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REVIEW OF FEDERAL FARM POLICY
WEDNESDAY, MARCH 29, 2000
U.S. House of Representatives,
Committee on Agriculture,
Washington, DC.
The committee met, pursuant to notice, at 10:20 a.m., in room 1300 Longworth Building, Hon. Larry Combest (chairman of the committee) presiding.
Present: Representatives Barrett, Boehner, Ewing, Pombo, Canady, Smith, Lucas of Oklahoma, Hostettler, Chambliss, LaHood, Moran, Schaffer, Thune, Jenkins, Cooksey, Calvert, Gutknecht, Walden, Greg, Simpson, Hayes, Fletcher, Stenholm, Peterson, Dooley, Clayton, Minge, Hilliard, Holden, Bishop, Pomeroy, Baldacci, Berry, McIntyre, Stabenow, Etheridge, Boswell, Phelps, Lucas of Kentucky, Thompson of California, Hill, and Baca.
Staff present: Tom Sell, deputy staff director; Alan Mackey, senior professional staff; Wanda Worsham, chief clerk; Callista Bisek, scheduler/clerk; Howard Conley, minority economist, Danelle Farmer, minority consultant; and Anne Simmons, minority consultant.
OPENING STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
The CHAIRMAN. Good morning. We will now begin the hearing on the review of Federal farm policy. We're holding this hearing to complement the field hearings the Agriculture Committee is holding in different regions of the country. We have had a busy week. The committee convened a hearing Monday in Raleigh, NC and we'll move to West Chester, OH on Saturday and Kutztown, PA next Monday.
As I told the group in Raleigh, I think the time that we spend on this endeavor has been profitable both for members of the committee and for those in the audience.
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Today we will hear from seven witnesses who represent some of agriculture's input sector—the folks who supply the resources that farmers and ranchers use to produce a crop. In our field hearings we have heard from current producers their opinions on what is and wasn't isn't working with Federal farm policy. We'll ask those same questions here today.
I'll also say that I think all of the members at this table know that we have a problem in agriculture. What's more, we all fundamentally believe that it is in the best interest of this Nation to maintain and foster a diverse and strong agricultural sector. And so the question we want to answer today is how do we best accomplish that goal.
I look forward to the testimony of our witnesses and again would like to thank you for attending and for being here and participating, and would recognize Mr. Stenholm.
OPENING STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. STENHOLM. Thank you, Mr. Chairman, and I want to thank you for holding another in a series of hearings on farm policy. I've enjoyed the four hearings thus far we have held in the field and look forward to the additional six.
One thing has become very clear in the hours of testimony that we've heard to date: Congress needs to consider a policy that provides a permanent protection, a countercyclical, a safety net, rather than the continued year-by-year income assistance that we have been doing. The year-by-year assistance, though, is very much appreciated.
It has been 4 years since Congress passed the Federal Agriculture Improvement and Freedom to Farm Act, and it is painfully clear that complete dependence on world markets has failed to provide U.S. producers with the incomes promised by the authors of Freedom to Farm legislation. For 2 years running, Congress has found it necessary to provide emergency income assistance, and the House-passed budget provides $6 billion for the 2000 crop year. These actions indicate that the 1996 farm bill does not provide an adequate safety net and that Congress needs to develop a long-term policy that provides comprehensive protection.
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Under Freedom to Farm, planning flexibility in the absence of acreage controls have allowed producers to meet market demands and be a competitive presence in world markets. These positive steps should continue. Producers need assistance from year to year to meet the challenges posed by weather and changes in price, however, and Freedom to Farm fails to provide this.
In addition to using domestic policies to provide an adequate safety net for our farmers and ranchers, we must fund and support in a better way exports. We have heard from 75 witnesses, and there is tremendous agreement that Congress should approve normal trade relations for China as expeditiously as possible. Comprehensive sanctions reform, including Cuba, should also be enacted during this session.
I look forward to hearing today from the industries that serve our farmers and ranchers as to what they perceive to be the problems facing rural America as well as possible solutions.
The CHAIRMAN. I thank the gentleman. Any other statements that any M embers may wish to offer, without objection, will certainly be made a part of the record.
[The prepared statements of Mrs. Chenoweth-Hage and Mr. Bishop follow:]
PREPARED STATEMENT OF HON. HELEN CHENOWETH-HAGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IDAHO
Mr. Chairman, thank you. I appreciate the committee for holding this hearing to review Federal farm policy. This hearing is very welcomed, and I thank the witnesses for being here today.
First, Mr. Chairman, I commend your dedication to America's farmers and ranchers. Your agreeing to hold farm policy hearings in Washington DC and throughout the country further demonstrates your willingness to ensure producers receive the help they need to get them through to better times. I want to especially thank you for scheduling a field hearing in Boise, ID on May 12. This hearing will be an excellent opportunity for farmers and ranchers in my district, as well as in the Pacific Northwest to share with you realistic and effective solutions to improve the farm economy.
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As you are aware, Mr. Chairman, the Freedom to Farm bill (now Public Law 104–127) promised benefits to rural America. This is especially true since it released the agricultural community from the planting and cropland set aside requirements of earlier price support and supply management policies. As one of the authors of the Freedom to Farm bill, I firmly believe Congress should stay the course and not change the basic, market oriented premise of the measure.
