SPEAKERS CONTENTS INSERTS
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IMPLEMENTATION OF SECTION 192 OF THE
FEDERAL AGRICULTURE IMPROVEMENT AND REFORM ACT OF 1996
THURSDAY, APRIL 10, 1997
House of Representatives,
Subcommittee on Risk Management
and Specialty Crops,
Committee on Agriculture,
Washington, DC.
The subcommittee met, pursuant to call, at 9:15 a.m., in room 1300, Longworth House Office Building, Hon. Thomas Ewing, (chairman of the subcommittee) presiding.
Present: Representatives Combest, Smith of Michigan, Everett, Lewis, Bryant, Foley, Moran, Condit, Baesler, Goode, McIntyre, Etheridge, and Stenholm (ex officio).
Staff present: John E. Hogan, chief counsel; Dave Ebersole, senior professional staff; Stacy Carey, subcommittee staff director; Ryan Weston, subcommittee staff assistant; Wanda Worsham, clerk; Vernie Hubert, minority counsel/legislative director; Chip Conley, minority staff economist; John Riley, minority staff consultant; and Anne Simmons, minority staff consultant.
OPENING STATEMENT OF HON. THOMAS W. EWING, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Mr. EWING. The meeting of the Subcommittee on Risk Management and Specialty Crops to review the implementation of section 192, of the Federal Agricultural Improvement and Reform Act of 1996, will come to order.
I would like to welcome everyone to the first official hearing of the Subcommittee on Risk Management and Specialty Crops.
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The topic for our first hearing, the review of the implementation of the risk management education provisions of the farm bill is an appropriate one because the education of producers about the availability of various risk management tools has been, and will continue to be, of primary importance to the members of this committee.
Risk management education is an element vital to producers in each of our districts and throughout the entire nation. As many of you are aware, the need to provide objective information to producers about available risk management tools was becoming more important as producers increasingly developed their marketing and hedging skills long before the enactment of last year's farm bill.
However, the new flexibility provided to producers will now place a larger emphasis of risk management on individual producers who will undoubtedly bear more of the responsibility for managing price and yield risk on the farm.
This additional responsibility emphasizes an important development in the agricultural sector similar to the development that occurred when mandated catastrophic crop insurance forced producers to rely less on disaster assistance and more on crop insurance to cover their losses.
Now, more than ever, producers will be looking to the market rather than to the Government to manage risk. This new emphasis will drive a growing demand for risk management tools for the agricultural community which necessitates an accessible objective education delivery system for producers.
To that end, section 192 was developed to require the Secretary of Agriculture to work in consultation with the Commodity Futures Trading Commission to develop and implement educational programs about the management of financial risk inherent in the production and marketing of agricultural commodities.
Congress looked to the USDA as the lead agency in this effort due to their close proximity to producers. We understand that the knowledge and expertise of the CFTC and the futures markets would also be beneficial to this educational effort.
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Diversity and availability of options is important because producers will seek to utilize a wide variety of risk management tools. Risk management for one producer may simply mean the purchase of crop insurance, while risk management for another producer implies active use of the futures markets.
Today, the subcommittee is interested in receiving an update on the progress of this provision. We're interested to know how the implementation process has proceeded, what activities have taken place to date, what future activity is expected, and who was consulted throughout the process, are questions that we would like to have answers to today.
Our time is limited this morning and, as a matter of procedure, I would like to reiterate the subcommittee's request to keep our discussion focused on the issue at hand.
We are mindful of some of the many controversial issues under discussion, particularly concerning the crop insurance program. I want to ensure the subcommittee that these issues will be discussed during our crop insurance hearings to be scheduled at a later date.
We do not want to detract from the importance of this morning's topic regarding the implementation of section 192. With that, I would like to thank each of the witnesses for attending this morning's forum, and I look forward to your testimony.
On a procedural matter, we're going to be operating under the 5-minute rule, and we ask your indulgence, and of other Members here, to submit any opening statements you might have for the record. The Chair asks that the witnesses help us meet our time constraints by summarizing your oral testimony as quickly as possible. We would like to give Members adequate opportunity to ask questions. Your entire written statement will be included in the hearing record.
The Chair would also like to ask witnesses to remain available throughout the hearing to comment on issues that may arise later in our proceedings.
I see that the first panel is at the table and ready to go, and I would like to welcome Mr. Ken Ackerman, who is the Acting Administrator of the Risk Management Agency, United States Department of Agriculture. He is accompanied by Bob Koopman, Deputy Administrator, Rural, Economic, and Social Development, Cooperative State Research, Education, and Extension Service--a long title, lots of responsibility. I also want to welcome our other witness on the first panel, Chairperson Brooksley Born, of the Commodity Futures Trading Commission. Thank you very much for attending.
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Does any other member wish to make an opening statement?
Mr. SMITH of Michigan. Mr. Chairman, just very briefly. I think a significant part of risk management is the ability of producers, even small farmers and ranchers, to hedge on the commodity futures market, and so I hope we can pursue implementation of procedures by the Chicago Board of Trade or the other trading agencies in CFTC, to allow smaller farmers that are actual producers to hedge on those markets at a lower cost and easier access.
So, I would hope that would eventually, Mr. Chairman, be part of this subcommittee's discussion. Thank you.
Mr. EWING. Mr. Ackerman, if you are ready.
STATEMENT OF KENNETH D. ACKERMAN, ACTING ADMINISTRATOR, RISK MANAGEMENT AGENCY, U.S. DEPARTMENT OF AGRICULTURE
Mr. ACKERMAN. Thank you, Mr. Chairman. I will summarize my statement and try to walk through it quickly.
I am very pleased to appear before the subcommittee this morning for a number of reasons. As a first matter, I believe this is the first time that these three agencies--the Commodity Futures Trading Commission, the Extension Service, CSREES, and the Risk Management Agency--have appeared together before a hearing of this committee. Given the importance of risk management education and related issues, I think is going to be probably the first of several times that our three agencies appear together to talk about this and related issues.
I'm also very pleased, given the importance of this subject, that the subcommittee has chosen risk management education as the very first hearing of the year in this area to conduct, and has made a point to make this the primary topic for discussion at the hearing. Clearly, this is a topic that deserves this level of attention.
I think it's well known that ever since the 1996 farm bill passed, there's been an overwhelming interest in risk management education. Confronted by an ever growing array of risk management products, farmers are facing a need for more information on available tools and strategies. As a result, numerous conferences and hundreds of published articles have focused on the new risk environment.
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Many private sector groups, including the National Grain Trade Council, the American Farm Bureau Federation, the Chicago Board of Trade, the National Grain and Feed Association, the National Cotton Council, among others, have launched significant initiatives in this area.
The reason is very obvious and very evident. Over the past several years, the Federal Government, responding to budgetary pressures, has very much changed the traditional safety net affecting farmers and very much limited the role of the Federal Government in that safety net. As two principal matters, the 1994 Federal Crop Insurance Reform Act eliminated ad hoc crop disaster aid and replaced it with an expanded and enhanced crop insurance program. The 1996 farm bill went further and eliminated deficiency payments and cut back on several other price supports in significant ways, again, cutting back the traditional safety net support mechanism that has existed for some 60 years.
As a result, farmers today must change in a very fundamental way the way they face the world, the way they relate to the economics of farming. Farmers can no longer afford to be passive, to wait for Government programs to come to them to help them. Instead, farmers today, in the new environment, must be active. They must make active choices. They must choose whether to buy insurance or whether to use other products, and at what level to use them.
Responding to this new environment, both the Government and the private sector have begun to address the changing needs of farmers. We, in the crop insurance community, FCIC, working with the private sector, have launched a series of new tools, many of which have been brought to us by the private sector, particularly in the area of Revenue Insurance, Crop Revenue Coverage, Revenue Assurance, and Income Protection.
In addition, other sectors of the farming community have launched other new risk management tools--yield futures and options contracts, new forward contract mechanisms, new marketing and financing techniques, and new combinations of all of these products.
But the authors of the 1996 farm bill recognize that new risk management products alone are not enough to prepare farmers for the new environment. Rather, if farmers are to function effectively, they must become far more sophisticated customers of these products. They must become far more sophisticated in identifying the risks to their farm business and mitigating those risks. And it was for this end, this need for farmers to become better customers, that section 192, the risk management education initiative, was placed into the law.
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Just yesterday, Secretary Glickman, at USDA, announced a formalization of the Risk Management Education Program that we have been developing over the past several months.
This new initiative will be a coordinated team effort involving both the public and the private sector. Leadership on the Government side will be provided through a three-member steering committee which is represented by the three agencies here before you this morning. It will be chaired by the Risk Management Agency, and include CSREES and the Commodity Futures Trading Commission. We will act as a facilitator for a semi-formal alliance of public and private sector organizations.
We have also made a financial commitment to this process. The 1998 budget request by the administration contains a $5 million item for risk management education, representing a very important element of seed money to get the process started.
The initial goal of the new program will be twofold, training and information distribution. On training, we intend to hold a kick-off meeting in St. Louis in September. The goal will be directed at two audiences, the local agriculture opinion leaders and the farmers themselves.
A series of integrated course outlines will be developed under the oversight of the Steering Committee, counting heavily on the expertise of the affiliated groups. Ultimately, opinion leaders at the local level, who deal face-to-face with farmers, will do the direct training. Insurance agents will teach insurance; commodity brokers will teach futures and options; grain elevators will teach forward contracting, and so on. The Government's role will be as a facilitator.
With respect to information distribution, one of the biggest challenges facing farmers today is to sort through the new array of products that have been introduced over the past several years. We intend to set up a Web site to provide farmers a neutral source of information on new products so that they can look to someone beyond the salesmen in making choices that are put before them.
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Mr. Chairman, today, if I can leave with one point--because I understand that I am running short of time--today, knowledge is critical, if farmers are to remain financially competitive. That is the underlying theme, we feel, of the new farm bill.
Through a comprehensive educational effort, we can help farmers meet the challenges and improve their prospects for agriculture in the 21st century.
Mr. Chairman, that completes my prepared statement. I would simply like to end by publicly thanking our partners, both in Government and in the private sector, in the various communities we've worked with--the insurance industry, the futures industry, the commodity groups, the lending industry, the farm organizations--who helped us get to this point. Mr. Chairman, I thank them, and I thank you.
[The prepared statement of Mr. Ackerman appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Ackerman.
Now, Chairperson Born, we're glad to hear from you.
STATEMENT OF BROOKSLEY BORN, CHAIRPERSON, COMMODITY FUTURES TRADING COMMISSION
Ms. BORN. Thank you very much, Mr. Chairman and members of the subcommittee. We very much appreciate your inviting the Commission to present its views on implementation of the risk management provisions of the Federal Agricultural Improvement and Reform Act of 1996.
The major shift in farm policy embodied in the FAIR Act has created a new opportunity for America's farmers--the freedom to farm for the market and not the Government. But with that freedom comes new responsibilities as farmers shoulder the burden of managing for themselves market risks previously covered by Government programs. In this new era for agriculture, it is vital for farmers to have the educational support that will allow them to create their own risk management programs.
The futures and option markets are an important element of the risk management tools available to agricultural producers. As the Federal agency charged with regulatory oversight of those markets, the CFTC strongly supply supports the FAIR Act's educational goals.
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In going forward with this educational mission, the CFTC brings to the table not only its experience, expertise and daily knowledge of the workings of the futures markets, but also a long history of commitment to agricultural risk management education.
Since it was organized in 1985, the CFTC's Agricultural Advisory Committee, or AAC, has given a spectrum of agricultural and agribusiness groups, currently 25 organizations, an ongoing voice in CFTC decisions affecting agriculture.
The Commission has also sponsored various special programs targeting particular agricultural issues, including the September 1991 ''Kalo A. Hineman Delivery Issues Symposium'', named in honor of former commissioner Kalo Hineman, who founded the AAC; the November 1994 ''Summit on Risk Management in American Agriculture'', co-sponsored by the Farm Foundation and organized by Commissioner Joseph B. Dial, the current Chairman of the AAC; and the December 1995 ''Public Roundtable on Agricultural Trade Options.''
The CFTC is committed to bringing is experience to bear in cooperating with USDA to carry out the consultative role that section 192 of the FAIR Act envisions for the CFTC.
In furtherance of this goal, as chairperson of the Commission, I've asked Commissioner Joseph Dial to serve as the CFTC's liaison with USDA in supporting the educational mandate of section 192. Joe Dial was very sorry he couldn't be here today because he is out of the country, meeting with futures regulators and futures industry representatives in Asia.
I have also designated Ron Hobson, the Deputy Director for Market Research in our Division of Economic Analysis, who is here with me today, as the Commission's primary staff person on section 192 matters.
The recent actions and current plans of USDA and the CFTC in support of the FAIR Act's educational mandate will be covered in detail in USDA's testimony, and I will not repeat that catalogue here. Attached to my testimony, however, is a chronology of the activities that the CFTC is engaged in.
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As demonstrated by the actions described in this statement and the attached chronology, the CFTC remains committed to fulfilling its obligations under the FAIR Act. We are continuing our active role in supporting the Act's risk management education initiatives in cooperation with USDA and with the private sector participants as well.
Consistent with the subcommittee's wishes, our testimony has been limited to the risk management provisions of the FAIR Act. I would be remiss, however, if I didn't at least mention in passing pending legislation that could have a significant impact on farmers' risk management activities. I am referring to H.R. 467, which will be the subject of hearings before this subcommittee next week.
In my testimony at that time, I will detail the Commission's concerns about the profound impact H.R. 467 could have by eliminating regulation of the futures exchanges at the very time that the risk management responsibilities embodied in the FAIR Act have made farmers and ranchers more dependent on futures markets than ever before.
Thank you again very much for the opportunity to appear before you. I will be happy to answer any questions the subcommittee members may have.
[The prepared statement of Ms. Born appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Chairperson Born.
Mr. Koopman.
Mr. KOOPMAN. Mr. Chairman, I have no prepared comments. I'm prepared to talk about the role of extension and research in the Land Grant system, as a resource for Mr. Ackerman and the chairperson.
Mr. EWING. Thank you for being here as a resource person.
I started out with you, Mr. Ackerman, and maybe in a little more detail you could tell us that now that we have received the draft of the 1997 risk management education package, can you tell us just how this plan was drafted? Who were the people that had the input? Was the industry consulted? And what are the plans for implementation of the program?
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Mr. ACKERMAN. Yes, Mr. Chairman. In a nutshell, there has been a lot of consultation over a period of months, to develop our plan. We have been bringing together players from the crop insurance industry, the futures industry, and the commodity groups, over the past several months, to develop our proposal and to bring it together.
I would note that shortly after the enactment of the farm bill, it became very clear that the private sector had very much identified the need for risk management education as a priority, and there was quite a lot of energy, quite a few initiatives already underway.
It became very apparent early on that the most effective use we could make of resources was to try to act as a facilitator for efforts underway in the private sector. There had already been a Risk Management Alliance put together at an early point, led by the National Grain Trade Council, and many other such groups.
We met with these organizations. We held a meeting at USDA in November, bringing together leaders from the futures industry, the insurance industry, and the grain trade, and others, to try to get an initial fast start on the program. That meeting led to the creation of a working group, which has continued to meet and which will meet as early as next week, to move these plans forward.
Our next several steps will be to aim towards kicking off a formal education program this fall, through the meeting in St. Louis, which will essentially become a ''Train the Trainer'' program. We hope to provide training through local opinion leaders, the networks of extension agents, local insurance agents, local brokers, local bankers, local commodity groups around the country, who deal face-to-face with farmers, and to also provide a source of neutral information through a Web site, which we also hope to have up and running over the next several months.
Mr. EWING. Thank you.
Chairperson Born, since your agency has the responsibility for regulating the futures exchanges, do you have available through your agency educational trained personnel to be involved with USDA, with Mr. Ackerman? Seems to me that one of the things that's most needed out there is training, particularly in the futures market. I think buying insurance is something almost every producer does. Could you maybe indicate what your agency, or how they might be involved in that?
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Ms. BORN. Certainly. The Commission has played a significant role in producer education and education of other potential users of the futures markets for many years. Our Public Affairs Office has available a number of educational materials for producers, including brochures and other materials.
We have a Web site on the Internet that includes various educational information about the markets, the Commission's role in regulating them, the various commodity professionals who have proceedings against them and sanctions against them.
Ron Hobson, who is in our Division of Economic Analysis, has been assigned to be the liaison to USDA in this educational effort. He has a significant background in educational efforts that the Commission has undertaken in the past.
Mr. EWING. Thank you. Just one final comment, and I don't know if I should direct this to you, Mr. Ackerman, or not but, in reviewing the education package, I would have to--maybe I'm being a little nitpicky--but the item in here, ''Freedom to Fail''--it's on the last page of my copy--I question the propriety of that. I question the manner in which it is written. I think it's almost back to something that was written by those who opposed Freedom to Farm, and it's quite negative, in my opinion, and it's probably not the way we want to approach the educational part here.
I think that you can state the facts and leave out the commentary words, and certainly I would think there's a better title.
I've lived through a lot of farming before we had Freedom to Farm, and people have always been free to fail, and they were failing under the old agriculture programs, just as they could under the new farm bill. So, I think that's something you might want to look at.
Mr. ACKERMAN. Mr. Chairman, my only comment--I'm informed that the working group agreed with you, and that page was removed from the final version of the document. What you have before you is a draft which has been changed in that respect.
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Mr. EWING. Well, that's great, to have it done before you even ask.
All right. To the distinguished vice chairman of the committee.
Mr. COMBEST. Mr. Chairman, I wouldn't yield my time to him, but I would ask that you recognize Mr. Smith first. He has a hearing he needs to chair.
Mr. EWING. Thank you. Mr. Smith.
Mr. SMITH of Michigan. Just briefly, it seems to me that if you are really going to reduce the risk of a producer, then to the greatest extent possible you need to know the anticipated supply and demand for a particular crop and, to the extent possible, would be good to be able to know what you're going to pay for your input, such as fertilizer and seed and pesticides. So, it seems to me that that should be considered in the whole area of pursuing risk management.
And so, to you, Mr. Ackerman, I would request that you investigate the possibilities of expanding the forward contracting opportunities or locking in a price in some ways 2 and 3 years ahead for such agricultural inputs as fertilizers and pesticides and seed, and also that we expand our efforts through other sources of USDA and the private sector in anticipating the production of certain crops around the world by having greater availability of that crop production information.
And, Mr. Chairman, what I've always been impressed with, as an old Air Force intelligence person, is our ability to predict crop yields up to 60 days before that crop is harvested because of our satellite and infracolor information. It seems to me we also would need to pursue that.
So, I would just hope that we don't too narrowly look into what aspects that you're pursuing now in risk management. Mr. Vice Chairman, I would yield back. Thank you very much.
Mr. EWING. Thank you. Did anyone have a comment?
Mr. ACKERMAN. I would like to comment. I think the point raised is a very important one. When we've been talking about risk management education, a lot of focus often is on the actual tools--futures, options, insurance, what have you--but we view it in a really much more basic way.
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For a farmer to be effective in managing their risk, a very important part of it is simply being aware of the information that exists, and being able to build it into a planning process. And part of what we would hope to do is make sure that farmers are aware of the kind of market information that, in fact, is available. Often it is very accessible over the World Wide Web. Often it is available through farm organizations or through the Government. But that element of risk management education and risk management planning, simple basic farm management techniques where a farmer is aware of the market information that's available and builds their plans around it is very important.
The one thing that is beyond our capacity, really, as a government to do, is to--some of the suggestions as far as creating new forms of forward contracts to lock in prices several years in advance--those new products, new kinds of initiatives we would look to the private sector to do. But the role that we feel we can play in Government is a coordination function as far as making sure that information is available and finding the best ways to get it to the customer.
Mr. SMITH of Michigan. Mr. Chairman, without objection, I would move that Mr. Combest be given his full 5 minutes.
Mr. EWING. We'll go to Mr. Combest.
Mr. COMBEST. Thank you, Mr. Chairman. The idea of risk management is something that's been discussed for many, many years. I'm sure different people have different impressions of what risk management means but, for it to be successful, obviously producers have to participate in risk management tools. Getting producers to do that, I think, is going to be somewhat of a challenge, particularly as new tools of risk management are discussed and the effort to implement those comes about.
I would like to talk a little bit more about your meeting that you held November 20, the forum on risk management. What was the feedback from industry, commodity groups who were there? How were these recommendations and discussions made a part of the final draft? And exactly how does the Department--well, not just the Department, but the risk management team for the Government--how do you envision that relationship going forward and getting the information out because obviously it's going to be an important both from the Government standpoint as well as from the private sector standpoint, to get the tools into the hands of the farmer.
