SPEAKERS CONTENTS INSERTS
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AGRICULTURAL ECONOMIC OUTLOOK
GENERAL FARM COMMODITIES
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
OCTOBER 9, 1997
Serial No. 10528
Printed for the use of the Committee on Agriculture
Page 2 PREV PAGE TOP OF DOCCOMMITTEE ON AGRICULTURE
ROBERT F. (BOB) SMITH, Oregon, Chairman
LARRY COMBEST, Texas,
BILL BARRETT, Nebraska
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
JOHN T. DOOLITTLE, California
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
RON LEWIS, Kentucky
HELEN CHENOWETH, Idaho
JOHN N. HOSTETTLER, Indiana
ED BRYANT, Tennessee
MARK FOLEY, Florida
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JO ANN EMERSON, Missouri
JERRY MORAN, Kansas
ROY BLOUNT, Missouri
Page 3 PREV PAGE TOP OF DOCCHARLES W. (CHIP) PICKERING, Mississippi
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GEORGE E. BROWN, Jr., California
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SCOTTY BAESLER, Kentucky
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
SAM FARR, California
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
VIRGIL H. GOODE, Jr., Virginia
Page 4 PREV PAGE TOP OF DOCMIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
JAY W. JOHNSON, Wisconsin
LEONARD L. BOSWELL, Iowa
PAUL UNGER, Majority Staff Director
JOHN E. HOGAN, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
VERNIE HUBERT, Minority Counsel
DAVID S. REDMOND, Communications Director
SUBCOMMITTEE ON GENERAL FARM COMMODITIES
BILL BARRETT, Nebraska, Chairman
LARRY COMBEST, Texas
JOHN A. BOEHNER, Ohio
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
JO ANN EMERSON, Missouri
JERRY MORAN, Kansas
JOHN R. THUNE, South Dakota
Page 5 PREV PAGE TOP OF DOCJOHN COOKSEY, Louisiana
DAVID MINGE, Minnesota
BENNIE G. THOMPSON, Mississippi
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
JAY W. JOHNSON, Wisconsin
C O N T E N T S
Barrett, Hon. Bill, a Representative in Congress from the State of Nebraska, opening statement
Minge, Hon. David, a Representative in Congress from the State of Minnesota, opening statement
Breimyer, Harold F., professor and extension economist emeritus, University of Missouri-Columbia
Campbell, John B., vice president, government affairs and industrial products, Ag Processing Inc.
Collins, Keith, Chief Economist, U.S. Department of Agriculture
Page 6 PREV PAGE TOP OF DOC National Grain and Feed Association, statement
Dobbs, Thomas L., professor of agricultural economics, South Dakota State University, statement submitted by Mr. Minge.
AGRICULTURAL ECONOMIC OUTLOOK
THURSDAY, OCTOBER 9, 1997
House of Representatives,
Subcommittee on General Farm Commodities,
Committee on Agriculture,
The subcommittee met, pursuant to notice, at 9:35 a.m., in room 1300, Longworth House Office Building, Hon. Bill Barrett (chairman of the subcommittee) presiding.
Present: Representatives Lucas, Emerson, Moran, Thune, Smith, Cooksey, Minge, Stabenow, Etheridge, and Johnson.
Staff present: Mike Neruda, staff director, Subcommittee on General Farm Commodities; Wanda Worsham, clerk; Callista Bisek, assistant clerk/scheduler; and Brian Hard, legislative assistant.
OPENING STATEMENT OF HON. BILL BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
Mr. BARRETT. This hearing of the Subcommittee on General Farm Commodities will now come to order.
I want to take this opportunity to thank the members of the subcommittee who will be in and out today and those of course who will be testifying before us today, for their cooperation and their assistance in reviewing our agricultural outlook.
Page 7 PREV PAGE TOP OF DOC A key responsibility of this subcommittee is to monitor our farm economy and to review the health of our agricultural sector. I believe in a market-based agricultural economy, the 1996 Freedom to Farm bill provides our producers with many more options and opportunities now and for the future. The flexibility provisions in the farm bill are a welcome change to our farm policy. I'm upbeat about our farm economy right now. According to USDA, cash receipts set a record of over $200 billion in 1996 and crop receipts rose well above the average of the 1990s. Livestock receipts are staying at about average.
The September 28, 1997, Grand Island Daily Independent, which is the largest newspaper in my district, headlines and I quote, ''Farmers Cautious Even Amid Ag Boom.'' The article goes on to state that exports are up, interest rates are down, farmers are enjoying one of the longest periods of growth American agricultural has ever seen. The boom was reflected in the huge crowds at last week's farm progress show in Illinois, billed as the Nation's biggest. On Tuesday, Secretary Glickman called the overall agricultural outlook bullish. Corn on Tuesday went up to the limit on news that China had stopped exports. But, like many of the Nebraska farmers, and like Federal Reserve Chairman Greenspan noted yesterday, I continue to be somewhat cautious.
Farm real estate values have risen every year since the mid1980s; a 5 percent increase is expected in 1997. As a former real estate broker, I know that cannot continue indefinitely. Total debt in this country has dropped from $250 billion in the early 1980s to about $160 billion today. However, farmers will take on more debt for the fifth year in a row, and I have some concerns that we not be heading into the same situation we were in the early 1980s where we experienced an economic downturn. We certainly want to hear today from our witnesses some indication of our farmers' financial status.
American agriculture will continue to adjust to the increasing risks that accompany changes in domestic farm and trade policy as well as new technologies and marketing arrangements that are emerging. Certainly, with seeds that are genetically engineered, computer systems that change overnight and innovative satellite systems geared toward agriculture, the risks that farmers will take to invest in the future will be enormous.
Page 8 PREV PAGE TOP OF DOC This subcommittee looks forward to an overview of agricultural markets for the near term, as well as implications for our farm economy generally. We want to hear about grain prices, planting flexibility, ethanol production, the cattle cycle, price volatility, and export activity. I've said I believe that the U.S. agricultural economy is in a relatively strong position, but I continue to suggest there are some areas of continued concern. These areas certainly include dairy producers; some areas cattle producers; corn, for example, shows consistent domestic demand. However, there's been variability for corn and wheat exports. Can corn and wheat producers count on continuous and growing export demand? How can the economic outlook be bright if our major bulk commodities are not moving?
I would imagine our subcommittee members today will probably be focusing on their local economy in the near term, but we also need to be mindful of the importance of the long-range trends in our exports and our world food demand. We hope our witnesses today will help us in those areas.
The Food and Agricultural Policy Research Institute has noted that continued growth in the world economy, especially in China and the Pacific Rim, provides a reason for cautious optimism for U.S. agriculture during the next decade. They do note short-term volatility for grain, but state that the overall outlook is good. I, too, am concerned about the short-term volatility for grain and I look forward to Mr. Collins' comments on bulk commodities.
I had the opportunity to read your testimony last evening, Keith. We again welcome you, and I look forward to hearing from you and other members of the panel.
Mr. COLLINS. Thank you, very much.
Mr. BARRETT. Before we start, Keith, I want to recognize the ranking member for a statement.
OPENING STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Page 9 PREV PAGE TOP OF DOC Mr. MINGE. Thank you, Mr. Chairman. Good morning. First, I'd like to express my appreciation to Chairman Barrett for scheduling this hearing to review the economic outlook for agriculture.
American agriculture has undergone many changes over the last few years. Today's hearing offers us an important opportunity to look at the future. I am particularly interested in how the farm economy has fared under the first two crop years of the 1996 farm bill.
The current trend in American agriculture is toward larger, more specialized farms. I believe it's important to ensure that we have an agricultural policy that allows all sizes and types of farms an opportunity to compete. Everyone who chooses to farm should have the tools to do so and should have the tools that are necessary to manage risk. We made some important policy decisions in the 1996 farm bill. The commodity-specific programs were either eliminated or on their way to being phased out. This provides a range of choice to farmers. It also means that farm income is far more dependent on market activity than it is on Government programs. We've been blessed with having high prices, or relatively high prices, for some basic commodities during the last year-and-a-half. It's unclear whether that price opportunity will continue. It certainly has not been universal. As you indicated, Mr. Chairman, dairy particularly has suffered, as have some other sectors.
So, I look forward with interest to the presentations of today's witnesses and hope that they address the issues which I have alluded to and others that you have identified as important, as we proceed to analyze the farm economy in the past two years and the future.
Mr. BARRETT. Thank you, Mr. Minge.
Perhaps a more formal introduction: We're pleased to have with us today Mr. Keith Collins, Chief Economist at the USDA. Keith, proceed.
Page 10 PREV PAGE TOP OF DOCSTATEMENT OF KEITH J. COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE
Mr. COLLINS. Thank you very much, Mr. Chairman and Mr. Minge. I have a rather lengthy testimony which I offer for the record and will just quickly summarize my testimony by commenting on three areas: the general state of the farm economy, highlight a few crop markets and the farm bill, and then I want to mention a couple of important factors that we're watching for the future.
Agriculture's overall performance traces to the demand for farm commodities which over the last several years has been reasonably good. Farm exports this year are down from the record high, but are still forecast at nearly $59 billion which would be the second highest ever. Likewise, we have a very favorable macroeconomy which is expected to pull this year's domestic demand to the highest level in at least 50 years for all the major crops: wheat, corn, soybeans, and cotton. This growing demand, combined with reduced stocks and some lower yields, produced strong or record high prices in both 1995 and 1996, and at or above average prices are expected for the 1997 crops. Net cash farm income in the United States was at a record high level in 1996 and income is expected to be above average again this year 1997.
In turn, as we look through the 1990s, farm solvency has steadily improved. The debt-to-asset ratio by the end of 1997 is expected to be down to 14.6 percent compared with the 16 percent range in the early 1990s. Despite this good news, as you both mentioned, the profit margin is still thin for many producers. Particular weak spots include dairy, where net returns during the first half of 1997 have been among the lowest in this decade, and also some stress in areas where weather has hurt yields over the last couple of yearsnotably, this year in this area, the eastern United States, such as in Virginia, Maryland, Pennsylvania, and up into New York.
Turning to the key crop markets, this year's wheat crop is the highest in this decade. That's lowering prices, but it's also rebuilding what had been the lowest wheat stocks since the early 1970s. Our exports are expected to rise because of growing world demand and declining production in Argentina, Australia and Canada.
Page 11 PREV PAGE TOP OF DOC The corn harvest is expected to be the fourth largest ever. Even so, corn prices remain above average in U.S. and world feed grain carryover stocks are expected to decline this season. Higher meat production in the U.S. is raising feed use to record levels and lower competitor production will expand our exports. Corn farmers will also likely see higher net returns as the 1996 farm bill payment rate for corn rises to 48 cents a bushel on the 1997 crop.
Soybeans has benefited from planting flexibility, surpassing wheat acreage for the first time ever. In 1997, production is a record high. That too is reducing soybean prices, but protein demand around the world is still pretty strong, including U.S. sales to Brazil and Argentina, and that's limiting the price decline.
Cotton has lost acreage to other crops this year, but production will still exceed 18 million bales, which was unheard of a decade ago. Domestic use is setting modern-day records as cotton's market share, relative to synthetics, continues to gain, and exports are likely to hold at last year's level despite reduced imports by China who now has 40 percent of the world's cotton stocks.
Thus far, the farm bill has generally been a positive factor for crop producers. Flexibility and elimination of bases and acreage controls have enabled more of the right kind of acreage to be planted in response to higher prices. The bill does remain untested with respect to how well acreage would shrink should prices turn quite low. In the first 2 years, fixed payments have pumped more than $8 billion into farm income, $8 billion more than would have been paid out under the old deficiency payment program. The loan programs are still being used to provide marketing flexibility, and finally, the CRP is enrolling acres that are rated more environmentally sensitive than the acres exiting the program and program costs are being reduced.
I'd like to end my opening comments with listing a couple of uncertainties that I have outlined in the testimony about the outlook and the challenges to American agriculture, factors that we're watching very closely. The first is variability caused by weather. A variety of El Nino and La Nina effects are expected and could influence agricultural production through the 1999 crop markets.
Page 12 PREV PAGE TOP OF DOC A second factor is economic disruptions which could affect U.S. exports. A concern we have is the currency devaluations in Thailand, Philippines, Malaysia, and Indonesia. Those four countries alone buy U.S. products, agricultural products, in excess of $2.5 billion. The devaluations are going to make our products more expensive to them, but a more serious problem would occur if these devaluations are followed by recession, as occurred in Mexico following their devaluation in 1995.
A third factor is food safety concerns which are becoming increasingly important in the new environment that farmers face. We're watching such things as what the effect of the E. coli finding in Korea will have; how soon approval will come for biotech crops in the European Union; what labeling will mean to our product demand in the European Union; and finally, of course, we've been watching closely the position of Brazil with respect to transgenic soybeans.
A fourth factor is crop and animal disease and health issues, which can also pop up and influence trade at anytime. We're continuing to monitor Taiwan's foot-and-mouth disease outbreak and the prospect it's creating for expanded U.S. pork exports.
A fifth factor is approval of fast track which I think is clearly important for the longer term outlook because of the general benefits it should confer to agriculture, but I think it's also important for the short term because it continues to emphasize the commitment the U.S. Government has to opening markets and the need for science to justify health and safety trade barriers.
Sixth, and last, I'll mention China. China, which like the weather, is always on our radar screen. Our year 2005 projections have China accounting for 10 percent of world grain trade. Their yields and policy decisions are immense variability factors in today's markets. We do not know to what extent their 1994 grain self-sufficiency initiatives will continue to be pursued, and the outcome of those decisions and decisions like WTO accession are going to have enormous implications for world grain, oilseed, and cotton demand.
Page 13 PREV PAGE TOP OF DOC That completes my comments. I'd be happy to answer questions.
[The statement of Mr. Collins appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you, Dr. Collins.
Does the fact that farmland values have been rising since the mid1980s, and expected to go up another 5 percent this year, is that of concern to you? How does this impact your economic forecast?
Mr. COLLINS. Well, for a long time we thought rising farmland values was good news after the crash of the mid1980s and the rise that began, I think, in 1987. We looked forward to the rising farmland values, because it showed confidence in the future strength of the agricultural economy. It's become a concern over the last couple of years because farmers are taking on a little more debt. We had the 1996 farm bill with its fixed payments, and people have raised those as factors in the rising land values. I've looked at that question; I don't believe they're very important factors in the rising land values. I think that the most important factor is the income prospects for agriculture and the stable interest rate environment that we have had. The land value increases have been large over the last few years, 7 percent in 1995, 6 percent in 1996, as you said, 5 percent expected next year. I don't think that I'm particularly troubled by that.