Mr. Chairman, while some would like to blame depressed prices and cash flow difficulties on the Freedom to Farm bill, I do not want to focus on that issue today. Rather, we must continue to equip rural America with the tools they need to gain access to foreign markets. Even further, we must ensure that farmers and ranchers have the tools to deal with the ''good'' and ''bad'' times often associated with the agricultural industry.
I'm absolutely certain that America's producers can compete effectively in the marketplace so long as there is economic fairness and equal opportunity for family farmers. In Idaho, the agricultural and food sectors support approximately 12,700 jobs. Furthermore, Idaho's exports are estimated at $833 million in 1998. The simple fact is, Mr. Chairman, Idaho's farmers and ranchers, as well as the American producer are very productive and efficient.
However, Mr. Chairman, I believe there are concrete steps we can take to assist farmers immediately, and save the traditional family farm. For instance, the Congress should focus on: (1) passage of mandatory country-of-origin labeling for meat (H.R. 1144); (2) common sense trade reform; (3) agribusiness consolidation reform, especially in the meat and grain industries; (4) real sanctions reform; (5) regulatory relief, including passage of H.R. 3552, the Food Equality Detection Act, and the fair implementation of the Food Quality Protection Act; and (6) meaningful tax relief. These initiatives are just a few examples that will enable American farmers and ranchers to compete more effectively in the world marketplace.
I look forward to working with my colleagues in the Congress and administration, as well as those individuals in rural communities nationwide to achieve positive results again for agriculture.
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Let me conclude by pointing out the very powerful words of Thomas Jefferson. President Jefferson said, and I quote: ''Those who labor in the Earth are the chosen people of God, if ever He had a chosen people, whose breasts He has made His peculiar deposit for substantial and genuine virtue.''
Mr. Chairman, these are very important words to remember as the Congress works to ensure that American farmers and ranchers remain competitive in the 21st century.
PREPARED STATEMENT OF HON. SANFORD D. BISHOP, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA
I commend Chairman Combest and Ranking Member Stenholm for holding this hearing to review Federal farm policy and I welcome the statements by the panelists here today.
Input industries in agriculture are the building blocks upon which our entire food system is built. Farmers depend on affordable and effective resources to grow their crops and raise their livestock. This includes affordable credit to help finance farm operations and a reliable source of inputs to bring their production to harvest and the marketplace.
As low farm prices persist, producers are facing increasing financial difficulties. There are real concerns about what the future holds for individual farmers and American agriculture in general.
When farmers experience low prices and low profitability, the entire agriculture sector suffers. That's why farmers and the businesses who serve them need to agree on solutions to bring more profitability to production agriculture.
Again, I thank the chairman for holding today's hearing about the impact of current and future farm policy on the input sector.
The CHAIRMAN. The Chair would call our first and only panel of witnesses. Mr. Jay Penick, president and the chief executive officer, Northwest Farm Credit Services, Spokane, WA, on behalf of the Farm Credit Council. Mr. Terry Hague, chief executive officer of the Farmers Exchange Bank, Cherokee, OK, on behalf of American Bankers Association. Mr. James Caspary, president, First National Bank of Clifton, Clifton, IL, and chairman of the Independent Community Bankers of America. Mr. Ted Glaub, president of American Society of Farm Managers & Rural Appraisers of Jonesboro, AR. Mr. Dean Urmston, executive vice-president, American Seed Trade Association in Washington, DC; Mr. Jay Vroom, president of American Crop Protection Association, Washington, DC; and Dr. James Holt, agricultural economist, McGuiness, Norris, and Williams, on behalf of the National Council of Agricultural Employers in Washington, DC.
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Gentlemen, thank you all very much for attending. Mr. Penick, we will start with you and just go down the table. Please proceed.
STATEMENT OF JAY PENICK, PRESIDENT AND CEO, NORTHWEST FARM CREDIT SERVICES, ON BEHALF OF THE FARM CREDIT COUNCIL
Mr. PENICK. I would like to thank you for the opportunity to appear before the committee today. I am Jay Penick, president and CEO of Northwest Farm Credit Services. I'm an agricultural credit association in the Northwest. We serve the States of Washington, Oregon, Idaho, Montana, and Alaska. We serve 20,000 agricultural producers, fishermen, timbermen, and about $3.5 billion worth of assets owned and serviced.
I also represent the Farm Credit System today, where we have over 180 system entities that are serving agriculture across the country with $70 billion in loan assets as we do.
What I'd like to do, and I've prepared statements that have been presented to the committee, but I would like to basically just have a discussion with you about four topics today that I think are very important in the direction.
If we take a look at the Farm Credit System in relationship to how our customers are doing financially and how they are performing on their loans and being able to service their debts, over the past 2 years, even with the troubled agriculture economy, the associations in the Farm Credit System and their customers have been able to work through the problems. And right now we have very low delinquencies. Our nonaccrual loans, which for those members that would not recognize that term, those would be customers that had very serious credit problems that would need to be restructured or worked with carefully to be able to continue those operations, those are at a low right now at the end of 1999 of 1.36 percent. That would compare with 1.77 percent at the end of 1998, so you see continued improvement.
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If we go back to the troubled times of the 1980's from a comparison standpoint, that percentage would have been 10 percent. Even moving to 1990, that percentage only moves to around 5 percent. So you can see that overall the portfolios of the Farm Credit System are performing very well, even though we are struggling from a price and a commodity standpoint.
Being from the Northwest, we recognize that we have a broad diversity of commodities, and I usually say that we always have one or two that are in trouble, only right now we have eight of 10 that are in trouble in the Northwest like everywhere else.