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Mr. ACKERMAN. Let me answer your question in two parts. As far as how we envision this working, we envision this working very much as a public-private partnership. For risk management education to work at the local level, we need to have educators at the local level. And to do that, given our limited resources, the best way to do that is to tap the expertise that exists in the private sector.
You already have today some 10,000 or so crop insurance agents all around the country. You have over 1,000 introducing brokers selling futures and options all around the country. There are grain elevators in every local farming community. There are local bankers in every community. There are local chapters of the Corn Growers, the Wheat Growers, the Cotton Council, and the other major commodity groups, the American Farm Bureau, all around the country.
What we would hope to do, in going forward with this program, is to have Government act more as the facilitator. We are in a position of being able to provide a clearinghouse of objective information on new products. We can provide a facilitation-coordination function of making sure that the risk management education programs cover all of the bases--that they cover futures, options, insurance, forwards, lending, that they have a larger view and, to some extent, we can provide seed money through our budget--but generally going forward, and we are in an early stage of putting this together. We would view a heavy reliance on the private sector groups for delivering education.
The November 20 meeting we envisioned as a way to try to jump-start the process at an early point. We realized that we were facing this year an insurance sales period which went through March 15 in most of the country, and we wanted at least at an early point to bring together leaders from the futures industry, the insurance industry, and the grain trade, the grain elevators, into the same room to talk to each other before we went into that sales period.
We had a good discussion that day. It did result in the creation of a subgroup, a working group, that met afterwards, developed a number of leaflets, a number of products, that could be shared by the different industries, and a fair amount of discussion about how to bring the industries together as we go forward.
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I think, at this point, now that we have formalized the process, our three agencies signed the memorandum of understanding just within the past couple of days, and we have had our clearance on our seed money just within the past couple of days, that the pace of this will be picking up very quickly as we go forward from now.
Mr. COMBEST. I guess playing somewhat of a devil's advocate role here a little bit, I think that obviously those people who are in the business are going to have to play a major role in this, and yet if you've got a meeting sponsored locally by someone who is selling crop insurance, you've got a meeting sponsored locally by someone who is in the commodities business, the thought might be, well, they're going to get together, and obviously they benefit from the fact that we buy crop insurance or we deal in the futures markets, but what mechanism--which may not be in place now, but would be intentional to be in place possibly in the future--more on a county level through either farm service agencies or someone locally, who might not seem to have a direct interest or, as we would say down in Texas, may not have a dog in the hunt, but just simply being there to provide information.
Mr. ACKERMAN. Very good point, and I would point to two things. First, we expect to use the Web page facility as a way specifically to provide an avenue for farmers to go beyond a sales person on a new product, a way to get information out that's objective.
Secondly, we intend to put together a set of syllabuses at the national level that we would provide to the local level, to make sure that the education that's provided does cover all the bases, so that it's not simply weighted totally towards insurance, or not weighted totally towards futures and options, but that there's a balance.
One of the biggest problems that we see, if you put yourself in the shoes of a farmer, is that in the new environment, they are being confronted by new products and new offers from all of these different industries. And we, in Washington, we hear the trade names all the time--CRC, IP, yield futures, whatever. But farmers hearing these new names, and the new ones that we haven't heard of yet that will be coming up in the future, need to have some way to cut through it, and that's what we're hoping to be able to do through this, to provide ways to show how they fit together.
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Mr. COMBEST. Thank you. Thank you, Mr. Chairman.
Mr. KOOPMAN. If I could add, USDA has a rather extensive network through the Cooperative Extension Service, and has for years provided objective and unbiased education on risk management tools and packages to farmers throughout the 50 states and territories.
Right now, CSREES is funding 135 extension programs on risk management and marketing training. We also fund about 400 projects doing research on alternative forms of risk management. Many farmers in the States turn to the Extension Service for this kind of information.
We've got major programs in Texas and Ohio, I think Kansas has some, that provide hands-on training to farmers to deal with a broad variety of different kinds of risk management techniques, and I think farmers tend to view these programs as that unbiased or ''no dog in the hunt'' perspective. And that's why we're sitting up here, is because we can provide that mechanism where it won't be a salesman educating, it will be a county extension agent who doesn't have any vested interest in any particular insurance product or futures product, but rather is more concerned about the well being of the farmer and his operation.
Mr. EWING. Mr. Baesler has waived his right. Several people have been concerned that I was not being fair, and Scotty wanted you to know. So, we will go to next in line. Mr. Lewis.
Mr. LEWIS. Mr. Ackerman, you mentioned earlier that there has been quite a bit of interest and inquiries from producers on risk management information. Do you how much that has increased since the 1996 farm bill, and do you have any----
Mr. ACKERMAN. I have heard it quite a bit more since the 1996 farm bill.
Mr. LEWIS. You would say quite substantially then?
Mr. ACKERMAN. Quite substantially, yes, sir.
Mr. LEWIS. I don't mean to harp on what the chairman brought up earlier, the ''Freedom to Fail'', but you can take it out of the information, out of the packet, but my concern, is this something that would be a thought or a view that would undermine what you are trying to accomplish in your initiative here? Even though you take it out of the packet, is this something that you think would be within this initiative, the thinking of those who are trying to accomplish these good goals, but it's still there in the minds of individuals?
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Mr. ACKERMAN. I really don't think so. I think what everyone recognizes is that the fundamentals of farm economics have changed in the last several years. That's simply a reality. That is placing a new responsibility on farmers, a new set of assumptions that they have to make in planning their farms as a business.
They have to be active, and they are forced now to make--I say forced, it's as much an opportunity that the new laws have created, there are important positives in this--but they must make choices about how they are going to manage their own risk.
A farmer has to make a choice whether to buy crop insurance now it's no longer mandatory, and they have to choose what level of crop insurance to obtain, if they are going to use forward contracting, if they are going to use other methods. It's something that they have to actively do.
I think the private sector, and our role at the Risk Management Agency in docking the Federal Crop Insurance Program, the private sector is perfectly prepared to come forward with the tools. And we've already seen the other very striking element since the 1996 farm bill and the period leading up to it, is that there has been a profusion of new risk management tools that have hit the market. And I think that's something that is going to very much continue.
The market demand has been very much identified, and that is starting to produce new market products. That's why I think we're seeing a profusion, a large new number of revenue insurance tools, CRC, IP, RA, and probably several others over the next few years. We're seeing the futures industry coming forward with yield futures. We're starting to see on the local level many situations where futures brokers and insurance salesmen will get together and develop combination products. We'll be seeing over the next several months and years, the grain trade coming forward with new ideas.
So, the new products are there, but the responsibility it does create is for us and the private sector to make sure that farmers know how to use the new tools because, if there is one truism about private sector tools, they can be very good if they are used in the right way, but they can be dangerous if they are used in the wrong way and, to the extent there is a risk, that is the risk.
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Mr. EWING. Thank you. Mr. Everett.
Mr. EVERETT. Mr. Chairman, I appreciate the comment that you brought up, and I appreciate, Mr. Ackerman, that you all have removed that from the document. I'm a little bit sensitive to that because I recall what was, in my mind, obviously political polling done by USDA last year, the year before, the fact that a lot of my farmers believe that USDA's position on peanuts and CPR was politically motivated. The fact that we had State representatives going around referring to the program as ''Freedom to Fail'', until we contacted Secretary Glickman. In fact, I have in my possession a grant that was given by USDA to a group that said that if the grant was given, that their 12 million members would show their appreciation. Things seem to get a little political. So, I appreciate the fact that you've removed that. Thank you, Mr. Chairman.
Mr. ACKERMAN. I would just say, Mr. Everett, we are very committed to make the program work.
Mr. EWING. Mr. Ackerman, I don't want to leave the impression that I don't think that some of the information--it doesn't hurt to remind people that the law has changed. It's how we say it that makes all the difference.
I think it's good to remind people that some of the Government involvement is no longer there, but it can be stated in a positive instead of a negative way.
Mr. Foley.
Mr. FOLEY. Thank you very much, Mr. Chairman. Mr. Ackerman, I just wanted to, first of all, add to the record a chronology of problems with the USDA on a national level, related to loss adjustment procedures following a 1989 freeze, and a hurricane, and some of the changes. So, if I could, I'd like to enter that as a part of the record, by unanimous consent.
[The information appears at the conclusion of the hearing.]
Mr. FOLEY. I want to read a letter that was addressed to our senior Senator from Florida, from a Tropical Fruit Growers group, basically urging a meeting with the USDA and the Secretary of Agriculture.
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Part of the letter says: ''We no longer are eligible for disaster grants. We now sit with a fruit tree policy which is essentially worthless, a row crop policy which is seriously flawed, and a nursery plant policy for which vital recommendations have been ignored. We are in fear of what will happen if a hurricane strikes this fall and both the policies and operational procedures remain unchanged. We desperately need assistance in this matter''. And I'd like to enter that for the record.
[The information appears at the conclusion of the hearing.]
Mr. FOLEY. I basically have a couple of questions for you. That is from Winter Haven, FL, in Dade County, from an insurance group who is involved in the program, is concerned about a few changes that occurred in the program, and maybe you can respond to them.
First, was a concern over the change in the deductible. In past years, the program had a 10 percent deductible. For the upcoming year, the deductible is increased to a minimum of 15 percent, with a maximum of 50 percent.
Other concerns included it required, because of the design of the program, increasing of the grower's buyup premium by as much as 85 percent. Also involved is the intent to cut off sales of the program on April 30 of this year.
One problem they've raised is the fact that we were to issue, for the 1998 crop year, for policies beginning May 1, we were to issue new rates and rules for the upcoming year by March 15, as stated in the new policy. The sales period has been changed from March 15 to April 30--the policy changes--which reduced from 120 days to 45 days.
The problem exists, though, that as of April 1, the rates and rules are still not published, despite the fact that it was required to be published by March 15. That leaves very little time for the growers to be able to respond, in the shortened 45-day period, for sales changes.
Can you, first of all, give me an idea of why we've gone and changed the deductible, and then also why we have not promulgated rates as of, well, still April 10, as required by March 15.
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Mr. ACKERMAN. I will answer both of those questions. First, as a general matter, the tree policy is a new pilot program that we've brought into Florida to insure the citrus trees as well as the citrus fruit. It has some bugs to be worked out as a new program, and we will be doing that over time, but we think that it is one that will be very important as it gets expanded and worked through.
As far as the deductible, that was changed in response to the 1994 Crop Insurance Reform Act, which placed a limit on the level of yield coverage that we could provide under any policy to 85 percent. Currently, that 15 percent deductible is, in fact, the lowest deductible we have on any crop. On most crops, the deductible is at least 25 percent but, for the citrus policy, it is 15 percent. It is actually an exception in being a lower deductible than other crops, although it is a change from the prior deductible of 10 percent.
I would point out that the way the mathematics of that policy works, if you have a total loss, the payment is the same. It's a question of at what point the first dollar is paid. But the actual change was made in response to the 1994 statute.
And with respect to the change in the sales closing date to April 30, that was made this year in order to be sure that the sales closing date occurred before the hurricane season, before the potential loss season. I have been informed that while the rates and policies are now out, that they did come out somewhat late. We are looking at a potential extension. We have not made a final decision on that yet, and I hope to be able to give you a firmer announcement in the next few days.
Mr. FOLEY. When did the rates finally get published?
Mr. ACKERMAN. It was just recently.
Mr. FOLEY. So we probably have a 20-day delay in getting the rates published, so hopefully the agency may consider somewhat of an extension.
Mr. ACKERMAN. That's what we're looking at. We haven't made a final determination on it yet, but I understand there was a problem, and we're looking at that.
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Mr. FOLEY. Is there a chance that you would agree to a meeting possibly with the Florida delegation and some of the groups that have expressed some concern, to see if we can iron out some of the concerns expressed by both of these various groups?
Mr. ACKERMAN. Yes, I would be very happy to participate in a meeting. I think it would be a very useful thing for me as well as the delegation.
Mr. FOLEY. I appreciate that. Thank you, Mr. Chairman.
Mr. EWING. Congressman Moran.
Mr. MORAN. Mr. Chairman, thank you for the opportunity, but I have no questions.
Mr. EWING. With the indulgence of the Members here, and if anybody else has a question we'll go back to it, but I would like to ask a couple questions before we release this panel.
First, I want to say that recently, in an effort to educate myself, I went to a local farm organization risk management seminar in our State, in my home district. And while it was well presented and well done, I felt it was extremely elementary. And it's hard, when you're in a position that you've been studying an issue, to know just what the level of awareness out there is on risk management and risk management tools.
And I was just wondering what, if any--well, it's not polling, but--information-gathering you might have done, any of you, in an effort to determine what the level of awareness on risk management is.
Mr. KOOPMAN. Mr. Chairman.
Mr. EWING. Mr. Koopman.
Mr. KOOPMAN. We typically, the Extension Service, when they provide seminars of this sort, typically have some sort of followup questionnaire or appraisal that they ask at the end of the session.
The sense that we have is that there's a wide variance in knowledge and abilities and, at this point, I don't believe the resources have been available to provide targeted or specific seminars based on the different level of understanding.
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Part of our goal in developing this curriculum is to look at this kind of issue and understand that there are different segments of the farm population that are very sophisticated. They'll need different kinds of information than some parts of the farm population that have never participated before.
So, we do have data on this. It is collected regularly. I can't tell you the numbers off the top of my head, but it's going to be part of the process of us sitting down and looking at the curriculum, the target training for the different levels of need.
Mr. ACKERMAN. I'd like to comment on that also. One thing that we're going to have to be very sensitive to in developing this project is the diversity of agriculture around the country, and the diversity of types of farms. There's not only a difference in sophistication among different farmers of the same crop in the same State, but what may work educationally as a risk management matter for a corn farmer in Iowa will be totally different than what works for a citrus farmer in Florida or for a dairy farmer in Wisconsin because the economics of the different crops are very different, the different tools that are available are different, and there are also some very specialized needs of limited resource farmers and of socially disadvantaged farmers that we're going to have to account for in doing this.
This cannot be a ''one size fits all'' operation. We're going to have to be very sensitive to the different needs of different people.
Mr. EWING. It would appear to me--and this is just a kind of personal observation--that the need for risk management training is really more necessary with those less sophisticated. It might be that the more sophisticated producers around the country are up with and as knowledgeable as many who you might be having to carry out the instruction. And when you talk about the Web page, I think we don't want to count too much on the Web page to reach those who really need the training that, if they have the Web page, they're pretty apt to be more sophisticated, more involved in risk management, maybe a younger producer who has been to the university.
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Mr. ACKERMAN. The Web page, in my view, would be the best way to reach the local trainers, to reach the local insurance agent, banker, extension agent, that they can relay the information to the farmers, because your point is very well taken. There are a number of farmers who are on the Internet, but many are not, and especially some of the ones who are most in need of training are not.
Mr. EWING. Along the same line--and I'm pretty sure that you didn't mean that you didn't want the private sector involved in the training. I think that there is a real asset there in the private sector.
If I want information on insurance, I will talk to an insurance professional. If I don't get good information from that insurance professional, then I'll find another one. But I think most people are aware that they are in business to sell insurance, but I think you can get, and I think producers can receive a great deal of help in planning their risk management tools, by accessing the professionals out there in the different areas, whether it be in the futures market or insurance. They aren't being left out, are they?
Mr. ACKERMAN. They are clearly not being left out. We are depending on them.
Mr. EWING. Could you just quickly tell us how we anticipate the $5 million budget for education might be used? Do we have any kind of a breakdown on that?
Mr. ACKERMAN. We have done a preliminary breakdown on it. A fair amount of it will go towards the development of curricula, the development of training materials. Some amount will go towards planning meetings, train the trainer sessions, developing of materials. We can provide a detailed breakdown for the record.
Mr. EWING. And is that a 1-year budget?
Mr. ACKERMAN. That's a 1-year budget.
Mr. EWING. And you anticipate your responsibility on this program is ongoing?
Mr. ACKERMAN. Yes. I assume that we are--the $5 million is for the 1998 budget. I would anticipate that this program would continue for many years.
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Mr. EWING. Mr. Etheridge has a question.
Mr. ETHERIDGE. Thank you, Mr. Chairman. You raised my antenna when you were talking about the ''one size will not fit all'', and I couldn't agree more, especially when you think of the Southeast where you have more small farmers than probably any other part of the country. And as you think about the Web page, as fortunate as we are to have a lot of young farmers who understand that, as the chairman indicated, there are a lot of our farmers, when you talk about a Web page, they really think you're talking about a spider web out near the farm. They are just not that interested in it.
And I would encourage you, as we work on this, that we have a lot of older farmers and every day farmers are much older than we'd like for them to be, and I think it would be very dangerous for us, as a country, not to recognize that they aren't going to interface with us if we're going to be too high-tech. It's not that they aren't very competent and capable, because they are, but they aren't up to speed on the high tech.
And one final point--and you may or may not want to comment on this--you were commenting on training the trainers. I hope you will comment on that a little bit more because I need to know who those trainers are you are training, who are going to do the work. I'm very familiar with that process. It can be very effective, and it can work, if it's an ongoing process and if, as you do it, you have the cross-fertilization from all the agencies involved.
Mr. ACKERMAN. I think we anticipate train the trainer as a way to--that the role of the Government agencies as facilitators, would be to put together a curricula or set of curricula that bring together the different fields--futures, options, forwards, insurance, lending, financial planning, and others--into a core program, that then we would try to get the word out by using the networks across the country of Extension agents, insurance agents, futures brokers, local elevators, and so on, use the people who interact face-to-face with farmers in making their risk management decisions, the local opinion leaders, and use them as a key pivot in this.
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I think your point is very well taken. As I mentioned in my response to the chairman, the Web page is a way to get information out around the country. Often, it is a better way to get it to the trainers, to the local opinion leaders in many cases, than to the actual farmers. Some farmers have it, others don't. And it's not something that we can rely on as the backbone of the program, but it is a good way to get information out quickly, particularly on new products.
Mr. ETHERIDGE. Mr. Chairman, one followup, if I may, please. On the point you made regarding commodities and others, for those who are moving into a whole new venture, I would also encourage, as we talk with the trainers and are out working, many of the people who are moving into this new era of uncertainty, that's almost foreign language to a number of these people who have never been accustomed to it. And I would be very supportive that we continue this educational process because I think it's going to take a good long time. A lot of them are not going to be a part of it initially, and it may be to their detriment, if we aren't very careful.
Mr. EWING. Anyone else, any further questions?
[No response.]
If not, I want to thank the panel. I would also invite you or your representatives to stay for the second panel, where we will have private sector people giving their opinions and ideas on this important topic. Thank you very much.
The next panel I would like to ask to come forth and take a seat at the table, starting with Mr. Bob Petersen, president of the National Grain Trade Council; Mr. Tom Coyle, vice president of Continental Grain, National Grain and Feed Association; Mr. Jack Laurie, president of the Michigan Farm Bureau, American Farm Bureau Federation Executive Committee; Mr. Bill Northey, chairman, National Corn Growers; Mr. Mark Berg, first vice president, American Soybean Association; Mr. Robert Parkerson, president, National Crop Insurance Services; Ms. Melinda Schramm, executive director, National Introducing Brokers Association; Mr. Dennis Collins, managing director, Commodity Markets Group, Chicago Board of Trade; and Mr. Bryce Knorr, editor, Farm Futures.
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Mr. Knorr, if you brought copies of your IQ Test for Futures Trading, I think that appeared in your magazine.
Mr. KNORR. I do have one copy.
Mr. EWING. One copy, OK. Well, I'd like to take the test over. I think maybe I could do better next time.
Mr. KNORR. I grant you permission to do that.
Mr. EWING. Thank you very much. I want to welcome the second panel, from the private sector, to discuss education and training in risk management, and I think, Mr. Petersen has another meeting, so we're going to allow you to go first and, if you need to excuse yourself, feel free to do so, and we thank you for coming.
STATEMENT OF BOB PETERSEN, PRESIDENT, NATIONAL GRAIN TRADE COUNCIL
Mr. PETERSEN. Thank you, Mr. Chairman, and I should be OK as long as I get out of here by noon. I also appreciate your interest, and the subcommittee's interest, in this hearing today because, as I will wrap up my statement, I think this is truly one of the most important issues facing production agriculture today.