If you look at where we are, in terms of land values now, relative to where we were before the crash in the 1980s, we're only up a little bit in many areas of the country. We're up quite a bit on the coastswest coast and east coastbut when you get into the heart of the Corn Belt, Southern Plains, Northern Plains, the nominal dollar increase is not up very much compared to where we were, and if you adjust that for inflation, actually the real value of farmland is down quite a bit from where it was before the decline in the 1980s. I don't particularly see a major concern with those recent increases. I would expect them to come down a little bit over the next couple of years. They're being propelled somewhat now by the record high income we had in 1996 and the very strong export prospects that we have had.
Page 14 PREV PAGE TOP OF DOC Mr. BARRETT. Do you think that the fact that farmers are taking on a bigger debt load again for what, the fifth year in a row, I believe, is this a function in anyway of increasing land values?
Mr. COLLINS. Obviously, there's some relationship there, but a couple of comments about this debt increase. It's been fairly substantial since 1993. It's up about $18 billion, up from $140 billion, to what we think will be $158 billion this year, up $18 billion since 1993. The majority of that debt increase has not been for real estate. It's been for farm operating loans. The increase in farm operating loans has been twice as great as the increase in farm real estate debt.
One of the things we've observed over the last couple of years is that farmers who are expanding the size of their operations and buying contiguous fields have frequently paid cash. There has been somewhat less financing for the land acquisitions as farmers expand the size of their farms. I think that the debt increase, again, like the farmland increase, is due to some optimism about American agriculture. To some extent, that is a good thing. Farmers are optimistic about the future.
Mr. BARRETT. Expansion of existing operations?
Mr. COLLINS. They're expanding existing operations, they're investing in equipment. We had machinery and equipment purchases in 1996 at the highest level in the 1990snot much higher than the previous high. I mean, farmers are not going overboard in buying new equipment, they're still fairly conservative, but nevertheless, it was the highest level in the 1990s. The interest rate climate has also been favorable to borrowing.
One of the things that we track at USDA is debt repayment capacity. We have a measurewe look at the debt capacity that American agriculture can hold. We take into account a 7-year loan, the actual rate of interest, and then bankers' guidelines on what farmers can afford to pay on debt service. If you go back to the 1980s when the farm credit crisis was at its highest, farmers were using more than 100 percent of their debt repayment capacity. In 1996, that was below 50 percent; 49 percent of their debt repayment capacity was being utilized. So there's a lot of debt repayment capacity out there that was not being utilized and we're in a much better position than we were in the 1980s.
Page 15 PREV PAGE TOP OF DOC Now in 1997, because income is going down, that debt repayment capacity utilization is going to go up to about 55 percent of the maximum guideline. So, I think it's something worth watching, but at the moment, I don't think we've moved up to any kind of level that's inconsistent or unsustainable with respect to the overall income growth in the farm economy.
Mr. BARRETT. Good. Thank you. In my opening statement I indicated what was happening in the 1980s. We both recall that USDA was saying that we'd have a robust economy, exports would be up, prices high, so on and so forth; and then we all know what happened: prices slipped, things went to pieces. We're saying essentially the same thing today; that things are very, very, very robust. What's the difference between the forecast of today, and the forecast of the early to mid1980s?
What's the different situation here?
Mr. COLLINS. There are some similarities. One of the hallmarks of what happened in the late 1970s was what some economists have called the export euphoria of the 1970s. With former Soviet Union's purchases in world markets, with a lot of emphasis on population growth, assumptions about stagnation of yields, and the inability of technology to meet population growth, there was a belief that we were going to see increasing real farm prices in the future. Well, as we got into the 1980s that didn't occur. Export markets stagnated and declined and that led to the whole unraveling of the system.
To some extent today, we are very optimistic. Many people are very optimistic about exports. I would use your word; I'd be very cautious about that in the future. There are some reasons for thinking that the global, macroeconomic conditions are a little different. We don't have the piling-up of the less-developed country debt that we had in the 1980s; we don't have the interest rates that we had which helped bring the whole structure down in the 1980s. You may recall 18 percent prime rates in the early 1980s which made debt service costs just astronomical for countries around the world, which led countries around the world to become more self-sufficient, try and cut down their imports, and it caused their economies to shrink and we went into a massive global recession in the early 1980s which helped bring down the whole structure.
Page 16 PREV PAGE TOP OF DOC Right now, just the opposite is occurring. Over the past year, we've seen positive GDP growth rates in a higher percentage of the countries in the world than we've seen for most of the 1990s. So, the overall world economy is on a much better footing. Interest rates are on a much better footing, both in the United States and around the world. Inflation rates are on a better footing. Income growth is increasing. Market orientation and capitalism is prevailing in a lot of areas. Governments are getting rid of their parastatal corporations and we're seeing some kind of economic dynamism that's coming from those market orientation changes as well as the trade liberalization moves around the world. I think the macroeconomic climate today is much different than it was in the 1980s and that's grounds for a little more optimism.
However, I would not underestimate some of the things that could happen. We're very dependent in our long-term forecasts on what we think China will do. We're very dependent on assumptions about production potential in other countries. Those things could change and those things could change quickly. China, for example, is a good case. Just 2 or 3 years ago we were thinking that China would import 10 percent of its grain needs; this year China will import about 1 percent. So, these market situations could change, but fundamentally, I think, the big difference is in the macroeconomic environment in the world between the 1980s and now.
Mr. BARRETT. Thank you, I appreciate that answer very much.
Mr. MINGE. Thank you. There's been a lot of talk about the role of transition payments in current farm economy and their importance. There was criticism of this in the 1996 farm bill discussions. One question that came up that I guess I've heard discussed increasingly in rural areas is the affect of the transition payments on land values and rental rates. Is there anything that you have been able to identify that would either confirm or reject the proposition that the transition payments essentially were capitalized into rental rates and into land values?
Page 17 PREV PAGE TOP OF DOC Mr. COLLINS. Well, the value of land is a function of the present value of all the income you can earn on it and the interest rate. To the extent that those payments are tied to the land and they represent income that can be earned from that land, then they're going to get capitalized into land values. Another question is: OK, if they're capitalized, how important is that capitalization relative to the land value increases that we've seen? I think that it probably accounts for less than half of the land value increases we've seen.
In fact, I think fairly a small percentage, and I say that because, if you look at what the payment is worth relative to what the value of the deficiency payment program was, which is kind of a theoretical concept but people can estimate that using implied options values, if you look at that difference, the value of the actual payments that are being made versus what the deficiency payment program would have been worth over the next 7 years, and then you discount that to the current time, it probably represents an increase in the price of $2,000 or $3,000 an acre farmland in the Midwest of $100 an acre or something like that, or even less. So, I think it's a factor, it contributes to the increase in farmland values, but I don't think it's the dominant factor. I think that the general belief that people have in the future income earning power from the marketplace is what's driving farmland values right now.
Mr. MINGE. Have the payment limitation provisions in the 1996 farm bill been effective? Can you tell from the statistics or anything whether they're being evaded?
Mr. COLLINS. Yes, that's a good question for our inspector general. I would say that this is an issue that we have struggled with a lot over the years and we know that, because we provide opportunities for people to structure their operations in different ways, we know that there's not as much money left on the table as you might think when you look at the concept of a payment limit. Every year we've tried to estimate how much money we didn't pay out because of the payment limits. We know how much we would pay out if every single bushel of program production received a payment and we compare that to what we actually paid out and it varies from year to year. Last year there was something like $100 million, this is very rough, I don't have the exact figure, but it was something in the order of about $100 million in payments that we did not make which we attribute to the payment limit. How does that compare with previous years? It's actually down a little bit from some earlier years, but there's a lot of offsetting factors going on. There's different payment rates for different crops and we haven't figured out the effect of all those different offsetting factors.
Page 18 PREV PAGE TOP OF DOC So, in just looking at the raw data on what we think we saved because of payment limits, it's not inconsistent with what we've saved in past years. So, it doesn't look like there's anythingthere's no new monkey-business; there's nothing new and funny going on in the way farmers are constituting their operations and the way in which payment limits are saving money compared to the past.
Mr. MINGE. I note that you discuss conservation reserve program and the number of acres that are not being farmed as a result of that, and it appears that CRP acreage in the 15th signup was disproportionately in the areas that produce wheat. I'm wondering if there's any problem that you see in terms of the decrease in the carryover stock for wheat and the CRP concentration in that area and if that would indicate anything about the policies that ought to be pursued by USDA here in the 16th signup?
Mr. COLLINS. Well, this is a big issue at USDA and this is a big issue in the grain trade, who talk to me frequently about this issue. First of all, with respect to what we did in the last signup, before the 15th signup, we had 33 million acres enrolled in the CRP. After the 15th signup, as of October 1, last week, we had 28 million acres enrolled in the CRP. So we're down about 5 million acres.
With respect to wheat, we had a little over 9 million acres in the CRP; now we have about 8.5 million acres that we would consider traditionally planted to wheat. We can't measure that precisely, but that is our rough estimate. So, we actually have less wheat acreage in the CRP now than we had before the 15th signup. So in that sense we freed up a little land to be planted.
Now, that's not a stagnant number, we've got a 16th signup coming up and that could change the amount of wheat acreage that's in the CRP. Based on what we've done so far, we've not tightened the market, we've actually loosened it up a little bit.
Getting to the broader question, I think that we have a lot of capacity in the United States and around the world to rebuild wheat stocks. We're going to do it this year. We've got the largest wheat crop in the 1990s this year, an 11 percent increase from last year. Our carryover stocks on June 1 of this year were about 450 million bushels. On June 1 of next year, they're forecast to be about 680 million bushels. So we are increasing wheat carryover in the United States
Page 19 PREV PAGE TOP OF DOC The rest of the world is not increasing that much, but there's a lot of capacity around the world to do so. We have poor yields in Argentina, Australia, and Canada this year. So, I think that there is some prospect that the very low, the record low stocks to use ratios of the last couple of years are going to inch up over the next couple of years regardless of what we do with the CRP.
One final comment about the CRP is that with flexibility and with no acreage bases, the land that is not in the CRP on a producer's farm is now free to plant anything; it wasn't before. Before, when a producer went into the CRP, when we had acreage bases, they had to reduce the wheat bases on their farm and they were constrained by their wheat base on their non-CRP acreage. That is no longer the case. There is no wheat base. So if the price gets high enough, we're going to see, even though there's land in the CRP, the land that's not in the CRP, have a higher proportion go to wheat.
Mr. MINGE. Thank you.
Mr. BARRETT. The gentlelady from Missouri, Mrs. Emerson.
Mrs. EMERSON. Thank you, Mr. Chairman. Thanks, Dr. Collins, for being here today.
I'm a strong supporter of agricultural research, and in fact, we in our district have one of the premier agriculture research centers, the Delta Center, which is connected with the University of Missouri. My question is: How do you account or do you account for agricultural research in developing your projections and if you do so, how positive is that impact; and if not, then why don't you all include that?
Mr. COLLINS. Well, we don't account for agriculture research explicitly in terms of, say, research budgets in the United States or other countries of the world. It is something that we take account of judgmentally. To the extent that research is making a difference in the productive capacity of the United States or different countries, we take that into account. Let me give you an example with China. Through much of the 1980s and early 1990s, China's investment in agricultural research went way down. Over the last couple of years, China has dramatically increased their investment in agriculture. We think that that's going to make their production capacity a little better in future years, and as a result of that, we will change our production forecast.
Page 20 PREV PAGE TOP OF DOC Same way in the United States. If you go back a few years ago, people made judgments about what corn yield was going to be or wheat yield was going to be, but now just take a look at some of the research breakthroughs, a lot of which are not university breakthroughs, but private sector breakthroughsthings like Roundup-ready soybeans, Roundup-ready corn, bt corn, bt cotton, high lysine corn, high stearate soybeans, all of this stuff that's out there is going to make a yield difference. Those are the products of research. To the extent that they come onstream through research, we do build those into our projections.
Mrs. EMERSON. I appreciate that. Thanks very much.
I don't have any other questions, Mr. Chairman, thanks.
Mr. BARRETT. Ms. Stabenow.
Ms. STABENOW. Thank you, Mr. Chairman. I apologize for not being able to be here at the beginning of this session, but appreciate very much your being here. I understand you talked about the winter wheat crops and that they're nearly perfect at this point in time. As a person from Michigan who's been working an issue of a wheat and barley scab and the need to be doing more extensive research to followup on my friend from Missouri, I know that Minnesota has been hit dramatically again this year, that many other States have experienced losses. Michigan has not as much this year, but last year we lost about $56 million in yield.
I'm wondering how you factor that into your assessments, particularly on the wheat conditions, and as we move forward we have in the research reauthorization that will be coming before this committee, one of the priority areas being to do wheat research into the issue of vomatoxin, and so on.
How do you factor that in?
Mr. COLLINS. A couple of comments on that. I did make a comment in my testimony about the near ideal conditions of winter wheat, and I think that's true. As I go back and retrace what happened over the past year, I can't imagine better conditions for a wheat crop with the one exception, which was the freeze in the southern plains and I think it was in April. But then following that freeze we had absolutely the most perfect conditions for the wheat crop to recover from that freeze. As a result of that, we have something like over 10 States that had record high winter wheat yields this year. That's a quantity measure. That quantity measure comes from our on-field surveys.
Page 21 PREV PAGE TOP OF DOC In fact, most of the numbers I might throw out today could all well be changed tomorrow, because the Department of Agriculture tomorrow will release its October crop report and it's new world supply and demand estimates report. But, in that report, we won't cover wheat; we've done our last wheat crop estimate, but that crop estimate comes from on-field surveys. We actually go out and look at the crop; we enumerate the crop; we make a measure of the quantity of the crop; we do not assess the quality of the crop. That's something we're just not capable of doing. That's something that shows up in the marketplace with premiums or discounts. But the quality also can affect the yield, and to the extent that quality affects the yield, then we would measure a shortfall in yield.
Now one of the factors with respect to the problems you've raised, disease, has been a big concern at USDA. We have a new Under Secretary for Research, Miley Gonzales. He has been out to look at the wheat crop in the Northern Plains. I think the wheat industry has got his attention with respect to the vomatoxin and other issues that you raised. In fact, I think he told me he was going to go out for a second trip in the near future. So we know that's a problem and that's high on his research agenda, to deal with.