The second point is is that there's a disconnect between the performance of our portfolio and the current conditions of agriculture. And we recognize that that's because of the fact that the Government has stepped up and supported agriculture the last 2 years, and as a result, those producers have been able to meet their payments, perform as structured in the loan, and have done very well.
If we take a look into the future, though, these farmers are using their equity. What the support that they have been given does is it provides a bridge from basically harvest to the next year's production, and it is not allowing those producers to make long-term plans in being able to keep their operations viable and moving forward. Each year, over the last 3 years as we have worked through our renewal seasons, which we're just now completing in the Northwest and around the system, we see more and more farmers that are unable to cash flow their operations based on the projections of USDA.
So our problems continue, and it will be necessary to support agriculture strongly again through 2000 and probably 2001 until this gets back into a cycle to where some money could be made by these agricultural producers.
And in summing up, the last point that I would like to make is that risk management tools are becoming very important to producers today. Sound insurance programs not only from the protection or the standpoint of weather-related issues but also income-related issues, are becoming more important to us. We also need additional tools for the ability to project into the future as to how producers are going to be able to meet their debt obligations. And the final one is that adequate funds for Government guaranteed programs are very important.
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So with that, Mr. Chairman, I would thank you for your time this morning and hope that those four points are helpful to the committee. Thank you.
[The prepared statement of Mr. Penick appears at the conclusion of the hearing.]
The CHAIRMAN. Mr. Hague, if you don't mind, I believe what we'll do is take a brief recess, go catch this vote, and come right back. And so I would implore Members to return as soon as possible.
[Recess.]
The CHAIRMAN. Thank you for your patience, Mr. Hague. Please proceed.
STATEMENT OF TERRY M. HAGUE, CHIEF EXECUTIVE OFFICER, FARMERS EXCHANGE BANK, ON BEHALF OF AMERICAN BANKERS ASSOCIATION
Mr. HAGUE. Mr. Chairman and members of the committee, I'm pleased to be here on behalf of the American Bankers Association to discuss additional ways that the banking industry can work with Congress and the administration to help ensure a sound, long-term economic footing for American agriculture.
We represent thousands of thousands of bankers who are concerned for their farm and ranch customers. I'm Terry Hague, chief executive officer of Farmers Exchange Bank in Cherokee, OK. I'm a member of the ABA's Agricultural and Rural Bankers Committee and am chairman of the Oklahoma Bankers Association. My bank is a USDA Farm Service Agency Preferred Lender.
I want to thank the chairman and this committee for your support of PLP and recommend that it be continued and expanded. We thank you for your prompt response to the critical needs of farmers and ranchers. By acting swiftly in 1998 and 1999, you helped divert what could have become a disaster.
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I can sum up agriculture's basic need in one word: Certainty. If we knew at the start of each year what we could calculate into our customers' cash flow projections, we would have a greater level of confidence about the credit we're extending, and we would be able to make more credit available in a more timely manner.
Continued low commodity prices and the uncertain nature of future Federal assistance to agriculture have raised banker concerns for their farm customers. In our area, we're seeing more and more voluntary liquidations by farmers. While our banks are sound, economic problems faced by farmers are mounting, and the future is uncertain.
To deal with the uncertainty in agriculture, the ABA report, ''Positioning Agriculture in Rural America for the 21st Century,'' is a result of months of meetings and discussions that we held. I've attached the complete report to my written statement.
Many of the recommendations made in the report have been accomplished and are well underway. For example, both the Senate and House have now passed major Federal crop insurance reforms to meet the criteria for meaningful change that the task force identified. To be successful, crop insurance must have widespread appeal to farmers.
We look forward to prompt reconciliation of the two bills so that our producers will receive the benefit of the new program in time for the 2001 planting season.
I also want to thank you for passing the Gramm-Leach-Bliley Act, which allows my bank to utilize farm and small business loans as collateral for additional advances from the Federal Home Loan Bank, which our report recommended. My bank will be able to provide longer terms and lower interest rates to our farm and small business customers.
When ABA testified before you last year, we predicted that as the farm economy continued to decline, the need for the guaranteed loan programs would increase significantly, and indeed it did. We faced critical funding shortages. We asked for more funding. You responded. And today nearly 50,000 farmers and ranchers receive credit that is guaranteed by the FSA. We urge you to continue to make funding for the FSA guaranteed loan programs a priority.
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We strongly recommend that Congress repeal the 15-year limit on guaranteed loan eligibility. In these very difficult economic times, many of our borrowers, because of the eligibility term limits, are facing ineligibility for guaranteed loans, and they will not be able to get credit. Given the fact that the agriculture sector is expected to be under continued financial stress, borrow term limits should be eliminated.
Last year under your direction Congress corrected a program delivery problem, the 110 percent cash flow rule. This change has been a positive step. Let me be clear that I'm not advocating that banks in FSA enter into irresponsible underwriting practices. However, given the current economic situation of commodity prices near historical lows an exclusive focus on cash flow coverage may be too limited. If the bank has indicated that they will approve and fund the loan, FSA should be allowed to lower the percentage of guarantee if the projected cash flow coverage is less than 100 percent.
Finally, FSA's current system of program delivery reflects a time when there was much direct contact with agricultural borrowers by local offices. This situation has changed and will change even more with PLP. FSA should consider consolidating guaranteed loan servicing to ensure consistency and efficiency of program delivery.