My name is Bob Petersen, and I serve as president of the National Grain Trade Council. We appreciate this opportunity to share our views with you this morning on risk management education.
I want to begin by saying I was pleased to hear Mr. Ackerman's testimony this morning. I am hopeful that USDA will be able to implement an education effort that reflects the concerns and recommendations we are presenting under our statement today. My testimony will focus on managing price risk.
Farmers have a growing array of available tools, but the key to successful risk management is having the necessary information to select the right marketing tool or tools for that farm operation.
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Council members have a vested interest in helping farmers to become better marketers. Better marketers for us make better customers.
We also want to see the 1996 farm bill succeed and we want to see farmers prosper. On that basis, we embarked on an effort to organize a private sector Risk Management Alliance, which brought together the resources of 14 different groups. That group met on August 29, October 14, and December 30.
Ultimately, this alliance decided its best role was that of a resource or resource clearinghouse to those many people who will be meeting with farmers to discuss risk management education.
The alliance also decided we want to try to avoid the temptation to reinvent the wheel. There is already a lot of good information available on risk management, it needs to be successfully delivered at the local level.
I am pleased that many of the ideas identified by the private sector Risk Management Alliance have been taken up by USDA's Risk Management Agency.
From my experience with the Risk Management Alliance, I do have several recommendations that I would like to share with the subcommittee. First, be clear in the focus for the risk management effort. The target audience, in my opinion, is not that top 5 percent of farmers who already possess good marketing skills nor is it likely to be the small share of farmers with very limited resources that have special needs of their own.
The target audience is the two-thirds who admit their skills are already shaky. And I think Mr. Knorr will speak to that issue at the end of the panel.
Two, a successful program must have strong local roots. It is important to have a central point that provides information and assistance, but the key to success is delivering objective information at the local level.
Three, risk management education needs greater emphasis from USDA at a higher level.
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Four, I am not convinced that the Risk Management Agency at the USDA is the right place for the education effort. The RMA, just a short time ago, was known as the Federal Crop Insurance Corporation, and crop insurance remains their top priority.
As a practical matter, the Risk Management Agency remains strapped for personnel, and has its hands full with its crop insurance responsibilities. They have tried hard under the circumstances, but it seems difficult for them to move in a timely manner.
Five, regardless of where leadership of the program is based, the effort needs to get moving. I realize these things do take time, and I'm pleased to see the Risk Management Agency now moving ahead to develop programs and to employ someone who can focus on the educational effort.
Six, finally, I am convinced that the best way to develop a successful national market education program is to take a look at what has worked at the state or local level and use that model for a national program.
I personally am impressed by the program in place in Illinois. It offers a menu of educational opportunities a farmer can choose from. It brings together a cross-section of state farm organizations as sponsors. It is a formula that can also draw upon the availability and the expertise of State Extension specialists.
I would like to see USDA offer a grant program that would encourage the formation of similar state or private alliances to undertake these types of programs.
Another program that I think is particularly noteworthy is the managing Change in Agriculture initiative by the land grant marketing specialists. It is important and it could well be a good program to build upon.
In conclusion, Mr. Chairman, I think risk management is one of the most important issues facing production agriculture today. Those farmers with stronger risk management skills are going to be more profitable and better positioned to succeed over the long term. There is an appropriate role for Government to play in encouraging risk management education programs. Thank you.
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[The prepared statement of Mr. Petersen appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Petersen.
Now, Mr. Coyle, vice president of Continental Grain.
STATEMENT OF TOM COYLE, VICE PRESIDENT OF CONTINENTAL GRAIN, NATIONAL GRAIN AND FEED ASSOCIATION
Mr. COYLE. Good morning, Chairman Ewing and members of the subcommittee. My name is Tom Coyle. I am vice president of origination for Continental Grain Company in Chicago. I serve on the National Grain and Feed Association's Risk Management Committee, and I appreciate the opportunity to share the National Grain and Feed's thoughts on risk management education this morning.
The National Grain and Feed Association presented written testimony to the subcommittee for today's hearings. My remarks this morning will cover the highlights of that written testimony, and add additional comments from a commercial perspective.
The shape of farm programs has been changed dramatically by the Federal Agriculture Improvement and Reform Act of 1996. Farmers now have freedom to determine the best use of their land. Farmers can make their own decisions about what crop to plant, how much to plant, and where to plant it.
The NGFA believes that Freedom to Farm is a critically important step in maximizing U.S. agriculture's competitiveness and economic growth. We strongly supported Freedom to Farm's passage, and we believe it is working. This will become even more evident as farmers respond during this planting season to the extreme differences in U.S. stocks of corn and soybeans.
Along with the opportunities offered by the new farm legislation comes new challenges. Farmers and ranchers will be required to derive a larger portion of their income from the market rather than the Government, as Federal payments decline over a number of years.
While farmers have shown a keen interest in new risk management ideas, passage of the FAIR Act has, for the first time in years, created an urgent need for the development of new risk management products and education. We believe the ultimate success and longevity of the FAIR Act will depend in large part on our ability to meet this need.
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As a measure of the importance National Grain and Feed places on risk management, we have identified this area as one of our association's top priorities for the coming year. That is why, Mr. Chairman, the NGFA commends you for calling this hearing today.
The NGFA believes that farmers and ranchers should have access to a wide range of risk management instruments, including crop insurance, exchange-traded instruments like futures and options, and cash grain contracts offered by grain companies like the NGFA's members. To that end, it is imperative that, as the USDA implements its risk management education initiatives, each of these constituencies is engaged to achieve the most comprehensive educational outreach.
Generally, we believe that the new Risk Management Agency has done a credible job of bringing various risk management interests to the table and seeking their input and participation in the development of educational programs for production agriculture.
While this initiative naturally began with a focus on crop insurance, the risk management instrument with which the agency has the most experience and a ready network, the NGFA believes the agency now can be recognized for including other industry interests in its efforts.
In particular, we appreciate being asked to serve on the RMA working group that has developed some initial risk management education materials and is now working on the development of a risk management summit and training to be delivered to farmers and ranchers.
We recommend that risk management education receive a high priority within the Department and that RMA be encouraged to move ahead expeditiously in developing information and training for farmers and ranchers, as well as the delivery mechanism for getting the message out.
It is the strongly held view of the National Grain and Feed Association that practitioners who deal daily with producers, like insurance agents, brokers, and elevator personnel, are best suited to deliver the risk management message. Poor choices made in this area will result in the failure of educational efforts.
A final cautionary note regarding the delivery of risk management products. I noted earlier that crop insurance is the risk management product with which the RMA is most familiar, and I noted that the NGFA believes crop insurance is important. However, despite the tremendous value of crop insurance, achieving the most effective risk management program in terms of dependability, flexibility, and cost to the producer and the taxpayer will require fully engaging the widest range of resources available.
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Although the subject of today's hearing is confined narrowly to risk management education, I have just a few comments about action that could be taken which would be of value to U.S. agriculture in the area of risk management. We have petitioned the Commodity Futures Trading Commission to lift its ban on agricultural trade options, a step we believe would clear the way for a new generation of risk management products.
We believe these products will not only make a significant contribution by providing farmers additional risk management options and the opportunities to add value to their production, but more critical to today's hearing is that this will induce a much greater participation by the cash grain industry in developing and promoting educational efforts.
We believe strongly that any new product offering must be supported by adequate education. However, at this point, because the industry has not received a clear signal on the products it can or should offer, it has little reason or incentive to move forward with education.
In our petition, we have asked the CFTC to clarify that revenue assurance contracts providing similar outcomes to crop insurance products like the CRC policy can be utilized by producers and grain buyers in the cash marketplace. Such action would allow grain buyers to offer unsubsidized competitive products and give farmers additional risk management alternatives.
Staff at the CFTC currently are completing work on a white paper that will make recommendations to the Commission on lifting the agricultural trade options ban. The NGFA does not believe congressional action is needed at this point, but we urge subcommittee members to join us in supporting this farmer-friendly risk management action. If any members would like copies of the NGFA's petition to the CFTC, we would be happy to provide it.
In conclusion, Mr. Chairman, the National Grain and Feed Association views risk management as a jigsaw puzzle, with many interlocking pieces that all must come together.
Various interest groups hold pieces of that puzzle. The crop insurance industry understands its products and how they could benefit some producers. Exchanges and brokers understand futures and options. Grain elevators understand cash grain contracts and their risk management features. However, we do not believe that anyone, including the RMA, understands how to link all these pieces together. This is why we believe it is critically important to engage each industry sector in an unbiased contribution to the risk management education process. This will be the real challenge for the RMA in achieving the educational goals of the legislation.
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We began the process in our industry last year with publication of a comprehensive white paper and a series of seminars on hybrid cash grain contracts. We believe this paper lays out in an objective manner many of the cash grain contracts that are offered. It details the features of various contracts, and it suggests steps that should be taken before offering or entering into a contract. We believe this paper can make a significant contribution to the risk management education efforts of the RMA.
Let me finish by recapping my comments. The National Grain and Feed Association is excited about the future of U.S. agriculture under Freedom to Farm. We believe new product development and education are critical to achieving the long-term success envisioned from this legislation. Engaging all participants in the risk management arena and a sense of urgency are required to assure the programs are developed and developed in a timely cost effective manner. The ban on agricultural trade options is a barrier to the process of developing new products and a supporting education. Finally, the NGFA has committed to active participation in this process.
On the issue of urgency, I may make another point. It's one thing to have the providers of education urgent about providing education, but it's equally important for the receivers of this education to see the same urgency in terms of receiving the education.
I know this past year we have done a fair amount of research in our company to identify what kind of service the farmer really wanted. They currently show a keen interest in new products. But it was interesting to note that one of the comments that was very clear as well is that the farmers did not believe that these transition payments would end in seven years and there would be nothing behind it to support them. To the extent that the farmer believes that there will be something after the transition payments are over, it reduces their urgency for seeking this education.
I will also make a note of the question, Chairman Ewing, that you made earlier about the participation of various interest groups in this process. And we had our convention recently in San Diego, and Commissioner Joseph Dial was on-hand to provide remarks, as was Mr. Ken Ackerman. Both of them have been willing to actively participate in this process. We also had Chairman Pat Arbor from the Chicago Board of Trade, and Rick Gibson, president of American Ag Insurance, a leader in the development of insurance products. So, the process is moving forward.
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Thank you again, Mr. Chairman, for the opportunity to testify this morning. With a commitment to a broader educational role, we look forward to working with your subcommittee, the RMA, and the private sector interests to meet agriculture's risk management needs. We believe the time has come for farmers and other market participants to come together to develop the risk management products and education needed to insure agriculture's transition to a new, exciting, and profitable era.
[The prepared statement of Mr. Coyle appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Coyle.
Next, Mr. Jack Laurie, president of the Michigan Farm Bureau.
STATEMENT OF JACK LAURIE, PRESIDENT, MICHIGAN FARM BUREAU
Mr. LAURIE. Thank you, Mr. Chairman for the opportunity to talk to the committee about this most important topic of risk management. My name is Jack Laurie. I'm the president of the Michigan Farm Bureau. My family farm centers around a 550-cow, 1,600-acre dairy operation. I'm here today representing the 4.7 million members of the American Farm Bureau Federation from across the United States. The American Farm Bureau Federation has identified risk management as a high priority area for several years now.
Farmers and ranchers have generally utilized a number of marketing tools over the years to enhance the pricing and returns from the commodities that they produce. However, there are others who have been comfortable with the Government setting a minimum price level. Individual farmers, if not entire sectors--milk producers being an example--will need education to implement risk marketing strategies that some have utilized for many years.
It's clear that an effective risk management program involves managing many components. In fact, risk management is really a multi-disciplinary effort. The delivery system for risk management education should reflect this multi-disciplinary approach.
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Farm Bureau's approach to developing the tools for effective risk management emphasizes the need for supportive programs and policy in a variety of areas. An effective crop insurance program, an effective marketing program, and short- and long-term income stabilization strategies are all necessary components.
Resources within the USDA and other agencies are critically scarce. This necessitates a high level of coordination and use of existing resources to meet a multi-disciplinary goal. The emphasis should be on delivering the educational message as economically as possible. There's no room to build new bureaucracies or maintain old ones where partnerships can be effective. Directly involving the private sector in the delivery of risk management education is critical.
Farm Bureau believes that private sector creativity is being more directly applied to risk management as a result of the 1996 farm bill. We believe the results of this private sector activity will be significant.
I'm happy to report that there are efforts underway to address some of these issues. Both the American Farm Bureau and some State farm bureaus are working with the USDA Risk Management Agency to develop a comprehensive Risk Management Education Program. This effort encompasses input from a wide range of agricultural interests and organizations.
The focus of the effort is to develop a basic curriculum that covers the following areas: Cash marketing, futures and options, crop insurance/production risks, and financial planning.
This is not an effort to reinvent the wheel. There are many good programs that are already available. An example is the American Farm Bureau Market Master Program. Indeed, Farm Bureau has been working with various States to incorporate a Market Master or similar education program for over a decade. The group's focus is to take the good elements from the many existing programs and make them available on a wide basis, essentially all across the country. The current schedule calls for a National Risk Management Summit this fall followed by the distribution of a program with related materials that can be utilized across the country.
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Given the width and breadth of agriculture, there is almost an infinite number of different risk-related activities that need to be addressed. Moreover, it would be well to look at some strategies that might be applied more in general to agriculture as opposed to specific commodities or geographic areas. For example, I would like to suggest we would be well advised to consider some type of pilot program that would deal with general revenue risks as opposed to specific commodity-related risks. This would allow producers to take income from peak years and put it in some type of fund or reserve from which they could draw when revenues decline significantly or profits become losses.
Farmers used to be able to utilize income averaging to offset the peaks and valleys experienced from time to time. Other countries such as our neighbor Canada have experimented with some of these programs such as General Revenue Insurance Program, or the Net Income Stabilization Account. I doubt if these types of programs can be easily duplicated for U.S. farmers. However, work needs to be done that pursues this conceptual idea of revenue averaging into a cohesive, long-term program. Programs need to be developed and piloted on a limited basis. However, such pilots would need to be pursued for an extended time period, up to 10 years.
Let me close by encouraging this committee to support the research and pilot programs currently underway and those that may be forthcoming in the area of risk management. There are many challenges and opportunities to develop new and innovative risk management tools that can benefit farmers and ranchers. Eventually, these tools and ideas may be transferred from Government development to private industry. I hope you agree that this would be the best of all worlds for farmers, ranchers, consumers and taxpayers. Thank you, Mr. Chairman.
[The prepared statement of Mr. Laurie appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Laurie.
Mr. Northey.
STATEMENT OF BILL NORTHEY, CHAIRMAN, NATIONAL CORN GROWERS ASSOCIATION
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Mr. NORTHEY. Thank you, Mr. Chairman. My name is Bill Northey. I farm near Spirit Lake, IA, and serve as the chairman of the board of the National Corn Growers Association. The NCGA represents almost 30,000 members in 25 affiliated States, and we appreciate the opportunity to testify today.
The risk management education provision of the Federal Agriculture Improvement and Reform Act of 1996 directs the Secretary of Agriculture in consultation with the Commodity Futures Trading Commission, to provide appropriate education in management of the financial risks inherent in the production and marketing of agricultural commodities. We suggest that the appropriate Federal role is to make sure that crop insurance products meet producers' needs and that markets operate fairly and efficiently.
Agricultural producers generally understand the risks associated with their businesses. Those who desire information about the various tools available to manage financial risk typically turn to the private sector providers for information. Crop insurance and futures products are delivered by the private sector--local crop insurance agents, and brokers or country elevators--which should inform and educate producers.
It is appropriate that the RMA lead the educational effort within the USDA, but their failure to timely approve new products indicates a serious lack of understanding about the needs of producers. Information about the cost of alternative crop insurance products was not available until days before the sales closing deadline. Producers had little opportunity to compare products and make informed decisions.
Crop insurance has evolved from straightforward yield loss coverage to a variety of products designed to meet very different risk management needs. Those products include, depending upon the location, Multiple Peril Crop Insurance, MPCI plus private enhancements, Group Risk Protection, Income Protection, Crop Revenue Coverage. In my state, producers could also purchase Revenue Assurance, Catastrophic Insurance is available, and producers, of course, are permitted to self-insure without jeopardizing AMTA payments if they provide a waiver of disaster assistance. All of these options suggest an important role for education and information, but the RMA failed to get the information to the front-line delivery system early enough for producers to evaluate options. The resultant frustration of producers and crop insurance agents should provide the first important lesson to the Risk Management Agency--make information available in a timely manner.
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Agricultural associations, extension, and the farm press will have time to help producers understand how new products work and will provide useful information to help producers decide between alternatives. Agents should have the rating software early to enable producers to compare the cost and the coverages of the various alternatives.
The second focus of the RMA should be to concentrate efforts on improving the crop insurance products. Crop insurance premium rates must realistically reflect the risk over time. When insurance rates are too high, producers will make a prudent financial decision to self-insure. The RMA must develop procedures to periodically review insurance rates to reflect changes in production expectations.
With respect to risk management education, the CFTC should facilitate a better understanding of how futures markets can be used by producers as a part of a risk management strategy to achieve better overall returns. However, the most important role of the CFTC is to assure the integrity of the price discovery function of futures markets. Quite simply, some producers distrust the markets, and must be convinced that futures markets are free of manipulation and fraud, before they will ever participate in the markets. Efforts to limit the regulatory responsibility of the CFTC either through deregulation of the markets or by asking the regulators to promote the use of the markets, will only lead to greater producer distrust.
Ultimately, each producer must develop and implement a sound financial risk management strategy tailored to their individual needs. The Risk Management Agency can best assist by assuring that a variety of affordable crop insurance products are available, and that producers have the information about their options in time to make educated decisions. The CFTC's best role is to assure confidence in the integrity of markets. Thank you for the opportunity to testify.
[The prepared statement of Mr. Northey appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Northey.
Our next witness is Mark Berg, first vice president, American Soybean Association.
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STATEMENT OF MARK BERG, FIRST VICE PRESIDENT, AMERICAN SOYBEAN ASSOCIATION
Mr. BERG. Good morning, Mr. Chairman and members of the subcommittee. I am Mark Berg, from Tripp, SD. I am a corn and soybean producer. I currently serve as first vice president of the American Soybean Association. ASA is the national organization comprised of 30,000 U.S. soybean farmers.
ASA would like to commend you, Mr. Chairman, for holding this hearing on section 192 of the 1996 FAIR Act. Learning to manage the significant risks of farming has always been important. Under Freedom to Farm, it will be essential.
Many of our members are already familiar with how to use futures and options markets, forward contracting or insurance programs to reduce loss exposure and maximize opportunities for profit. For these producers, the full planting flexibility and unrestricted production permitted under the new farm bill represent a dream of economic freedom come true.
However, for every farmer who fully understands how to use these production and marketing tools, there are probably two or three who depended on the old farm program to dictate which crops to plant, and who expected the Government to step in when prices fell or disaster struck. For these growers, the new era of declining income supports and no disaster assistance is a nightmare waiting to happen.
So far, we have had the best of both worlds--comparatively high prices for basic crops and guaranteed market transition payments. Producers are looking forward to a second year of relative prosperity driven by continued strong foreign demand and depleted domestic reserves.
As we all know from experience, however, nothing in farming changes faster than prosperity. And in the brave new world of Freedom to Farm, the downside potential for pain is just as great as the upside opportunity for profit.
For these reasons, we need to move quickly to ensure that producers will be ready for what lies ahead. Congress appropriately recognized that further efforts would be needed by directing the Secretary of Agriculture to undertake risk management education in section 192 of the FAIR Act.
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Of course, no one expects USDA, CFTC, or any Federal agency to provide unilateral production and marketing education to farmers anymore than Government should be responsible for how every producer fares over the next 6 years. Education must be a partnership between Government and the private sector. And as with any partnership, success will require active interest and effort from both parties.
What is most needed from Government is development of effective tools that can assist farmers to improve their production and marketing decisions and to reduce risk. It is then the responsibility of groups such as ASA to work with the Department and CFTC to make producers aware of these options and how they can be used.
At this time, USDA and CFTC are actually in the process of developing several risk management options. The Department recently extended last year's pilot program for Crop Revenue Coverage to a total of 12 soybean States for the 1997 crop. ASA strongly supports this step, and is encouraging extension of CRC to all soybean producing States for 1998. One significant advantage of CRC as a price and yield insurance program is that local crop insurance agents will help educate producers about its benefits.
