moment because one of the areas of success is the area of rough rice. We are able to increase market share in the area of rough rice. I would like you to go into that a little more where maybe that is part of the problem as well as the solution.
    The CHAIRMAN. Mr. Chambliss.
    Mr. CHAMBLISS. Thank you, Mr. Chairman.
    Mr. Canon, one thing I agree with in your testimony is the fact that we need to encourage rice farmers to plant more acreage for wildlife habitat. I know being on a midwestern flyway where you have some of the best duck hunting in the world in Mississippi, Mr. Dooley looks forward to a field hearing for our subcommittee the day before opening season of duck hunting this year. I am curious about your statement on the major competing countries having anticipated lower plantings this year. Argentina, Brazil, I don't remember the other one.
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    Mr. CANON. Uruguay.
    Mr. CHAMBLISS. While at the same time it looks like we have projected low prices. Normally you would think that less supply would create more demand. Tell me what is going on with respect to the world market price.
    Mr. CANON. I think in these countries in South America that I have referred to that the low commodity price has legitimately caused reduced plantings. One of the strangest things about rice is it is a very thin market. It is the most widely produced food crop in the world, but on a percentage basis of exportable supplies it is very small. So it trades at the margin. You get a little overproduction upstart, the good weather that causes these supplies to rise, you get a corresponding much greater decrease in the world price. If world production had been off a little the last 2 years, you would get an increase in the price because it trades at the market.
    So there are some factors out there that are just working on this market that are really uncharacteristic for this time period. We just have a lot of rice, and more rice than normally would be expected. And I hope I answered your question, Congressman.
    Mr. CHAMBLISS. Do those competing countries pay any compensation to their farmers in the form of export subsidies or, for that matter, domestic subsidies?
    Mr. DENISON. Thailand does. I don't believe Vietnam subsidizes their farmers that much, Thailand and Vietnam being our largest competitors. Thailand does help their farmers.
    Mr. CHAMBLISS. How about the South American companies? You mentioned Argentina, Brazil, Uruguay.
    Mr. DENISON. They are minimal competitors of ours as far as acreage goes. They primarily, I think Uruguay and Argentina compete with us particularly with the Brazilian market, but they have an advantage that they have a zero tariff base going into Brazil, whereas we still have around a 25 base. If it wouldn't be for that, I think we would compete with Uruguay and Argentina.
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    Mr. CHAMBLISS. I was beginning to think fast track legislation may not help you, but it sounds like it might.
    Mr. DENISON. Very definitely it would help us.
    Mr. CHAMBLISS. If we have open trade with Cuba, Iran or Iraq for food products and medicine, as we have been talking about doing for the last couple of years or so, do you see that as having an immediate impact on your industry?
    Mr. DENISON. Yes. I led a trade delegation from U.S.A. Rice Federation producers and millers in November 1999, and we believe that they would immediately take somewhere between 350,000 to 400,000 tons of metric tons of rice a year. They are spending a billion dollars in cold hard dollars for agriculture products. It takes them about 180 days turnaround time to get a shipment of rice from Vietnam. They would prefer doing business with us, but the current restrictions on letters of credits with our banks and no short-term credit being available, I think all their agricultural trade is based upon a one-year short term credit from what I am told, we do have a great potential there in Cuba, we have a great potential in Iraq. In the Middle East it is still very competitive, but we think they prefer our quality product and our dependability of delivering.
    Mr. CHAMBLISS. If I understand you correctly, you are projecting that the worldwide price of rice will remain below the $6.50 market loan rate for the next 3 years.
    Mr. CANON. Yes, sir.
    Mr. CHAMBLISS. I think that is based basically on your consultant's projections; is that right?
    Mr. CANON. That is what Mr. Spark's forecasts, but we only have to look back at the projections of the last farm bill to see how flawed commodity futures prices can be.
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    Mr. CHAMBLISS. So he may be liberal and he may be conservative; is what you are saying?
    Mr. CANON. That is right, but we are looking for a mechanism more than we are for a price forecast.
    Mr. DENISON. We believe that is why we have to move to some type of countercyclical program, if at all possible, to provide for those years that do not turn out as projected by our economic analysis people.
    Mr. CHAMBLISS. But you were talking about a continued market loan rate of $6.50?
    Mr. DENISON. Yes, sir, at least, a minimum.
    Mr. CANON. No less.
    Mr. CHAMBLISS. Thank you, Mr. Chairman.
    The CHAIRMAN. Mr. Dooley.
    Mr. DOOLEY. Thank you, Mr. Chairman. Thank you both for testifying. I was wondering if you could help me on your tables on page 9 and 10. I am not sure I fully understand. The market revenue figures are basically returns from the marketplace, correct?
    Mr. DENISON. I am going to say that basically there is some discrepancies. I hate to criticize profound economists, but their total revenue table does not reconcile with the individual tables, if that is what you are calling attention to. They have got the total revenue section grossly exaggerated for rice from 1996 through 2001. The individual tables are more accurate, if that is what you are referring to.
    Mr. DOOLEY. What I am interested in——
    Mr. DENISON. My pages don't correlate to yours. If you will give me the area of concern, of question.
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    Mr. DOOLEY. I have the table where it says ''Market Revenue,'' then it has a list of the commodities, then you have production flexibility products, which is the next column, the next table.
    Mr. DENISON. Right.
    Mr. DOOLEY. And I guess what I am interested in is the combination of payments that you are suggesting are appropriate would be included in the second table; is that correct? At that point that would be the combination; the program that you are suggesting that we adopt would result in the Government payments that are included in the second table?
    Mr. CANON. For——
    Mr. DOOLEY. That doesn't include loan deficiency payments?
    Mr. CANON. No, it does not.
    Mr. DOOLEY. Mr. Denison, what is the cost of production? What do you figure it costs you to produce?
    Mr. CANON. It varies by region, but rice is one of the more expensive crops to produce. But it can range from anything from $350 to $400 worth of indirect costs, direct costs in my region, to upwards of $500 to $600.
    Mr. DOOLEY. Give me an idea though.
    Mr. DENISON. The USDA is showing $378 currently as an average for variable costs only. When you put fixed costs in there, it shoots up to considerably more than $500. About $550, I believe.
    Mr. DOOLEY. What are you talking about an acre?
    Mr. DENISON. Acre.
    Mr. DOOLEY. I want to know how much you figure it costs per hundredweight. What you have here, you have these figures that are by hundredweight and it doesn't do me any good to know per acre.