In summary, I hope I've been able to convey to you the substantial commitment the banking industry has to agriculture as well as the concerns that agriculture bankers like me have for our farm and ranch customers. The American Bankers Association created the Center for Agriculture and Rural Banking last fall. We have committed additional resources to agriculture. We're thankful that you have, too.
If the 1980's taught us anything, it's that credit cannot be used as a replacement for earnings and profits. My bank will do everything it can to work with our stressed farm and ranch customers consistent with safe and sound banking practices. Remember, Americans love a challenge. If we work together, we cannot fail.
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[The prepared statement of Mr. Hague appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you very much. Mr. Caspary.
STATEMENT OF JAMES E. CASPARY, PRESIDENT, FIRST NATIONAL BANK OF CLIFTON, AND CHAIRMAN, INDEPENDENT COMMUNITY BANKERS OF AMERICA
Mr. CASPARY. Thank you, Chairman Combest and Congressman Stenholm, for the opportunity to present the views of the Independent Community Bankers of America on the current and future farm policy issues. ICBA applauds your efforts for trying to reach a consensus on future farm policy. We're hopeful that your efforts can lay the groundwork for implementing the types of policies that will adequately assist our farm families. Certainly the hearings are timely, given the financial distress that many farmers face and the recent farm aid packages Congress has enacted. I'm president of the First National Bank of Clifton, Clifton, IL. I'm also the chairman of the ICBA's Ag-Rural America Committee. ICBA was an early and outspoken advocate for farm aid packages over the last couple of years. Beginning in September 1998, we urged Congress to pursue a number of options that included income assistance for producers, crop insurance reform, temporary disaster aid, increased funding for FSA-guaranteed loans, targeted expansion of the CRP, pursuing an aggressive trade agenda, increased food aid donation, funding alternatives for community, and of other positive initiatives.
In January 1999, we sent Congress a comprehensive proposal to strengthen the farm safety net. An updated summary is attached to the end of my statement.
We believe the farm income packages have been extremely important to rural America from the standpoint of preventing an agriculture credit crisis and helping farmers survive a very difficult period.
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Let me briefly make a few recommendations to the committee. First, past a multi-billion dollar farm assistance package once again this year, since the low price and export problems facing our farmers are still present. We appreciate the $6 billion of income assistance included in the House Budget Committee's fiscal year 2001 budget package and are hopeful that this package can be worked out quickly.
Also, consider adding a second year of the farm income payments to this year's farm aid package, providing for 2 years of funding to cover next year as well as this year in case future aid is necessary. This would provide Congress with enough lead time to ensure major progress is made in writing a new farm bill beginning early next year, without the distraction of passing another farm aid assistance package. This would also provide producers and their lenders with more certainty for planning process.
Regarding the next farm bill, we believe that the current farm policy does not provide sufficient aid in times when prices are low. Future farm policies could incorporate policy tools that provide the producer enough income protection that future farm aid packages are unnecessary. Perhaps this might be a combination of tools, including:
Automatically calculated supplemental income payments. And we appreciate Congressman Stenholm's efforts in this area.
A special fund that is part of a multi-year budget that can be drawn down or paid out to producers when prices are low.
A broad access to revenue insurance products, ensuring that farmers have access to adequate revenue insurance tools at affordable rates. There may be a significant number of ideas to consider in this realm, and it could better protect farm income during low price periods while not infringing upon the planning flexibility that the current farm policy allows.
The CRP should be modernized by increasing the size between 40 and 50 million acres targeted to areas where removing more land from production would not hurt local economies. Also, we would give farmers greater flexibility by allowing 3- to 5-year contract options so that they don't have to retire their land for an entire decade.
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Due to the dramatic increase in demand for FSA guaranteed loan funds, we have outlined several suggestions in our written testimony. Over the long run, we need to ensure that farmers aren't prevented from planting their crops due to Government miscalculations over projected demands. Contingency funding would help.
Mr. Chairman, many rural banks across the Nation have witnessed an erosion of their deposit base. It would be especially beneficial for rural community banks to double the current deposit level to $200,000 and index it annually to inflation. The deposit insurance levels were raised in 1980—20 years ago—the longest period in the history of FDIC that we have gone without raising the coverage limit.
Mr. Chairman, we congratulate the committee on moving a crop insurance bill forward and believe that this will be an important step toward improving the farm safety net. Our written statement comments on the need to look at a number of rural issues beyond farm policy to ensure the health of our rural communities.
In fact, Mr. Chairman, the Center for the Study of Rural America, a national center headquartered within a Kansas City Federal bank, will be conducting its first of two conferences on this subject. The first conference is called ''Beyond Agriculture: New Policies for Rural America'' and will be at the end of April in Kansas City.
Also a thought-provoking article on the situation facing many rural communities was printed in yesterday's Washington Post entitled, ''An Earth Without a Future,'' about a small community in the Texas panhandle. And I ask that a copy of this article be included in the hearing record. Perhaps at the time that the next farm bill is written, we can also put in place a number of legislative initiatives that would help us spur entrepreneurship, close the digital divide, keep our rural hospitals, schools, infrastructure and Main Street businesses healthy.
We encourage this committee, which can have such a positive influence on the quality of life of our rural citizens, to also explore how to better answer some of these broader challenges that lie beyond the scope of farm policy.