At the same time, CFTC is considering lifting the longstanding ban on agricultural trade options. Trade options offer a major opportunity for producers to improve forward marketing and pricing without getting locked into fixed contracts, as under Hedge-to-Arrive.
CFTC will shortly release a White Paper on the potential upsides and downsides of allowing trade options for basic agricultural commodities. Depending on the conclusions, ASA is prepared to support lifting the ban. At such time, a significant educational effort will be needed by CFTC and grower groups to ensure that producers understand both the benefits and the drawbacks.
Another area where Congress could help provide farmers and ranchers with a valuable risk management tool is the Tax Code. Many producers recall using income averaging to even out the highs and lows in year-to-year farm income for tax purposes. While reinstating income averaging may be too costly, an alternative would be to allow farmers and ranchers to set up tax-deferred ''rainy day'' accounts. Funds deposited in better years could be withdrawn in poor years to manage volatile shifts in farm income. ADA and other farm groups are exploring this concept with members of the congressional tax-writing committees, and we are hoping legislation can be introduced later this month.
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As Congress, USDA, and CFTC develop these new risk management options, it is important to have a delivery process in place to educate producers about how they can be used. We understand the Risk Management Agency at USDA has developed a Risk Management Education Plan, including establishment of a public-private sector task force. ASA looks forward to participating in this group, and believes grower organizations must play a key role in the education process.
Thank you, Mr. Chairman, for the opportunity to appear before you today. I will be happy to respond to any questions you or other members of the subcommittee may have.
[The prepared statement of Mr. Berg appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Berg.
Now, Mr. Parkerson.
STATEMENT OF ROBERT PARKERSON, PRESIDENT, NATIONAL CROP INSURANCE SERVICES
Mr. PARKERSON. Mr. Chairman, my name is Robert Parkerson, and I serve as president of National Crop Insurance Services, on whose behalf I will give testimony today. We appreciate the opportunity to present this testimony before the subcommittee. We will try to summarize our written statement.
National Crop Insurance Services, known as NCIS, is a nonprofit trade association responsible for serving the needs of every crop insurance company that actively participates in the Federal Crop Insurance Program. NCIS members write more than $1.8 billion in MPCI premium with liability totaling nearly $26 billion representing approximately 1.6 million policies earning premium. In addition to the Federal program, NCIS member companies write approximately $600 million in private hail insurance.
Several types of crop risk information are required in order to properly offer fair and equitable coverage to the American farmer. Highly technical crop information is required so that the industry may develop: (1) fair underwriting guidelines; (2) loss adjustment procedures; (3) the appropriate premium and insurance policy terms and conditions; and (4) professional educational resources for the training of agents and adjusters. NCIS provides this type of information and services for the crop insurance industry. This is accomplished through joint effort between NCIS, its major companies, and major agricultural universities.
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NCIS also serves as a liaison for its members between the USDA Risk Management Agency and the individual state insurance departments through active participation with the National Association of Insurance Commissioners.
Within the NCIS organizational structure, this is accomplished through a series of technical standing committees composed of our leaderships deals with the first sets of subjects, including loss of adjustment procedures, statistical data gathering, industry public relations, and industry legal issues.
NCIS also utilizes a regional-state committee structure which sponsors various loss adjuster educational activities throughout the year. The regional committees also actively participate in the development of the industry wide crop research agenda.
Assisting the membership in supporting of this committee, NCIS has a diverse, well trained professional and technical staff. The staff members hold advance degrees in agricultural economics, statistics, soil chemistry, botany, plant science, actuarial science, computer science, computer engineering, education and mathematics.
In the fall of 1995, the Risk Management Agency drastically reduced its promotional budget. The NCIS board allocated additional budget dollars to fund educational and promotional campaigns conducted by NCIS on behalf of its members.
Since the fall of 1995, NCIS has spent over $300,000 developing informational and educational brochures and writing press releases and magazine articles on upcoming sales closing dates and on the benefits and importance of using crop insurance as part of a farmer's risk management strategy. This funding is in addition to ongoing individual and company educational program promotion. Some of the products supported by industry and developed by NCIS include: The Guide to Crop Insurance. NCIS and its member companies developed and printed 1.2 million copies of the two versions. Over 1 million have been distributed to date, including over 200,000 copies provided to the Farm Services Agency and 35,000 distributed through the Extension Service.
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Publicity campaigns: Addition funding has been allocated since the fall of 1995 to write and distribute press releases and magazine articles to major farm publications, 300 local newspapers, and 2,000 radio stations.
Crop Insurance Today Magazine: This quarterly publication is the only one of its kind for the crop insurance industry. Many articles focus on the change or the improvements of MPCI programs, and with respect to farming and risk management. Recent articles have been authored by university professors, commodity brokers, crop insurance agents, Risk Management Agency staff, and ERS economists.
The Extension Service: NCIS supports and participates in Extension Service educational activities at the national, State, and local levels. NCIS plans to continue this partnership with the Extension Service in providing risk management education to farmers. This is a key service and a resource we look to for guidance.
In addition to all this, the private insurance companies also spend hundreds of thousands of dollars on their own to inform and educate farmers on the benefit of crop insurance and the value in seeing your private crop insurance agent.
One company alone touched over 5 million readers and subscribers, distributed over 200,000 pieces of educational material, attended 200 farm trade shows, and was interviewed by over 300 different newspapers and magazines for feature stories. Another company reported that last year they held over 613 farmer meetings, with over 20,000 farmers attending.
The topic of risk management is not new. Volumes have been published and thousands of farmer meetings held addressing this important topic. What is new is the environment in which the farmer must make decisions in the absence of the traditional commodity programs and ad hoc disaster assistance. Adverse weather, changing commodity prices and uncertain input costs are all sources of risk facing the farmer.
The crop insurance delivery system is currently the critical element in helping the farmer with his or her risk management decision. The crop insurance industry is an important participant in risk management education because virtually every producer meets individually with an independent agent to discuss their risk management needs. These meetings simply do not take place in offices or formal settings. Instead, a lot of the meetings are held in the farmer's kitchen or on the tailgate of a pickup. The crop insurance delivery system is best suited to meet the needs of the farmer under these conditions.
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Nationwide, there are approximately 26,000 licensed crop insurance agents to meet one-on-one with the farmer. These agents are equipped with the technical experience needed to explain all the insurance options available to farmers to help protect his or her income. The agent is available to meet the client on the client's timetable. It is one of the most important one-on-one decisions that a farmer can make.
Generally, the most effective learning takes place at the local level with hands-on participation, using real farm level data and examples. These farm level meetings are important to deliver the producer a level and location most useful and convenient to him or her. Because resources are limited, initiatives that leverage these resources should be given priority. In our opinion, this can best be accomplished by strengthening the existing agent delivery system which is already being supported by NCIS member companies who represent all the current MPCI carriers in the industry.
We propose that a meaningful percentage of the risk management education budget be allocated to the crop insurance industry. These funds would be provided to NCIS on behalf of its membership to support risk management education efforts focused on providing meaningful producer level education through the agent delivery system. NCIS and its members would be responsible to oversee the content and quality of these educational efforts.
Our approach will not only leverage resources, gut will channel limited resources to the most effective teaching situation--one-on-one discussions between professionals and growers. This would reduce the Federal workload and achieve Congress and the Administration's efforts to ''reinvent Government'' to a more efficient and workable institution.
[The prepared statement of Mr. Parkerson appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Parkerson.
Next is Ms. Schramm, executive director, National Introducing Brokers Association
STATEMENT OF MELINDA SCHRAMM, EXECUTIVE DIRECTOR, NATIONAL INTRODUCING BROKERS ASSOCIATION
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Ms. SCHRAMM. Thank you, Mr. Chairman and members of the subcommittee, and thank you for inviting us to appear before the subcommittee to discuss the provisions of section 192.
My name is Melinda Schramm, and I am the president of MHS Capital Resource, located in Chicago, IL. Today, I am representing the National Introducing Brokers Association as its executive director and its founder.
Our organization, established in 1991, represents the interests of introducing brokers who are the field salespersons of the futures industry. In addition to nearly 300 introducing brokers, we count six futures and options exchanges and 11 future commission merchants among our members. This is a voluntary organization whose board of directors consists of nine active introducing brokers, three FCM advisors, a lawyer, an account, an exchange advisor, and myself, all of whom volunteer their efforts. We are dedicated to the growth and the perpetuation of introducing brokers as professional business people, by helping them remain in compliance, remain up-to-date and competitive. We accomplish this through continuing education, lobbying efforts, and communication with others who have an interest in the futures and options industry. We are currently planning our sixth annual conference to be held in June 1997.
Risk management education is what an introducing broker does for a living. Each and every time an IB presents a trading opportunity to an existing or a potential client, a hedger, or a speculator, he must present a balanced view of both the risk and the reward possibilities.
An introducing broker who primarily services the farming community will provide his customers with many types of information from a number of sources in order that the IB and the farmer can make informed decisions regarding limiting the risks of the marketing process.
The IB and the client discuss previous production numbers and characteristics, marketing goals for this year and forward, and current marketing tools being used. The tools will include crop insurance, set-aside programs, and commitment of production to the cash sales contracts.
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It is not unusual for this education process to require months, even years, to compete. Often, an IB must demonstrate to the farmer his need for the exchange traded product as a part of his total risk management plan, and then he develops a strategy that matches the client's needs.
Since many IBs live in the same community as their clients, they may see one another often, sometimes even daily. Therefore, their interaction is ongoing. An IB may hold workshops or seminars for producers to explain new products or discuss new ways to utilize the existing old ones. Many of these educational meetings are held at the request of bankers, cooperatives, extension agents, chemical companies, insurance agencies, and others working with the farming community.
Much of the written materials come from the exchanges, FCMs, the USDA, or is specifically developed by the introducing broker as part of his publication package specifically for the needs of those clients.
Some IBs publish newsletters and/or use the Internet as part of their education process. And two of our current introducing broker board members regularly present these programs to several thousand farmers every year.
I've taken a portion of my time this morning to present the foregoing picture so that the Members of the Committee will understand where introducing brokers fit with the other risk management education providers, and to briefly describe the methods we are currently using to educate farmers and producer clients.
When we were asked to be a part of the panel meeting, at the request the Risk Management Agency, we were pleased and flattered. Futures brokers are a valuable and inseparable part of risk management, along with crop insurance people, farm management people, elevator operators, bankers, and other trade organizations. In our written materials package, I've included the presentation that we made at the November 20 meeting.
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It was decided at that meeting that a small steering group would be organized, which would be responsible for further identifying the participants in the education program. It would develop ideas for getting our message out to our clients, and generally create an action plan for 1997.
When we left that meeting, we were all acutely aware that because of certain closing dates present in the crop insurance industry, we would need to take action as quickly as possible.
On December 17, 1996, I attended by teleconference the second meeting of that group. This group concerned itself with the proposed contents of a tri-fold brochure, a poster, and newsletters into which inserts could be put, which would briefly explain the risk management process.
Additionally, our organization suggested that a one-page fax be developed to include the above information and be distributed to all the participants of the education process for refaxing to their respective members. The National Futures Association suggested that the fax be in the form of a press release.
On December 20, 1996, we received a draft of a document developed in response to that meeting. We commented on that document, saying that it was too long and complex. Additionally, we said that a document of that size would not be easily reproduced for faxing to members of various participant organizations without substantial expense. We included our comments at that time for suggests for panel type discussions to be held throughout the producing regions, and for other education type programs.
In January 1997, the National Crop Insurance Service, in Kansas City, MO, asked me if I would like to contribute an article to their trade magazine. I did that. It explained who IBs were, what we do, and how we work together with crop insurance salespeople to meet the mandate of section 192. The NIBA's phone number was referenced, and since it's publication I have received several insurance professionals' phone calls and referred them to IBs near them to discuss how the futures and crop insurance personnel could work together to limit the risks of marketing.
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We're eager to continue to cooperate with the other risk management professionals, and we would like to suggest the following things. We suggest that the initial material be developed by the Risk Management Agency that explains the need to educate to the professionals involved in the process.
The material should be simple, should be short, and should be easy to distribute. Contact numbers of all the members of each of the organizations involved must be included so that the members will be encouraged to communicate with one another. The materials can be developed with input from one or two representatives from each of the areas, and they should keep in mind that the purpose of this initial piece is to provide information about the education process, not to provide the education.
Each professional participant in the education process does not have to become an expert on all areas of risk management. For example, the crop insurance salesman doesn't need to know how to develop the strategies of placing futures or options transactions, or vice-versa. However, each must know how his area of expertise fits with the futures brokers, fits with the insurance agents, fits with the elevator operator, and enhances the total plan. Further, he should know how to contact each one of the participants, all of the participants in a good risk management program, so that they may work together.
Later, and ongoing, more sophisticated written materials, perhaps even a videotape, need to be developed and incorporated into sort of a risk manager's kit to aid the professionals in the presentation of the education to his clients. The material needs to be uniform. It has to meet the requirement of section 192. And it could be used in client workshops or one-on-one presentations.
We understand from this morning's presentation that Mr. Ackerman is planning a conference which is a thing that we think is also very beneficial to present the education process to the professionals.
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And, lastly, we think--and we think that this is quite important--that a timetable needs to be developed, needs to be established with target dates in order to accomplish each step of developing this program so that we can meet the mandate of this section.
Thank you very much for inviting us this morning. We look forward to continuing to participate.
[The prepared statement of Ms. Schramm appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Ms. Schramm.
Mr. Dennis Collins, managing director, Commodity Markets Group, Chicago Board of Trade.
STATEMENT OF DENNIS COLLINS, MANAGING DIRECTOR, COMMODITY MARKETS GROUP, CHICAGO BOARD OF TRADE
Mr. COLLINS. Good morning, Mr. Chairman and members of the subcommittee. I am Dennis Collins, managing director of the commodity markets group of the Chicago Board of Trade. I'm pleased to be here today representing the almost 4,000 members of the Chicago Board of Trade.
Our exchange, with its deep roots in agriculture, has played an active and comprehensive role in developing the marketing skills of American farmers for many decades. In today's age of instantaneous information and highly competitive markets, effective marketing is the key to the success of American producers.
The FAIR Act of 1996, giving producers more flexibility and opportunity, makes timely and prudent marketing decisions all the more critical.
Teaching marketing skills is a stepped approach, the first of which is inspiring an awareness and understanding of price risk within the context of global agricultural markets. A line used often used in producer seminars by a former Board of Trade product manager was, ''Look beyond your backyard to understand what's going on in the markets''. It is only when a producer has this perspective that a meaningful discussion of marketing can take place.
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The first step in our curriculum, therefore, is motivational, to sell the concept of marketing. Our primary tool is a video that features producers telling, in their own words, how having a formal marketing plan has benefitted their operations. We used farmers because peers are often the most credible source for information. Nearly 16,000 copies of this video have been distributed during the past two years at its own cost.
We use producer testimony throughout our educational literature, which is divided into two modules, core education and applications. The core module aimed at individuals with little or no knowledge of markets or risk management teaches the fundamental concepts of the futures and cash markets that must be understood before opening a trading account. There are currently four publications in our core module.
The applications module assumes knowledge of fundamentals and proceeds directly to preparing marketing plans and risk management strategies. There are three publications in this module, including the most popular piece, A Home Study Course on Options, of which 30 to 40,000 copies have been distributed each of the last several years.
Among these pieces, five were produced during the past year as part of our new curriculum designed to respond to the heightened educational needs of American producers.
The best learning experiences take place in face-to-face instruction such as workshops. The Board of Trade conducts literally dozens of producer workshops each year, following the same stepped approach of selling the need for a marketing plan, teaching the fundamentals, and then developing risk management strategies.
The Board of Trade sponsors its own series of workshops offered both at the exchange and at targeted regional locations throughout the Midwest. For producers attending the Chicago programs, we subsidize the cost of room and board to help make the experience available to a broad cross-section of producers.
The bulk of the educational programs we do for producers, however, are tailored for groups such as marketing clubs and extension groups, who either come to the Board on their own or for whom we travel to their location at our own expense.
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Producer response this past year has been impressive. We have attendance two to three times what it's been in past years but, more importantly we feel, we have seen a distinct change in attitude. Producers are demonstrating a keen desire to learn about the markets and about marketing alternatives.
A new educational venture by the Board is the development of an interactive educational CD-ROM which will make it possible to include the benefits of all our educational material, plus historical data and personal worksheets, all into one interactive format. When complete, a producer will be able to direct his or her learning, have hands-on experience solving problems and making decisions. Much of this CD content eventually will be added to the CBOT Internet site, expanding its distribution exponentially.
In closing, Mr. Chairman, I want to comment about cooperative educational activities. Since last September, the Board has been part of the public and private sector joint effort to develop and deliver comprehensive educational programs. Initiated by Bob Petersen and the Risk Management Alliance, this effort is now coordinated by the USDA's Office of Risk Management, and is referred to as the Risk Management Education Task Force.
It is fair to say that following the shift to the Government coordination, there was initial concern among some participants, stemming from their desire to have balanced representation in the final product, and this concern, to some extent, was probably a result of bringing together entities that were to a large degree unfamiliar with each other's potential contribution.
A positive outgrowth of this process, however, has been the participants developing a mutual understanding and recognition of areas for cooperation in risk management education, but this understanding will not guarantee a balanced program. That will require the objective dedication of all involved.
As a member of the task force, the Board will develop even more new materials during coming months to teach producers how to integrate various new products with traditional marketing tools.
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In conclusion, Mr. Chairman, the Board of Trade's commitment to producer education includes the creation of new educational literature that producers can use independently or that can be used by instructors, numerous educational seminars offered across the country, investing significant resources in the development of the interactive educational CD-ROM and, in addition to these ambitious educational activities of our own, being active participants in the Risk Management Education Task Force.
Thank you, Mr. Chairman, for the opportunity to appear this morning. The Board of Trade believes in the spirit of section 192 of the FAIR Act and is committed to doing all they can to ensure its successful implementation. I will be glad to answer questions that the committee may have.
[The prepared statement of Mr. Collins appears at the conclusion of the hearing.]
Mr. EWING. To the panel, we're going to try and beat the clock so you don't have to wait around while we do our votes. We have one more presenter, Mr. Knorr, the editor of Farm Futures, so the clock is running.
STATEMENT OF BRYCE KNORR, EDITOR, FARM FUTURES
Mr. KNORR. Mr. Chairman and members of the subcommittee, thank you for inviting me here today to discuss risk management education. As events of the past year have clearly demonstrated, there is today perhaps no topic of greater importance to the future of agriculture in the United States than how our Nation's farmers can manage the many risks their businesses face.
The ink was barely dry on the historic farm legislation approved by the last Congress when farmers experienced corn and wheat markets that surged to all-time record prices. But the grain markets' volatility over the past few months has served as a reminder that Freedom to Farm may jeopardize farmers unable to manage the risks of an unfettered marketplace.
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In addition to keeping abreast of constantly changing production technologies, farmers now realize they must also learn a whole new set of risk management skills. Education must play a key role in this process, not only to help producers use these tools but to prevent their abuse as well. The problems with hedge-to-arrive contracts that surfaced last summer were a warning that what you don't know can damage, or even ruin the legacy that took a family generations to build.
Fortunately, I can report that many farmers realized this need years ago. Whether on their own, or through programs sponsored by USDA, the Extension Service, community colleges, futures exchanges, or commodity organizations, U.S. farmers already have a base level of knowledge about the new marketing tools that have evolved over the past decade or so.
Farm Futures Magazine, since its inception 25 years ago, has focused on commodity markets. As a result, we've been in a unique position to both observe, and participate in this educational process. In addition to providing forecasts and educational articles about risk management, we've wondered what practices really pay off. To find out, we regularly survey our readers to learn which practices are correlated with profitability.
I'd like to share the results of some of this research with you today. Recently, we developed a 20-question marketing IQ test and surveyed our readers to find out just how much they know about marketing.
It came as little surprise to us that the farmers who scored higher on this test also were more likely to have achieved above-average profitability, as measured by return-on-equity over the last 5 years.
It was also encouraging to see that between 85 and 95 percent of those surveyed correctly answered questions relating to essential topics such as bases. Moreover, between 68 percent and 83 percent of these readers correctly defined options terms such as put, call, strike price, and premium.
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When we asked similar questions in 1989, less than 45 percent of our readers answered correctly. And while only about a quarter of our readers use options, this figure has doubled since 1989.
As encouraging as these findings are, our research also shows that for many farmers the educational process is only beginning. Only 6 percent of the readers surveyed scored an A on our test, answering 18 or more if the 20 questions correctly, and 60 percent of the respondents received a score of 70 percent or less.