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    Mr. DENISON. The average production in the United States is $6 a hundredweight and so we would be looking at about $6 a hundredweight, actually just variable costs alone, and if you are looking at total costs you are looking at somewhere probably $9 to $10 total cost, including land and machinery.
    Mr. DOOLEY. OK. So your variable costs you are saying are $6 and you are suggesting that your fixed costs would actually be another $300, which seems, or $3 a hundredweight, which seems to be a little high. So if I look at your charts then, if I totalled up even your market revenue plus your fixed payments, you are talking about $10.68 in the year 2000. Would that be correct?
    Mr. DENISON. That I think is correct.
    Mr. DOOLEY. My concern is if we adopt a program that goes down that path and you already acknowledge that you have an average cost of production of variable even of $6 and maybe it is even $6.50 and then you put another $3 on top of that in fixed costs, you are telling me that the average cost of production covering both variable and fixed costs is about $9 and $9.50, and yet you were suggesting a program that does not even include a loan deficiency payment that would return to growers $10.68 a hundredweight. Is that correct?
    Mr. DENISON. We were trying to be conservative.
    Mr. DOOLEY. That doesn't sounds too conservative. My concern is if you have a policy that a combination of returns to the market plus Government payments, if they exceed the cost of production, you are actually sending a signal to producers that they ought to be producing a whole lot more, which is going to compound our problem of perhaps having an oversupply. Do you gather what I am suggesting here?
    Mr. DENISON. I think from your State these costs are considerably higher than an average, from what I consider their cost of production.
    Mr. DOOLEY. And I accept that. You would be concerned, I would think, about having a program in place that generated revenues, a combination of market place revenues plus Government revenues, that exceeded the cost of production. Isn't that inevitably going to encourage an overproduction and oversupply?
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    Mr. CANON. Congressman, we have always wanted the bottom dollar to be more than the cost of production in any commodity you grow. If you are in the negative, you will not stay in business.
    Mr. DOOLEY. I am a farmer myself, and my concern is I have to be making my decisions based on what the marketplace is telling me. And the program, what I understand the combination of things you are suggesting here is you are telling me that where the marketplace is telling me it is only worth $6 a hundredweight, that from a producer's standpoint when I calculate Government revenues in it, you are suggesting that the total package is suggesting it ought to be $10.48 a hundredweight. Now that is going to result in me making a much different decision, which isn't going to be correlated to what the marketplace is telling me. So I guess that is where I am a little bit concerned, if I understand exactly what you are— and I am not sure I understand your tables.
    Mr. DENISON. One correction, the number you are using is for the 2000 crop, which included a doubling of AMTA payment. It would be better to look at the 2001 crop, which we are forecasting as far as market revenues $6.15, and only $3.73 total payments, which is $9.88 for this current 2001 crop that we are planning, Congressman. So it is barely a break even proposition with what we have in hand. That is only the most efficient, probably the most efficient price producer. So that is why we are saying it is probably not going to be adequate for a number of rice producers in the country.
    Mr. DOOLEY. So you are suggesting what we are doing there year—excuse me. Thank you.
    Mr. DENISON. It is $9.88 with market plus total Government payment.
    The CHAIRMAN. Mr. Smith.
    Mr. DENISON. If you look under total Government payments for rice in 2001, is $3.73 and the market revenue, which I think is probably high right now, $6.15, the current price of rice is below $6 a hundredweight, and with the projections of huge world supplies I am not sure Spark's might not be overly optimistic for that $6.15. But even using their estimate of $6.15 a hundredweight for 2001 and the total projected payment in the budget for 2001 from the Government of $3.73, is $9.98 total, which is knocking at a break even. And bankers do not loan money on break even propositions. In fact, in my area there are a number of bank loans that have not been made for 2001.
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    The CHAIRMAN. Mr. Smith.
    Mr. SMITH. Starting out, I would like to ask a couple of questions. What would rice farmers do if there weren't a loan rate of support price in LDP? We are the largest exporters of rice, processed and raw, in the world. Is that right?
    Mr. CANON. No, sir.
    Mr. SMITH. Who is?
    Mr. CANON. Thailand.
    Mr. SMITH. So in terms of our largest customer, which I understand is Mexico, what percentage of the total Mexican rice, raw and processed, do we provide?
    Mr. CANON. Virtually all of it. Almost 100 percent of Mexico imports their rice from our country.
    Mr. SMITH. Is there rice grown in Mexico?
    Mr. CANON. There is rice grown in Mexico as well.
    Mr. SMITH. So in terms of what is bringing down the market price, is it fair to say that it is world overproduction?
    Mr. DENISON. Cheap prices in Thailand and Vietnam. They have dropped their prices from a year ago from the $250 ton metric level to below $190 a ton.
    Mr. SMITH. Would rice farmers produce rice at the market price that ranged, I understand, last year somewhere between $5.70 and $6.15 or something?
    Mr. DENISON. I don't believe there would be very much rice produced if it had to be——
    Mr. SMITH. What would happen if we produced less rice in this country other than generically other countries would fill in? Could Thailand, India, other rice producers ship rice into Mexico and compete with us?
    Mr. DENISON. Well, they will not allow them to ship paddy rice. We were the only major country that allows paddy rice, unprocessed rice to go out. Thailand and India and Vietnam, they refuse to allow any rice to go out of their country that is not processed, that doesn't contribute to jobs in their country. So any rice that would come into Mexico would be minimum rice, it would not be paddy rice.
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     Probably the export market would be safe probably at a higher price level if we weren't producing in the United States, and then the United States would have to depend upon foreign production for their domestic consumption of rice. And I will remind this committee that that is what is happening in the energy policy, that we are relying primarily on foreigners to produce it. I dare say if the consumer would be safe in relying upon foreign producers of rice because of the lack of food——
    Mr. SMITH. What is the yield of rice person-acre for a good farmer?
    Mr. DENISON. In the United States 6,000 pounds is the average yield.
    Mr. SMITH. I understand it gives us a competitive advantage shipping unprocessed rice into Mexico, but the disadvantage of course is the additional income of value added?
    Mr. DENISON. That is correct. We lose the value added here in this country.
    Mr. SMITH. So but your position is still that you would purchase the additional demands and sell the unprocessed rather than trying to move more value added?
    Mr. CANON. It is in our benefit to sell the buyer what he wants. If they do not buy from us, they will find somewhere else to buy it.
    Mr. SMITH. And that would happen with Mexico, so they could somehow come up with enough non-paddy rice to accommodate Mexico's demands?
    Mr. CANON. It would open up the Argentina, Brazil, and Uruguay market and bring the price down.