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Mr. Chairman, we appreciate the committee's efforts. Agriculture is undergoing dramatic changes, and it's important to consider how farmers in our rural communities can best adapt to these changes. We hope efforts will be made to pursue a broad policy mix to benefit our rural economies for many years to come. ICBA and its Rural America Committee stand ready to help you grapple with these issues and meet the challenges that confront us. Thank you for your opportunity to present our views.
[The prepared statement of Mr. Caspary appears at the conclusion of the hearing.]
The CHAIRMAN. Mr. Glaub.
STATEMENT OF TED L. GLAUB, PRESIDENT OF AMERICAN SOCIETY OF FARM MANAGERS & RURAL APPRAISERS OF JONESBORO, AR
Mr. GLAUB. Thank you, sir. My name is Ted Glaub from Jonesboro, AR. I'm the president of the American Society of Farm Managers & Rural Appraisers. Our organization was founded in 1929 and is comprised of professional farm managers and property appraisers. Our farm managers influence the decisions on over 25 million acres of crop land, and our appraisers complete approximately 175,000 appraisals annually.
We estimate that 46 percent of the farm land in America is owned by absentee landowners. We believe that this astounding high percentage of absentee landowners represents a valuable asset to the American agriculture. It provides a source of capital for the farmers, many of whom would not be able to farm or to get a start in farming without it.
Typically, absentee landowners enter into either cash leases or crop share leases with individual farmers. In the case of a crop share lease, the absentee landowners share in both the risks and the rewards of the operation.
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Congress has properly recognized that in the case of the crop share lease, the landowner is and should be eligible for farm program benefits. We urge you to continue this policy. To do otherwise would simply convert many leases to a cash rent, leaving producers in the position of accepting all the risk.
Mr. Chairman, it is neither our role nor our intention to offer suggestions on specific commodity policy. We believe that responsibility is better lodged with the national commodity organizations which do an excellent job representing their membership. Neither is it our intention to catalogue the woes that have beset American agriculture in the recent years. You're too well aware of these situations.
We would, however, like to offer the views of the overall direction of the farm policy to succeed the Agricultural Market Transition Act, or Freedom to Farm. Our landowner clients and the operators with whom we work are well pleased with the flexibility in planning decisions current farm law allows. We feel we are better able to make those decisions of which crops to plant instead of having mandatory acreage set-sides and recommend to you the extent of that farm policy in future farm law.
It makes little sense to us to idle valuable productive farmland that our clients have either bought or leased. Such a policy only telegraphs to our highly-subsidized foreign competition the signal to increase their production of specific crops which we are reducing production of.
By now it should be clear to everyone in Congress and America that the Agricultural Market Transition Act never was or will be a transition to free market for agriculture, as it was described to be when it was passed into law. There is simply no way, Mr. Chairman, to transition to something that does not exist. Our Congress must face the fact that so long as foreign governments subsidize the production and the export of their commodities, there cannot be a free market in agriculture.
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Therefore, so long as America demands a cheap food policy, Americans will have to understand they cannot enjoy that without the Government's assistance to our farmers. Economics dictate that either the Government pays or the consumer pays. And history teaches us the consumer does not want to pay. The obvious conclusion is, like it or not, the Government will have to pay. And we would add parenthetically that you cannot subsidize enough for the consumer's cheap food policy when you limit financial assistance to $30,000 per producer or any other number that has so far been discussed.
We understand the politics of payment limitations, but there is a dire need for an understanding in the Congress and the press of what is needed to subsidize cheap food policy that competes with a more heavily subsidize foreign production base. That's the reason that Secretary Glickman's current proposal is a nonstarter for any sort of rational farm policy for American agriculture.
You recall as well as we do the commitment given to agriculture at the time the 1996 farm bill was passed. Trade was one of the areas Congress promised progress as an offset to phasing out farm programs. Four years later, we have no fast track authority, and we are facing a ridiculously close vote on whether or not we should trade with the largest market in the world, China.
The free market we were supposed to transition into is not something that this country seems to be willing to sit down and vote and talk about. The largest potential market in the world may or may not be granted permanent normal trading relationships with us. Not much comfort, Mr. Chairman, for an American farmer to be asked to transition into.
But if we clear these two hurdles, the job of getting American agriculture into a free market through negotiations is huge. We believe that until we really get tough with the European Union and other highly subsidized agricultural producers, we will never get there. Until they understand and believe our willingness to put the full resources of this country behind achieving a truly free market, they will never enter into the reforms necessary to bring such free market into existence.
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We hope this committee will exert its enormous influence on the Congress and the administration to adopt a get tough policy before you ask us transition to something that does not exist.
Again, we want to thank you for the opportunity to present our views in front of you today. We will be submitting additional notes after the conclusion of this, and we'll be glad to answer questions that you have. Thank you.
[The prepared statement of Mr. Glaub appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you. By the way, all statements in their entirety and any additional information will be made a part of the record.
Mr. Urmston.
STATEMENT OF DEAN URMSTON, EXECUTIVE VICE-PRESIDENT, AMERICAN SEED TRADE ASSOCIATION
Mr. URMSTON. Thank you, Mr. Chairman, members of the committee. My name is Dean Urmston. I'm the executive vice-president for the American Seed Trade Association. It's a pleasure to be here with you this morning.
The American Seed Trade Association is pleased to offer our unique comment and perspective on current and future agricultural policy. Clearly the farm bill offers many opportunities and programs that we believe make our farmers the most productive and efficient in the world. No doubt in your field hearings around the country you've heard and will continue to hear about profitability. For members of the seed industry, the fiscal health of the American farmer is of utmost importance.