Ms. STABENOW. Well, let me just indicate that we, those of us in States affected, very much appreciate the USDA's support and involvement. There are dollars this year in the budget that USDA will have available to work with both your own labs, as well as the land grant universities and the consortium that's been put together across the country that we've been working on to address that. And certainly we hope that as that research goes forward and we can offer farmers some information about what should be done and solve this, that your report will be even better as we're able to address this.
Mr. COLLINS. Well, I hope so. I know as the winter wheat growers had a wonderful year, the spring wheat growers have had just the opposite, and those disease problems have been partially responsible. They had the lowest yields in spring wheat areas since 1989, and so to ensure that people get the best income they can get, those problems have to be solved.
Page 22 PREV PAGE TOP OF DOC Ms. STABENOW. Thank you, Mr. Chairman.
Mr. BARRETT. The gentleman from Oklahoma, Mr. Lucas?
Mr. LUCAS. Thank you, Mr. Chairman.
Dr. Collins, I couldn't help but think about the comment earlier about the supply of wheat on hand potentially this year and next year in stocks. The comments made to me back home in the field by the producers basically are at the cash price presently for wheat. They tend to believe that the folks who trade commodities out there and who worry about stocks, obviously, think that we have a sufficient stockpile and they make that point rather graphically.
Also, another issue that comes up more directly related to you. With the 16th signup beginning in just a matter of days for this round of the Conservation Reserve Program, could you describe for me, I guess in a thumbnail sketch, the criteria for evaluating CRP applications this time for the 16th signup and how that system will vary, if any, from the previous 15th signup?
Mr. COLLINS. Well, there are some differences in the way we're running this signup. It's largely going to be the same as last time. The main differences are in the scoring system that we're going to use for the bids. I would say there are two primary differences. One has to do with how we're going to weigh the rental rate. In the last signup, we had approximately 400 points that a producer could theoretically achieve from the environmental factors. We had 200 points that the producer could achieve from the cost, the rental rate bid. This time we are going to provide bonus points for producers who bid below the maximum acceptable rental rate in their State. For each dollar they bid below that rental rate, they will get an extra point, up to 15 points. That is the single most important change for the Nation as a whole.
In addition to that, there are some changes on the air quality measure of which I'm not enough of a scientist to know all those changes, but we're going to provide some additional points for certain kinds of soils, volcanic soils and fine soils, and some additional points for land that falls in a certain air quality area.
Page 23 PREV PAGE TOP OF DOC Then once those scores are awarded, we will proceed essentially the same way we proceeded before. We will array all those scores from highest to lowest, however they come out. We will meet regularly, debate various things, and then the Secretary will make the determination on how much acreage he would like to accept.
Mr. LUCAS. Can you give me some insights, Doctor, into why it was felt that these two changes were necessary?
Mr. COLLINS. With respect to the rental rate, this is an issue that we debated for sometime. The way the system worked in the 15th signup, if someone lived in an area where their rent, their typical market rent, was $30 an acre, and someone lived in an area where their typical rent was $100 an acre, and both bid what the typical rent would be in their area, the person with $30 an acre bid would get far more points and be far more likely to be enrolled into the CRP. Those producers in areas where average rental rates are higher thought that was inequitable. Suppose I'm a producer in my State, I bid half of what the market rental rate for my land is, because I really want to get in the CRP. Yet, some other producer in another State bids what the average value is; just because they're in a lower rental rate State, they're more likely to get in than I would be. So they perceive that as unfair.
We knew about that before we did the 15th signup. We debated whether to deal with thatwhether, for example, we should award points based on the rental rate bid as a percent of the average rental rate instead of the absolute rental rate that's bid. We debated whether we should do that. In the end, we decided to go with what we did in the 15th signup and this time around we've decided to pay a little bit of deference to those producers in the other areas of the country who are very concerned that they feel they're being inequitably treated.
Mr. LUCAS. Just, I suppose, without having looked at great detail to the new concept, I just suppose my first glance is to think that if rental rates reflect the productivity of the property involved and if the goal was to focus on those resources that would be better served not being in production, I just find that most interesting and I intend to look deeper into that. Looking back at the 15th signup, you mentioned that prior to the 15th signup, there was 33 million acres approximately in the program, now after the 15th, 28 million acres in the CRP. Any thumbnail guesstimates as to what we'll see after the 16th over, based on the way the terms have been adjusted?
Page 24 PREV PAGE TOP OF DOC Mr. COLLINS. No, I don't have an answer to that. If you followed what happened on the 15th signup, it was a point of some debate within the Department. It will be a point of some debate this time around. It will, of course, depend on how many acres are bid. We have about 4.8 million acres that will expire next fall. We would expect a sizeable portion of those 4.8 million to bid. I would expect some of the rejections from the past bid, as well, to bid and there may be some new acres that never bid before, come in. We might get, I'm going to guess and say, 10 or 11 million acres bid. What we take out of that will be a function of the environmental quality and the rental rates that are offered.
Mr. LUCAS. Thank you.
Mr. BARRETT. The gentleman from Wisconsin, Mr. Johnson.
Mr. JOHNSON. Thank you, Mr. Chairman.
I'm sorry also, Dr. Collins, that I was late and didn't hear the testimony or have had a chance to read over it. It's an optimistic picture, I think, but it contrasts, I think, with what we've been seeing in some areas across the country and the sell off and reduction of the family farm. I'm wondering how this fits into the picture where you describe the optimism and the general good economy of agriculture in general, yet as we at the same time we've seen individual and small family farms really going out. Are we only headed for corporate farming?
Mr. COLLINS. I think that's certainly a good question. First of all, with respect to farms going out, if you look at the total number of farms in the United States, it has hardly changed in 5 years. We are reducing the total number of farms by about 4,000 to 6,000 farms per year, compared with 30,000 or 40,000 farms in the late 1980s. So the rate of decline in the number of farms in the United States has dramatically been reduced here in the 1990s. Now, within that total figure, there's lots of changes that take place. The group that is most likely to change is the group of farms that are generally in the sales category of $50 to $150,000 in annual sales. That tends to be the group of farms that suffer the most financial stress from year to year. Within that group, you have people who consider their principal occupation to be farming, but their asset base and the size of their operation is not great enough to make that high an income from farming. In fact, they also have low off-farm income. Last year that group had their total household income was well below the national average. Whereas if you look at all farms, their total household income on average is equal to the national average.
Page 25 PREV PAGE TOP OF DOC So, that particular group is a group that has been vulnerable to change. It's a group that is hard to get at, hard to deal with. They're too small to benefit that greatly from commodity programs. You get at that group through education and extension, improvement of their human capital, the skills of those producers. You get at that their problems by helping to ensure that they have adequate credit to make the technological changes that they need to make, but there's no question that among all the categories this is a group that's vulnerable.
We also list a second category that we monitor which we call the limited resource farms, and we have a specific definition for those farms. It's farms that have less than $15,000 a year in off-farm income, have sales less than $100,000 a year in farm sales, and have total assets of less than $150,000. We do, through our surveys, try and track those farms. There's roughly 150,000 of those farms and those likewise, are very difficult to touch. They have low educational credentials; they have low asset values. It's very hard to solve their problems. Those farms are going to continue to face difficulties, no question.
Mr. JOHNSON. The small farms are vulnerable and I think, probably, the average size of our farm, you know, $750,000, just under $1 million average for our farms. They too are caught in the squeeze between being too small and can't afford to get too big, very much between a rock and a hard place, and find it difficult to see themselves as a part of this optimistic picture, which I agree is there in the statistics, but not when it comes to them.
Mr. COLLINS. I might add another thing. When you start looking at the net returns of small farms and where their income flow is generated from, they're much more dependent on livestock, on cattle and calves, than they are on crops comparable with than the larger farms. As you know, in 1996, we had the lowest cattle prices in 10 years, and so we did see a number of small farms suffer quite a bit in 1996 at the same time that we had record high net farm income in the U.S. economy.
Page 26 PREV PAGE TOP OF DOC Mr. JOHNSON. Just finally, I know we're heading toward a new and major change and that's evolving in terms of the milk pricing policy and I get asked that question every week. How do you see this playing in terms of affecting their income or affecting their stability, whereas continuing to be the roller coaster ride until now in 1999, yet we don't know what policy we're going to have when we finally evolve?
Mr. COLLINS. Yes, this is a difficult one, as well. This is the last major piece of unfinished business of the 1996 farm bill, the requirement to reform milk marketing orders by April 4, 1999. Those orders cover 70 percent of the milk produced in the United States. So, first of all, not all producers are going to be directly affected by those orders. Second, what happens depends on what we do and you can go in basically three directions. One direction is to make those orders more protectionist, to try and provide more income support through the orders, as some people have asked us to do over the last couple of months. My own view of that is that probably would be a mistake. I think that the orders were not designed for that purpose. Price support was designed for that purpose.
The second thing we could do is tinker with the orders as they now exist; try and take out a few of the distortions that exist. If that were to be the case, I don't think it would make a big difference for most producers in most areas.
The third thing we could do is change the orders as the upper Midwest would want, reduce the class I differentials as the upper Midwest would want, in which case that would reduce incomes for many producers in the high class I areas, and likely raise incomes for the upper Midwest, because it would reduce milk production outside the upper Midwest. That's the general range of effects.
I don't believe that there's a great reduction in volatility or stability that will come from order reform, because remember the purpose of the orders is to reflect market prices. Every month we announce what's called the basic formula price. The name of that drives me crazy, because it sounds like the USDA is setting the price of milk every month. The basic formula price is supposed to be what we believe is the market clearing price of manufacturing grade milk, and as that goes up and down based on supply and demand, the whole order pricing system goes up and down. So, if the markets are fundamentally volatile, the class I, II, and III prices are going to be fundamentally volatile.
Page 27 PREV PAGE TOP OF DOC There are a few things we can do with that. Some people use the term ''decoupling.'' Let the class I price react more slowly to changes than the class III price. We're looking at options like that as a possible way of taking a few of the volatile wrinkles out of the milk market, but I don't know where we'll come out on that, but we do plan, we're still on track, to publish our proposed rule for Federal milk marketing order reform in December of this year.
Mr. JOHNSON. When is it coming out in December?
Mr. COLLINS. How many days are there in December?
Mr. JOHNSON. Probably late in December?
Mr. COLLINS. Late in December, yes.
Mr. JOHNSON. A Christmas present?
Mr. COLLINS. Yes, probably.
Mr. JOHNSON. Thank you, Dr. Collins.
Mr. BARRETT. The gentleman from Kansas, Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you very much. I too apologize for missing your testimony, Doctor, but will read it on the plane, hopefully this afternoon. I'm curious just about some trends you see. Changes in environmental standards, do you detect that there will be increase in cost production or other impacts on agriculture, on farmers and ranchers in this country?
Mr. COLLINS. I think changes in environmental standards is one of the major new challenges and one of the new frontiers that American agriculture faces. One of the things that's different about now than in the past is in the past a lot of the environmental standards we were concerned with were things that were happening within agriculturethe problem of highly erodible soils and trying to deal with erosion on farms, for example. The kinds of changes we're seeing now in the 1990s and we'll see into the future are agreements that affect the national environmentnational agreements, like the Clean Air Act, and then international agreements, like the Montreal Protocol for methyl bromide or the Framework Convention on global climate change coming up in Kyoto. These are things where international agreements are being struck to affect national environments which will affect farmers.
Page 28 PREV PAGE TOP OF DOC So more and more farmers have to look at some implication for their operation from something that's being negotiated, perhaps even outside of our geographic borders. So that's sort of a new thing. How will that play out? I'm just not sure how that's going to play out. We have a few markers along the way. For example, we've seen PM10 regulations and what that's meant. We know we have the National Ambient Air Quality Standards that have just come out. It's been suggested that that's not going to have a big impact in agriculture. We don't know yet what's going to happen in global climate change.
Mr. MORAN. Would you agree that the nature of those standards are important in other countries and how it impacts their agriculture will also impact our agriculture?
Mr. COLLINS. Oh, absolutely. To the extent that we impose costs on agricultural production in the United States that are not imposed in other countries, it changes our competitive position.
Mr. MORAN. Do you have analysis impact on any of those three environmental changes that you've just mentioned? Has the Department done studies that would determine the anticipated costs on American agriculture?
Mr. COLLINS. We, in fact, right now, have an ongoing study at the moment, that we're closing in on finishing on methyl bromide. There was just a big Washington meeting this week of the participants in that study where we are looking at the costs of the elimination of methyl bromide. Previously, we had earlier done a study on the costs to the U.S. agriculture of elimination of methyl bromide by 2000, which is the Clean Air Act requirement. So, we do have that; that already exists and it's quite a sizeable figure as you might guess.
With respect to the national ambient air quality standards, we did not do an independent study. There was a cost-benefit analysis that was done by the Environmental Protection Agency that had estimated impacts for agriculture in it. That's a document that exists. We have some people who have worked on that at USDA as well.
Page 29 PREV PAGE TOP OF DOC With respect to global climate change, we have done a lot on the effects of global climate change on agriculture. We're fortunate enough at USDA to have one of the leading analysts in the world on that issue who is working for us; who had been at MIT and now works at USDA. Now that effort is looking at the effect of global climate change on agriculture. There's no really clear picture of what that effect is. It depends on the global climate change model that you use, and you can get a wide range of effects.
What we haven't done is look at the effects of the mitigation measures, the control measures to meet some type of reduction target. What's been proposed for Kyoto has been reductions from 1990 emissions levels; some percentage reduction from 1990 levels. Well, how do you achieve that? You can do it through carbon taxes, or whatever. Clearly, whatever the control measure that's chosen, is likely going to have an effect on energy prices.
Agriculture is pretty energy-dependent. So, that's going to have an effect on the cost of production in agriculture, but we have not estimated that primarily because you must have an analysis of the macroeconomic effects. What does control do to oil prices? There is no consensus estimate of what these control measures will do at this point.
Mr. MORAN. What's the number on methyl bromide? You know that off the top of your head?
Mr. COLLINS. Oh, it seemed to me the total impact on U.S. agriculturethis is from the early studymaybe I'd better not do it off the top of my head. No, I'm not sure I remember. It was large, it was big. I'll try to get the numbers as well as those reports.
The Department of Agriculture's National Agricultural Pesticide Impact Assessment Program conducted a study of the effects of a ban on methyl bromide. The study, ''The Biological and Economic Assessment of Methyl Bromide'' was published in April 1993. The following table from the report summarizes the U.S. economic losses from no longer having methyl bromide available for soil fumigation or quarantine use for imports.