    Mr. SMITH. What is bringing the price down? Apparently it is not the Mexican price that they are paying for rice. What percentage of our exports go to Mexico?
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    Mr. CANON. I am not sure.
    Mr. DENISON. Price is set in Thailand. The rice price is set in Thailand because they are the largest exporter of rice. Just like soybean price now is either set in the Midwest and Chicago or in some cases South America now. Corn, primarily that price is set in the Midwest, the largest producer.
    Mr. SMITH. Just my last question as I am out of time. Have you got any ideas or suggestions for the kind of support programs that doesn't encourage additional production?
    Mr. DENISON. It depends upon your economic income safety nest. The lower that level is, the less rice will be produced.
    Mr. CANON. Rice acreage has been fairly stable for the last 10 years across the United States. It has not gone way up or way down, so we have been staying fairly harmonious.
    Mr. SMITH. The competition for rice, if you didn't produce rice what would most rice farmers produce?
    Mr. DENISON. The Delta would probably go to cotton or corn, soybeans, which would be Arkansas and Mississippi and Missouri. Louisiana and Texas would have a little bit more problem. That would probably revert to cattle.
    Mr. CANON. More rice farmers are already diversified. They grow these other crops they can next, a little bit from one to another, depending on the profitability and other factors. And historically rice land is somewhat different from some of the cotton land. And I don't think there would be a huge shift unless there was a huge economic incentive to do the shifting.
    Mr. SMITH. I want an invite to look at a rice farm because I need to understand better to see if we can grow it in Michigan.
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    Mr. DENISON. I will be glad to bring you.
    The CHAIRMAN. Mr. Baca.
    Mr. BACA. Thank you very much, Mr. Chairman. As I read part of your statements, in your conclusion you indicate that we urge Congress to pass legislation this year to provide additional income assistance for crops for the year 2001 and 2002 in the amount that would bring the total assistance to the same level provided by Congress in the year 2000.
    Based on that recommendation, some of us members are very much concerned with the President's proposal of $1.6 trillion to cut taxes, that may well become 2.2 to 5 to $7 trillion tax cut, using all or nearly all of the surplus. This raises a question, however disturbing, we must consider. How would you modify your proposal if there is no additional money for agriculture after the year 2002, if there is only the current CBO's baseline of $4 billion for annual AMTA payments, varying the amount under the Commodity Loan Program at the current loan rate projected expenditures for the current Dairy, Tobacco, Peanuts, Sugar and Export Programs? This is also my way of asking is your proposed program scalable? Can it be adjusted to meet the reduced level of expenditures even as little as no additional funding or does a proposal need to be completely rethought beyond some level of the minimum additional funding?
    These are three different questions, I guess, that I am asking. Either one of you can attempt to answer it.
    Mr. DENISON. I think you are dealing primarily with the possibility of a reduced spending level in the budget.
    Mr. BACA. That is correct.
    Mr. DENISON. Well, as we said before, any reduction of the safety net, the income safety net which is performance contract, marketing loan payments and some kind of countercyclical program to at least supplant the emergency funding, we believe if it is not attained at somewhere in the same neighborhood as the last 3 years you will have less agriculture production in general and specifically less rice acreage planted.
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    Again, I would say that this is the responsibility of Congress to set priorities and determine national food policy for the consumers' benefit primarily.
    Mr. BACA. If this is the case, what is the effect?
    Mr. DENISON. If we are looking at a preference for tax cuts over meeting agriculture needs, you will have less agriculture production in the United States.
    Mr. BACA. Ultimately what does that mean, loss of revenue, jobs?
    Mr. DENISON. That means loss of jobs, that means depending on foreigners to produce your food, foreigners that do not have near the food production safety and oversight and are not near as dependable as domestic farmers in the United States.
    Mr. BACA. Ultimately, how many people would be effected by this when you look at amount of jobs in agriculture, tax base; do you have an estimate in terms of losses?
    Mr. CANON. We can start with two. It would be me and him. After I rearrange the testimony, I would rearrange my career.
    Mr. DENISON. I tell you, I am already looking at other alternatives. I hate to think about subdividing my farmland. I don't want to do that. But I am very fortunate I am in a growing area next to a big city, and I can do that. I don't want to do that. My family farm has been in existence since 1880, and I would like to have a grandson to continue in my footsteps. He wants to.
    We are here to tell you that if you do not address the importance of a reliable safety net during these low commodities price years because of the global competitiveness, you will have less agriculture production. It is the decision of the lawmakers and the executive branch and we are not here to take sides of what is an appropriate tax cut and what is not an appropriate tax cut. We are very much for estate tax relief.
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    I have some personal opinions about the problems that you face. I am glad I am not a Congressman because I believe in a budget that is balanced, where farmers are fiscally conservative, and we would like to get our money from the marketplace. We don't like to get our checks—I don't like to meet bank notes with Government checks. And, quite frankly, gentlemen, in my operation last year I had a loss for the first time in a couple years. It was a combination of things, primarily weather. The years were just good enough not to qualify for crop insurance. I am having to refinance and take some outside money to satisfy indebtedness, but that is not the first time that has happened in my 45 years of farming. We expect that from time to time.
    But to answer your question specifically, the more pressures there are for a tax cut, or other budget priorities that lessens the expenditure level in agriculture, I believe, and I think no one disagrees, it would be less domestic agriculture production available for the American consumer.
    Mr. BACA. That is an alert for some of us to consider. A lot of us Blue Dogs also believe in the balanced budget as well.
    Mr. DENISON. I am not here to criticize previous administrations because there is enough blame for all of us. But I really don't think we have had a sound energy policy for 20 years, an energy policy that has deferred to foreigners to supply our energy. We have not had to do that in agriculture yet, and I hope that my grandchildren do not have to depend upon that.
    Mr. BACA. Thank you.
    Mr. CANON. Farmers have also not been as involved in the tax cut debate as we probably should have been, but when it doesn't affect you, you don't get involved in it. You were not making my money.
    The CHAIRMAN. Mr. Ose.
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    Mr. OSE. Thank you, Mr. Chairman. One of the questions I always try and deal with is the fundamental that lead us to what we are discussing, and that would be how much or how little Government support shall we have provide for agriculture. One of you has mentioned earlier the WTO and the parameters under which we deal there, and I have one very basic question and that is—let me rephrase the question. WTO members can meet their commitments to WTO guidelines in any number of ways. The question I have of Mr. Canon and Mr. Denison is whether or not WTO members should only be able to meet their WTO commitments with other WTO members? In other words, you can't fill your WTO commitment with non-WTO. Would you have any comments on that?