As you know, each spring, farmers across the land begin a process that includes more than seed selection. It involves economics, marketing, weather forecasting, and conservation. And these four themes will dominate my remarks this morning.
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On economics, profitability and return on investment are critical to our customer success. Clearly in today's challenging economic environment, seed selection is the first major purchase made each spring. Our success as an industry hinges on the performance of our genetics. And with the advent of biotechnology and related technologies, farmers have more choices than ever before. While biotechnology is but one tool in the arsenal, it is one that complements traditional plant breeding. Whatever the decision, new and improved varieties are abundant, and our ability to provide the choice and selection is proven and unyielding.
It is clear that any new future agricultural policies must include provisions that take into account the necessity for profitability. Fair prices and honest returns drive business everywhere, especially in agriculture. The seed industry remains responsive to our customers and believe that appropriate agricultural policies that complement their proficiency, efficiency and stewardship are crucial. We believe that the investment of seed is an important foundation and that selection affects the livelihood and financial health of our customers. It is up to all of us, though, to find ways to identify and enhance new uses and new markets.
As an example, ASTA strongly believes that ethanol programs offer much promise and opportunity. This potential market of 500 million bushels of corn could significantly complement efforts to improve air quality as well as add up to 35 cents to the value of every bushel of corn and sorghum. The USDA estimates that by 2004, ethanol could replace current additives in gasoline. This action alone could potentially utilize an additional 600 million bushels of corn annually.
On the issue of marketing, ASTA believes that enhanced funding of P.L. 480, the Export Enhancement Program and the Foreign Market Development Act, could all add significant benefit to our farmers. One good example is the ASTA's leadership in gaining the listing of seed to the list of commodities on the P.L. 480 docket. Last spring, the first ever shipment of seed under P.L. 480 was shipped to Russia. This shipment consisted of approximately 15,000 metric tons of seed. Now in 2000, the USDA is considering additional requests.
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ASTA remains steadfast in its belief that identifying and enhancing new markets around the world must be a priority and long-standing objective.
Under conservation stewardship and invasive species, ASTA agrees wholeheartedly with scores of witnesses that have asked for crop insurance reform. Fairness in crop insurance rates should be a priority. We believe some modifications are necessary, and those adjustments will help to ensure continued efficiency and fairness.
Likewise, we believe that loan deficiency payments provide a certain level of counter-cyclical price protection. LDPs are not sufficient in protecting our growers from extreme low prices. We would respectfully suggest that consideration and debate include a combination of crop insurance and supplemental income payment programs.
Turning to conservation, ASTA works hard to provide products for fragile lands and pastures. We endorse the CRP and believe that it should be maintained at maximum enrollment. Each planting season, the seed industry unveils scores of new varieties that promote good stewardship. The seed industry believes strongly that preservation of our resources and our ongoing to commitment to efficient and responsible stewardship benefits all citizens.
On a related note, Mr. Chairman, ASTA has been working hard to coordinate efforts and provide much-needed information to officials at the State, local and Federal levels on invasive species. And while Secretary Glickman has been showcasing efforts to prevent, control and eradicate harmful species like citrus canker and long-horned beetles around the country, ASTA remains concerned that in our collective haste to fix very real problems, some actions could potentially disrupt the availability and limit the use of long-standing and legitimate agricultural products.
On a final note, Mr. Chairman, while much is said and reported on biotechnology and plant breeding in general, I must convey our collective support and commitment to genetic research and varietal development. Farmers count on us, and we have a tremendous obligation and responsibility to ensure that they have an ongoing selection of genetics that will feed a growing world efficiently, responsibly and thoroughly. That is why ASTA has been a strong advocate for increased funding for research in general but also for the important National Plant Germplasm System.
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We feel this is a critical program that needs a doubling of its current budget of $20 million. And without that, we see significant adverse effects to the future of agriculture in the United States.
The American farmer needs help. The seed industry stands ready to provide the genetics and the technical knowhow. We can help with the stewardship; we can help with the selection. All of us, though, are needed in market development, consumer education, and acceptance.
ASTA appreciates your leadership, Mr. Chairman. Hopefully at the end of the day, you and your colleagues will have a better sense on what's right with American agriculture and what we can all do to offer a new idea or approach to make farming more profitable.
We believe by providing excellent genetics and innovative products, American farmers can continue to do what they are known for around the world: Innovators and pioneers that provide food and fiber to a growing world responsibly and efficiently. Thank you, and I'd be pleased to answer questions.
[The prepared statement of Mr. Urmston appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you. Mr. Vroom.
STATEMENT OF JAY J. VROOM, PRESIDENT OF AMERICAN CROP PROTECTION ASSOCIATION
Mr. VROOM. Thank you, Mr. Chairman, for the opportunity to appear today before the full committee to share the perspective of the crop protection industry and biotechnology providers that we represent at ACPA with regard to your review of overall U.S. agriculture policy.
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I will summarize just a couple of highlights out of our written testimony, focusing most of all on the observation that it is absolutely crucial that you and the committee continue to view agriculture policy in its largest context—encompassing the perspective of not only traditional farm bill type of legislation, which you do so well and so capably over the years. While clearly that is important and clearly the primary focus of this committee and its representation of your constituencies, increasingly, we appreciate the fact that you have recognized and embraced many other related policy areas that are crucial both in a direct and indirect way on its impact in terms of overall economic prosperity of the American farmer.