Page 30 PREV PAGE TOP OF DOC "The Official Committee record contains additional material here."
Mr. MORAN. Just quickly, one of the things I've noticed in Kansas is the continual demise of the rail system. Is there going to be a continuing trend that we are moving, we're moving in the direction of moving commodities by truck as compared to rail, and the economic impact on agriculture. Is there something happening there that is going to continue?
Mr. COLLINS. Yes, I am concerned about that as wellwe see other countries around the world figuring out that they can improve their competitive advantage in agriculture through infrastructure investments, like in Brazil and Argentina. On the other hand, in the United States, at the moment we seem to be going the other way. In the mid1980s, we had 33 major railroads serving the United States, today we have about 7. Most recently, this year in particular, there has been a lot of concern about the ability of the Union Pacific-Southern Pacific to move grain. In fact, the head of that operation has been apologizing for the performance of that railroad and the inability to have rail cars in the right place and get them at the right place and time. So, the performance this year looks subpar.
So, we are concerned about that, we're concerned about the effects of the mergers, the abandonment of rail lines and the level of investment that these merged companies are going to make in rail cars. Are they going to use agriculture as a way to cut costs and reduce service or are they going to make the investment for the future in rail cars and that's something we don't know the answer to, but our pounding on about.
Mr. MORAN. Dr. Collins, thank you. I've only been here 10 months. You're a reasonably candid witness. I appreciate it.
Mr. COLLINS. Thanks.
Mr. MORAN. Mr. Chairman, thank you.
Mr. BARRETT. The gentleman from North Carolina, Mr. Etheridge.
Page 31 PREV PAGE TOP OF DOC Mr. ETHERIDGE. Thank you, Mr. Chairman, and I also, Dr. Collins, apologize for not being here for your testimony. I've been looking through it and I noted from the document and I plan to read it in detail, that exports to Mexico have increased. My question to you as I look at the district I represent in North Carolina, as it relates to this whole export import and the health of our agriculture economy: As you probably know, we have one of the States in the country that has a lot of small farms. It historically has been a small farm State for a lot of reasons. One being the commodities grown being peanuts, tobacco, et cetera; and recently increased in the production again of cotton as a result of eradication of the boll weevil.
I'm going to piggyback on something that Mr. Johnson said and then ask a question on that, as it relates to the dairy industry. We used to have a lot of dairy farms in our State. As a result of the decisions in recent years, we have very few. I think in my district we now have three and soon to have one and maybe zero, as relates to our policy, because they're going broke. I'm not so sure big is better in that regard, because if we ever get to the point where we have to import milk, we'll be like importing shoes that we now import and the clothingI think leads to a national problem as relates to our economic security as a Nation. If we would go to war today, we couldn't put shoes on our soldiers; we'd have to import them.
My question is this: Since the implementation of NAFTA, U.S. agricultural exports to Mexico have increased and your testimony indicated that it increased this year. My question deals with looking down the road and the amount of exports versus, and I know that agriculture products do a better job of meeting the export expectations than most of our others, but they haven't increased to the extent we had hoped for, and with the Mexican economy now stabilizing. What are your forecasts in short-term and long-term potentials for U.S. exports to that market? I know Canada is still, I assume, is still our No. 1 customer?
Mr. COLLINS. Yes.
Page 32 PREV PAGE TOP OF DOC Mr. ETHERIDGE. In that regard and Mexico is moving up. Our economic region, obviously, cotton, tobacco and a number of the other commodities are part of it, especially in the pork and poultry area.
Mr. COLLINS. Right. Well, we've done a lot of work looking at Mexico and NAFTA. I could certainly provide you with some written materials. We do an annual NAFTA report in which we trace what the effects have been of NAFTA and it's mainly focused on Mexico. This summer we put out a report on NAFTA in which we included estimates of all of the increases in exports above what we think we would have seen had there not been NAFTA, by commodity, including horticultural products, and I'd be happy to provide you with that.
The most recent USDA analysis on the effects of NAFTA is the Secretary of Agriculture's report to Congress ''The Effects of the North American Free Trade Agreement on Agriculture and the Rural Economy,'' August 1997. The following table from that report summarizes the estimated effects on U.S. agricultural trade due to NAFTA.
"The Official Committee record contains additional material here."
Mr. COLLINS. I would say, generally, you're right. We had a disruption in 1995 when the peso devalued 50 percent. Our exports to Mexico fell over 20 percent in 1995, but that's because the Mexican economy contracted 6 percent. They had a 6 percent real GDP decline. They're back up to about a 5 percent increase in GDP this year. Generally, most long-term macro forecasters foresee them in the 5 to 6 percent range for years to come. There could always be some disruption, but generally, people are fairly optimistic about how their economy will get back on track.
As it comes back on track, I think we can expect to see our exports continue to grow, particularly in some of the areas where we've already seen growththings like some horticultural products, like apples, sorghum in particular. Among the grains, we also have a good wheat market in Mexico. Livestock products, both cattle and beef, have been particularly strong markets; and the one you mentioned, cotton, has been an extraordinarily good market.
Page 33 PREV PAGE TOP OF DOC In fact, I think that I have been astonished at the way in which many in the textile industry in the United States have changed views of NAFTA mainly because what is occurring. We're sending a lot of cotton fabric to Mexico, and raw cotton to Mexico, and receiving made up goods back into the United States, which is displacing our imports from mainly Asian countries, including China. Our textile imports from China are down and there way up from Mexico. We're better off buying apparel products from Mexico made from U.S. cotton, U.S. yarn, and U.S. fabric any day, than we are buying Asian textile imports made from Australian cotton or Pakistani cotton and Chinese cotton and Chinese yarn. So, our textile industry appreciates that now; our cotton producers appreciate it. I think we have a good opportunity to continue with cotton exports to Mexico.
Mr. ETHERIDGE. Thank you.
Mr. BARRETT. The gentleman from South Dakota, Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman.
Our State has had some interesting times this last year and our agricultural economy is, I think, recovering generally quite well, all things considered. We're sort of hopeful that the El Nino effect will, you know, we'll see some results. I don't know if you want to make any predictions about that today, but we could certainly use a less difficult winter than we had last year in South Dakota.
Just a couple of questions. I want to return for just a minuteI had one question on the CRP and you may have addressed this already in some respects, so bear with me. But one of the complaints that I hear most frequently and in traveling through South Dakota at places like the State fair, where you have a good cross-section of the agricultural population, is a concern that particularly young farmers who cash-rent land are being outbid by the government in the CRP program. My understanding was that when the 1996 farm bill took effect that there would be some sort of settling-out and that Government would more approximate actual market prices when it came to what cash rents are.
Page 34 PREV PAGE TOP OF DOC What we're seeing in South Dakota and a lot of areas actually is quite the converse, and that is that the Government continues to outbid what is the market rate in certain areas. The concern is that a lot of the owners of land will want to put their land into CRP and there will be less land available to young farmers who want to get into the business and to keep that land in production.
I'm just wondering what your experience has been with that, if that has come up anywhere else and just what your overall comment might be in terms of how we address that. Maybe it's unique to our State, I don't know.
Mr. COLLINS. Obviously, this is a big concern in implementing something like the CRP. In approaching the 15th signup, I can tell you what we did. This doesn't answer your question about whether we did it right or not, but I'll tell you what we did.
We did form a land rental rate task force. We brought in some Farm Service Agency people from around the country; we brought in people from other agencies within USDA, including the Economic Research Service, The purpose of that group was to establish the maximum acceptable rental rate in each area.
Now how do you do that? We did it a couple of ways. We started out by establishing a benchmark. What are we going to do to a rate that is going to be a rental rate that exists for a 10-year contract? Ten years into the futureis it just a current rental rate or do you build in some kind of inflation factor or whatever? So, we went through all those kinds of discussions and agreed to use the 1994 to 1996 average cash market rental rate in each area as the benchmark rental rate.
Then we had our Farm Service Agency people go out and survey to see if those rates that we came up with, the 1994 to 1996 averages, were what they were seeing in the field, and they could recommend back to us either increases or decreases. There were a few that recommended increases. In fact, we gave them the authority to raise rental rates as much as 10 percent, if they thought we were out of line. A few of them took that authority and raised rental rates.
Page 35 PREV PAGE TOP OF DOC Once we developed a map of all the rental rates on it, we then went to the National Agricultural Statistics Service which does survey rental rates, unfortunately not for all counties of the country, but most of them, and we pulled that data, overlaid it on top of this other data map, and tried to resolve all of the conflicts so that we had a rental rate that we felt confident was an average market rate and not high above it.
Did we do that perfectly? I can't tell you that we did. We know there were some areas where counties bumped up against each other and their rates were not quite in line. We've made a couple of changes since then; we will have a few more changes probably for this signup. I can't tell you specifically about South Dakota, I don't know, but to the extent that we are above the cash market rental rate, that is a mistake, because then we are saying thatI mean I view that as a mistakethen we are saying that we're offering above what the market is bidding for that land and we're trying not to have ourselves in that position. You could justify that on other grounds. For example if the environmental benefits are immense, then you will certainly have people in the environmental community that say, well, you should bid more than the market rental rate to get those benefits, but that's not the way we've approached this process.
Mr. THUNE. Well, I would hope that is an aberration. I know it was something that was fairly common before and I come from a part of the State where there's a lot of CRP acreage, and it's a part of the State that frankly should have a lot of CRP acreage, because it's highly erodible land to start with. This is starting to become more common in other parts of the State, too.
My understanding was, and that's why I was somewhat concerned when I heard this repeatedly at the State fair, that there was a concern out there that we are not in fact getting these things into any sort of a normalized situation where, and it's not a good deal for the taxpayer either. So, obviously I think it's something that you would want to make sure that we're addressing.
Page 36 PREV PAGE TOP OF DOC Mr. COLLINS. Let me say, I was one of the reviewers of the work of our rental rate task force. I will go back and look into the South Dakota issue.
Mr. THUNE. If you could, that would be very helpful; I'd appreciate that.
One other question and it comes back a little bit to the whole question of transportation infrastructure. The second thing that I hear leveled probably more than anything else in South Dakota, and it's particularly true again this year, but we get into the harvest season, there's an awful lot of corn and beans that get dumped on the ground out there because we don't have the storage capacity and the transportation infrastructure isn't there to move it. That's a chronic, annual, perennial problem that we deal with every year in South Dakota, and as a former State rail director, I dealt with that on a yearly basis too.
I guess my question would be, does USDA have a comprehensive inventory of the Nation's agricultural economic infrastructure, marketing infrastructure, how we get our products there? Is it possible to create that sort of a thing to identify where the shortages are going to be and the bottlenecks and that sort of thing, realizing of course that is partly a function of the railroads and the providers of transportation services, that they're going to have responsibility for that? Is there any sort of monitoring system that you all have?
Mr. COLLINS. Yes, there is. In fact, the very point you just made was one of the primary recommendations last year that came out of the Secretary's advisory committee on concentration. Most of that advisory committee's work focused on meat, cattle markets, and the grain part of that work got less visibility. One of the things that they recommended was that USDA develop an early warning system for precisely what your talking about. Try and look at what's produced where, look at the consumption points, look at the shipping infrastructure that it's out there and see if we could help advise the industry on where the bottlenecks are.
Page 37 PREV PAGE TOP OF DOC It's a little heroic to think that USDA's going to do a better job of that than all of the rail companies and other shippers nevertheless, we are proceeding try. We have awarded some cooperative agreements to a couple of universities to do work on that. We have a group called the Office of Transportation and Marketing which is in the Agricultural Marketing Service which is charged with that responsibility.
We've also decided that we're going to try and do more outlook reporting with respect to transportation issues. It's not something we have historically done at USDA. We do outlook with respect to forecasting wheat price and variables like that, but in the area of transportation we have not done outlook work. So, we are going to try and do more of that, including at our annual outlook conference, and put out more information on what we think is happening in the transportation area.
We also plan to be more active in issues that come before the surface transportation board and presenting USDA's views on the issues that they have to deal with which we've not always done in the past.
Mr. THUNE. All right, I appreciate that. My time's expired. I thank the Chair. Thank you, sir.
Mr. BARRETT. The Chair again acknowledges the presence of our colleague from Michigan, Mr. Smith, who is not officially a member of this subcommittee, but is a very welcome visitor. Mr. Smith, would you care to ask questions or make a comment?
Mr. SMITH. Just a few brief questions. And there's no question, in Michigan, the rental rates paid by CRP are range from 40 to 50 percent higher than what farmers would pay and the suggestion that more environmentally-sensitive land should be allowed to receive higher CRP payments than the rental rates would contradict what normally happens, because that more environmentally-sensitive land rents for less than once you get onto the high productive ground that tends to be flatter. So, a review of that I think would be good, because it is driving up land prices, especially for those young farmers that are trying to expand by rent rather than ownership.
Page 38 PREV PAGE TOP OF DOC I'd like to followup on some other points that Mr. Thune made, specifically on transportation. As we have a glut on our rail lines and are less able to move a lot of our grain by rail, we see that the shipping industry, the Jones Act fleet, has lost almost two-thirds of its ships that are available under the Jones Act to transport goods from U.S. port to U.S. port over the last 40 years. Has the Department ever looked at the prospects of changing the Jones Act to allow international bidding on the building of ships where some economists estimate that the price of the ship and the expansion of sea-going vessels could dramatically increase and fill some of the need for transport, especially from the Midwest? You can't get Midwest grain now into the Carolinas because of the Jones Act restrictions.
Mr. COLLINS. I can't answer that, Mr. Smith. I don't recall ever being involved with any issue related to the Jones Act at USDA.
Mr. SMITH. Would you consider looking at the availability of U.S. ships moving grain out of the Midwest and the limitations because of the lack of ships to move that grain?
Mr. COLLINS. I will look at that.
Mr. SMITH. Give me yourand Mr. Chairman, I'm sort of moving into another area on dairy, but probably the dairy industry is the most threatened in our Nation right now. Are we going to lose the traditional dairy farmer in this country and be moving toward the 2,000 and 3,000 cow herds or something, as we see in my area the traditional 50 to 120 cow dairy cow herds going out of business? What is the position of the Department of Agriculture and what would the consequences in your mind be of setting a floor price like the bill that's been introduced? I think it's $14 floor price on milk. What would the market consequences be of that?