    Mr. DENISON. Certainly the rice industry has benefitted from the recent changes in WTO, particularly in 1996. We have had greater access into Mexico. We have really picked up there. Japan, minimum access. But we have had problems getting Japan and Europe to live up to the WTO agreements that they signed on to. The non-WTO members, we really do not. We are usually competing against them. China has not been a member of WTO, I think they are in the process of becoming a member of the WTO, but I am not sure that that is finalized. We are told that we have a tremendous advantage there if they would become members of WTO.
    We strongly support being compliant with our WTO contracts or arrangements. But the unfortunate thing is it is a very unlevel playing field, particularly in the domestic support area. Europe and Japan are supporting their farmers as a percentage of their gross domestic agriculture production value probably to double to triple of what we are. We are averaging, our limit is $19 billion. We are producing about $200 billion of agriculture value products. That is a little under 10 percent. You are going to find that Europe and Japan are in the 30 to 40 percent of their value, and so that is the problem.
    We are on an unlevel playing field when it comes to domestic supports, plus our country has very few retaliatory tariffs on incoming agricultural commodities. There are a few, but rice has none. We have a double whammy on rice. We have exorbitant tariffs still in place in Europe, Japan, the prosperous areas of the world, and we have no tariffs on any imported. About 10 percent of our consumption is coming from India and Pakistan and Thailand.
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    Mr. OSE. I guess that answers my question, I am not quite sure if that is a yes or no.
    Mr. DENISON. Maybe I didn't answer it.
    Mr. OSE. We have WTO trading partners who have made certain commitments to buy in this case X amount of rice and they are fulfilling those WTO commitments by buying that rice from non-WTO nonmembers. It would seem to me the height of common sense that WTO member requirements should be met by trading with WTO members.
    Mr. DENISON. That makes sense. Japan specifically, they were buying rice from us but they in turn give it away to other countries. They don't put it on a grocery shelf. We believe that is very unfair. We believe they are not living up to the intents of the WTO, and they ought to be made to.
    Mr. OSE. And the other thing, I see our good friend from Michigan has departed, but if he wants to see rice he should come to my district.
    The CHAIRMAN. Mr. Thompson.
    Mr. THOMPSON of California. Thank you, Mr. Chairman and the witnesses. I would like to pick up on a point that was what happens when there is less rice grown, what is it substituted with and you had mentioned one of the substitute crops being cotton. Can you qualify the environmental value of cotton vis-a-vis rice?
    Mr. CANON. Well, I am a farmer but I am no environmentalist.
    Mr. THOMPSON of California. Actually I would argue that if you are a farmer and you are farming correctly I would think you are a pretty good environmentalist.
    Mr. CANON. Thank you. I will take that as a compliment. Rice does not get the deserved credit for providing all the environmental benefits that it does. A tremendous amount of waterfowl habitat are encouraged and increased because of flooded rice fields, and just the food that it provides for migratory birds. If all of the sudden that acreage was greatly decreased, it would have a big impact on wildlife. Other environmental areas, I am sure there are many other areas that it would affect as well as water quality. Actually a lot of water that leaves the rice field is cleaner than when it came in.
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    Mr. THOMPSON of California. I have had the good fortune of visiting Mr. Ose's district and actually represented it for a number of years. It is a fabulous rice growing region in California. And right now we are currently in a situation where cotton is competing with rice and in some instances cotton is winning out. For every acre of rice that you lose to cotton, I would argue that you lose a considerable amount of both environmental value, waterfowl and wildlife value as well as local resources, because in our region that is the Pacific flyway and without the Sacramento Valley's rice production area, there would be no Pacific flyway.
     So not only would it hurt that particular area, but it would hurt the entire region from the northernmost part of Canada to all the way down to Mexico. And there is no comparison that you could make between rice and cotton that in any stretch suggests that cotton would add any environmental benefit, certainly not to waterfowl. And I think it is time that we recognize that and that we put a value on that, a value that is important not only to Government but to the farming community, and we would like to see more of that as we move forward.
    Mr. CANON. To grab a term from the Europeans, I guess you are saying we are multi-functional.
    Mr. DENISON. Congressman, I come from southwest Louisiana, and we have a number of National Wildlife Refuges right there adjacent to the rice country. I have been told by the directors that without the rice country in southwest Louisiana they would pretty much have to close down the refuges because there would not be enough habitat for the wintering geese and ducks, and you are right, we would lose a large portion of our flyways.
    Mr. THOMPSON of California. Do you grow cotton as well?
    Mr. DENISON. No, I do not. Years ago there had been cotton on our place and there hasn't been cotton in my county or parish since the forties.
    Mr. THOMPSON of California. I know in California in our region if you look at the chemical use between the two crops, I think there are some 65 registered chemicals that are used in the cotton area and I think four in rice. So it has a tremendous environmental impact if we make this substitution and lose that rice production.
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    Mr. DENISON. You might be interested, the Rice Foundation which I currently chair, we have a joint venture with Ducks Unlimited. We have a publication coming out showing the environmental stewardship of the rice industry. We hope to have that available in early 2002 for this committee.
    The CHAIRMAN. Mr. Osborne.
    Mr. OSBORNE. I don't know much about rice. That is why I am here. I am trying to learn a little bit. And I wondered if you, you have probably gone over this, could you briefly for my own education speak briefly as to the redemption of loans and generic commodity certificates, exactly what you are referring to there?
    Mr. CANON. Well, I am sure you understand what the loan rate is. The LDP was a mechanism to keep the Government from getting into the——
    Mr. OSBORNE. You are saying maintaining the present?
    Mr. CANON. Yes, we strongly urge you to maintain the current structure of the marketing loan.
    Mr. OSBORNE. Basically just glancing through this, it appears to me that the major adjustment to the present farm bill is your recommendation on a countercyclical price support or countercyclical mechanism. That is correct?
    Mr. CANON. Which is the most glaring weakness of the previous farm bill. It was predicated on the prediction that farm prices would increase as the AMTA payments increased, and that did not happen, and it just makes common sense that producers need help when the prices are very low. But when the prices rise, they don't need as much help. So it seems like a common sense approach to the problem.
    Mr. OSBORNE. I would like to add being an outdoorsman, I understand the significant contribution that rice production does to our bucks particularly, and I appreciate that.
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    I yield back my time, Mr. Chairman.
    The CHAIRMAN. I thank the gentleman. Mr. Berry.