In addition, another recent survey demonstrated that risk management means more than managing price risks. When we surveyed farmers on other practices, we found that few, just 5 percent or so, qualified as first-rate risk managers, using a wide spectrum of financial, production, and marketing tools to control their overall level of risk while achieving outstanding returns.
One of the most troubling aspects of this survey was that some 20 percent of today's full-time farmers are vulnerable, burdened by debt and without adequate cash flow and profitability and risk management skills.
Indeed, a majority of those surveyed, another 55 percent, had substantial levels of debt but had not yet adopted the risk management skills needed to ensure their farm's survival.
On average, the Government farm program remains, by a wide margin, the most popular risk management tool used by producers. With this in mind, I believe it's important to focus our efforts on complete risk management. Farmers must learn how to use and synthesize the complex array of tools in the marketplace today, from new forms of crop insurance to financial tools such as ratio analysis and accrual accounting.
This process will not occur overnight. As I can attest, it takes time to learn about topics such as marketing. Our research shows a significant correlation between marketing experience and profitability, but education can be an effective first step.
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For example, we also gave our marketing IQ test to farm women who completed training conducted by the University of Nebraska Extension. The women scored 15 percent higher than our average reader, and only one received a failing grade.
Just as important, our research shows that by using this knowledge, farmers can indeed improve their profitability and prosper in this new era of premarket agriculture.
I'd like to add that there are copies of the IQ test attached to my complete testimony that you received. Thank you.
[The prepared statement of Mr. Knorr appears at the conclusion of the hearing.]
Mr. EWING. Thank you. I suppose I should set the record straight. I didn't fail the test, I did get, I think, a B on the test. But I thought it was very interesting and, if my math were better, I might have scored better on the test.
Very quickly to the panel, either yes or no, do you visualize that this education program that I think we all agree is needed out there, has to be a combination of both public and private?
[Chorus of yeses.]
Mr. EWING. Do your organizations generally all, particularly the commodity groups, have a program? I know the Farm Bureau does. Does corn, soybeans, and other commodity programs? Is that up and running?
Ms. SCHRAMM. As far as the introducing brokers go, the Commodity Futures Trading Commission does not mandate a specific method for us to get the education out, nor do the exchanges, nor do our future commission merchants. So, each introducing broker is left to put together his own program. However, those who service primarily farming communities are quite expert at putting these program together, and have done so for many years.
Mr. NORTHEY. I think it's very important that there is a coordinated effort, I think not only public and private, but certainly among the private groups. The work that's going on is a coordinated effort because there are many different experiences out there, and many different needs. We think that it is important for the public not to lose focus of its either regulatory role or its role in bringing products out and bringing them out in a timely manner, and that the privates can best focus on providing the information to the users.
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Mr. EWING. I'm going to turn to our ranking member, Mr. Condit, for any questions he might have.
Mr. CONDIT. Mr. Chairman, in the spirit of us getting through this and get over and not miss any of the vote, I would like your permission--I apologize for being late, we have other meetings and hearings going on--and I'd like to submit a statement for the record, if I may and, with the consent of the witnesses, I have some questions that I'd like to submit in writing to you and maybe you'll respond to those for me, if that's OK with you, Mr. Chairman.
[The prepared statement of Mr. Condit follows:]
PREPARED STATEMENT OF HON. GARY A. CONDIT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
I want to thank Chairman Ewing for convening this important hearing regarding the implementation of the risk management tools as prescribed under the 1995 farm bill.
With the initiation of the Federal Agriculture Improvement Act, farmers are now faced--more than ever--with heightened responsibility of managing risk in the agriculture arena.
Risk management tools must be developed and implemented for farmers who must face increased awareness of risk-based decisions they make.
Yield price and financial risk should be considered and a strategy advanced by the administration to assure farmers have the necessary information and mechanisms required to make good decisions regarding their bottom line.
I am hopeful we can learn from the administration today, a status report on the implementation and risk management tools and educational process for getting the message out to farmers
Finally, I am looking forward to hearing from the different farm groups about current uses of risk management tools, ways to improve and enhance their use, and the ability to secure information about these products.
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Mr. EWING. That's fine, and we also will submit any further questions that weren't covered in your testimony. I very much appreciate your being here today. This is the beginning of our review of this matter, and I welcome your input in the weeks and months ahead, on problems or successes that we're having out there. We're not going to do all this training in a year, and we all know that, so keep our committee abreast of what your thoughts are, what your industry's thoughts are on this matter.
If there are no further questions, I would like to again thank you for your time and effort for appearing, all of you, both panels, before the subcommittee. The record will remain open for 10 days to accept statements and any additional information.
The subcommittee is adjourned. Thank you.
[Whereupon, at 11:25 a.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion on the record follows:]
STATEMENT OF KENNETH D. ACKERMAN, ADMINISTRATOR, RISK MANAGEMENT AGENCY, U.S. DEPARTMENT OF AGRICULTURE
Mr. Chairman and members of the subcommittee, I am pleased to appear before you today on behalf of the United States Department of Agriculture (USDA) to discuss our implementation of section 192 of the Federal Agricultural Improvement and Reform Act (1996 Act), which mandated a coordinated program of Risk Management Education.
It is also an honor for me to be a part of a panel that includes Dr. Bob Koopman, Deputy Administrator for Rural, Economic, and Social Development for the Cooperative State Research, Education and Extension Service (CSREES) and Ms. Brooksley Born, chairperson of the Commodities Futures Trading Commission (CFTC). Without their personal and organizational commitments to this cause, our prospects for success would be greatly diminished.
As announced by Secretary Glickman, USDA has made a substantial commitment of resources to the education initiative as reflected in the 1998 budget proposal. The Risk Management Agency (RMA) plans to make $5 million available in fiscal year 1998 and a smaller start-up amount in fiscal year 1997. Initial education efforts will focus on training and information distribution. To achieve these goals in time for fall planting, we will develop a system to distribute information and training to farmers and local agriculture opinion leaders, and hold a summit of interested public and private sector organizations.
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As evidenced by this hearing, there is an overwhelming interest in the subject of Risk Management Education. Confronted by an ever growing array of risk management products, farmers are facing a need for more information on available risk management tools and strategies. As a result, numerous conferences and hundreds of published articles have focused on the new risk management environment. The National Grain Trade Council recently formed a Risk Management Alliance comprised of producer associations, agri-business groups and Government officials whose primary goal is to help farmers improve their risk management decision-making skills. The American Farm Bureau Federation, the Chicago Board of Trade, and the National Grain and Feed Association are each developing and implementing programs to inform growers about different risk management tools. Commodity organizations, such as the National Cotton Council, are also developing risk management programs for their members.
Farmers today face an environment that is drastically different from that which existed just a few years ago. Amendments made to the Federal Crop Insurance Act by the Federal Crop Insurance Reform Act of 1994 (the 1994 Act) fundamentally changed the way Government responds to losses resulting from natural disasters by eliminating ad hoc disaster payments and replacing them with an expanded and enhanced crop insurance program. Further, the 1996 Act eliminated deficiency payments, the traditional income support mechanism that provided increased payments to producers when market prices were low.
USDA, through RMA, has begun to address the changing needs of farmers in this new risk environment. We are developing insurance protection programs for new crops on an unprecedented scale, while also maintaining actuarial soundness. We are exploring new insurance models which not only address losses in yield and quality, but account for adverse changes in price. In cooperation with the private sector, we are experimenting with
revenue-based programs such as Crop Revenue Coverage (CRC), Revenue Assurance (RA) and Income Protection (IP).
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The authors of the 1996 Act recognized that new crop insurance or other products alone were not enough to prepare farmers for the new risk environment. Rather, if farmers are to function effectively, they must become far more sophisticated in identifying the risks to their farm businesses and in mitigating those risks by becoming customers of the many varied risk management products available. To address this need, section 192 of the 1996 Act mandated that USDA initiate a Risk Management Education initiative as follows:
In consultation with the Commodity Futures Trading Commission, the Secretary shall provide such education in management of the financial risks inherent in the production and marketing of agricultural commodities as the Secretary considers appropriate. As part of such educational activities, the Secretary may develop and implement programs to facilitate the participation of agricultural producers in commodity futures trading programs, forward contracting options, and insurance protection programs by assisting and training producers in the usage of such programs. In implementing this authority, the Secretary may use existing research and extension authorities and resources of the Department of Agriculture.
To carry out this mandate, the education initiative we envision will be a coordinated team effort involving both the public and the private sector. Leadership will be provided by a three-member Steering Committee chaired by RMA and including CSREES and CFTC. This Steering Committee will act as facilitator for a semi-formal alliance of private organizations actively interested in providing energy, expertise, and, to some extent, resources to this educational effort. The participating organizations will represent the crop insurance and futures/options industries, producer and commodity organizations, the grain trade and dairy industries, and farm lenders. We have included with this statement a copy of the Memorandum of Understanding which outlines the duties and responsibilities of each of the Steering Committee members.
To date, there have been several events held to introduce the Risk Management Education initiative:
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A Risk Management Alliance, a workgroup comprised of representatives from 13 producer associations and agribusiness groups met with government officials on August 29, October 14 and December 30, 1996, to discuss joint efforts to help farmers improve their risk management decision-making skills.
A Forum on Risk Management Education sponsored by USDA was held on November 20, 1996, with a goal of bringing together leaders from the insurance, futures, and forward cash contracts industries.
A Forum on Risk Management Education was held in Kansas City on
December 16—17, 1996. Representatives of CSREES, CFTC, RMA, Farm Foundation, Kansas State University Cooperative Extension Service, and Texas A&M University Agricultural Extension Service sponsored discussion on current initiatives and plans for educational development.
RMA is also working on a number of other initiatives to facilitate the education effort. In addition to a number of smaller projects on the local level aimed at increasing producer awareness of risks, risk management tools, and strategies, RMA has made numerous presentations on risk management at meetings of the National Farmers Union, the Farm Credit Agency, National Corn Growers Association, Texas A&M University, and others.
The future Risk Management Education effort will work toward two major goals: training and information distribution.
TRAINING
To be successful, Risk Management Education must teach not only the role and use of individual risk management tools, but also how these tools fit together, what choices farmers must make, and what potential combinations of products and strategies will best help them manage price and yield fluctuations. Our training effort will be broad in both scope and content, focusing on integrating basic information on risk management from all relevant sectors. The training effort will be directed toward two audiences: participating organizations comprised of local agriculture opinion leaders (i.e. insurance agents, grain elevators, commodity groups, lenders, Government employees, etc., which deal directly with farmers in their local communities in making financial and risk management decisions) and the farmer.
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To initiate the training program, we are planning a Risk Management Education Summit for the week of September 14, 1997, in St. Louis. This summit will initiate the formal training program for farmers and opinion leaders. It will be the impetus for the public/private sector partnership with regard to Risk Management Education, and will establish the basis for a consistent nationwide educational effort. The summit will be open to the public and will be attended by the media, the insurance industry, USDA state office and regional offices, commodity groups, and so forth.
A series of integrated course outlines will be developed under the oversight of the Risk Management Education Steering Committee and tapping the expertise of the participating organizations. Using the ''train the trainer'' technique, opinion leaders will be educated on the array of tools available and how they work in tandem to minimize producer risks and maximize profits. Ultimately, these opinion leaders will assist in the direct training of the farmer on the local level. Insurance agents will educate producers on crop insurance products, the commodity broker will discuss futures contracts, the grain elevator will provide training on forward cash contracts, and so forth. Training sessions will consist of lecture and hands-on marketing and pricing simulation exercises, and will provide a basis for an education effort at the county level which will continue into future years. The Government's role will be to facilitate the field training where necessary. We intend to work with organizations such as the Federation of Southern Cooperatives to develop a specialized curriculum for small and limited resource producers. A recent study conducted by the Economic Research Service on Characteristics and Risk Management Needs of Limited Resource and Socially Disadvantaged Farmers will be extremely helpful in this effort.
INFORMATION DISTRIBUTION
One of the biggest challenges facing farmers is the need to sort through the array of new products, each with new trade names and new risk profiles, emerging from the private sector. During the past few years, we have seen products such as CRC, RA, IP, yield futures and options, hedge-to-arrive contracts, and many others. To help farmers make knowledgeable, informed decisions, we intend to develop a Risk Management Education web site to provide them, as well as local agriculture opinion leaders, with a source of up-to-date information on available risk management tools. We will use the web site to post current educational materials, market information, analysis of new financial products, articles, fact sheets, meeting schedules, and key contacts that farmers and opinion leaders can turn to for unbiased background when confronted with decisions, questions, and solicitations. RMA is also developing fact sheets containing information on crop insurance products, futures and options, and forward cash contracts. These fact sheets will be available on the web site and at a multitude of grower and vender locations.
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The Risk Management Education initiative is exciting as well as daunting. Many producers today do not have a marketing plan as part of their price risk management. Consequently, farmers must move from a passive approach of marketing and pricing to a far more active approach. They must be educated on the tools which are available to assist them in planning and marketing crops and maximizing prices, and they must be knowledgeable of both the advantages and potential dangers of using these tools. Finally, producers must be educated on how to select the best risk management strategy for their operation. This knowledge will be critical if producers expect to remain financially competitive in the new risk environment. Through a comprehensive educational effort which provides up-to-date, neutral information, we can help farmers meet these challenges and improve the prospects for American agriculture in the 21st Century.
In closing, I appreciate the opportunity to outline the Risk Management Education initiatives completed thus far and those planned for the future. Mr. Chairman, this concludes my testimony. I will be happy to answer any questions that you may have.
STATEMENT BY MARK BERG, AMERICAN SOYBEAN ASSOCIATION
Good morning, Mr. Chairman and members of the subcommittee. I am Mark Berg, a soybean and corn producer from Tripp, South Dakota. I currently serve as First Vice President of the American Soybean Association. ASA is the national voice of U.S. soybean farmers, and represents 30,000 producer members in 26 States.
ASA would like to commend you, Mr. Chairman, for holding this hearing on Section 192 of the 1996 FAIR Act. Learning to manage the significant risks of farming has always been important. Under Freedom to Farm, it will be essential.
Many of our members are already familiar with how to use futures and options markets, forward contracting, or insurance programs to reduce loss exposure and maximize opportunities for profit. For these producers, the full planting flexibility and unrestricted production permitted under the new farm bill represent a dream of economic freedom come true.
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However, for every farmer who fully understands how to use these production and marketing tools, there are probably two or three who depended on the old farm program to dictate which crops to plant, and who expected the government to step in when prices fell or disaster struck. For these growers, the new era of declining income supports and no disaster assistance is a nightmare waiting to happen.
So far, we have had the best of both worlds--comparatively high prices for basic crops and guaranteed market transition payments. Producers are looking forward to a second year of relative prosperity driven by continued strong foreign demand and depleted domestic reserves.
As we all know from experience, however, nothing in farming changes faster than prosperity. And in the brave new world of Freedom to Farm, the downside potential for pain is just as great as the upside opportunity for profit.
For these reasons, we need to move quickly to ensure that producers will be ready for what lies ahead. Congress appropriately recognized that further efforts would be needed by directing the Secretary of Agriculture to undertake risk management education in Section 192 of the FAIR Act.
Of course, no one expects USDA, CFTC, or any Federal agency to provide unilateral production and marketing education to farmers any more than government should be responsible for how every producer fares over the next six years. Education must be a partnership between government and the private sector. And as with any partnership, success will require active interest and effort from both parties.
What is most needed from government is development of effective tools that can assist farmers to improve their production and marketing decisions and to reduce risk. It is then the responsibility of groups such as ASA to work with the Department and CFTC to make producers aware of these options and how they can be used.
At this time, USDA and CFTC are actually in the process of developing several risk management options. The Department recently extended last year's pilot program for Crop Revenue Coverage to a total of 12 soybean States for the 1997 crop. ASA strongly supported this step,
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and is encouraging extension of CRC to all soybean producing States for 1998. One significant advantage of CRC as a price and yield insurance program is that local crop insurance agents will help educate producers about its benefits.
At the same time, CFTC is considering lifting the longstanding ban on agricultural trade options. Trade options offer a major opportunity for producers to improve forward marketing and pricing without getting locked into fixed contracts, as under Hedge-to-Arrive.
CFTC will shortly release a White Paper on the potential upsides and downsides of allowing trade options for basic agricultural commodities. Depending on the conclusions, ASA is prepared to support lifting the ban. At such time, a significant educational effort will be needed by CFTC and grower groups to ensure that producers understand both the benefits and the drawbacks.
Another area where Congress could help provide farmers and ranchers with a valuable risk management tool is the tax code. Many producers recall using income averaging to even out the highs and lows in year-to-year farm income for tax purposes. While reinstating income averaging may be too costly, an alternative would be to allow farmers and ranchers to set up tax-deferred ''rainy day'' accounts. Funds deposited in better years could be withdrawn in poor years to manage volatile shifts in farm income. ASA and other farm groups are exploring this concept with members of the Congressional tax-writing committees, and we are hoping legislation can be introduced later this month.
As Congress, USDA, and CFTC develop these new risk management options, it is important to have a delivery process in place to educate producers about how they can be used. We understand the Risk Management Agency at USDA has developed a Risk Management Education Plan, including establishment of a public-private sector Task Force. ASA looks forward to participating in this group, and believes grower organizations must play a key role in the education process.
Thank you, Mr. Chairman, for the opportunity to appear before you today. I will be happy to respond to any questions you or other members of the subcommittee may have.
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TESTIMONY OF BROOKSLEY BORN, CHAIRPERSON, COMMODITY FUTURES TRADING COMMISSION
Mr. Chairman and members of the subcommittee, thank you for inviting me to present the views of the Commodity Futures Trading Commission on implementation of the risk management provisions of the Federal Agricultural Improvement and Reform Act of 1996. The major shift in farm policy embodied in the FAIR Act has created a new opportunity for America's farmers--the freedom to farm for the market and not the Government. But with that freedom comes new responsibilities as farmers shoulder the burden of managing for themselves market risks previously covered by government programs. In this new era for agriculture, it is vital for farmers to have the educational support that will allow them to create their own risk management programs.
The futures and option markets are an important element of the risk management tools available to agricultural producers. As the Federal agency charged with regulatory oversight of those markets, the Commodity Futures Trading Commission strongly supports the FAIR Act's educational goals. In going forward with this educational mission, the CFTC brings to the table not only its experience, expertise and daily knowledge of the workings of the futures markets, but also a long history of commitment to agricultural risk management education. Since it was organized in 1985, the CFTC's Agricultural Advisory Committee (AAC) has given a spectrum of agricultural and agribusiness groups (currently 25 organizations) an ongoing voice in CFTC decisions affecting agriculture. The Commission has also sponsored various special programs targeting particular agricultural issues, including the September 1991 ''Kalo A. Hineman Delivery Issues Symposium,'' named in honor of former Commissioner Kalo Hineman, who founded the AAC; the November 1994 ''Summit on Risk Management in American Agriculture,'' co-sponsored by the Farm Foundation and organized by Commissioner Joseph B. Dial, the current Chairman of the AAC; and the December 1995 ''Public Roundtable on Agricultural Trade Options.''
The CFTC is committed to bringing its experience, history and commitment to bear in cooperating with USDA to carry out the consultative role that Section 192 of the FAIR Act envisions for the CFTC. In furtherance of this goal, as Chairperson of the CFTC, I have asked Commissioner Dial to serve as the CFTC's liaison with USDA in supporting the educational mandate of Section 192. I have also designated Ron Hobson, the Deputy Director for Market Research in our Division of Economic Analysis, who is with me here today, as the Commission's primary staff person on Section 192 matters.
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The recent actions and current plans of USDA and the CFTC in support of the FAIR Act's educational mandate will be covered in detail in USDA's testimony, and I will not repeat that catalogue here. However, I have attached to my testimony a ''Chronology of Recent CFTC/USDA Cooperation in Risk Management Education,'' which covers the CFTC's role in greater detail. I respectfully request that this chronology be included in the hearing record.
As demonstrated by the actions described in this statement and the attached chronology, the CFTC remains committed to fulfilling its obligations under the FAIR Act. We are continuing our active role in supporting the Act's risk management education initiatives in cooperation with the lead agencies in USDA and with private sector participants as well.