Mr. COLLINS. Well, the proposal I guess is setting a floor price on class I prices as if the basic formula price were $14.50 per hundredweight. That's the proposal that some have advanced, others have suggested $13.50. The consequence of that would depend on whether the class III price, the price of manufacturing milk is still free to be determined by supply and demand, and it's only the class I price that's being raised; I assume that's the proposal. Some people have also suggested we ought to raise all 3 class prices of milk, which is impossible because you can't raise the price of all uses of milk and have it persist without supply control or the authority to buy product, neither of which we have under Federal marketing orders. So you have to allow one market to clear somewhere. So, assuming it's the manufacturing milk market that clears, then what you'd be doing is raising the price of class I milk. What you would have is exactly what you have in the Northeast. You would have the New England Dairy Compact expanded nationally. You would have a minimum hard floor on the price of beverage milk for the Nation as a whole. The consequence of that would be less consumption of fluid milk.
Page 39 PREV PAGE TOP OF DOC Mr. SMITH. Well, why do you say that?
Mr. COLLINS. Less consumption of fluid milk?
Mr. SMITH. I mean, the traditional philosophy of the elasticity of class I milk isn't what it used to be and I'm so sure of that. Do you have anything to back up the decrease consumption of fluid milk during last summer's substantially higher prices and what at least I observed is the prices that went up last summer have only come down very moderately in relation to the farm gate price of milk?
Mr. COLLINS. I can't tell you that I have a study based on what happened last summer, no. That statement I just made is based on the traditional elasticity of demand of fluid milk. When you look at what happens from year to year, you also have to take into
Mr. SMITH. No, no, I'm talking about class I whole milk.
Mr. COLLINS. Correct. It's demand is very price inelastic. It doesn't change very much, but the historical estimates that have been made are that when you raise the price of fluid milk at the retail counter, it tends to create some decline over time.
Mr. SMITH. I know that's traditional philosophic economic philosophy. Do we have anything recently that would verify that?
Mr. COLLINS. I will check. I did not do a study of what happened during the past year when milk prices set record high levels last fall, but I'll see what we have and see if there's been a decline, but it would be my belief that if you were to raise the price of class I milk that over time, that would have some effect on the quantity demanded since that is a pretty robust result from economics that applies to virtually every market, and I would expect it to apply to fluid milk as well.
The following table shows quarterly U.S. fluid milk sales and retail prices of whole milk during 199597. During 1986, sales and prices both increased. However, during 1997 sales have fallen. The 1997 decline may reflect a lagged consumer response to the higher prices of 1996 and early 1997, although that cannot be substantiated by the limited data. For January through August 1997, fluidmilk sales are 1 percent below a year earlier.
Page 40 PREV PAGE TOP OF DOC "The Official Committee record contains additional material here."
Mr. SMITH. I just bring up the Jones Act in closing simply because of the protectionism that a very small percentage of the American flagships in this Nation can transport goods port to port, simply because of the restrictions that no American flagship unless it was built in this country can serve a U.S. port to port service. My grain farmers and dealers tell me that the lack of ships that are eligible to ship that grain is part of the transportation problem.
Mr. Chairman, thank you for letting me ask all those questions.
Mr. BARRETT. Thank you.
Dr. Collins, thank you very much for being with us this morning. We appreciate your good words, your testimony, and we hope that you'll come back again another day.
Mr. COLLINS. Thank you.
Mr. BARRETT. Thank you.
We're pleased to invite our second panel and our final panel to the table this morning. Joining us from Omaha, NE is a friend of many of us, Dr. John Campbell, vice president of government affairs and industrial products at Agriculture Processing, Inc. Mr. Campbell is certainly no stranger on Capitol Hill, having been a staffer here for many years, having written probably at least three farm bills. John, welcome back.
Also, joining Mr. Campbell is Dr. Harold Breimyer, professor and extension economist emeritus at the University of Missouri-Columbia. Dr. Breimyer has been interested in agriculture for many, many years and will bring a little different insight, I think, to the overall subject of the economic future of agriculture.
Mr. Campbell, let's start with you.
STATEMENT OF JOHN B. CAMPBELL, VICE PRESIDENT, GOVERNMENT AFFAIRS AND INDUSTRIAL PRODUCTS, AG PROCESSING INC.
Page 41 PREV PAGE TOP OF DOC Mr. CAMPBELL. Thank you, Mr. Chairman, members of the subcommittee. I know there's a huge age difference between the two panelists here on the committee, an experience difference. But, I just want you to know having been through three farm bills here in Washington, I'm really not 40, as my bio says, because every year in Washington when you go through a farm bill, it's like a dog year and that's worth 7, so I'm just going to add 21 years onto my age and make me 61, so that difference won't seem so bad here.
I have traditionally testified here with a cast of thousands and a lot of data and backup provided by Dr. Collins and others at the Department, and I don't have those resources today. What I bring to the subcommittee today is really a view of agriculture as I see it from the Midwest from the perspective of someone who works in the value-added end of agribusiness and primarily from a midwestern perspective.
I think one of the things I'd like to focus on is the changing nature of agriculture and agricultural producers. I think that this change really allowed the FAIR Act to be approved. Were it not for the changing nature of farmers themselves, which is reflected in farm organizations, I doubt that piece of legislation would have been approved in the form it was. I thought it was significant that so many farm groups eventually came around to endorse it. That certainly wasn't the case for the 1985 or 1990 acts. I've tried to characterize some of the changes and differences that we see in producers out there.
What I call the new generation of producers which have taken over economic and political leadership of our industryI've characterized these as having survived the farm depression of the 1980s. They are now prospering in the 1990s. They are not interested in high debt loads due to inflated land values; they've been there, done that, seen the consequences. They're even more independent than there farming predecessors. They are extremely business-oriented and lifestyle is less of a consideration. What I mean by that is that there's not so much of an emotional attachment to traditional farm life. They have high expectation for themselves and their business stakeholders.
Page 42 PREV PAGE TOP OF DOC The new producer profile are typically 30 to 50 years old; they rent more ground than they own, and they're not that interested in owning more ground. In other words, that is, I think, a completely different mindset than maybe the past generation. They see land debt as something that you get into, you struggle for 30 years to pay for it, and when your done, what do you have? You've got an asset that's not very liquid. So they look at things a little bit differently.
Most of them could farm more ground, they have the skills, they have the equipment, but there's just not that much available. Ground is not trading and it's in very strong hands. They are not interested in paying above market rental rates either. They own or they lease new, big, fast equipment; leasing is becoming more and more of an accepted practice in agriculture.
They're looking for new marketing opportunities, such as identity preserved crops and contracts and value-added processing. They also have a new financial perspective. They're generating cash. As Dr. Collins says, a lot of land that's being purchased is not with debt; it's with cash. That cash is being generated in agriculture, not outside of agriculture. So when you've got cash, you have to invest it or you're taxed. Of course, one of the things that hasn't changed is that producers hate taxation on income more than probably anything and that hasn't changed.
They want to add value to crops rather than land. They want to invest in on-farm storage. They're investing in high-speed, high-volume grain handling equipment, such as the big huge grain carts that you see parked at the end of the fields. Many, many of these producers have tractor trailer units. They use the traditional as well as creative risk management tools, such as contracting, forward pricing, deferred pricing, futures options and the new insurance tools.
What's the impact on agribusiness? Well, the amount of land being cultivated is about the same as it was 50 years ago, but the customer base has dropped significantly. The concentration of economic power into fewer farm hands is being reflected by merger mania in agribusiness. Farm equipment companies merged first and now seed, chemical, feed, grain, and processing have followed and it's not over yet. You almost need an electronic score card to keep track of who owns what in agriculture these days.
Page 43 PREV PAGE TOP OF DOC The speed and the technical skills are evolving too in agriculture, and especially on the farm. The speed at which our crops can be planted and subsequently harvested is amazing. Just watching the harvest this year, we have perfect weather conditions, the combines just fly through the fields, and there's tractor trailers waiting at the ends. The agribusiness infrastructure, such as transportation, can't keep up.
The same thing as harvest at planting timethese producers with these huge planting routes can get out there in a very narrow window of time can get the entire spring crop planted. So that has changed.
The farmers that have these high technical skills are having the time of their life. They see new technology as an opportunity to make higher yields and to add profits to their farming enterprises. I mentioned earlier the pursuit of value-added and I would call vertical integration from the farmers perspective. In the Midwest and upper Midwest, literally billions of dollars have been invested by farmers in value-added processing, off-farm investments. Many of these are so-called closed cooperatives. Some have prospered, some have failed, and for most, it's too early to tell how they're going to do.
Ethanol is a good example. The vast majority of new investment in ethanol production has come from farmers themselves. The pork industry change is worth focusing on because it's happening so rapidly and with so much controversy.
As family size operations voluntarily exit, a vacuum is created for consolidators and integrators to fill the void. Consolidators and integrators are changing the face of the feed industry and will probably change the face of the packing industry, too. We also see a continuing move by producers to become very accomplished at doing one or two things very well and not trying to run diversified operations. They're equipping themselves with machines and skill sets for one or two crops, depending on their climatic geographic situation.
Chemical application is a good example. We estimate that in our trade area, probably 60 percent of chemicals is applied by custom applicators, not the producer with the exception of fertilizer.
Page 44 PREV PAGE TOP OF DOC So the role of farm programs is different in this environment, and you notice I haven't really even talked about farm programs until this point and that's because they're becoming less relevant. The producers that I have described herein really don't plan on having a program in the future and they're making plans accordingly. There are farm programs that are in increasing importance but they're not the traditional commodity programs. It's the Ethanol program, the CRP, and trade policy that are much more important to agriculture, and as we've talked about earlier today, environmental policy.
USDA management of the remaining CRP enrollment is critical to the public perception of agriculture and to the environmental challenges that farmers are facing. We believe that USDA should take a new management approach to CRP. One example of this new management approach would be for the USDA to embrace the National Buffer Strip initiative, not through words, but through action. The Department should reserve land in the CRP for USDA's 2-million-mile buffer strip goal. This would be approximately 8 million acres if the buffer strips were 33 feet wide. We see no indication the USDA is prepared to meet the future challenge of water quality through using the only funded tool they have, which is the CRP.
Ethanol is another de facto program, and we don't need to go into the importance of that here, as this subcommittee have been very supportive. Trade policy is also critical. Issues such as veterinary equivalency, beef hormone bans, BSE, have a big impact on grain farmers and they're beginning to understand the interconnectedness of what happens in other commodities besides the particular commodity they're producing.
Fast track is of course on your plate right now. Most farm interests understand the reality that the President must have fast track to negotiate in the trade agreement arena. The reluctance of some farm groups to jump on the fast track bandwagon stems from trade agreement indigestion and the inability of the administration to galvanize support around an immediate and macro trade policy goal, such as GATT or NAFTA.
Page 45 PREV PAGE TOP OF DOC Mr. Chairman, it has appeared to me for several years that the social contract between farmers and the rest of society is changing. Farm programs were forged in the hard times of the Depression for a group of people who constituted, at that time, a majority of Americans and had living standards far below their city cousins. Today, there are probably less than 300,000 commercial farmers who produce more that 75 percent of the goods. They have standards of living in excess of the average city cousin. Larger urban and suburban society today is much less concerned about how much is produced and at what farm level price than they are about how farm and ranch products are produced.
The political apparatus for agriculture, which includes the triad of Congress, USDA, and farm organizations, must create systems and programs that recognize the important change in societal expectations of farmers and their agribusiness partners. A first step would be to hold off on the next CRP enrollment until USDA is able to organize a program that truly targets the most sensitive environmental areas for long term protection. If farmers can use precision farming techniques, USDA should be able to use precision enrollment techniques, even if it takes more time and money to administer.
Thank you, Mr. Chairman.
[The statement of Mr. Campbell appears at the conclusion of the hearing.]
Mr. LUCAS [presiding]. Thank you, Mr. Campbell.
Apparently, we will have a couple of 15-minute votes and a 5-minute vote, so what I would propose would be to allow Dr. Breimyer to begin his opening testimony and we'll kind of play it by ear as we go. The doctor is a graduate from Ohio Stateyou can tell my Oklahoma prejudicesin 1934 and has a 30-year career with the USDA. I look very forward to his comments and his perspective over agricultural policy as it has affected for many decades in this century. Doctor.
STATEMENT OF HAROLD F. BREIMYER, PROFESSOR AND EXTENSION ECONOMIST EMERITUS, UNIVERSITY OF MISSOURI-COLUMBIA
Page 46 PREV PAGE TOP OF DOC
Mr. BREIMYER. Thank you, Mr. Chairman, members of the committee. I am Harold Breimyer. I'm a retired professor and extension economist, University of Missouri. Academia was only my second career. My first career was right here in Washington for 30 years where I was economist for the Department of Agriculture and the Council of Economic Advisors.
Now, I've testified before and I'm a veteran on that, and I know that this subcommittee has been in session for an hour-and-a-half, so I will touch on mine really quite quickly and maybe pick up some of my points that have a little jolt to them.
My comments are on the future for agriculture and agricultural policy, based mostly upon my experience and rather than any current investigation and technical analysis I'm doing. I'm not limited by the consensus of opinion; in fact, I like to probe into some of the issues that others bypass.
Years ago, I gave a talk about 10 prickly proverbs and I have 10 prickly proverbs of today, but I'll touch on only few. The first one is the policy for agriculture in the future depends most upon, all upon, what kind of agriculture we are going to have, and this bears a little bit upon Mr. Campbell's comments; what the structure of agriculture will be. The harsh fact is that traditional proprietary farmer-managed, market-oriented agriculture is a disappearing species. If it continues to fade from view and if the managerial role moves out of the hands of the operating farmer, there would be no need for farm programs such as we have had in the past.
For years I taught my students that the role of government in agriculture the last century began with our helping farmers to adopt industrial technology, and Experiment Stations and the Extension Service did that. Later, particularly since World War II, lo and behold, those new techniques monetized risk and the primary role of the farm programs has been to enable or to help the proprietary farmer to accept those degrees of risk. Since much of the risk is moving off of the farm, then there's less room or reason for farm programs to protect the farmer, who no longer is the risk bearer and losing some status in the process.
Page 47 PREV PAGE TOP OF DOC Former Congressman Volkmer heads a commission that's charged with coming up ways to save the family farm. I write a weekly newspaper column and what I recently opined is ''Not a chance.'' They won't find a way.
Very quickly in flaggings of past, one of the sort of, not too exposed, features of what's going on lies in bioengineering. For years, the Experiment Stations have developed new varieties, and so on and so forth, and them available to everybody free. Now, bioengineering is taking all of that out of the hands of the Experiment Stations, putting it in private hands, patenting it, restricting availability, and leading to all kinds of court tests and that's a major change bearing on the future.