    Mr. BERRY. Thank you, Mr. Chairman. I would like to thank our witnesses this morning for their efforts, and I would just say I come from the largest rice producing district in the United States, Mr. Chairman. I happen to be a producer myself. I can tell you for certain that these numbers are not—I don't understand what the needs are. We have as much distress in rice country today as we have ever had, and certainly I think it is equal to or greater than the problems that all of our commodity sectors are having with low prices, and I think this is a very reasonable program that our rice producers have put together and I appreciate their effort.
    I would make one comment in response to the distinguished gentleman from Michigan. If we didn't grow rice, obviously we could put that land to other uses. It is not easy to get into the rice production bills. You do not just jump up middle March and decide you are going to switch from cotton to rice or from corn to rice or any other. Being in the rice production business is a long term, highly—most of the time highly leveraged investment. And the land that is used to produce rice has to be considered a long time in advance that it is going to be used for that purpose, particularly in getting a supply of irrigation water and having it level enough so that it can be approved. So this is not something that is easily switched in and out of, and once you have make that commitment it is something that pretty well you have to stay with it after you decide that that land is going to be used for that purpose.
    And I think it would be a terrible mistake, as it has been mentioned many times here this morning, to create a situation where we had to depend on someone else for a supply of rice, just like it would be for any other food stuff that we produce in this country.
    But again, I want to thank the witnesses for being here this morning and thank you for this time, Mr. Chairman.
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    The CHAIRMAN. Mr. Lucas.
    Mr. LUCAS of Kentucky. No questions.
    The CHAIRMAN. Mr. Stenholm.
    Mr. STENHOLM. I want to continue on the export market share and go a little further on the positive side of it where we have been increasing our market share on rough rice. And I guess there the simple question is should we be exporting more rough rice versus mill rice and, as you answer that, how does the fact that our competitors set the price for mill rice affect our ability to export mill rice and what is the impact of the increase of rough rice exports on our rice millers?
    Mr. CANON. Well, we have somewhat carved a niche in the rough rice exports by the fact that some of the other major rough rice exporting countries do not allow unprocessed rough rice exported. I contend if there is a milling industry that wants to buy an unfinished product then they will find that product somewhere, and we can either provide the customer for what it is asked or we can give that up to somebody else.
    So the fact that we can sell unprocessed rice has given us an advantage in certain areas, especially Mexico. With the implementation of NAFTA, it started reducing the tariffs and allowed us to go into a market that formerly we did not have, and this in the future could possibly be a legitimate source of revenue for rice farmers of the United States.
    As to what it does to the milling industry, they have to compete as well.
    Mr. STENHOLM. Are you saying that there are markets that we can sell rough rice but then not buy milled rice and therefore there has been a niche there for us that would otherwise go somewhere else? Is that what I understand you to say?
    Mr. CANON. I think that is fair.
    Mr. DENISON. At the appropriate time I would like to comment but I don't want to interrupt Nolen.
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    Mr. CANON. Mexico has not been importing Thai rice in the past for some reasons. If we had to compete, if our milling industry had to compete against the Thai industry, I could tell you who would win out, and it would not be us.
    Mr. STENHOLM. And there is no LDP on milled rice?
    Mr. DENISON. I am not sure I totally agree with that, because there is a difference in quality and a difference in transportation cost with Thai, with mill rice versus mill rice out of southwest Texas or Louisiana. What has made the paddy rice exports increase is primarily because the tariff has been reduced.
     It will still be cheaper, less tariff on paddy rice than mill rice in Mexico. The milling industry in Mexico is very powerful and they are trying to keep their business together, and the only way they can keep it together is to depend on paddy rice imports because there is only about half enough rice growing in Mexico.
    The thing that is keeping paddy rice profitable in Mexico is because there is a higher tariff on mill rice than there is paddy rice. If you have zero, there is some that believe that with a zero tariff in Mexico, which is going to prevail in 2003, we could very easily lose the advantage of paddy rice exports to Mexico and that would end up being all mill rice, is what Nolen is saying, either from Thailand or the United States.
     Paddy rice you have to realize is—30 percent of the volume of that sale is valueless. The hulls are valueless; that is, only 70 percent of that finished product is edible or usable in the marketplace, and that is what makes it difficult to ship paddy rice very far and into too many markets. But paddy rice, the commercial paddy rice business in Mexico has been a boon to the rice industry and I think it will continue because I think the South American rice millers will through Government regulations keep a preference for their processing in their country, which creates jobs and creates profit opportunities within Mexico and South America.
    Again, we are the only major exporter of rice that is allowed to ship unprocessed rice. Vietnam does not allow it, Thailand does not allow it. India does not allow it, Pakistan. The major exporters recognize the value of keeping the value of those jobs in their country, and I would say to you, Congressman, I would not want to depend totally on an unprocessed market on export. Our greatest opportunity from southwest Louisiana is milled rice through the Port of Lake Charles. When we compete on a paddy rice basis, I am competing against my good friends on the Mississippi River and generally speaking paddy rice business most of the time that comes off of the Mississippi on barges or maybe on boxcars out of south Texas. So it depends on what area of the country, but there is no doubt that the paddy rice market is here to stay, and I think that is good.
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    But I would not want to move completely to a paddy rice market because there is not enough market there to consume all of our exports. And besides, we are not keeping jobs alive in the infrastructure, which is still our biggest asset in American agriculture, our infrastructure, our dependability, our quality. And once we have lost that I don't think we will be very much competitive on the international export market.
    The CHAIRMAN. Mr. Ose.
    Mr. OSE. I don't have anything further, Mr. Chairman.
    The CHAIRMAN. Mr. Osborne, any further questions?
    Mr. OSBORNE. Just one quick question, Mr. Chairman. I see $9 billion mentioned in here. Is that the total cost of the farm program as you propose it?
    Mr. CANON. Mr. Osborne, to be honest, I didn't really focus as much on the numbers as on the mechanism to make sure we had an adequate safety net. If we have a mechanism that takes care of the unforeseen problems in the future, that number may be too low. It may be big. But I really haven't focused on the $9 billion. If the predictions are right by Spark's, it may be enough for some of these years. But if Spark's is wrong, we need to have something in place where we wouldn't have to come for ad hoc assistance. We want a countercyclical structure that would account for these unforeseen problems in the future.
    One other thing, just to add, the cost of production of American agriculture is up between $7 billion and $8 billion last year alone with less income. So out of the gate we are $8 billion worse than we were 2 years ago just from cost of production.