Consistent with the subcommittee's wishes, this testimony has been limited to the risk management provisions of the FAIR Act. I would be remiss, however, if I did not at least mention in passing pending legislation that could have a significant impact on farmers' risk management activities. I am referring to H.R. 467, which will be the subject of hearings before this subcommittee next week. In my testimony on that bill next week, I will detail the CFTC's concerns about the profound impact H.R. 467 could have by eliminating regulation of the futures exchanges at the very time that the risk management responsibilities embodied in the FAIR Act have made farmers and ranchers more dependent on futures markets than ever before.
Thank you again for the opportunity to appear before you. I will be happy to answer any questions the subcommittee members may have.
CHRONOLOGY OF RECENT CFTC/USDA COOPERATION IN RISK MANAGEMENT EDUCATION
April 4, 1996 The FAIR Act becomes law.
May 8, 1996 21st meeting of the CFTC's Agricultural Advisory Committee (the first of two meetings in 1996). Ken Ackerman, head of USDA's Risk Management Agency (RMA) and a member of the Advisory Committee, briefs the Committee on RMA's programs and responsibilities under the FAIR Act.
September 6, 1996 Commissioner Joseph B. Dial and CFTC staff members attend organizational meeting at USDA aimed at getting initial risk management education efforts underway.
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October 7, 1996 22d meeting of the CFTC's Agricultural Advisory Committee. Committee members representing 17 agricultural and agribusiness organizations make formal presentations to the Committee concerning their organizations' plans and programs for risk management education.
November 20, 1996 CFTC representatives join with representatives of USDA, farm groups, academia and the crop insurance and futures industries in a ''Forum on Risk Management Education,'' hosted by USDA, in Washington, DC., with the stated purpose of ''develop[ing] ways of providing producers useful information about risk management products and strategies.'' In addition to its own participation, the Commission also cooperated in securing the attendance of appropriate futures industry groups, including the National Futures Association, the Futures Industry Association, the Futures Industry Institute, the National Introducing Brokers Association and the futures exchanges.
December 16, 1996 Commissioner Dial delivers remarks entitled ''Everybody Wins with Agricultural Risk Management Education'' at Cooperative State Research, Education and Extension Service (CSREES) program on risk management education in Kansas City.
April 8, 1997 CFTC renews educational Memorandum of Understanding with USDA. The MOU, originally signed with the CSREES in 1992 and renewed in 1994, is revised and expanded to include both CSREES and the Risk Management Agency and specifically to incorporate the goals of Section 192 of the FAIR Act.
Ongoing CFTC is continuing its cooperation with USDA in longer term efforts to develop comprehensive education on management strategies. Options being considered include the establishment of Web site tutorials on the Internet, the use of radio and television ''infomercials,'' and local meetings and seminars under the auspices of USDA's CSREES.
TESTIMONY OF THE NATIONAL GRAIN AND FEED ASSOCIATION
Good morning Chairman Ewing, Congressman Condit, and members of the subcommittee. My name is Tom Coyle. I am vice president origination for Continental Grain Company in Chicago, IL. I serve on the National Grain and Feed Association's Risk Management Committee, and I appreciate the opportunity to share the NGFA's thoughts on risk management education this morning.
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New Era for Agriculture
Much has been said and written about the new era in which agriculture finds itself today, and I do not disagree. The shape of farm programs has been changed dramatically by the Federal Agriculture Improvement and Reform (FAIR) Act of 1996. No longer will farmers be compelled to set aside a portion of their farm to qualify for income support from the government. No longer will deficiency payments be disbursed to farmers as the primary means of delivering Federal support.
Instead, farmers now have the freedom to determine the best use for their land. Without fear of being penalized, farmers can make their own decisions about what crop to plant, how much to plant, and where to plant it. Federal support is provided to farmers through direct payments not linked to production levels or prices. If a farmer faces a crop disaster or is prevented from planting, his market transition payment is unaffected. Now, he gets income support in the year he most needs it. Conversely, in the old days, higher prices would have reduced or eliminated deficiency payments just when the farmer needed them most. The NGFA believes that Freedom to Farm is a critically important step in maximizing U.S. agriculture's competitiveness and economic growth. We strongly supported Freedom to Farm's passage, and we believe it is working.
Much also has been said and written about the challenges facing farmers and ranchers under the new farm program because Federal payments are scheduled to decline over a period of years. Farmers and ranchers will be expected to derive a larger portion of their income from markets, making it even more important for them to have a thorough understanding of the range of production, marketing, and risk management tools available. While we believe farmers long have showed a keen interest in new risk management ideas, passage of the FAIR Act has, for the first time in years, created an urgent need for the development of new risk management products and education. The ultimate success and longevity of the FAIR Act will depend in large part on our ability to meet this need.
As a measure of the importance the NGFA places on risk management, we have identified this area as one of our association's top priorities for the coming year. That is why, Mr. Chairman, the NGFA commends you for calling this hearing to look at the U.S. Department of Agriculture's implementation of the farm bill's risk management education provisions.
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RISK MANAGEMENT - IT'S NOT JUST CROP INSURANCE ANYMORE
For more than 150 years, the grain industry has been helping farmers manage their price risk through forward contracts and other types of grain purchase agreements. One of the great strengths of the U.S. grain marketing system is the ability of first purchasers like grain elevators to offer their farmer-customers specialized contracts reflecting local customs and practices, farmer preferences, and market conditions.
The NGFA believes that farmers and ranchers should have access to a wide range of risk management instruments, including crop insurance, exchange-traded instruments like futures and options, and cash grain contracts offered by grain buyers like the NGFA's members. To that end, it is imperative that, as the USDA implements its risk management education initiatives, each of these constituencies is engaged to achieve the most comprehensive educational outreach.
Generally, we believe that the new Risk Management Agency (RMA) has done a credible job of bringing various risk management interests to the table and seeking their input and participation in the development of educational programs for production agriculture. While this initiative naturally began with a focus on crop insurance, the risk management instrument with which the agency has the most experience and a ready network, the NGFA believes the agency now can be recognized for including other industry interests in its efforts. In particular, we appreciate being asked to serve on the RMA working group that has developed some initial risk management education materials and now is working on the development of a risk management summit and training to be delivered to farmers and ranchers.
The pace of education efforts, however, has left something to be desired. It is roughly one year today since the FAIR Act was signed into law, yet it was only a couple of weeks ago that the RMA was designated by Secretary Glickman as the lead agency for risk management education. Therefore, it is not surprising that the agency does not yet have much to show in risk management education.
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We recommend that risk management education receive a high priority within the department and that RMA be encouraged to move ahead expeditiously in developing information and training for farmers and ranchers, as well as the delivery mechanism for getting the message out. Further, we strongly recommend that as educational information and curricula are developed, the RMA take great care in the selection of appropriate parties to deliver such information. It is the strongly held view of the NGFA that practitioners who deal daily with producers '' like insurance agents, brokers, and elevator personnel '' are best suited to deliver the risk management message. Poor choices made in this area will result in the failure of educational efforts.
A final cautionary note, Mr. Chairman, regarding the delivery of risk management products. I noted earlier that crop insurance is the risk management product with which the RMA is most familiar; and I noted that the NGFA believes crop insurance is important. In fact, crop insurance is an essential element of many farmers' risk management strategies. However, despite the tremendous importance of crop insurance, achieving the most effective risk management program in terms of dependability, flexibility, and cost to the producer and the taxpayer will require fully engaging the widest range of resources available.
I will not get into a philosophical discussion today about the appropriateness of taxpayer subsidies for crop insurance, the appropriate extent of such subsidies, or the fairness of asking other industries to compete against federally supported crop insurance to provide risk management services to producers. I will say that the NGFA believes this is an area that should be kept in mind by the RMA and policy makers as they evaluate whether farmers' and ranchers' risk management needs are being met.
LIFT THE BAN ON AGRICULTURAL TRADE OPTIONS
Although the subject of today's hearing is confined narrowly to risk management education, I have just a few comments about action that could be taken which would be of value to U.S. agriculture in the area of risk management. We have petitioned the Commodity Futures Trading Commission (CFTC) to lift its ban on agricultural trade options, a step we believe would clear the way for a new generation of risk management products.
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Although the relationship of lifting the agriculture trade options ban to risk management education may not be immediately apparent, we believe there is a connection. Lifting the ban on agriculture trade options will increase the offering of new products and induce greater participation by the cash grain industry in educational efforts. We believe strongly that any new product offering must be supported by adequate education. However, at this point, the industry has not received a clear signal on the products it can or should offer. Therefore, some feel little need to move forward with education.
We also believe this subject should be aired with the subcommittee because of the significant contribution it could make in giving farmers additional risk management options and the opportunity to add value to their production. As a brief example, let me describe how an agricultural trade option might work. Let's say a farmer in Illinois wants to market his corn through his local country elevator. He wants to protect against lower prices, but he also wants to maintain the flexibility to benefit from higher prices. In exchange for a premium, the elevator could offer the farmer a contract with a specified minimum price under which the farmer could deliver his grain to the elevator at harvest time if the farmer believed that was his best alternative. On the other hand, if the farmer thought he could receive a better price than stipulated in the contract, he could elect to forfeit the premium and market his production elsewhere.
In our petition, we have asked the CFTC to clarify that revenue assurance contracts--providing similar outcomes to crop insurance products like the Combined Revenue Coverage (CRC) policy- can be utilized by producers and grain buyers in the cash marketplace. Such action would allow grain buyers to offer unsubsidized, competitive products and give farmers additional risk management alternatives. With these products, as with crop insurance or exchange-traded instruments, thorough understanding by both parties is essential if risk management goals are to be met.
Agriculture is the only industry still laboring under a ban on agricultural trade options. We believe the time has come to give farmers and ranchers the same opportunity other industries have to deal with their business risks. Lifting the ban would give producers new alternatives to manage their risk and seek to improve market income.
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Staff at the CFTC currently are completing work on a white paper that will make recommendations to the Commission on lifting the agricultural trade options ban. The NGFA does not believe Congressional action is needed at this point, but we urge subcommittee members to join us in supporting this farmer-friendly risk management action. If any members would like copies of the NGFA's petition to the CFTC, we would be happy to provide it.
CONCLUSION
In conclusion, Mr. Chairman, the NGFA remains committed to the education of all market participants--farmers and ranchers, elevator managers, crop insurance agents and companies, brokers, et cetera--to the wide range of risk management alternatives and how they operate. We view risk management as a jigsaw puzzle, with many interlocking pieces that all must come together for farmers and other market participants to understand the big picture and make the best choices for their own situation.
Various interest groups hold pieces of the puzzle. The crop insurance industry understands its products and how they can benefit some producers. Exchanges and brokers understand futures and options. Grain elevators understand cash grain contracts and their risk management features. However, we do not believe anyone, including RMA, yet understands how to link all these pieces together. That is why we believe it is critically important to engage each industry sector in the risk management education process; and that is why it is important that personnel from each sector be utilized to deliver this information to producers.
We began the process in our own industry last year with publication of a comprehensive white paper and a series of seminars on hybrid cash grain contracts. We believe this paper lays out in an objective manner many of the cash grain contracts that are offered. It details the features of various contracts, and it is frank in discussing the risks to buyer and seller. Further, it discusses in some detail the legal and regulatory climate surrounding the use of cash grain contracts, and it suggests steps that should be taken before offering or entering into a contract. We believe this paper can make a significant contribution to the risk management education efforts of the RMA.
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We have committed to an ongoing, long-term contribution to risk management education, and we expect our industry to be called on in a significant way to help RMA achieve its risk management mandate. This process should not result in a centrally controlled, government-delivered education product. Rather, each sector must commit to making an objective, unbiased contribution to the education of all other sectors, including farmers and ranchers. We must all work together to serve the best interests of U.S. agriculture's risk management needs.
Thank you again, Mr. Chairman, for the opportunity to testify this morning. With a commitment to a broader educational role, we look forward to working with your subcommittee, the RMA, and private sector interests to meet agriculture's risk management needs. We believe the time has come for farmers and other market participants to come together to develop the risk management products and education needed to insure agriculture's transition to a new, exciting, and profitable era.
STATEMENT OF JACK LAURIE, AMERICAN FARM BUREAU FEDERATION
Thank you Mr. Chairman for the opportunity to comment on the important topic of risk management. My name is Jack Laurie and I am president of the Michigan Farm Bureau. Our family farm centers around a 550-cow dairy herd with 1,600 acres of crops. I am here today representing the 4.7 million Farm Bureau member families across the United States.
Agriculture is an inherently risky business with the majority of risk being beyond the control of the producer. The greatest focus is typically on production risk and pricing risk. Even the best managers and producers can be subdued by inclement weather which can affect both crops and livestock as well as a multitude of disease and insect problems that can, again, affect both crop and livestock producers.
The American Farm Bureau Federation identified risk management as a high priority area several years ago. Let me quote from our policy book on this topic.
We support development of risk management tools that can supplement or be an alternative to the current crop insurance program. We support expansion of current revenue insurance products and the development of new risk management tools that may be offered by private insurance companies and reinsured by the Federal Government. We encourage education programs that provide risk assessment and risk management as well as professional education for farmers in marketing, financial management and government relations.
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As you are aware, the Federal Agricultural Improvement and Reform (FAIR) Act of 1996 significantly changed the concept and implementation of Federal farm programs. As an organization, we support the concepts contained in the FAIR Act because the Farm Bureau favors a market-oriented agricultural system. Again, I quote another part of our policy which says:
Any change, amendment or fine-tuning of the FAIR Act must continue the focus of consistent, long-term market-oriented farm policy that will, among other things, develop risk management tools to deal with the inherent fluctuations in revenue and income associated with farming.
As a result of the FAIR Act, farmers and ranchers will have much more flexibility to respond to market price signals. We expect that crop prices are likely to be more volatile under the FAIR Act than experienced under the farm programs of the previous 60 years. The potential for increased volatility does raise the anxiety level among many producers. However, there are many who welcome and even embrace the concept of increased volatility as an opportunity to enhance the returns to their operation.
Farmers and ranchers have generally utilized a number of marketing tools over the years to enhance the pricing and returns from the commodities they produce. However, there are others who have been comfortable with the government setting a minimum price level. Individual farmers, if not entire sectors--milk producers being an example--will need education to implement risk marketing strategies that some have utilized for many years.
There are a number of different marketing tools that farmers can use to help them sell their commodities at a profitable level. Farmers and ranchers can lock in a profitable price long before the crop is harvested or the animal is ready to go to the packing plant. This can be done by forward cash contracting and/or utilization of the futures and options market. By utilizing forward pricing methods--be it contract with elevators, processors and packers or via the futures market--they can expand the marketing window so they have a better chance of pricing their products when they are at seasonal highs. By the same token, producers can take positions in the futures and options market that enable them to sell their commodity beyond the time it's harvested or, for livestock, when they reach the appropriate weight level.
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Marketing and pricing is only one aspect of risk management. Another key issue is production and crop insurance. A number of revenue-based insurance products have been available on a limited basis for selected crops in 1996 and 1997. Some of these products, crop revenue coverage or CRC being one, are being expanded to more States in 1997. These products have elements of both production risk and/or price risk associated with them. Up to now, the tools available for risk management have been focused in separate areas, either price risk or production risk but not both. The new insurance policies are designed to compensate the producer if either production falls short of some predetermined level or if prices go below a predetermined level. If competitively priced and appropriately marketed, these policies can greatly assist producers in developing an overall risk management strategy.
While there are a number of marketing tools and insurance related tools that have been available for some time or are being developed, we have challenges in other areas. I am unaware of any work similar to what's being done in crop insurance that focuses on the livestock side. And, unfortunately, even some of the traditional tools that have been available for many sectors, for example, futures and options for the major crops and livestock, are not available for other sectors. While there are several futures contracts aimed at the dairy industry such as milk, cheese and non-fat dry milk contracts, they are in their infancy and do not have sufficient liquidity to be a viable option for producers. Likewise, the 200-plus minor crops, such as fruits and vegetables, have little prospect for marketing tools such as futures and options and, for them, even developing a comprehensive crop insurance program is very challenging.
The Federal tax code can provide important financial and tax management tools for farmers and ranchers to reduce the risks associated with production agriculture. Farm Bureau supports tax code changes that would allow farmers to reduce unpredictable income fluctuations and to save for a ''rainy day.''
Prior to 1986, farmers and ranchers had the ability to average their farm-related income.
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There is now a 24.6 percent tax rate variation. In low income years, tax liabilities are low but it is difficult for farmers to pay their bills or save money. In profitable years, farmers must pay high tax rates on their incomes, also making it difficult to pay bills and save. Income averaging is needed so that farmers and ranchers can stabilize their incomes in order to meet expenses and save.
Farm Bureau also believes that Congress should enact legislation to create ''farmer savings plans'' that allow farmers and ranchers to save pre-tax money for future needs. These risk management accounts should be limited to those engaged in production agriculture. Agricultural producers would use these accounts to reduce income fluctuations caused by weather and markets and to save money to cover expenses when needs exceed farm income.
It is clear that an effective risk management program involves managing many components. In fact risk management is really a multi disciplinary effort. The delivery system for risk management education should reflect this multi disciplinary approach. Farm Bureau's approach to developing the tools for effective risk management emphasizes the need for supportive programs and policy in a variety of areas. An effective crop insurance program, an effective marketing program and short and long-term income stabilization strategies are all necessary.
Resources within USDA and other agencies are critically scarce. This necessitates a high level of coordination and use of existing resources to meet a multi disciplinary goal. The emphasis should be on delivering the educational message as economically as possible. There is no room to build new bureaucracies or maintain old ones where partnerships can be effective. Directly involving the private sector in the delivery of risk management education is critical. Farm Bureau believes that private sector creativity is being more directly applied to risk management as a result of the 1996 farm bill. We believe the results of this private sector activity will be significant.
I'm happy to report that there are efforts underway to address some of these issues. Both the American Farm Bureau and some state Farm Bureaus are working with the USDA Risk Management Agency to develop a comprehensive risk management education program. This effort encompasses input from a wide range of agricultural interests and organizations.
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The focus of the effort is to develop a basic curriculum that covers the following areas:
Cash marketing, futures and options, crop insurance/production risks, financial planning
This is not an effort to reinvent the wheel. There are many good programs that are already available. An example is the American Farm Bureau Market Master Program. Indeed, Farm Bureau has been working with various States to incorporate a Market Master or similar education program for over a decade. The group's focus is to take the good elements from the many existing programs and make them available on a wide basis, essentially all across the country. The current schedule calls for a National Risk Management Summit this fall followed by the distribution of a program with related materials that can be utilized across the country.
Given the width and breadth of agriculture there is almost an infinite number of different risk-related activities that need to be addressed. Moreover, it would be well to look at some strategies that might be applied more in general to agriculture as opposed to specific commodities or geographic areas. For example, I would like to suggest we would be well advised to consider some type of pilot program that would deal with general revenue risks as opposed to specific commodity-related risks. This would allow producers to take income from peak years and put it in some type of fund or reserve from which they could draw when revenues decline significantly or profits become losses. Farmers used to be able to utilize income averaging to offset the peaks and valleys experienced from time to time. Other countries such as our neighbor Canada have experimented with some of these programs such as General Revenue Insurance Program (GRIP) or the Net Income Stabilization Account (NISA). I doubt if these types of programs can be easily duplicated for U.S. farmers. However, work needs to be done that pursues this conceptual idea of revenue averaging into a cohesive, long term program. Programs need to be developed and piloted on a limited basis. However, such pilots would need to be pursued for an extended time period, up to ten years.
Let me close by encouraging this committee to support the research and pilot programs currently underway and those that may be forthcoming in the area of risk management. There are many challenges and opportunities to develop new and innovative risk management tools that can benefit farmers and ranchers. Eventually these tools and ideas may be transferred from government development to private industry. I hope you agree that this would be the best of all worlds for farmers, ranchers, consumers and taxpayers.
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STATEMENT OF ROBERT PETERSEN, NATIONAL GRAIN TRADE COUNCIL
Mr. Chairman and members of the subcommittee, I am Robert Petersen, president of the National Grain Trade Council. We appreciate the opportunity to express our views at this oversight hearing on Section 192 of the Federal Agricultural Improvement and Reform (FAIR) Act of 1996. This section of the FAIR Act directs the Secretary of Agriculture to provide education in the production and marketing of agricultural commodities.
I would like to begin by explaining why the National Grain Trade Council is interested in risk management. There are a lot of people interested in risk management. There are a lot of people with a vested interest in how a risk management program is structured. I think it is important to clearly understand those self-interests as we discuss efforts to help farmers.