I'm probably talking a little too fast to save time. Let me slow down and say that, if farm programs have been risk bearing, risk absorbing, and stabilizing, the 1996 farm law has certainly reduced that role very sharply. It is not very stabilizing. It is almost destabilizing, and one of the major factors there is the undermining of the storage research the buffer stock, which I think is the biggest single weakness of the 1996 farm program, and the monumental losers are exporters, because a reserve available is quite helpful in building and retaining any continuing export movement.
Now a further word on foreign trade. For some reason the subject of foreign trade lends itself to all kinds of fluff, all kinds of stand-taking that lacks a firm base. Economists love to prate about free trade. Our country has never been a free-trading country and never will be, but the point I make most oftenthat is a little bit off the courseis we hear so much about tariffs and we want freer trade and non-tariff barriers on such. I submit to you, lady and gentleman, that the most annoying obstacles to trade these days are what I call a third force: the kit bag of sanitary rules, environmental considerations, infringement of patents, and then Mr. Collins mentioned currency devaluation. Those are the annoying considerations that keep the whole thing a mess, and the World Trade Organization will increasingly be a playing field for lawyers. It won't be free trade or a managed tradea litigious trade, in my judgment.
Page 48 PREV PAGE TOP OF DOC Now, I see I've got a yellow light. I'll pass more on foreign trade. I have no comment as to what the outlook is because I don't know, and neither does anybody else; but my next, quickly, is a sleeper. I say that one of the most difficult contentious issues in farm and food policy is going to be food safety. It's going to be with us; it's not a happy thing and I think possibly one of theit could have an effect upon this confinement feeding of livestock, because bacteria love all that confinement of animals and meat, mass handling. I look for some major changes.
I'll tell you in about 30 seconds, to give my last two comments, and these are a little bit different and they're longer run. The first is medium run; the second is long run, indeed. Agriculture is a special pleader and that's all right, but by and large, it seems to me, as a veteran of the Depression, that agriculture and all farm people have most at stake. What happens and how the country as a whole manages what I think is the most superficially prosperous stage we've ever had in my lifetimeand I call it a papier mache economy. We have capital values that have lost all anchor, virtually all relationship to current operating income. The investment economy has turned into a casino. I was a young adult in 1929 and I am scared.
Lastly, 15 seconds on this: The 20th century was the petroleum century; the 21st will be the petroleum exhaustion century, and the meaning to agricultureand this bears on Mr. Campbell's field in soybeansis agriculture will no longer be so nearly confined to producing food and fiber. It will be a biomass agriculture, in addition, providing the energy sources and the basic raw materials to replace the petroleum, and this will a revolutionary change, indeed.
I hope I haven't talked too fast. Thank you very much.
[The statement of Mr. Breimyer appears at the conclusion of the hearing.]
Mr. BARRETT [presiding]. Thank you, Dr. Breimyer. I'm sorry we have a vote underway right now in the Capitol. Could I impose upon you both to stay here for a few minutes? We'll go over and vote. There may be two or three members that would like to ask some questions. Is that possible? Fine, we'll join you just as soon as we can. Thank you.
Page 49 PREV PAGE TOP OF DOC [Recess.]
Mr. BARRETT. Thank you again for your participation. I'm sorry to report that, having gone to the floor, we now have a series of votes on the floor. So I think discretion being the better part of valor, some of the rest of us have three votes in succession and a markup at another committee in another building. I think I need to thank you again for your participation. Every member of the subcommittee will have an opportunity to read or re-read your testimony and for any questions, specifically, to be directed at you or to you, we'll be glad to contact you at some future point in time. So thank you for, again, your participation, the time, and the trouble that you have taken to be with us this morning.
This hearing is adjourned.
[Whereupon, at 11:32 a.m., the subcommittee adjourned subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE
Mr. Chairman and members of the subcommittee, I welcome the opportunity to discuss the outlook for U.S. agriculture, including the performance of the Federal Agriculture Improvement and Reform Act of 1996 (1996 farm bill), with a focus on the commodities under your jurisdiction. My goals today are to describe the near-term outlook for U.S. agricultural markets and review the influence of the 1996 farm bill. U.S. agriculture is doing well now with near-record exports; prices above average; generally good harvests; restrained increases in production costs; record-high farm income last year and another strong year in prospect; and a profusion of new technology and global market opportunities that could help maintain the current momentum. However, there are events that could blot this optimism and I will review some of these major challenges in the global market.
Page 50 PREV PAGE TOP OF DOC Twenty-four consecutive quarters of positive economic growth in the United States, record-high indicators of consumer confidence, and the lowest unemployment rate since 1973 have bolstered domestic demand for agricultural products, while an expanding world economy and declining barriers to trade have supported expansion in U.S. agricultural exports. In addition, low inflation and moderate interest rates have limited increases in farm production expenses. In 1997, U.S. real gross domestic product (GDP) may increase by 3.8 percent, compared with 2.8 percent last year (table 1). The macroeconomy will continue to support agricultural demand in 1998, with GDP forecast to grow by 2 to 2.5 percent, reflecting continued productivity growth, low inflation, and a near-balanced Federal budget. The rate of inflation continues to remain below 3 percent through 1997, with only a slight rise expected in 1998.
Outlook for U.S. Agricultural Exports
The strong foreign economic growth and some foreign crop reductions pushed U.S. agricultural exports to a record $59.8 billion in FY 1996 (figure 1). Lower world market prices and bulk export volume are expected to reduce exports to $56.5 billion in FY 1997. For FY 1998, exports are forecast at $58.5 billion, the second highest ever, with grains and feeds up over $1 billion from last year reflecting reduced competition. Although volume is expected up, oilseed and product exports are forecast to fall by $1 billion as world prices moderate. High-value product exports are expected to increase for the 12th consecutive year, led by livestock products and vegetables.
Pacific Asia, including Japan, Australia and New Zealand, is the most important region for U.S. agricultural products, accounting for 42 percent of total U.S. sales this past year. Over the coming decade, rapid income growth in Pacific Asia will stimulate expansion in demand for U.S. agricultural products. Other important growth markets include our North American Free Trade Agreement (NAFTA) partners Canada and Mexico. Mexico recently supplanted Japan as the second largest market for U.S. agricultural exports, while Canada remains number one.
Page 51 PREV PAGE TOP OF DOC Outlook for Farm Income and Finance
Market receipts. With strong demand and record or near-record market prices for several crops, crop cash receipts exceeded $109 billion in 1996, a new record and up nearly $10 billion from the previous year (table 2). Crop prices are declining in 1997/98, but with fairly large harvests, receipts will only fall to about $106 billion, second only to 1996's record. Cash receipts for wheat, feed grains, and cotton are projected to be down in 1997, but soybean receipts are expected to be up as record-high production is expected to more than offset lower market prices. Net returns per acre will be down for major crops, except corn, where government payments rise sharply (table 3).
Livestock receipts are rising for the second consecutive year in 1997, with cattle, hogs and broilers all experiencing gains. In 1998, lower beef production is expected to keep cattle prices strong. Feed grain demand will be boosted by pork production which is now expanding rapidly and is expected to rise 8 percent in 1998, pulling hog prices below the $50 to $55 per cwt trading range seen during much of 1997. Broiler production is expected to rise 6 percent in 1998 with prices remaining about 60 cents per pound.
Financial situation. While it is difficult to characterize simply the financial condition of such a diverse industry as U.S. agriculture, aggregate indicators show a continually improving overall farm economy during the 1990's, with 1997 and 1998 expected to reflect that trend. This year, U.S. net cash farm income (gross cash income less gross cash expenses) will decline from the record high of nearly $60 billion set in 1996 and is expected to be slightly above the average of the 1990's (figure 2). Farm debt has risen 2 to 3 percent per year in recent years, but the value of farm assets has grown faster. Consequently, farm sector solvency has steadily improved, with the overall debt-to-asset ratio in 1997 expected to be 14.6 percent, down from 15 percent in 1996. Part of the debt increase is due to higher incomes which enable higher debt carrying capacity and stable interest rates. High income, record-high crop prices in 1996, strong export prospects, and 1996 farm bill payments have pushed up farm real estate values by 7 percent in 1995 and 6 percent in 1996, and a rise of over 5 percent is expected this year.
Page 52 PREV PAGE TOP OF DOC Outlook for Major Crops
Wheat and rice. After 2 successive years of reduced U.S. wheat yields and stocks, near perfect conditions for winter wheat, unlikely to be repeated very often, have resulted in U.S. wheat production at 2.5 billion bushels in 1997/98, up 11 percent from last year and the largest since 1990. Consequently, wheat prices are dropping from the strong levels of the past 2 years. The U.S. average farm price is expected to range from $3.20 to $3.70 per bushel in 1997/98, compared with $4.30 last year (figure 3). Despite record-high 1997 world wheat production, U.S. wheat exports are forecast to be up 10 percent in 1997/98 due to production declines in major foreign exporting countries. U.S. wheat imports are placed at 95 million bushels in 1997/98, only 3 million bushels above last year but the highest since 1993/94.
World wheat production is expected to reach a record 596 million tons in 1997/98, up almost 14 million tons from 1996/97. In addition to a large U.S. crop, production is also up in key importing areas, such as China, where the summer grain harvest was record large; the countries of the former Soviet Union (FSU), with production up 20 percent from last year; Eastern Europe, with production up 32 percent; and India, up 7 percent.
Normally, such gains in importing country production would signal a drop in U.S. exports, but drought in North Africa and rising demand in the Middle East, Southeast Asia, and Latin America are expected to keep world imports near last year's level. Moreover, 1997/98 production for major foreign wheat exporters, which include Canada, Australia, Argentina, and the European Union (EU), is estimated down about 20 million tons or 12 percent from a year ago. Sharply lower plantings and dry conditions are reducing production in Canada. Dry conditions are expected to reduce yields in Australia, although recent rains there have been timely, while extended planting delays and lower prices reduced Argentina's area.
Soil conditions are very favorable for U.S. winter wheat planting for the 1998 crop, which is now underway in the Southern and Central Plains. Nationwide, planting of winter wheat was 58 percent complete as of October 5, up from 51 percent in 1996 and about equal to the 199296 average. In 1998, U.S. acreage is expected to be up slightly, but assuming a return to lower yields, 1998 production would decline from 1997.
Page 53 PREV PAGE TOP OF DOC An important concern for consumers worldwide has been the declining global acreage, reduced yields, and consequently low global wheat stocks of the past two years. The 1995/96 U.S. and global carryover were the lowest since the mid 1970's. During the 1996/97 season, U.S. inventories increased slightly, but even with a rebound in acreage and production in all leading foreign exporting countries, global stocks relative to use fell to record lows as consumption rose sharply.
For 1997/98, global wheat acreage dropped slightly, but record-high yields are pushing up global production to a record high. Even so, global carryover stocks are forecast at only 21 percent of use, the lowest on record except for the past 2 years. However, U.S. carryover stocks are expected to rise over 50 percent to nearly 700 million bushels at the end of the 1997/98 season and are expected to remain at about that level at the end of the 1998/99 season, assuming average yields.
Should observers be alarmed at the continued low level of global wheat stocks? Concern, but not alarm, appears appropriate; the situation should be closely watched. First, historical stock levels are no longer a precise guide to the desirable level. Government policy actions to reduce stocks, such as in the U.S. and EU, and the experience of operating with lower stocks in recent years will limit accumulation in the future. Second, there likely is capacity to rebuild global stocks to a higher level during the next few years. Importing regions such as China, India, and the FSU have capacity to raise production and keep imports minimal. Eastern Europe has performed well below potential in the 1990's and could also produce more. And Canada, Argentina, and Australia are all having below par years in 1997/98. The EU, with reduced export supplies following policy reform, still has set-aside land under domestic programs. In the United States, strong prices and planting flexibility can generate wheat acres.
The U.S. rice market has performed surprisingly well compared with pre1996 farm bill expectations. In 1997/98, U.S. rice production is up an estimated 6 percent. Strong domestic demand and exports, forecast 5 percent and 13 percent higher, respectively, have been the keys to firm prices. Exports to Latin America, Europe, the Middle East, and Japan account for the bulk of shipments. The Asian currency devaluations are reducing competitors dollar selling prices and will account for a modest decline in the 1997/98 U.S. farm-level rice price, compared with 1996/97's $9.90 per cwt.
Page 54 PREV PAGE TOP OF DOC Corn and other feed grains. U.S. corn production for 1997 is forecast at 9.3 billion bushels, about unchanged from last year. Expectations of historically strong year-to-year corn prices led to a slight increase in corn area in 1997 on top of 1996's large expansion. After a promising start, crop conditions deteriorated from early July through the middle of August. Nevertheless, the crop is still expected to be the fourth largest on record. The average farm price is forecast at $2.45-$2.85 per bushel in 1997/98, compared with $2.70 per bushel last year.
U.S. corn exports are forecast to increase from 1.8 billion bushels last year to over 2 billion bushels in 1997/98 because of reduced competition from other major exporters, notably China, Argentina and South Africa. Drought is expected to reduce China's corn crop by 14 percent from 1996's record level. Although uncertain because planting has only just begun, Argentina's and South Africa's corn crops are expected to be down 12 percent and 6 percent, respectively, in 1997.
Domestic use of corn is expected to reach a record 7.3 billion bushels in 1997/98, exceeding the previous record set in 1994/95. A 4 percent increase in red meat and poultry production in 1998, particularly hogs and broilers, and stable corn prices are expected to boost feed and residual use by 5 percent in 1997/98 following a 13-percent jump last year. Food, seed and industrial use is also forecast to increase by 5 percent in 1997/98. Corn used in the production of alcohol fuels is expected to continue to recover from record high corn prices in 1995/96. In 1997/98, 485 million bushels of corn are forecast to be used in the production of alcohol fuels, compared with 435 million last year and 533 million in 1995/96, before corn prices reached record highs.
In contrast to the increase expected in world and U.S. wheat stocks, world and U.S. coarse grain stocks at the end of 1997/98, while remaining above 1995/96 levels, are expected to decline from previous-year levels by 13 and 8 percent, respectively. Both world and U.S. coarse grain carryover stocks are expected to equal about 1 month's consumption. Reduced coarse grain production in the United States and China is the primary reason for the anticipated decline in coarse grain inventories. The decline in U.S. production is mainly due to reduced sorghum area in 1997 as Southern Plains producers switched to alternative crops. U.S. barley production is also expected to decline slightly and oats increase in 1997.