    Mr. OSBORNE. So you do not have a range, even the worst case scenario, the best case scenario?
    Mr. DENISON. Mr. Osborne, that does not include the old commodity programs sugar, tobacco. It does not include conservation programs. It does not include export programs or crop insurance. That is only our projection for the eight major program crops under Freedom to Farm, and also that is based upon those projections, those market prices being accurate and coming in on target.
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     And so Nolen is very correct. It could be more, and probably it has a greater chance of being more than less. We think that these are very conservative budget expenditures for the eight program crops on both the LDP payments and the AMTA payments and gross revenue payments. But it is strictly for the eight program crops. It does not include the other parts of your budget for commodities.
    Mr. CANON. We do have a projection here in our testimony of $4.4 billion as the lowest year, up to be $8.8 billion in the highest year. To be honest, that scares me because it seems so much lower than the total assistance package we have had over the last 3 years. So I am nervous in giving this projection. But all that is is a rough projection by Spark's Commodities, and I would hope the committee would understand that the projections are not as important as an adequate safety net mechanism.
    Mr. OSBORNE. Thank you. Sometimes you get what you ask for, and I wanted to make sure that we had a clear understanding here because I missed part of your testimony. But I just wanted to make sure that I was understanding what those numbers meant.
    Thank you, and I yield back my time, Mr. Chairman.
    The CHAIRMAN. Mr. Stenholm, a final question.
    Mr. STENHOLM. In some cases Texas rice producers have not benefited from the emergency assistance payments that we have made over the last several years, and it is rather ironic because the landlord-tenant issue that has faced them is in fact the way that Freedom to Farm was supposed to work, those that could shift out of rice into some other commodity or convert it back to grazing and then phase it out. But now I understand your recommendation that you are recommending an additional income supplemental payment this year based on AMTA.
     Wouldn't it be better that we, if in fact we are—and I agree with you and we are going to need supplemental income payments across the board on commodities again this year for the same reasons we have needed them for the last 2 years. Would not it be better to update the acreage that the rice AMTA is paid on to the people that are actually raising the rice rather than continuing to give an extra payment to those who are no longer farming rice because it was their economic decision not to do so?
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    Mr. CANON. We are very sensitive to the landlord-tenant issue in Texas, and we have been debating and trying to figure out a solution to that ever since it arose. It is somewhat ironic that it seems to be a Texas problem more than some of the other rice areas. I am told a couple reasons for that, many of the rice farms in Texas are solely rice farms, where in our areas there is a combination. You are not 100 percent rice farm. I am one-third rice and two-thirds soybean. You have to blend it out.
    The other problem in Texas, they have extremely high water costs and low rental rights. So this transformed into all of the sudden that the AMTA payment is a lot more than the rent that the rice farmers were able to pay and make a profit. Basically, we think that the payments should go to the people that were at risk. If the landlord is at risk and farming the land in some manner, then he is absolutely justified in receiving his AMTA payment. But to be perfectly honest with you, the way the law was written it is a very difficult issue to address, if a landlord wants to take his land out of production and receive the AMTA payment. But it is not what we would like.
    I didn't answer the question, I just kind of sympathize with the problem.
    Mr. DENISON. Mr. Stenholm, the organization that I represent, I think that if you could make this get into the Amber box, we have even talked in our producer group, Arkansas and Louisiana and California, of making the second AMTA payment on production if it will fit in the Amber box, because that wasn't in the original legislation, this additional, and we think that this committee in Congress can do pretty much what you want to do on that. But as Mr. Canon has said, landowners on that land will make those decisions and they think it will continue indefinitely and I have got a close friend of mine that—she lives in Austin, TX on a large farm that I used to farm, that I gave up. It does not have anything growing on it, and that family is getting the payments, and I don't think that is good for the program.
    Mr. STENHOLM. But the original intent of the Freedom to Farm was just that, and then to phase it out. And what I am talking about is the additional payments that come in in which it is rather difficult to justify or explain why that individual should get an additional payment. That one has always been difficult. But I understand the concern you have, and the committee will appreciate your continuing to work with us, assuming that there will be a second AMTA payment or something of that nature.
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    Mr. DENISON. We would like to correct it. We have a policy that we would be for correcting that if at all possible.
    Mr. STENHOLM. I think the record should show we are talking about a very, very small percentage of rice growers, landowners that are affected. I come down, the landowner deserves to share, as does the producer, in whatever income is generated on that land in a tenant-landlord relationship that is agreeable to the tenant and landlord. We are talking about a unique problem, as you have described the causes of it. If we could find an answer it would give us a little better PR, problem, answer, than what we have got today.
    Thank you very much.
    The CHAIRMAN. Thank you. We thank you for your testimony. We have indicated there will be some follow-up questions now and as we are going forward. We appreciate very much and recognize the difficulty you have in putting this together. But the committee does appreciate your input. Thank you very much.
    The hearing is adjourned.
    Mr. DENISON. Thank you, Mr. Chairman.
    [Whereupon, at 11:24 a.m., the committee was adjourned, subject to the call of the Chair.]
    [Material submitted for inclusion in the record follows:]
Answers to Submitted Questions
    1. You propose to continue AMTA payments for fiscal year 2003–07 at the fiscal year 2002 budgeted level for the eight major crops. Currently, only seven crops are eligible for AMTA contract payments. Are you proposing to add soybeans? If so, what share of the $4.01 billion would you propose for soybeans and how would contract acreage be reformulated?
    We propose to extend the marketing loan and loan deficiency payment programs (but not the ''AMTA'' payments) for the eight major crops. While we do propose to extend the $4.01 billion baseline for ''PFC-type'' fixed payments, we did not specify that these payments simply constitute a continuation of ''AMTA'' payments. It is correct that seven, not eight, major crops are currently eligible for PFC payments. Our testimony did not mean to imply that we are advocating (or opposing) the extension of a PFC-type payment to soybeans. However, our proposal does contemplate that soybeans would be eligible for the Gross Revenue Payment.
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    If Congress extends these PFC-type fixed payments to soybeans, we would support the provision of additional budget resources to accommodate the payments. To the extent that budget resources are made available to enhance the funds available for fixed payments, we support making these payments at the same levels made available to producers for the 1999 crop year (e.g. $5.603 billion in total payments, before providing any funds for soybean payments).
    Finally, as we stated in our prepared testimony, many rice producers continue to be concerned regarding the effects that the current Production Flexibility Contract (PFC) payments are having on the rice-farming infrastructure. Because these payments are currently completely decoupled from rice production, some tenant farmers have been faced with situations where landlords make the economic decision to accept the PFC payments, while declining to produce a crop, or even to accept any risk associated with the production of a rice crop.