The National Grain Trade Council is a national trade association whose voting members are grain exchanges, including futures exchanges such as the Chicago Board of Trade, Kansas City Board of Trade, and the Minneapolis Grain Exchange and including cash exchanges, such as the Merchants Exchange of St. Louis and the Enid Board of Trade. Our associate members include grain companies, processors, railroads, futures commission merchants, and several bases. The Council focuses on two policy areas--farm policy and futures trading issues.
Risk management is a central issue for the Council and its members. We are also interested in market-based farm policies. The Council was a strong supporter of the new farm bill, the Federal Agricultural Improvement and Reform (FAIR) Act. We believe it does the best job of using scarce Federal dollars for the benefit of American agriculture.
THE NEED FOR RISK MANAGEMENT EDUCATION
The new farm bill created more of a need for better knowledge of marketing tools. The new farm bill did away with the guarantee of target prices for major crops. Instead, the Federal Government now provides a farmer with a direct payment, regardless of prices. And Federal farm policies today give farmers virtually complete freedom in the choosing the crops they wish to produce.
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These changes place more responsibility on the shoulders of farmers. Farmers will bear the responsibility for investment, planting, and marketing decisions, not the Federal Government.
At the same time, markets will continue to go up and go down as we look to the future. In either case, there will be no change in the amount the farmer is scheduled to receive through
the market transition payments. There are farmers who will miss the security of government farm programs, especially when prices fall to low levels. So, what can be done to help farmers better weather these cycles on their own?
There are a number of private sector tools farmers can use to better manage their business risk. Studies show that those farmers who are good risk managers are more profitable. If good risk management skills mean more money in a farmer's pocket, why do some surveys show that perhaps two out of three farmers badly need to improve their marketing skills?
One reason is that many farmers quickly feel overwhelmed when faced with the variety of risk management choices they have. Farmers focus on the production part of their business and by and large do an excellent job of efficiently producing a crop that is needed by consumers. For many, the risk management part of the business has not been a priority, they are not expert in it, and they are not comfortable with that part of their business.
Thus, the goal is to help that group of farmers become more comfortable making risk management decisions. The first step in achieving that comfort level is providing educational opportunities for farmers to increase their knowledge level.
It is important to clearly define what we mean by the term, ''risk management.'' The two major risks that most often come to mind are yield and price. Yield risk encompasses weather and growing conditions--elements that farmers have faced since the beginning of time. There are a variety of ways to minimize or manage yield risk: one might be to install an irrigation system on your farm; another is to purchase crop insurance; and yet another would be to use the Chicago Board of Trade's yield protection contract.
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My focus today, though, is on price risk. The recent changes in farm policy have left farmers more open to price risk than before. Commodity markets are often cyclical and usually unpredictable. There are a number of tools a farmer can use to minimize risk from falling prices. But, a good knowledge of the markets and how market-based instruments can work to fit his needs are necessary. He also needs to know how to get access and utilize those instruments to support his marketing plan.
Price risk management revolves around a marketing plan. The American Bankers Association has an excellent publication which identifies three steps to farm marketing: (1) calculate your break even; (2) make a marketing plan; and (3) execute your marketing plan. In other words, you must know your break even costs and then plan what to do if prices move higher and how to guard against prices moving lower.
When making a marketing plan, a farmer must evaluate the circumstances being faced and what marketing tool will best fit the needs. The spectrum of risk management tools include such items as: storage; futures; options; over-the-counter products like swaps; and a variety of cash transactions that use contracts to lock in a forward price, defer the pricing decision, establish a minimum price, or pegged to the ''basis'' between cash and futures;
Storage allows farmers to market at regular intervals during the year; forward contracts allow farmers to forward price their grain during the summer for delivery later in the year, the only risk then is yield risk. Futures and options provide more flexibility, but require more expertise, too. (There are also over-the-counter products for the sophisticated market user that mimic futures and options.)
As we define risk management, and in particular how to manage price risk, we need to clearly understand what it is not. The goal is to help farmers become more knowledgeable of their marketing choices. The goal is not to turn them into grain traders. Being a grain trader is a full time job of its own. The goal is for a farmer to make disciplined, profitable choices. The goal is not to be in a constant, consuming search for the highest price or to be a speculator.
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Furthermore, not all marketing tools are appropriate for all farmers. The goal is not to get every farmer into the futures market. A position in the futures market can be very risky for the uninitiated. The right tool often depends on circumstances and the producer's knowledge base. Marketing skills in many ways go hand in hand with good management skills.
If better marketing skills mean more profits, how can we help farmers hone those skills?
EXPERIENCES WITH THE RISK MANAGEMENT ALLIANCE
After Congress passed the new farm bill, the National Grain Trade Council felt that, since we had so strongly pushed for reform, we had an obligation to followup and help farmers make the transition to a more market-based world. Since our members include grain exchanges and major grain companies, we felt we were in a good position to provide this kind of assistance.
We have a vested interest in helping farmers to become better marketers. We believe a farmer who is knowledgeable about market choices will be a market user in some fashion and will be a better customer. Our goal was to help farmers become more familiar with the market tools already available to them.
Even though there is general agreement that more education on risk management is needed, there is no consensus on how to best accomplish that goal. It is not even a new or novel idea. Many farm groups, extension specialists, and exchanges have worked for years to provide market education programs. What new can be brought to this mix to make it more successful?
I am a big believer in coalitions. I believe the more people you can bring together behind one goal, the greater your chances for success. With that thought in mind, we organized a private sector Risk Management Alliance to discuss what kind of programs can be utilized to help farmers become better marketers. The American Farm Bureau Federation and USDA's Extension Service played an instrumental role in helping to get this process going.
Representatives from 14 producer groups, agribusiness groups, and government have participated in the Risk Management Alliance. The participants have included representatives from the following organizations:
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American Bankers Association, American Farm Bureau Federation, American Society of Farm Managers and Rural Appraisers, American Soybean Association, Chicago Board of Trade, Commodity Futures Trading Commission, Crop insurance industry Farm Progress Publications, Kansas City Board of Trade, Minneapolis Grain Exchange, National Association of Wheat Growers, National Corn Growers Association, National Grain Trade Council, USDA's Risk Management Agency, USDA's Extension Service
At its initial meeting, the group reached a consensus on the following broad areas: (1) there is a need to help producers to improve their basic risk management decision-making skills; (2) such an effort should be targeted toward the rank-and-file or typical producers; (3) to further this goal the group should strive to form a ''risk management alliance'' that would eventually include many other interested groups as members; and (4) individual groups, like commodity groups, will continue to conduct their own education effort and the alliance can support those efforts.
The Risk Management Alliance decided its best role was that of a resource or a resource clearinghouse to those many people who will be meeting with farmers to discuss risk management. We discussed the need: for an inventory of available resources; to assess the marketing skills of farmers; and to encourage USDA to organize a ''train the trainer'' event whose audience would include crop insurance agents, introducing brokers, extension agents, and local elevator operators.
It is important, also, to state what we decided not to do. We wanted to avoid the temptation to re-invent the wheel. There is already much good information available on risk management and marketing choices. The most important job is to identify the good information that is out there and decide upon a strategy to pursue in making that information generally available in an understandable form.
Many of the ideas identified by the Risk Management Alliance have been taken up by USDA's Risk Management Agency in its education effort. In fact, many of the groups who have participated in the Alliance are also part of a group providing advice to the Risk Management Agency on how to structure its educational program.
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EXAMPLES OF SUCCESSFUL PROGRAMS
There are several examples of good market education programs already in place at the state level. There are four in particular of which I am aware that I think are noteworthy.
(1) Texas A&M's Master Marketer. This program combines three successful concepts: intensive education, the master volunteer, and marketing clubs. Producers are trained in advanced risk management and marketing techniques through an intensive 64-hour program and then extend that knowledge to other producers through marketing clubs. Enrollment is usually limited to about 65 people. Tuition is $250 per person. The program organizers believe the course can help farmers increase their marketing returns by five percent. So far about 20 clubs have been formed from the first class.
(2) National Cotton Council. The National Cotton Council has a sophisticated program available to its members that enables continuously updated information to be downloaded from the association's web site. Further information about this program is available from the National Cotton Council.
(3) Illinois Farm Bureau. The Illinois Farm Bureau offers their members a package with 14 different alternatives to choose from to improve their skills in various aspects of risk management. About 1,400 Illinois farmers took part in these programs last year.
The centerpiece is the Agricultural Business College. This financial management program better prepares farmers to assess operational and management efficiency, develop a strategic plan, and generate the biggest return on investments. The program is offered through an alliance of state organizations, including the farm bureau, pork producers, corn growers, milk producers, speciality growers, soybean farmers, and farm credit services.
(4) Managing Change in Agriculture: a group of extension specialists from mid-western land grant colleges have proposed an ambitious effort to disseminate information to agriculture. The objective of the effort is to have a multi-institutional, multi-disciplinary team design, deliver, and evaluate a regional education program focusing on the dynamics of the world and its affects on agriculture. The effort would use innovative transmission and interactive risk management systems, dissemination to agribusiness and country agents through DTN, Farm-Dayta, Internet, CD-ROMS, and computer programs. The program would include the following topics:
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(1) Changes in U.S. and world economic and climatic conditions that will influence the risk and profitability of the U.S. grain industry.
(2) Risks and benefits of different cash and futures marketing choices.
(3) Rules or guidelines for entering into cash grain marketing contracts.
(4) Directors' role, responsibilities, liabilities, and risks.
(5) Grain accounting and financial risk management issues.
(6) Process and methods for developing sound marketing plans.
(7) Present profit and risk outcomes for simulations that cover a 15-year time period.
The ''Managing Change in Agriculture'' initiative I have described is now in the formulation stage. The organizers hope the program will be ready to unveil nationally the first week of June.
RECOMMENDATIONS
Based on my experience with the Risk Management Alliance, I have several recommendations to share with the subcommittee.
(1) Be clear in the focus for the risk management effort. The target audience is not that top 5 percent of farmers who already possess good marketing skills, nor is it likely to be the small share of farmers with very limited resources that have special needs of their own. The target audience is the two-thirds who admit their skills are shaky.
(2) A successful program must have strong local roots. It is important to have a central point that provides information and assistance, but the key to success is delivering objective information at the local level.
(3) Risk management education needs more emphasis from USDA at a higher level. Secretary Glickman has mentioned the importance of risk management in a number of speeches. I think the subject is worth making a focal point for his next two years in office.
(4) I am not convinced that the Risk Management Agency at USDA is the right place for this education effort. The Risk Management Agency, just a short time ago, was known as the Federal Crop Insurance Corporation. Crop insurance remains their main priority. Conceiving and operating a successful risk management education program requires a much broader view, ranging from the use of basic market information, to farm financial management, to various marketing contracts. As a practical matter, the Risk Management Agency remains strapped for personnel and has its hands full with its crop insurance responsibilities. They have tried hard under the circumstances, but it seems difficult for them to move in a timely manner.
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Earlier in my testimony I pointed out that there is a wealth of information in the public sector that deals with this subject, and that there are some excellent examples of successful programs that work. The question that remains is what role do you want the Risk Management Agency to play? Should they be spending their time rewriting risk management curricula, or should they be given the authority to locate and contract with the private sector for the best of the materials that are in existence. I believe the latter is the better choice. It makes little sense for a Federal agency to spend time developing new curricula on basic risk management strategies, or writing new materials when all of the experts agree that there is a wealth of information available. The USDA has a long and proud tradition of distributing information--their great strength is the ability to go out to their constituents with information. I recommend that the USDA leverage their vast distribution network and employ it to get the best, most current information out to their constituents.
Perhaps the effort should be more focused on the private sector. There is no reason the Federal Government could not support a well-organized, broad based coalition from the private sector.
(5) Regardless of where leadership for the program is based, the effort needs to get moving. I realize these things do take time and I am pleased to see the Risk Management Agency now moving ahead to develop programs and to employ someone who can focus on the educational effort.
(6) I am convinced that the best way to develop a successful national market education program is to take a look at what has worked on the state or local level and use that as a model for a nationwide program.
I personally am very impressed by the program in place in Illinois. It offers a menu of educational opportunities a farmer can choose from. It brings together a cross-section of state farm groups as sponsors. It is a formula that can also draw on the availability of state extension specialists and other local experts.
I would like to see USDA offer a grant program that would encourage the formation of state or private alliances to offer similar programs.
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The ''Managing Change in Agriculture'' initiative by the land grant marketing specialists is also noteworthy and could be a program to build upon.
CONCLUSION
In conclusion, Mr. Chairman, I think risk management is one of the most important issues for production agriculture. Those farmers with stronger risk management skills are going to be more profitable and better positioned to succeed over the long-term. There is an appropriate role for government to play in encouraging risk management education programs.
I think USDA needs to guard against re-inventing the wheel. There is much good information and several successful programs to look to as a guide. It is important that those who take a leadership role at USDA on the risk management issue have a broad perspective. A solid economic background with a strong understanding of marketing would be an asset.
I think the best approach to move ahead with a risk management program would be to identify an on-going, successful program and use it as a model for others.
TESTIMONY OF BILL NORTHEY, CHAIRMAN, NATIONAL CORN GROWERS ASSOCIATION
Thank you Chairman Ewing. My name is Bill Northey. I farm near Spirit Lake, Iowa and serve as the chairman of the board of the National Corn Growers Association (NCGA). The NCGA represents almost 30,000 members in 25 affiliated States. We appreciate the opportunity to testify today.
The Risk Management Education provision of the Federal Agriculture Improvement and Reform Act of 1996 directs the Secretary of Agriculture in consultation with the Commodity Futures Trading Commission (CFTC) to provide appropriate education in management of the financial risks inherent in the production and marketing of agricultural commodities. We would suggest that the appropriate Federal role is to make sure that crop insurance products meet producers' needs and that markets operate fairly and efficiently.
Agricultural producers generally understand the risks associated with their businesses. Those who desire information about the various tools available to manage financial risk typically turn to the private sector providers for information. Crop insurance and futures products are delivered by the private sector--local crop insurance agents, and brokers or country elevators--which should inform and educate producers.
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The Risk Management Agency (RMA) has been assigned the task of developing the education effort for the Secretary. It is appropriate that the RMA lead the effort within USDA, but their failure to timely approve new products indicates a serious lack of understanding about the needs of producers in the real world. Information about the cost of alternative crop insurance products was not available until days before the sales closing deadline. Producers had little opportunity to compare products and make informed decisions.
Crop insurance has evolved from straightforward yield loss coverage to a variety of products designed to meet very different risk management needs. This spring corn producers in most States were able to purchase Multiple Peril Crop Insurance (MPCI), MPCI plus private enhancements, or Group Risk Protection. In select counties, producers could purchase Income Protection, and, in a limited number of States, Crop Revenue Coverage. In my home state, producers could obtain Revenue Assurance. In every state, producers were able to obtain Catastrophic insurance by paying a $50 administrative fee. Producers were also permitted to self insure without jeopardizing Agricultural Market Transition Act (AMTA) payments provided they signed a waiver of disaster assistance. All of these options suggest an important role for education and information, but the Risk Management Agency failed to get the information to the front-line delivery system early enough for producers to evaluate options. The resultant frustration of producers and crop insurance agents should provide the first important lesson to the Risk Management Agency--make information available in a timely manner.
Producers need time to understand how crop insurance products work and whether a new product can better meet their risk management needs. Ideally, alternative crop insurance products will be approved early. Agricultural associations, extension, and the farm press will have time to help producers understand how new products work and will provide useful information to help producers decide between alternatives. Agents will have rating software early to enable producers to compare the cost of the various alternatives.
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The second focus of the RMA should be to concentrate efforts on improving the crop insurance products. When crop insurance provides value--effective risk management at an affordable price, producers will seek information and will purchase coverage. Crop insurance premium rates must realistically reflect the risk over time. The Risk Management Agency (RMA) has failed to respond to changing production conditions and improved varieties. When insurance rates are too high, producers will make a prudent financial decision to self insure. The RMA must develop procedures to periodically review insurance rates to reflect changes in production expectations.
With respect to risk management education, the Commodity Futures Trading Commission (CFTC) should facilitate a better understanding of how futures markets can be used by producers as part of a risk management strategy to achieve better overall returns. However, the most important role for the CFTC is to assure the integrity of the price discovery function of futures markets. Quite simply, some producers distrust the markets, and must be convinced that futures markets are free of manipulation and fraud, before they will ever participate in the markets. Efforts to limit the regulatory responsibility of the CFTC either through deregulation of the markets or by asking the regulators to promote the use of the markets, will only lead to greater producer distrust.
Ultimately, each producer must develop and implement a sound financial risk management strategy tailored to their individual needs. The Risk Management Agency can best assist by assuring that a variety of affordable crop insurance products are available, and that producers have the information about their options in time to make educated decisions. The Commodity Futures Trading Commission can assure confidence in the integrity of markets.
Thank you for taking the time to consider the views of the National Corn Growers Association on these issues.
TESTIMONY GIVEN OF ROBERT W. PARKERSON, NATIONAL CROP INSURANCE SERVICES
Mr. Chairman, my name is Robert W. Parkerson. I serve as president of National Crop Insurance Services, on whose behalf my testimony is presented today. We appreciate the opportunity to present this testimony before the subcommittee.
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NATIONAL CROP INSURANCE SERVICES
National Crop Insurance Services (NCIS) is a nonprofit trade association responsible for serving the needs of every crop insurance company that actively participates in the Federal crop insurance program. NCIS member companies write more than $1.8 billion in MPCI premium with liability totaling nearly $26 billion representing approximately 1.6 million policies earning premium. In addition to the Federal program, NCIS member companies write approximately $600 million in private hail insurance.
Companies writing crop insurance require several types of crop risk information in order to properly offer fair and equitable coverage to the American farmer. Highly technical crop risk information is required so that the industry may develop: (1) fair underwriting guidelines so that crop risks may be evaluated prior to executing an insurance contract; (2) accurate loss adjustment procedures to appraise crop damage at any stage of plant growth; (3) appropriate premium and insurance policy terms and conditions specific to each crop and location; and (4) professional educational resources for the training of agents and adjusters. NCIS provides this type of information and services for the crop insurance industry through joint efforts between NCIS, its member companies and major agricultural universities.
NCIS assists the crop insurance industry to meet the regulatory requirements of the individual States. This is accomplished by filing the appropriate material and statistical information with the respective State Insurance Departments. NCIS also serves as liaison between the USDA Risk Management Agency and the individual state insurance departments through active participation with the National Association of Insurance Commissioners.
Policy direction and overall responsibility for NCIS affairs rests in our Board of Directors. Within the NCIS organizational structure, this is accomplished through a series of technical standing committees which tap the reservoir of talent and skill in our membership. These committees deal with a diverse set of subject matter including loss adjustment procedures, statistical data gathering, industry public relations, and industry legal issues. NCIS utilizes a regional/state committee structure which sponsors various loss adjuster educational activities throughout the year. The regional committees also actively participate in the development of the industry wide crop research agenda.
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NCIS has a diverse, well-trained professional and technical staff. Staff members hold advance degrees in Agricultural Economics, Statistics, Soil Chemistry, Botany, Plant Science, Actuarial Science, Computer Science, Computer Engineering, Education and Mathematics. NCIS emphasizes ongoing educational and technical training to continually increase staff expertise in areas of concern to the agricultural industry which it serves.
INDUSTRY AND NCIS EDUCATION AND PUBLICITY PRODUCTS
In the fall of 1995, the Risk Management Agency drastically reduced its promotional budget. The membership of NCIS understood that promoting the importance of crop insurance was vital to maintaining and increasing the number of producers who obtain adequate crop insurance protection. The NCIS Board of Directors allocated additional budget dollars to fund educational and promotional campaigns conducted by NCIS, on behalf of its members. Since the fall of 1995, NCIS has spent over $300,000 developing informational and educational brochures and writing press releases and magazine articles on upcoming sales closing deadlines and on the benefits and importance of using crop insurance as part of a farmer's risk management strategy. This funding is in addition to ongoing individual and company educational and program promotion. Some of the products supported by industry and developed by NCIS include:
GUIDE TO CROP INSURANCE Historically, this educational brochure was developed by the Federal Government but due to budget cuts is now produced by NCIS. In some years during the government's production of the Guide, it was unavailable until well after the sales closing deadline rendering it useless as an educational tool. NCIS began development of a new version of the Guide in December of 1995 and it was available for distribution by January of 1996. In July of 1996, version two was developed and distributed. NCIS and its member companies developed and printed 1.2 million copies of the two versions. Over 1 million have been distributed to date, including over 200,000 copies provided to the Farm Services Agency and 35,000 distributed through the Extension Service. NCIS plans to continue updating this valuable source of risk management information in the years to come.