Three examples I'd like to touch on and highlight of such related policy for which this committee either has or shares jurisdiction for legislation and oversight, or certainly can impact and direct agency behavior and also international perspective. The first health and environmental policy like the Food Quality Protection Act. The second has to do with the protection of intellectual property. And the third is the encouragement of more fair and free trade to benefit not only the American farmer, but U.S. agribusiness.
Well, in regard to FQPA, we want to thank you, Mr. Chairman, and Mr. Stenholm and the entire committee for the rigorous oversight of this important law and the concerns that you've expressed both to EPA, USDA and in part as well appropriately, to the Food and Drug Administration, over the possible unintended consequences of certain steps that have been taken over the last 3 years as EPA has undertaken implementation of the Food Quality Protection Act.
We are approaching some new crucial crossroads in FQPA implementation. For instance, the impending conclusion of the review of the OP insecticide reviews at EPA later this year, likely regulatory consequences that will result; the refinement and initial implementation of common mechanism regulatory practice that will likely begin to take shape in calendar year 2000; and steps to use new science policy approaches on key regulatory fronts like new developmental neurotoxicity testing standards and a moving target cancer policy for pesticides are all examples of watershed precedent that are poised to unfold in this an important election year.
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I commend Mr. Pombo and Mr. LaHood specifically for introduction of H.R. 1592 and H.R. 1334, FQPA technical correction legislation that many on this committee have signed onto as co-sponsors. It continues to provide a strong signal we believe to EPA that this committee and many others in the House of Representatives and the Senate are watching closely as regard the interpretation of sound science and the go forward process of implementing important regulation like FQPA.
EPA's Total Maximum Daily Load or TMDL water quality regulation, like FQPA, is another example of environmental and health policy that this committee is giving careful oversight to.
Finally, on intellectual property protection and fair trade, I believe they go hand in hand, especially when it comes to critical issues that are related to both conventional crop protection and new biotech products that are currently deeply troubling to American farmers and to the members of ACPA alike. The most vivid examples are the differences of product availability and cost between U.S., Canada and Argentina as lifted up by recent studies issued by the Government. We all have had a chance to look at those, and I think they very specifically articulate a need for a more level playing field across these major markets so that the American farmer has an opportunity to have a fair shot at competing and also for companies like those that I represent to be able to capture value and be fairly rewarded across the national borders that we serve and in individual economies around the world.
I look forward to responding to your questions and again, thank you for this opportunity to appear.
[The prepared statement of Mr. Vroom appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you. Dr. Holt,
STATEMENT OF JAMES S. HOLT, AGRICULTURAL ECONOMIST, MCGUINESS, NORRIS, AND WILLIAMS, ON BEHALF OF THE NATIONAL COUNCIL OF AGRICULTURAL EMPLOYERS
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Mr. HOLT. Thank you, Mr. Chairman. I appreciate the opportunity to testify today on behalf of the National Council of Agricultural Employers about the status of agricultural labor in the United States and the need to reform the H–2A alien agricultural worker program and adjust the status of the agricultural workforce to legal status.
Mr. Chairman, I want to congratulate you and the committee for including I believe for the first time the subject of agricultural labor in hearings on current and future farm policy. The fact that I can say this I think is surprising, because hired labor is an essential input in farming. Essentially all commercial farms rely to a greater or lesser degree on hiring labor to perform essential production tasks.
In 1997, the Census of Agriculture reported that more than 650,000 farms hired labor directly. Farmers made 3.4 million hires. More than 225,000 farms also hired contract labor. Total expenditure for hired and contract labor in 1997 was $17.8 billion. This was about $1 of every $8 of farm production expenses. Farmers spent more for hired labor than they spent for seed, fertilizer, agricultural chemicals—with no apologies to my colleagues here on the panel—petroleum products, interest or property taxes.
Hired farm wages are also rising rapidly. The average hourly earnings of all U.S. hired farm workers in 1999 was $7.77 an hour. And for nonsupervisory field and livestock production workers, it was $7.22 an hour. Both of these rates were up 21 percent from 5 years earlier. Hired and contract farm labor expenditures increased $2.5 billion between 1992 and 1997, accounting for more than 10 percent of the total increase in farm production expenses.
Mr. Chairman, the U.S. agricultural industry faces not just a labor problem, not just a labor crisis, but an impending labor catastrophe. Just a few days ago, the U.S. Department of Labor issued a report entitled ''A Demographic and Employment Profile of United States Farm Workers'' based on its National Agricultural Worker Survey or NAWS survey. This Government-sponsored survey, believe it or not, asks farm workers whether they are legally authorized to work in the United States. And believe it or not, farm workers answer that question. And in the 1997–98 survey, 52 percent of all seasonal farm workers in the United States admitted in a Government-sponsored survey that they were not legally entitled to work in the United States—52 percent.
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Mr. Chairman, the NAWS survey is the most conservative estimate of the percentage of agricultural workers who are illegal. While the INS and the Social Security Administration check the validity of documents of farm workers, they routinely find 60 to 80 percent of these documents are invalid or do not relate to the person presenting them. The most recent previous NAWS survey covering the 1994–95 period reported 37 percent of U.S. farm workers not authorized to work. This means the percentage of unauthorized workers in the U.S. agricultural workforce increased by 15 percent in just 3 years. That's not surprising, since the 1994 and 1995 survey also reported that more than 70 percent of those persons newly entering the United States hired farm workforce reported that they were unauthorized.