Page 55 PREV PAGE TOP OF DOC Soybeans and other oilseeds. The outlook for soybeans is quite favorable, with record production, crush and exports expected in 1997/98. With plantings up nearly 7 million acres, and exceeding wheat for the first time, U.S. soybean production is estimated at a record 2.7 billion bushels. New varieties and farming practices are steadily boosting yields; U.S. yields of 40 bushels per acre will soon be commonplace. Very low carryover stocks on September 1 are expected to rise 150 percent to 285 million bushels on September 1, 1998. Consequently, the average farm price for 1997/98 is forecast at $5.60-$6.70 per bushel, compared with $7.38 last year.
Soybean crushing in 1997/98 is forecast at a record 1.5 billion bushels, up 4 percent from last year. The increase in crush reflects record domestic soybean meal disappearance, as hog and poultry feeding expand, and strong soybean meal exports. Soybean exports are also forecast to be a record 950 million bushels in 1997/98, up 8 percent from last year.
Record global oilseed supplies are in prospect for 1997/98 which will restore U.S. and world carryover stocks to near-normal levels. Among major producers of soybeans, only China is expected to have a smaller, drought-reduced crop. The higher U.S. exports will come early this season as Brazil and Argentina import an estimated 1.5 million tons during October-February and China and Mexico show strong import demand. Asia will be a good market for protein feed and vegetable oils although currency turmoil, El Nino and Taiwan hog problems create uncertainty. In the EU, where hog disease and beef safety concerns are limiting feed demand increases, shifts to poultry and vegetable oils in lieu of animal fats could help oilseed demand.
This season's decline in U.S. soybean prices relative to corn is likely to reduce 1998 U.S. soybean plantings by several million acres. This would bring production in line with likely total use for 1998/99, stabilizing U.S. carryover stocks and prices at near 1997/98's expected levels.
Page 56 PREV PAGE TOP OF DOC Cotton. With cotton area down from last year due to relatively more attractive prices for other crops, 1997/98 production is expected to be 18.4 million bales, 3 percent lower. The strong economy and continued market share gains from synthetic fiber will benefit domestic textile mill use, which is now about double the level of the early 1980's. Little change in the foreign supply-consumption balance means U.S. raw cotton exports are likely to be about at last year's level, even with smaller sales to our major buyer, China. With U.S. production down and total use up slightly on the strength of domestic consumption, carryover stocks are expected to decline a little and keep prices in the recent trading range.
Cotton has faced a substantial change in customers in recent years. This past year Mexico imported more cotton than Japan, once the major buyer. Mexico and Brazil combined imported as much as Korea, Hong Kong and Taiwan. During 1997/98, South American imports are expected to be record high, and 6 times greater than in 1990. NAFTA has helped make Mexico a big factor. Their cotton textile and apparel imports into the United States grew from 4 percent of the U.S. market in 1990 to 15 percent this year, with U.S. raw cotton and cotton fabric used as their raw material. South America and emerging Asian markets like Thailand and Indonesia also will be increasingly important buyers of U.S. cotton.
Another key to the 1997/98 outlook will be China's imports. China holds 40 percent of world cotton stocks and has taken steps to work them down this year. Consequently, China's cotton imports are forecast at 2.7 million bales, down from last season's 3.5 million.
The Impact of the 1996 farm bill
The 1996 farm bill continued the evolution begun in the mid1980's toward less government intervention in commodity markets. Program changes included expanding planting flexibility, eliminating acreage reduction programs (ARPs), fixing program payment rates, and capping loan rates. A cap was also placed on CRP acreage enrollment.
Has planting flexibility been a benefit? The 1996 farm bill eliminated nearly all of the previous planting restrictions and severed the link between program payments and plantings, freeing producers to choose the amount of acreage to plant and its allocation among crops based on expected market returns and environmental considerations. These changes have shifted acreage among crops and expanded total plantings, enabling producers to increase returns, improve crop rotations, and generate more local economic activity (figure 4).
Page 57 PREV PAGE TOP OF DOC Plantings of the eight major cropswheat, corn, sorghum, barley, oats, upland cotton, rice and soybeanstotaled 245 million acres in 1995. In 1996, plantings increased to 262 million acres and remained at 261 million acres in 1997. The gain in plantings reflects higher crop prices over the past two years, increased planting flexibility, and the elimination of ARPs.
This year, producers increased plantings of soybeans by about 10 percent to nearly 71 million acres, the most since 1982, mainly because of expectations of strong soybean prices. The planting flexibility provisions probably increased soybean acreage by 4 to 6 million acres in 1997 and reduced plantings of other crops, especially wheat, by a similar amount.
Most regions are benefitting from lifting planting restrictions. For example, in the southeastern and Delta States (Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, and Tennessee), corn area increased sharply and soybean area also rose, while upland cotton and rice acreage fell in 1996. In 1997, soybean plantings grew further as strong soybean prices caused producers to expand plantings of soybeans at the expense of upland cotton, corn, and wheat. Rice acreage also rose in 1997 reflecting strong prices.
In Texas, Oklahoma, and Kansas, sorghum plantings increased sharply in 1996, reflecting strong prices, replanting of failed winter wheat area to sorghum, and a shift from cotton to sorghum in dry areas of Texas. In 1997, sorghum area declined in these States as sorghum prices fell relative to wheat and cotton, and better weather caused less shifting of wheat and cotton to sorghum. However, sorghum plantings in 1997 continue above 1995 levels in these States.
In Minnesota, North Dakota, and South Dakota, strong prices in 1996 pushed up total plantings. Spring wheat accounted for most of the increase in plantings in these 3 States.
Page 58 PREV PAGE TOP OF DOC Producers are generally reporting satisfaction with flexibility as it enables them to respond more fully to market opportunities. Even so, there has been concern that the 1996 farm bill could lead producers to shift too much acreage and that would lead to wider year-to-year swings in market prices. Although some producers may overreact to changes in expected prices during the next few years, experience thus far with flexibility and with nonprogram crops suggests that, as a whole, farmers tend not to make excessive shifts in acreage among crops in any one year and flexibility is not likely to generate market volatility. Initially, some producers may make large shifts to establish optimum rotations, with lesser shifts thereafter. Alternatively, over a relatively short period such as 1 to 2 years, the need for new investments in machinery and equipment may prevent some producers from immediately shifting to alternative crops.
Has elimination of ARPs weakened farm prices and incomes? The 1996 farm bill eliminated the authority for ARPs. The need for ARPs to balance supply and demand declined following enactment of the Food Security Act of 1985 and the implementation of market-driven price support loan rates. In 1987, nearly 54 million acres of cropland were idled under ARPs, but less than 5 million acres were idled under ARPs in 1995. If ARP authority had been continued in the 1996 farm bill, it is extremely likely the Secretary would have set ARPs for all crops at 0 percent in 1996 and 1997. Looking beyond the current year, it is likely ARPs would have been set above 0 percent only on rare occasionswhen market prices turn out to be much weaker than projected. Consequently, elimination of ARP authority is likely having little influence on current markets.
How have fixed payments performed? The 1996 farm bill established fixed payments for eligible wheat, feed grains, rice, and upland cotton producers each year through 2002. Payment rates vary from year-to-year averaging $0.33 per bushel for corn, $0.61 for wheat, $0.072 per pound for upland cotton and $2.57 per cwt. for rice during FY19962002. Payment rates under the 1996 farm bill will exceed those under the previous target price/deficiency payment program if the market price for corn averages above $2.42 per bushel, wheat averages above $3.39 per bushel, upland cotton averages above 65.7 cents per pound and rice averages above $8.14 per cwt. during 19962002.
Page 59 PREV PAGE TOP OF DOC In 1996/97, $5.1 billion in fixed payments were provided to producers. This past year market prices were above or very near the target prices established for 1995 crops. If the target price/deficiency payment program that had been in effect for the 1995 crops had been in effect for 1996 crops, deficiency payments to wheat, feed grain, upland cotton, and rice producers would have amounted to about $0.7 billion for 1996 crops. Consequently, U.S. net cash farm income would not have been a record high in the 1996 but for the 1996 farm bill's fixed payments.
The much larger payments provided to producers with respect to 1996 crops under the 1996 farm bill's provisions raised incomes considerably above expected norms, in effect, increasing income variability. For example, wheat production generated an average price of $4.30 per bushel in 1996/97 and about $5.15 per bushel after including the 1996 farm bills fixed payments. Over the previous 5 years, wheat production returned an average of $3.50 per bushel in the market and an average of $4.10 per bushel, including deficiency payments.
For 1997/98, 1996 farm bill payments are also expected to exceed payments that would have been made under the provisions of the target price/deficiency payment program. Under the 1996 farm bill, fixed payments of about $6.3 billion will be provided in 1997/98. Under the previous target price/deficiency payment provisions, payments would have totaled about $2.5 billion in 1997/98.
Although fixed payments have raised average income, a common concern is that severing the link between payments and market price will lead to greater volatility in farm income. While many producers may face an increase, USDA analysis suggests the increase may not be great compared with expected volatility under the previous deficiency payment program. Stabilizing price received, as the old deficiency payment program attempted to do, does not assure stability in producer revenues or income. National prices and yields tend to move in opposite directions, providing a natural hedge against extreme yield losses at the national level. Attempting to stabilize incomes through variable direct payment rates or other forms of price stabilization may actually make revenues of some producers more variable. For example, USDA research indicates that deficiency payments increased variation in gross incomes on acreage covering about one-third of corn production and one-quarter of wheat production.
Page 60 PREV PAGE TOP OF DOC Have changed commodity loan and stocks policies made a difference? The 1996 farm bill suspended the farmer-owned reserve (FOR), capped loan rates at their 1995 levels for program crops, and increased the interest charged on commodity loans by 100 basis points. Despite these changes, many producers continue to use and to derive benefit from the loan program as a marketing tool. Even though wheat prices were abnormally strong, wheat producers placed 194 million bushels of 1996-crop wheat under loan, only slightly below the average for the 199195 crops of 197 million bushels. Loan placements for 1996-crop corn totaled 970 million bushels, nearly 20 percent below the previous 5-year average. Loan placements amounted to about 10 percent of 1996-crop production for both corn and wheat.
Government-owned stocks are now all but eliminated except for the Food Security Commodity Reserve which contains 93 million bushels of wheat. Under the 1996 farm bill, Government-owned inventories are expected to remain near zero because of the cap on loan rates and the marketing loan provisions. The implied reduction in market intervention has raised concerns about the ability of the Federal Government to stabilize prices.
While the Government no longer has the tool of inventory management available, managing stocks for the purpose of stabilizing prices has proven to be extremely difficult in the past. Removing stocks from the marketplace when prices are low may temporarily help solve the low-price problem but creates a new problem of stocks disposal. Disposal in the 1980's created considerable price variability. A complication is that there is no hard and fast rule for deciding when prices are above or below typical norms. And, holding stocks for price stabilization purposes increases the cost of farm programs and, as indicated earlier, even if these stocks stabilize prices, that may not help stabilize the incomes of many producers.
How is the new CRP affecting markets? The 1996 farm bill capped enrollment in the CRP at 36.4 million acres through 2002. The 1985 Act had an initial enrollment cap of 45 million acres. However, subsequent legislation, including appropriation acts, limited enrollments to lesser amounts. During FY 1997, about 33 million acres were enrolled in the CRP. Contracts on over 21 million acres previously enrolled in the CRP expired on October 1 of this year and contracts on another 4.8 million acres expire on October 1, 1998.
Page 61 PREV PAGE TOP OF DOC In early 1997, USDA established new rules for future CRP signups. The first signup under the new rules, and the 15th since the program began, was conducted during March 1997 and was the largest CRP signup ever. Land owners and operators offered 23.3 million acres for enrollment and USDA accepted 16.1 million acres. Total CRP enrollment now stands at about 28 million acres. The 16th CRP signup will be October 14-November 14, 1997.
Of the acres accepted in the 15th signup, 4.4 million were not previously enrolled in the program, and 11.7 million were acres enrolled under contracts that expired in 1997. About 55 percent of existing CRP acres were re-enrolled with improvements in wildlife cover and reduced rental costs. Rental costs averaged $39 per acre in the 15th signup, compared with an average of $50 per acre for previous enrollments. Regionally, small reductions in the share of enrollment occurred in the Lake States and Pacific Regions, while the Mountain and Northern Plains regions increased.
Prior to the 15th signup, producers had to designate which crop bases would be reduced if acreage was accepted in the CRP. The 1996 farm bill eliminated crop bases and the designations, except for tobacco and peanuts, so historical cropping patterns are now used to estimate the mix of crops enrolled in the 15th signup. From these data, it appears that the share of wheat acres enrolled in the 15th signup was higher than in the previous signups, while the share of corn and soybean acres enrolled was lower. However, since total enrollment is presently down about 5 million acres from early this year, wheat, corn, and soybean acres enrolled in the CRP as of October 1, 1997 are also down by about 1 million acres each compared with last year's enrollment levels.
Key Uncertainties in the Outlook
Although the agricultural economy is generally strong with a few exceptions, such as dairy, and prospects look sound, there are several key uncertainties that could affect markets and the well being of market participants over the next 1 to 2 years. A few key factors follow:
Page 62 PREV PAGE TOP OF DOC El Nino and agricultural production. This weather event is forecast by the National Weather Service to cause weather changes that could affect global agricultural production over the next 9 to 10 months. El Nino effects can be more strongly documented outside the United States. For example, dryness forecast in South and Southeast Asia and Oceania could affect palm oil, wheat and rice production during 1997/98. In northwest Brazil and parts of Central America, inland areas may suffer drought. In South Africa, dryness could affect corn production. However, even in foreign regions El Nino effects cannot be predicted with certainty. For example, this year there already have been significant deviations from the expected El Nino impacts. The Indian monsoon has been strong and is withdrawing on time. In Australia, rains in the past 6 weeks have been ample and timely, and in South Africa, pre-season rains have been adequate.
While El Nino impacts are consistent in many parts of the globe, the interactions of many other weather variables tend to mask U.S. El Nino crop effects. Also, not all El Nino effects are negative. El Nino effects may bring adequate to abundant moisture to some areas, improving moisture for crop growth and irrigation supplies. The principal negative U.S. effect often occurs in coastal California where west winds lifting moisture-laden air into the mountains can result in excessive rains that can trigger flooding and mud slides.