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PUBLICITY CAMPAIGNS Additional funding has been allocated since the fall of 1995 to write and distribute press releases and magazine articles to major farm publications, 300 local newspapers, and 2,000 radio stations. Many of the articles and releases focus on themes such as: upcoming important deadlines, extension of the sign-up for catastrophic crop insurance, the value of crop insurance in helping producers recover from the effects of Hurricane Bertha (including producer testimonies), the importance of following the Secretary of Agriculture's advise to buy additional crop insurance protection, how to prepare for a meeting with a local crop insurance agent, and the need for increased knowledge on all aspects of risk management.
CROP INSURANCE TODAY MAGAZINE This quarterly publication is the only one of its kind for the crop insurance industry. Over the last four years it has become a vital source of information for insurance companies and their employees, agents, congressmen and state insurance and agriculture departments. Many articles focus on changes and/or improvements in the MPCI program and aspects of farming and risk management. In addition to NCIS staff, recent articles have been authored by university professors, commodity brokers, Risk Management Agency staff, and ERS economists.
EXTENSION SERVICE NCIS supports and participates in Extension Service educational activities at the national, state, and local levels. These activities include providing materials on crop insurance products, cosponsoring educational meetings, providing technical reviews of extension materials, inviting extension specialists to participate in NCIS sponsored activities, and providing training to interested extension specialists. NCIS plans to continue to partner with the Extension Service in providing risk management education to farmers.
The private insurance companies also spend hundreds of thousands of dollars on their own to inform and educate farmers on the benefits of crop insurance and the value in seeing a private crop insurance agent. One company alone touched over 5 million readers/subscribers, distributed over 200,000 pieces of educational material, attended 200 farm trade shows and was interviewed by over 300 different newspapers and magazines for feature stories.
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EDUCATIONAL NEEDS
The topic of risk management is not new. Volumes have been published and thousands of farmer meetings held addressing this important topic. What is new is the environment in which the farmer must make decisions in the absence of the traditional commodity programs and ad hoc disaster assistance. Adverse weather is a primary concern of farmers because it has the potential to affect every crop in every location. Changing commodity prices and uncertain input costs are also of great concern. In addition to the weather, commodities are subject to price fluctuations induced by other changes in the marketplace (supply and demand). It is important for farmers to have a basic understanding of the impact that changes in new technologies, consumer preferences, industrial products, and macroeconomics policies have on the farm. These factors affect the farm business because they ultimately impact prices received at the market and/or the cost of production.
One major benefit of the FAIR Act is the flexibility provided farmers in charting their own future. No longer are they bound by commodity programs, but are free to produce in a fashion that makes the most economic sense to them. Timely and reliable risk management information is an increasing necessity because farmers make planting decisions based primarily on national and international market signals and not on Federal commodity program requirements, as in the past. Complicating this task is the fact that there appears to be ''information overload''. Certainly no shortage of trade magazines, newspapers, electronic data services, consultants, et cetera, exist; all offering information to farmers. The key is to sort out which sources are the best for any given farmer, and how to synthesize the salient points into an understandable message.
The crop insurance delivery system is currently the critical element in helping the farmer with his/her risk management decisions. The crop insurance industry is an important participant in risk management education because virtually every producer meets individually with an insurance agent to discuss their risk management needs. These meetings simply do not take place in an office or formal setting. Instead, these meetings are held at the farmer's kitchen table or on the tailgate of the pickup. The crop insurance agent delivery system is best suited to meet the needs of the farmer under these conditions. Nationwide, there are approximately 26,000 licensed crop insurance agents to meet one-on-one with the farmer. These agents are equipped with the technical expertise needed to explain all the insurance options available to a farmer to help protect his/her income. The agent is available to meet the client on the client's timetable. It is in these one-on-one personal discussions where the farmer explains his needs and the professional agent has the opportunity to review with the farmer how various tools (primary crop insurance) can be used to meet those needs.
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EDUCATION MODEL
Generally, the most effective learning takes place at the local level with hands-on participation, using real farm level data and examples. There is less value in general information in a structured setting, with little opportunity for individual input. We envision the greatest success coming from an educational program that is delivered to the producer at a level and location most useful and convenient to him/her. Because resources are limited, initiatives that leverage these resources should be given priority. In our opinion, this can best be accomplished by strengthening the existing agent delivery system which is already being supported by NCIS member companies who represent all current MPCI carriers in the industry.
We propose that a meaningful percentage of the risk management education budget be allocated to the crop insurance industry. These funds would be provided to NCIS on behalf of its membership to support risk management education efforts focused on providing meaningful producer level education through the agent delivery system. NCIS and its membership would be responsible to oversee the content and quality of these educational efforts.
Our approach will not only leverage resources, but will channel limited resources to the most effective teaching situation--one-on-one discussions between professionals and growers. This would reduce the Federal workload and achieve Congress and the Administration's efforts to ''reinvent government'' to a more efficient and workable institution.
STATEMENT OF DENNIS COLLINS, CHICAGO BOARD OF TRADE
Good morning Mr. Chairman and members of the committee. I am Dennis Collins, Managing Director of the Agricultural Markets Group of the Chicago Board of Trade (CBOT) and I am pleased to be here today representing the almost 4,000 members of the Chicago Board of Trade.
Our exchange, with its deep roots in agriculture, has played an active and comprehensive role in developing the marketing skills of American farmers for many decades. This interest is based on recognition that producers use our markets, directly or indirectly, and can become better marketers of their products through knowledge of, and use of, different marketing techniques. In today's age of instantaneous information and highly competitive markets, effective marketing is the key to the success of American producers.
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With the enactment of the Federal Agriculture Improvement and Reform Act of 1996, producers face major change in the way they operate--changes that offer significant opportunity. Full realization of that opportunity, however, is dependent upon producers' abilities to make timely and prudent decisions to market their production.
Our decades of experience have shown that successfully teaching marketing skills to producers is best accomplished by a stepped approach, the first of which is inspiring a practical awareness and understanding of the price risks producers face within the context of global agricultural markets.
It is from this foundation that the producer must recognize the need for and commitment to building a formal marketing plan to manage the two major risks they face: price and yield risks. While seemingly obvious, this is often the most arduous of all the steps to accomplish.
Only when a producer is committed to developing a marketing plan can risk management alternatives be introduced in a meaningful manner. Indeed, our emphasis in education is on futures and options, but we readily acknowledge the importance of, and use of, various cash market alternatives and their place in the repertoire of risk management tools.
The first step in our array of programs and materials is motivational; not to teach producers how to develop a plan or how to use futures, but simply to sell the concept of marketing. Our primary tool is a video, Taking Control of Your Future, that features producers discussing in their own words how having a formal marketing plan has benefitted their particular operations. We used farmers to convey the necessity of developing a marketing plan because one's peers are often the most credible source for information. This is particularly true for producers. The CBOT has distributed over 15,500 copies during the past two years at its own cost.
We use producer testimony as a persuasion tool throughout educational literature we produce. This literature is divided into two modules ''core education'' and ''applications.'' (The CBOT's full array of educational materials is published in the CBOT Publications Catalog, of which we distribute approximately 20,000 copies annually.)
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Literature in the core module is aimed at producers with little or no knowledge of markets or how to manage price risks. Core literature teaches the fundamental concepts (e.g., margin, basis, delivery, et cetera) of futures and cash markets that a producer should thoroughly understand before opening a trading account. There are currently four publications in the core module: Introduction to Agricultural Futures; Introduction to Agricultural Options; Understanding Ag Fundamentals: What's in a Price?; and, Understanding Basis.
On the other hand, the applications module assumes user knowledge of market fundamentals and proceeds directly to preparing marketing plans and risk management strategies. There are three publications in this module: Taking Control of Your Future--Workbook 1, which is an introduction to hedging with futures and options; Strategies for Selling Crops with Futures and Options--Workbook 2, a slightly more advanced piece with greater emphasis on the use of options; and Options on Agricultural Futures--A Home Study Course, our most popular piece with 30,000 to 40,000 copies distributed each of the last several years.
Among these pieces, five were new publications produced during the past year as part of our new curriculum designed to respond to the heightened educational needs of producers since the enactment of FAIR. To reiterate, the desired objectives for users of these materials are to first understand the fundamentals of futures and options and, secondly, to apply their knowledge to real marketing situations. For each publication targeting producers, we used producer focus groups to review final manuscripts to ensure we were communicating in content and style acceptable for producers.
However, the best learning experiences still take place in face-to-face instruction such as workshops. In our workshops we follow the same sequence of selling the need for developing a marketing plan, teaching the fundamentals of futures and options, and developing various risk management strategies, including some cash market alternatives.
The CBOT sponsors a series of workshops under the name ''Market Smart'' that are offered both at the exchange and at targeted regional locations. For producers attending the Chicago programs, the exchange subsidizes the cost of room and board to help make the experience available to a broad cross-section of producers. We know from surveys that the Chicago workshops are particularly popular in large part because the producers get to view the markets first-hand and to talk to floor traders about what goes on in the pits.
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This year we expanded our base by adding regional programs in Nebraska, Iowa, and Indiana. Since we cannot take exchange members to the regional programs, we use guest speakers from the local land-grant universities (Robert Wisner from Iowa State; Roger Selley from the University of Nebraska; and Chris Hurt from Purdue).
This year invitations for Market Smart workshops were sent to over 19,000 producers matching a specified demographic profile based primarily on size of operation and location within major corn, wheat, and soybean producing States.
The bulk of the educational programs we do for producers, however, are specifically tailored for groups who request to come to the Board on their own (e.g., marketing clubs and extension groups) or for whom we travel to their location at our own expense. We conduct literally dozens of these special programs each year.
It is no exaggeration to say that producer response this year has been phenomenal. Attendance at each program has been two to three times what it was in past years'up from 50—60 to 150. More importantly, there is a distinct change in the attitude of producers attending these programs as well as those visiting our booth at trade shows. They are demonstrating a genuine desire to learn about our markets and marketing alternatives.
A new educational venture by the CBOT is the development of an interactive educational CD-ROM. The capabilities of CD-ROMs affords us the opportunity to merge the benefits of face-to-face instruction with those of our literature. With this technology we can include virtually all the information contained in our literature and presented at our seminars, plus historical data and personal worksheets, into one interactive medium. As most producers are now very computer literate, we believe this CD will be a effective educational tool. Eventually much of the content also will be added to the CBOT Internet site to expand distribution exponentially.
When complete, a producer using the CD will be able to direct his/her learning according to their personal needs. There will be sections containing high levels of interactivity where the user will have hands-on experience solving problems and making decisions. Other sections will be more passive and instructional. A final section will contain worksheets for producers to create their own marketing plans.
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Another initiative implemented during the past year is the use of DTN as a medium to reach over 100,000 producers who subscribe to this market information resource. Initial screen placements appearing during the latter half of 1996 covered the basic steps of preparing a marketing plan. The current series of screens, that began in January, introduce the fundamentals of various marketing strategies. During the last eight months we have received over 1,500 requests for more information from farmers reading these screens.
In closing, I want to comment about cooperative educational activities. Since last September, the CBOT has been part of a public and private sector joint effort to develop and deliver comprehensive educational programs. Initiated by Bob Peterson, President of the NGTC, this effort has now shifted to the program coordinated by the USDA's Office of Risk Management and is referred to as the Risk Management Education Task Force.
The stated mission of the Task Force is to ''assist producers and agribusinesses in understanding their increased risk exposure and responsibility in the current economic environment; in understanding and making effective use of risk management tools and strategies; and in integrating these strategies in decision making that will enable them to meet business, personal and community goals.''
Mr. Chairman, I think it is fair to say that since the shift to the government coordination, there has been concern among some participants stemming from their desire to be fairly and fully represented in the final product. This concern was to some extent a likely result of bringing together entities that were to a large degree unfamiliar with each others' potential contribution.
A positive outgrowth of this process has been that the participants have achieved a degree of mutual understanding and recognition of areas for cooperation in risk management education. This increased level of understanding does not, however, guarantee a balanced program. That will require the continuing objective dedication of all involved.
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As a member of the Task Force, the CBOT will develop new educational materials during coming months to teach producers how to integrate various new products with traditional marketing tools. This new information, along with our traditional material, will be used in risk management education training sessions to be implemented this fall.
In conclusion, Mr. Chairman, the Chicago Board of Trade's commitment to producer education includes:
Ccreation of new educational curriculum materials that producers can use independently or that can be used by other instructors;
Numerous educational seminars offered across the country;
Investing significant resources in a new interactive educational CD-ROM;
Being active supporters and participants in the Risk Management Education Task Force coordinated by the government agencies in addition to our own ambitious educational activities.
Mr. Chairman, thank you for the opportunity to appear this morning. The Chicago Board of Trade believes in the spirit of Section 192 of the 1996 FAIR Act and is committed to doing all it can to ensure its successful implementation.
TESTIMONY OF NATIONAL INTRODUCING BROKERS ASSOCIATION
Thank you for inviting me to appear before this committee to provide testimony with regard to Section 192, Risk Management Education, of the Federal Agriculture Improvement and Reform (FAIR) Act of 1996. My name is Melinda Schramm, President of MHS Capital Resource, Inc. I am representing the National Introducing Brokers Association, (NIBA), as its Executive Director and Founder. Our organization, established in 1991, represents the interests of Introducing Brokers (IBs), who are the ''field salespersons'' of the futures industry. In addition to nearly 300 IBs, we count 6 futures and options exchanges and 11 futures commission merchants (FCMs) among our members. The Board of Directors consists of 9 active IBs, 3 FCM advisors, a lawyer, an accountant, an exchange advisor and myself. We are dedicated to the growth and perpetuation of Introducing Brokers as professional business people by helping them remain in compliance, up-to-date and competitive. We accomplish this through continuing education, lobbying efforts and communication with others who have an interest in the futures and options industry. We are planning our 6th annual conference to be held in June 1997.
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Risk management education is what the Introducing Broker does for a living. Each and every time an IB presents a trading opportunity to an existing or potential client, a hedger or a speculator, he must present a balanced view of the risk and reward possibilities. An introducing broker who primarily services the farming community will provide his customers with many types of information from a number of sources in order that the IB and the farmer can make informed decisions regarding limiting the risks of the marketing process. The IB and the client discuss previous production numbers and characteristics, marketing goals for this year and forward, along with current marketing tools being used. Those tools include crop insurance, set-aside programs, and commitments of production to cash sales contracts.
It is not unusual for this education process to require months, even years to complete. Often, an IB must demonstrate to the farmer his need for an exchange traded product as part of his total risk management plan, and then develop a strategy that matches the client's needs. Since many IBs live in the same communities as their clients, they may see one another often--sometimes daily. Therefore, their interaction is ongoing. An IB will often visit the farm many times before any futures or options trades are entered. IBs hold workshops or seminars for producers to explain new products or discuss new ways to utilize existing futures and options contracts as a part of a risk management plan. Many of these educational meetings are held at the request of bankers, cooperatives, extension agents, chemical companies, insurance agencies, and others working with the farming community. Much of the written materials comes from exchanges, FCMs, the USDA, or is developed by the IB as part of a publication package, specifically for the needs of the client. Some IBs publish newsletters and/or use the internet as part of their education program. Two of our current NIBA board members regularly present these programs to several thousand farmers each year.
I have taken a portion of my time today to present the foregoing picture so that the members of the subcommittee will understand where Introducing Brokers fit with other risk management education providers, and to briefly describe the methods we currently use to educate farmer/producer clients. When we were asked to be a part of a panel meeting at the request of the Risk Management Agency, U.S. Department of Agriculture, we were pleased and flattered. Futures brokers are a valuable and inseparable part of a risk management education program along with crop insurance salespersons, farm management educators, elevator operators, bankers and trade organizations. In our written materials package, I have included the presentation the NIBA made at the November 20, 1996, meeting.
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It was decided that a small ''steering group'' would be organized which would be responsible for: (1) further identifying participants in the education process; (2) developing ideas for ''getting our message out'' to our clients; and, (3) generally creating an action plan for 1997. When we left that meeting, we were acutely aware that because of certain closing dates present in the crop insurance industry, we would need to take action as quickly as possible.
On December 17, 1996, I attended by teleconference, a second meeting of this group. This meeting concerned itself with the proposed contents of a trifold brochure, a poster and inserts into newsletters which would briefly explain risk management products and include phone numbers, addresses, et cetera, of the organizations providing specific education with regard to those products. Additionally, the NIBA suggested that a one-page fax be developed to include the above information, and be distributed to all the participants in the education process for refaxing to their respective memberships. The National Futures Association suggested this fax be in the form of a press release.
On December 20, 1996 we received a draft of a document developed in response to our December 17 meeting. The NIBA commented on that document, saying that we believed it to be too long and complex. Additionally, a document of that size could not easily be faxed to the members of the various participant organizations without substantial expense. We also included in our comments, suggestions for panel-type discussions to be held throughout the producing regions. These panels would be made up of representatives of all risk management areas, and would be educational only in nature--no solicitation for business from any organization could take place.
In January 1997 the National Crop Insurance Service in Kansas City, MO, asked me if I would like to contribute an article to their trade magazine. I did. It explained who IBs were, what we do, and how we could work together with crop insurance salespeople to meet the mandate of section 192. The NIBA's phone number was referenced in the article. Since it's publication, I have referred several insurance professionals to IBs near them to discuss how futures and crop insurance work together to limit risks of marketing.
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The NIBA is eager to cooperate with other risk management professionals to develop, produce and present education to our clients. Most IBs are already providing this education as we have described above. IBs are willing to share this information. We suggest the following:
Initial material be developed by the Risk Management Agency that explains the need to educate to the professionals involved in the process. These materials should be simple, short and easy to distribute. Contact numbers of members at each of the organizations involved must be included so that these members will be encouraged to communicate with one another. The materials can be developed with input from one or two representatives from each area and should keep in mind that the purpose of this piece is to provide information about the education process, not to provide the education.
Each professional participant in the education process does not have to become an expert on all areas of risk management. For example, a crop insurance salesperson does not need to learn the strategies of placing futures or options transactions. However, he must know how his area of expertise fits with the futures brokers' and enhances the total plan. Further, he should know how to contact a futures broker, a banker, an elevator operator--all the participants in good risk management--so that they can work together.
More sophisticated written materials, perhaps even a video tape, need to be developed and incorporated into a sort of ''Risk Manager's Kit'' to aid the professionals in the presentation of this education to clients. This material would be uniform, meet the requirements of section 192 and could be used in client workshops, or one-on-one presentations. A conference might be held so that professionals could learn how to use and effectively present this information.
A time-table must be established with target dates set in order to accomplish each step of the task of developing an education program that will meet the mandate of Section 192.
Thank you Mr. Ewing and the members of the subcommittee for allowing the National Introducing Brokers Association and myself to comment on this very important section of the Federal Agriculture Improvement and Reform Act. We are pleased to be a part of the ongoing education process.
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LETTER TO SEN. BOB GRAHAM FROM CRAIG WHEELING, CEO, BROOKS TROPICALS
Dear Senator Graham:
Representatives of essentially our entire local agricultural community met with representatives of our Congressional delegation and a representative from the Governor's Committee on Sustainable Agriculture at the Dade County Farm Bureau on March 21, 1997. We believe that all were convinced that there are serious deficiencies both in the current crop insurance policies and in the administration thereof.
I have been asked, on behalf of the local agricultural community, to write this letter to communicate the sense of the meeting directly to you. As part of the communication we are enclosing herewith the attendance list at the meeting, a chronology, and to suggested letters. One of the two letters relates the need for the long term solution of a comprehensive revision of the policies. The other letter relates to the near-term need for forthright definitive negotiation (at a national, not regional, level) that would make the wait for a comprehensive revision more tolerable.
We no longer are eligible for disaster grants. We now sit with a fruit tree policy which is essentially worthless, a row crop policy which is seriously flawed, and a nursery policy for which vital recommendations have been ignored. We are in fear of what will happen if a hurricane strikes this fall, and both the policies and the operational procedures remain unchanged. We desperately need you assistance in this matter. We would greatly appreciate having the Florida delegation, perhaps jointly with the chairmen of the Senate and House Agriculture Committee, meet with the Secretary of Agriculture to discuss possible solutions to our problems
(Signed)
FOR THE FLORIDA FRUIT GROWERS
Craig Wheeling, CEO, Brooks Tropicals