U.S. rice producers look forward to working with the Committee on a resolution to this important issue.
    2. Assuming your proposed counter cyclical program was applicable for 2001 and 2002, what would the gross expenditure be for your program in each of the years? For both 2001 and 2002, what would be the per unit payment for each of the eight major crops?
    This information has already been provided to the Committee in our revised testimony. U.S. rice producers have engaged the Food and Agriculture Policy Research Institute to conduct further analysis on our proposed programs, and will share that information with the Committee when it is available.
    3. If producers participating in your proposed counter cyclical program were subject to a $40,000 payment limitation, would your industry view your proposal as providing a meaningful safety net?
    U.S. rice producers support the elimination of payment limits for all types of program benefits. Any payment limitation on the counter cyclical payment program would limit its effectiveness in compensating producers for income loss, and would therefore limit the program's effectiveness as an adequate safety net.
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    4. What is the rationale behind limiting payments to base production while at the same time pro rating payments for reduced acreage?
    The Gross Revenue Payment is designed to supplement the income of producers. As was indicated in our oral testimony before the committee, Rice producers will need to work with the Committee to develop other details of the program. Examples of these details include:
     Whether the program should be designed so that producers would be eligible for payments on plantings above and beyond their base acreage.
    Alternatively, whether producers with a base in any program commodity in the base years could be made eligible for GRP payments on either their base commodity (based on their actual history) or on any other program crop (based on some other history; e.g. county average yields for that commodity during the base period).
These are among the issues that U.S. rice producers have asked FAPRI analyze. We will share our findings and recommendations in this regard with the Committee when it is available.
    5. Do you believe the practical impact of your counter cyclical program limits a producers ability to maintain planting flexibility given that producers payments would be reduced on a pro rata basis when a producer plants less than their acreage base?
    No, but see answer to No. 4, above.
    6. Are you opposed to making a counter cyclical payment to a farm or producers ''base production'' regardless of whether the producer does or does not plant the crop?
    As explained in the answer to No. 1, above, and in our testimony, rice producers believe that any new farm legislation should be carefully constructed to avoid further economic dislocations of the type fostered by AMTA payments made to persons who choose not to produce a crop. This admonition applies here as well.
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In addition, see the answer to No. 4, above.
    7. Does the rice industry believe that beginning in 2003 there will be a significant rebound in prices for most of the major commodities?
    As reflected in our testimony and the supporting materials provided to the Committee, our initial analysis shows no significant recovery in prices for the foreseeable future, consistent with USDA's recent forecasts. These forecasts for rice prices show that the price does not even exceed the loan rate, assumed to remain at $6.50/cwt., until the 2004–05 [marketing year?].
    8. Has the United States share of the world rice export market increased since 1995? If not, what is the principal reason? What share of the world export market for rice do you think we would have had if we had had mandatory production controls in place the past 5 years?
    U.S. world rice export market share has declined significantly in recent years. From 1970 to 1989, U.S. world market share averaged 28 percent. Since 1990, U.S. world market share has averaged only 18 percent. Unfavorable exchange rates, competitive U.S. rice pricing vs. export competitors, economic conditions in importing countries, the pricing practices of a large number of State Trading Enterprises in world rice trade, unilaterally imposed trade sanctions, import market access and the cost of regulatory compliance here in the United States all contributed to the decline of U.S. world rice market share. Mandatory production controls would more than likely have increased the downward pressure on U.S. world export market share.
    9. Are you opposed to the manner in which emergency assistance Market Loss Assistance payments have been delivered the past three years?
    No, but some producers are concerned that Market Loss Assistance payments over the past 3 years have been made to landowner ''producers'' who neither planted nor produced a crop (and in some cases lacked the ability to do so). Unlike PFC payments, there is no contractual obligation that such payments be made to these persons. It is unclear what the justification is for this assistance to such persons.
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    With respect to producers, we support the provision of Market Loss Assistance payments this year, as we believe that the economic conditions facing rice producers warrant it. In addition, we believe that supplemental payments ought to also be authorized soon for 2002, so that producers and their bankers have some assurance that financial assistance will be provided.
    10. What impact would a $75,000 marketing loan program payment limitation have on producers if loan rates were rebalanced?
    Any payment limitation on the marketing loan/loan deficiency payment program would limit its effectiveness in compensating the producer for income loss because of market variation, and would therefore limit the program's effectiveness as a reasonable safety net. In the case of rice, if the rebalancing of loan rates resulted in increased loan rates as expected, increased marketing loan and loan deficiency payments would result. This would simply guarantee that producers would encounter the payment limits on fewer acres of production, and render the safety net that much less effective.
    The use of generic commodity certificates could mitigate somewhat the negative effect of these payment limitations, and we support the retention of the generic certificate authority. But generic certificates do limit the marketing options of some producers and raise other implementation issues that can adversely affect producer income.
    11. If permanent legislation containing your counter cyclical proposal was enacted as a part of a 5-year bill and assuming your counter-cyclical program was determined to fit in the ''amber'' box, what do you propose should happen if government expenditures exceed the WTO ''amber'' box ceiling at any time during the 5-year period?
Our analysis shows that the Gross Revenue Payment program we have recommended falls well within the current Amber Box commitment. Beyond our proposal, it should be left to Congress to design and oversee the implementation of the variety of domestic support programs such that, in total, they do not routinely exceed U.S. commitments under the WTO.
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    12. If permanent legislation authorizing economic assistance for fruits and vegetables was authorized, should there remain a restriction on the planting of fruits and vegetables on AMTA contract acres?
    Our understanding is that the rationale for restricting the planting of fruits and vegetables on PFC acres was that no assistance was available to these crops under the 1996 farm bill. If the authorization PFC payments or similar economic assistance is extended to fruit and vegetable growers, it would appear that the policy rationale underlying the fruit and vegetable planting restrictions would have disappeared.
    13. Are currency exchange rates the single largest factor that impacts our ability to competitively export agriculture products? If not, what is?
    While very important, currency exchange rates are not the single most important factor impacting our ability to competitively export rice. Other important factors include the cost of production (e.g. energy and other inputs) and of regulatory compliance (e.g. environmental regulations) here in the United States; U.S. domestic support policies (e.g. the marketing loan program, planting flexibility); U.S. rice pricing vs. that of our export competitors; U.S. export programs and policies (e.g. unilateral trade sanctions); economic conditions in importing countries; market access to importing countries; and export policies and subsidies of our competitors.