Macroeconomic performance, especially Asian currencies. Foreign economic growth in developed countries, while not surging, is still expected to be 2.2 percent this year and rise slightly in 1998, assuming some improvement in Japan's weak economy. Developing country growth is expected to decline slightly in 1997 to 5.3 percent and maintain that rate in 1998, as Asian economiesour prime export destinationgrow a little more slowly, but still above that of most other countries.
The main macroeconomic uncertainty is the currency devaluations in Thailand, Philippines, Indonesia and Malaysia and the possible impacts on their economic growth, U.S. competitiveness in these markets and the potential for currency problems to spread to other countries. The United States is the number one or two agricultural exporter to these countries, with total annual agricultural exports in excess of $2.5 billion. The currencies of these countries declined 15 to 30 percent since the devaluation began this summer and their peg to the U.S. dollar severed. The currency devaluations alone would be expected to result in some reduction in U.S. exports, but the extent of a decline would depend on the yet-unknown effect of the currency changes on capital flows, inflation, and economic growth. These countries import wheat, corn and soybeans. Currency-induced import reductions could be partially offset by increased grain needs due to reduced grain production, such as expected in Thailand this year, and by increased animal product exports as their devalued currencies boost their exports to other countries. At this point, it does not appear that the U.S. trade repercussions will be as great as those following the peso devaluation in Mexico.
Page 63 PREV PAGE TOP OF DOC Real or perceived food safety concerns. The finding of E. coli and BSE in foreign countries affected global and U.S. meat trade during the past year. For example, beef exports to Japan were running well below expected levels in FY 1997, attributable by many to food safety concerns, as well as to higher U.S. meat prices, the devalued yen and poor GDP growth. While food safety concerns may initially reduce imports of the affected meat and therefore the derived demand for feeds, the overall effect on U.S. feed demand thus far seems to have been very small. Continued pathogen or other findings overseas could lead to greater effects, including shifts to alternative meats which would change the pattern of energy and protein feed demand.
A similar concern is foreign-country policies over genetically modified crops, which could disrupt grain and oilseed trade flows. To avoid such disruptions, the Federal Government and private industry must both work to conduct and disseminate the scientific analysis that demonstrates the safety of U.S. agricultural products, educate foreign governments and consumers on these findings, and continue to press in international trade negotiations for science-based sanitary and phytosanitary trade regulations.
Crop disease and animal health concerns. Another uncertainty witnessed over the past year is disease outbreaks which can affect crop trade. Karnal bunt had a serious potential impact on global wheat trade but was averted by strong control measures and scientific research, although some countries are still refusing our wheat. TCK is still a problem with China. Foot and mouth disease has led to a 20-percent contraction in Taiwan's hog inventory and a drop in demand for U.S. feeds. Hog cholera has led the Government of the Netherlands to propose a one-quarter reduction in the country's hog inventory. Initial effects could be offset over time to the extent that U.S. pork exports increase to markets opened by fewer exports from Taiwan and the Netherlands.
Fast Track Authority. The current prosperity of agriculture traces to the dynamism in the world economy which has been spurred by advances in capitalism, market-orientation and trade liberalization around the globe. World agricultural exports have grown from over $200 billion in 1980 to over $400 billion in the mid 1990's. U.S. agricultural exports have been growing three times faster than domestic consumption, allowing total demand to keep pace with yield growth.
Page 64 PREV PAGE TOP OF DOC Despite significant progress in opening markets, agriculture remains one of the most protected and subsidized sectors of the world economy. In addition, there has been a proliferation of bilateral and multilateral trade agreements in recent years. Preferential trade agreements like MERCOSUR in South America, ASEAN in Asia, and the Canada-Chile trade agreement put U.S. suppliers at a disadvantage by providing duty-free access to each other's markets. The President must have the assurances provided by fast track authority that Congress will act expeditiously and not amend negotiated agreements to effectively negotiate future trade agreements and trading rules. Failure to provide that authority would undermine future growth in U.S. agricultural exports and the prosperity of our farmers and ranchers.
China. The outlook for U.S. agriculture is very much linked to what happens in China, home to one-fifth of the world's population. It is expected China's economy will maintain the strongest growth in Asia over the next several years with per capita GDP growth of 7 percent or more per year. As incomes grow, the demand for food is expected to outpace increases in production causing China to expand agricultural imports. However, very little is known about the economic and trade policies that China will follow. Increased emphasis on grain self-sufficiency has raised production and stocks and corn exports this year. Continued incentives to expand domestic production and maintenance of trade barriers could dampen future growth world grain trade and grain prices. Alternatively, if the pace of economic and trade liberalization could quicken, China could be integrated into the world economy more rapidly than anticipated, which would further strengthen world grain markets.
Although crop agriculture has fared well over the past 2 years and long-term prospects are generally favorable, the new market-oriented environment presents risks that market participants must manage. U.S. producers have substantial tools available to deal with them, including yield and revenue insurance; well-developed markets for options, futures and forward contracts; commodity loans; private storage and credit markets; and a variety of marketing and production practices.
Page 65 PREV PAGE TOP OF DOC Like producers, the Government has responsibilities in the new environment to reduce risks to U.S. agriculture using the tools of science, trade negotiations and dispute resolution. Accessible and accurate market information is also critical for sound decision making at all levels of the marketing system. The Department has been a leader in providing accurate, accessible and timely information on agricultural markets must make every effort to maintain the high quality of its market information.
Mr. Chairman that concludes my testimony and I'll be happy to respond to any questions.
"The Official Committee record contains additional material here."
TESTIMONY OF JOHN B. CAMPBELL
Good Morning Mr. Chairman and Members of the subcommittee. Today I appear on behalf of my employer, Ag Processing Inc (AGP) , a cooperative specializing in soybean processing, vegetable oil refining, feed manufacturing, grain merchandising and alternative fuels. I also serve as Chairman of the National Grain and Feed Association (NGFA), International Trade and Agricultural Trade Policy Committee, and have been appointed by the House of Representatives to serve on the Commission on 21st Century Agriculture established in the last farm bill.
My testimony today is given as an observer of and participant in the changing structure of agriculture. I will review several trends that we see from our perspective as a Midwestern value-added cooperative agribusiness and where they might be leading us in the future.
PRODUCERS HAVE CHANGED
Regardless of your opinion on the merits of the FAIR Act (otherwise known as Freedom to Farm), the legislation could not have been approved were it not for the changing nature of farmers themselves. It is significant that so many farm organizations finally came to endorse the legislation. Such endorsements were not forthcoming for the 1990 or 1995 Acts.
Page 66 PREV PAGE TOP OF DOC A new generation of producers has taken economic control and political leadership of agriculture.
These producers: have survived the farm depression of the early 1980s; have prospered in the 1990s; are not interested in high debt due to inflated land values; are even more independent then their predecessors; are very business oriented; lifestyle is less of a consideration; and have high expectations for themselves and their business stakeholders.
NEW PRODUCER PROFILE:
The new generation of producer: is 30 to 50 years old; rents more ground than owns and is not very interested in owning more ground; could farm more ground but refuses to pay above market rates; owns or leases new, big and fast equipment; and, is looking for new marketing opportunities such as identity preserved contracts and valued added processing.
NEW PRODUCER FINANCIAL PERSPECTIVE
The new generation of producers has a different financial perspective largely because of its experiences in the 1980's and the fact that many of this Generation are generating cash that must be invested outside of more land investments.
New generation producers believe they must: invest or be taxed on income; add value to crops rather than land; invest in on-farm storage; invest in high speed, high volume grain handling equipment such as carts and tractor-trailer semis; know where the best grain bids are and how many cents per bushel it takes to get there; use traditional and creative risk-management tools such as contracting, forward pricing, deferred pricing, futures, options and new insurance tools; create new business ventures if the old structure locks them out or is too diverse to benefit them directly; and, create new specialized business support rather than protect older institutions.
IMPACT ON AGRIBUSINESS
The amount of land being cultivated is about the same as it was 50 year ago but the customer base has dropped dramatically. Consolidation of farming into fewer hands is well documented but is probably understated due to the lag time of information. The concentration of economic power into fewer farm hands is being reflected by merger mania in agribusiness. Farm service companies are in multibillion dollar competition for the business of Mr. and Mrs. Farmer.
Page 67 PREV PAGE TOP OF DOC Farm equipment companies merged first and now seed, chemical, feed, grain and processing have followed. One needs an electronic scorecard to keep track of who owns what in agribusiness today.
Railroad mergers are a separate case but no less important. Transportation pressures are helping change the face of rural America. Much of the Heartland is dotted with elevators approximately 6 miles apart. Six miles was the optimum distance for horse and wagon. Today those elevators are being consolidated into larger operations at breathtaking speed. Some are being improved to serve a rail market or a feed business while others are being closed or turned into seasonal facilities.
The speed at which our crops can be planted and subsequently harvested is mind-numbing. Only weak links such as weather or transportation slow farmers down today. Agribusiness has to be fast on its feet to keep up with farmers and their ability to change plans depending on weather or other factors.
I have heard farmers with low technical skills comment that farming isn't much fun anymore. According to them it used to be that you could do about the same thing every year and come out OK. Now there seems to be no such thing as a normal year.
Farmers who have high technical skills are having the time of their life. They see the new technology as an opportunity to make higher yields at less cost and thereby improve their profits. One producer recently told me he hates to tell his neighbors what he is doing because what works one year many not work the next.
FARMERS ARE BECOMING AGRIBUSINESSES
In the Midwest and upper Midwest literally billions of dollars have gone into value-added processing through direct farmer investment. After all, if you are making money and you do not want to invest or can not invest in the traditional farm investment (which is more land), what are you going to do? Many farmers have invested in valued-added closed cooperatives. Some of them have prospered, some have failed and time will tell for the rest.
Page 68 PREV PAGE TOP OF DOC Ethanol is a good example. The vast majority of new investment in ethanol production has come from farmers themselves. Other examples include soybean processing, wet corn milling, beef packing and hog operations.
The pork industry change is worth focusing on because it is happening so rapidly and causing so much controversy. Less noticed, but just as important is the similar change in dairy production.
Work done by Iowa State and other universities show that even the high-cost family-sized hog operations in their management groups usually made money, but the lowest-cost family-sized operations really made money. As family-sized operations voluntarily exit, a vacuum is created for consolidators and integrators to fill the void. Consolidators and integrators are changing the face of the feed industry and will probably change the face of the packing industry too.
Specialization continues to work its wonders on everyday rural life. We see a continued move by producers to become very accomplished at doing one or two things well and not trying to run diversified operations. The integrated crop and livestock operation is going away. Not only is livestock concentrating with specialists but cropping is too. Producers will equip themselves with the machines and skills for one or two crops depending on their climate and become very good at production and risk management .
Chemical application is a good example. We would estimate that in our trade area as much as 60 percent of the chemicals other than fertilizer are custom-applied by specialized companies.
Farmers are hiring more and more outside help, including everything from crop and livestock consulting to chemical application to legal and accounting.
THE ROLE OF FARM PROGRAMS
You will note that not anywhere in this testimony have the words ''farm program'' come up, until now. That is because in our neck of the woods the commodity farm program is becoming less and less relevant. Many of the producers I described do not expect to have a program in the future and are planning accordingly.
Page 69 PREV PAGE TOP OF DOC Farm programs gaining importance relative to the traditional commodity programs are ethanol tax incentives, trade policy and the Conservation Reserve Program (CRP).
USDA management of the remaining CRP enrollment will be critical to the public perception of agriculture now that the media does not have the traditional commodity farm programs to focus on. CRP can be managed as it has in the past or as a true natural resource program that enhances the environment and helps farmers cope with new regulations.
One example of this new management approach would be for USDA to embrace the National Buffer Strip initiative, not through words but through action. The Department should reserve land in the CRP for USDA's 2 million mile buffer strip goal . This would be approximately 8 million acres if the buffer strips were 33 feet wide. We see no indication the USDA is prepared to meet the future challenge of water quality through using the only funded tool they haveCRP.
Ethanol is another de facto farm program. Approximately, 10 percent of the crop is supported by wet or dry corn milling which depends solely on continuation of the present tax treatment of ethanol and hopefully the improved tax treatment of ETBE.
Trade policy is also critical. Producers increasingly realize the interconnectedness of meat exports and grain demand. More of our grain is being exported in the form of meat than ever before. This realization has manifested itself in corn and soybean farmers investing through checkout dollars in meat export campaigns managed by their livestock counterparts.
Issues such as veterinary equivalency, beef hormone bans and BSE have a big impact on grain farmers and they are beginning to understand the relationship between grain and livestock and the global trade policy. What happens in Brussels on meat and Brasilia on GMO's is no longer seen as abstract.
Page 70 PREV PAGE TOP OF DOC Most farm interests understand the reality that the President must have Fast Track to negotiate in the trade agreement arena. The reluctance of some agricultural groups to jump on the Fast Track bandwagon stems from trade agreement indigestion and the inability of the Administration to galvanize support around an immediate and macro agenda such as GATT or NAFTA.
On the one hand trade agreements have been oversold as the be-all end-all solution to every problem. On the other hand it is difficult for many groups to endorse vague negotiating objectives for relatively small Free Trade Agreement's (FTA's). Our position is that the President should have Fast Track authority and it is the responsibility of the House and Senate Agriculture Committees to make sure that any new FTA's address the shortcomings of current FTA's as well as negotiate further reductions of production, consumption and trade barriers with increased emphasis on sanitary and phytosanitary disputes.
AGRICULTURE AND THE ENVIRONMENT
Mr. Chairman, it has appeared to me for several years that the social contract between farmers and the rest of society is changing. Farm programs were forged in the hard times of the Depression for a group of people who constituted the majority of Americans and had a much lower standard of living than their city cousins.
Today there are probably fewer than 300,000 Commercial farmers who produce more than 75 percent of the goods. They have standards of living in excess of their average city cousins.
Larger urban and suburban society today is much less concerned about how much is produced and at what farm level price than they are about how farm and ranch products are produced. We see this in everything from water quality concerns to the odor from hog confinement facilities.
The political apparatus for agriculture which includes the triad of Congress, USDA and farm organizations must create systems and programs that recognize the important change in societal expectations of farmers and their agribusiness partners.
Page 71 PREV PAGE TOP OF DOC A first step would be to hold off on the next CRP enrollment until USDA is able to organize a program that truly targets the most sensitive environmental areas for long term protection. If farmers can use precision farming techniques, USDA should be able to use precision enrollment techniques even if it takes more time and money to administer.
Mr. Chairman, I appreciate the opportunity to testify and would be happy to respond to any questions.
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