    14. What domestic or world factors have the most impact on the profitability of the group of producers you represent?
    See the response to question No. 13, above.
    15. If applicable, what percent of producers in your organization purchase a ''buy-up'' crop insurance policy?
    In the 2000 crop year approximately 24 percent of all rice acres were covered by a ''buy-up'' crop insurance policy. The use of crop insurance has traditionally been low for rice acres. This is because the large investment in land preparation and irrigation required by rice results in low yield and quality variations relative to other crops. As such, the crop insurance program continues to offer benefits that are too low at costs that are too high to entice most producers to purchase significant coverages.
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    16. What position has your industry taken with respect to entitlements of disaster benefits for producers who don't buy crop insurance?
    Primarily because crop insurance has not provided cost effective coverage to rice producers, we do not support tying any benefit eligibility, including disaster programs, to crop insurance purchases. The Federal crop insurance program should be administered in such a way as to entice participation on its own merits. Producers who opt to purchase crop insurance should not have any benefits reduced as a result of any indemnity received.
    17. Since the Agriculture Risk Protection Act of 2000 provided substantial improvements to crop insurance, do you believe that ad hoc disaster legislation should be authorized for crops currently covered by insurance? If yes, why?
    Yes. Rice producers did not oppose efforts to improve the crop insurance program through the Agriculture Risk Protection Act of 2000. While we understand that the crop insurance program is important to producers of some commodities, we made very clear during the consideration of the Act that we expected few, if any, of the benefits of this legislation to flow to rice producers. We also made clear that we oppose any requirement that crop insurance be purchased as a prerequisite to, or an integral part of, any part of the farm program safety net, including ad hoc assistance.
    Rice producers also supported the provision of ad hoc disaster and market loss assistance provided by Congress over the past 3 years. We believe strongly that the current economic conditions in the rice industry warrant the provision of assistance for the 2001 and 2002 crop years in an amount at least equal to the total economic assistance provided for the 2000 crop. Whether or not crop insurance currently ''covers'' a particular crop should not affect a producer's eligibility for ad hoc disaster assistance. This is doubly true for crops such as rice, where a crop may be ''covered'' by crop insurance that continues to be largely ineffective for the majority of producers.
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    18. Do you believe it is important that any counter cyclical program benefits are targeted towards those producers actually sharing in the risk of the production of major crops (cotton, corn, wheat, rice, grain sorghum, barley, oats and oilseeds)?
    Yes. Counter cyclical payments should be paid to producers actually sharing in the risk of producing the crop.
    19. Would a $40,000 counter cyclical payment limitation have a significant impact on your programs ability to function as a reasonable safety net?
Any payment limitation on the counter cyclical payment program would limit its effectiveness in compensating the producer for income loss because of market variation, and would therefore limit the program's effectiveness as a reasonable safety net. As we have indicated, rice producers oppose the imposition of payment limitations on the counter cyclical program, and support the elimination of payment limits on other income and marketing assistance programs.
    20. Do you believe your counter cyclical program distorts market signals and causes producers to grow crops that they might not otherwise grow in the absence of the program?
    Our analysis shows no significant area or yield response to the Gross Revenue Payment program in any of the eight program crops.
    21. At the time a borrower is arranging financing for the upcoming crop, do you believe that with some reasonable degree of certainty a lender could determine what a producer might expect to receive in counter-cyclical payments on a per unit basis assuming your concept for the major commodities was enacted into law?
    Yes. For example, a lender could calculate a reasonable estimate of what a producer might receive on a look-forward basis by using the average of current futures prices and the USDA crop estimate to calculate an estimate of the Gross Revenue for the current year. The current year Gross Revenue estimate could then be used to calculate the per unit Gross Revenue Payment by dividing the Gross Revenue Base (less the current year Gross Revenue) by the current year USDA crop estimate. Of course, these calculations would be affected by the program specifics yet to be determined, as discussed in the answer to question 4, above.
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    22. Do you believe that the loan deficiency component of the marketing loan program keeps prices at a level lower than they would otherwise climb in the absence of the loan deficiency component of the program?
    No, prices year-in year-out are a function of fundamental supply and demand factors both here in the United States as well as in competitor producing nations and export markets. The loan deficiency payments simply act as a counter cyclical payment when prices are below the loan rate. Unless marketing loan rates are set at a level high enough to give a producer a reasonable assurance that market prices will never exceed the loan rate, and that the loan rate level would virtually guarantee increased revenue from loan deficiency payments on increased production, the producer would have no incentive to increase production. Therefore there would be no increase in total supply, which would result in decreasing prices.
    Rather, the marketing loan program encourages the marketing of commodities, as opposed to the accumulation of loan stocks, with the possibility of forfeitures. Of course prices will respond to production levels each crop year. But the marketing loan program (including the deficiency payment component) encourages the marketing of commodities and discourages the build-up of price-depressing inventories over time.
    23. Do you believe the elimination of payment limits would encourage producers to expand their farming operation, encourage overproduction, cause a shift from one crop to another, et cetera?
    Payment limitations reduce the efficiency of the marketing loan/loan deficiency payment program as a counter cyclical mechanism and reduce the program's effectiveness as a component of the farm safety net. Payment limits on PFC-type fixed payments similarly reduce efficiencies and drive up administrative costs. Eliminating these payment limitations would reduce the government's program administrative costs and producers' transaction costs.
    Our initial analysis of our proposal, done on an aggregate national basis, does not assume any payment limitations. It reflects no area or yield response to our proposed the Gross Revenue Payment program in any of the eight program crops. With respect to the marketing loan program, producers would not have any incentive to increase production in order to collect greater revenues from loan deficiency payments unless the loan rates were set high enough to assure that market prices would never exceed the loan rate. The only exception to this observation would be if there were a significant imbalance in the relative loan rates among program commodities.
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    24. From a practical standpoint, when is the earliest date you believe any changes in permanent farm law should become effective?
    If Congress makes available a Market Loss Assistance payment or similar producer assistance for 2001 and 2002, then new permanent farm law could wait to take effect until 2003. If such assistance is not made available for 2002, then the new legislation needs to be in place in time to allow producers and their lenders sufficient opportunity to effectively plan for the 2002 crop.
    25. The FAIR Act covered 7 crop years. How many years do you think the next farm bill should cover?
    From 5 to 7 years, with a mechanism to review farm income safety net effectiveness every 2 years. We would urge the committee to avoid future reauthorization in an election year.

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