In other words, for all practical purposes, all of the new labor force entrants moving into the agricultural workforce are illegal.
Mr. Chairman, I hasten to point out that farm operators can do little to correct this problem. Virtually hired farm workers have documents that appear reasonably genuine. Under current law, employers may not reject them nor look behind them. Furthermore, there was no one else to do the work. There is no reservoir of willing and qualified legal workers available to replace the upwards of one million illegal aliens currently working in U.S. agriculture.
As many people have testified, most recently and most notably Alan Greenspan, the chairman of the Federal Reserve Board, the United States is facing a labor shortage not only for highly skilled workers but also for lesser skilled workers. Now as a result of increased efforts to enforce our immigrations and the Social Security Administration's efforts to assure the accuracy of Social Security accounts, agricultural employers and the Nation are having to confront the illegal status of the agricultural workforce.
This is not a problem of specific commodities or specific regions, it is a national problem. No farmer's business is secure, no farm lender's investment is secure, no farm supplier's customer base is secure as long as this problem remains unaddressed.
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The H–2A program in the Immigration and Nationality Act, the program Congress enacted to deal with precisely this problem, is a work fallen into a state of paralysis. The H–2A program is administratively cumbersome and imposes uncompetitive requirements on employers. It must be reformed and brought into the 21st century.
In summary, Mr. Chairman, no one can or should defend the status quo. An agricultural industry based on an almost entirely illegal workforce is bad for everybody—farmers, domestic and alien farm workers and the Nation. It is unsustainable. The NCAE believes the national interest is best served by effective immigration control and a workable agricultural worker program that enables the United States to realize its full potential for the production of labor-intensive and other agricultural commodities in a competitive global marketplace and which supports a high level of employment of domestic workers in upstream and downstream jobs while protecting access to jobs and wages and working conditions for domestic farm workers and providing legal status, dignity, and labor force protections to alien farm workers.
Several members of this committee, especially Mr. Pombo, Mr. Bishop and Mr. Chambliss, have been working hard to develop a workable reform of the H–2A program and fair treatment for the current agricultural workforce. We urge this committee and this Congress to support their efforts to address this problem, which is undermining the economic viability of the entire U.S. agricultural industry. Thank you. And I'll be happy to answer questions.
[The prepared statement of Mr. Holt appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you, Dr. Holt. And thanks to all of the witnesses for your testimony and interest in this subject.
Mr. Hague, you had mentioned I believe that your bank was a preferred lender.
Mr. HAGUE. Yes, Mr. Chairman, we are.
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The CHAIRMAN. How long have you had preferred lender status?
Mr. HAGUE. We received preferred lender status in late 1999.
The CHAIRMAN. Do you have——
Mr. HAGUE. Of course, the program's new last year.
The CHAIRMAN. Yes. We've been working on that for a while.
Mr. HAGUE. I know you have.
The CHAIRMAN. Let me ask you—and you may not know the answer to this question. But of the ABA, of the number of banks that you would consider to be substantial agricultural lenders, what percentage of them would be preferred lenders?
Mr. HAGUE. You are correct. I'm not able to give you a percentage on that. I know that the number is increasing and the last number I saw—so don't hold me to this—were that there were approximately 80 PLP lenders nationwide. And I know it's going up all the time with more and more applications.
What I can do is the ABA can get back to you for the record on that as to what that actual percentage is.
The CHAIRMAN. I'd be interested both from you and Mr. Caspary representing bank associations. What do you hear from your member banks in regard to problems that they either see or are confronted with as maybe they are attempting to or looking at the potential of becoming a preferred lender?
Mr. HAGUE. Well, I think some of the problems that we're facing, and I know other lenders are, too, and it's something I did address in my comments, and that is that we have a lot of FSA offices right now, and when you have that, you're dealing with people, you're dealing with different personalities, different opinions. And so I think that that causes some inconsistency between offices. And so an application that might be approved in one office might not be approved in another, and you might have one office that says we think this program's great. Let's figure out how to make it work, how we can do this deal. And you might have another office that says, well, let's try to figure out how we can say no on this deal.
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So I think, for me, I think that's one of the biggest issues is consistency.
The CHAIRMAN. Did you have a fairly good turnaround in your loan applications prior to your PL status?
Mr. HAGUE. No, sir, we did not. We were looking at 3, 4, 5, 6 months sometimes on applications. So it was very slow at times.
The CHAIRMAN. Mr. Caspary, do you have any comments about just the train of the discussion here?
Mr. CASPARY. Yes. I would think that the number would be low as far as the percentage. One reason would be I think that you need to have a certain number of applications to be able to justify the preferred lender to be able to at least ask to be one. So I think the small banks have not used it to their satisfaction.
The CHAIRMAN. Several of you mentioned CRP. And Mr. Caspary, you mentioned specifically about increasing the number of acres. Would you also—those of you who have an interest in seeing maximized utilization of the CRP, would you also recommend changing the county cap on the percentage of acres that can go into the program?
Mr. CASPARY. Yes. I think that we believe that targeted areas would be very useful, having all of the CRP land in—or land in areas that may have marginal land doesn't make a lot of sense. I think some of that creates a problem.
The CHAIRMAN. So you would be in favor of raising the 25 percent cap?
Mr. CASPARY. No. I don't believe we'd be in favor of raising the 25 percent cap. I think we would spread it out over a larger area.
The CHAIRMAN. Anyone else? Any CRP questions?
Mr. PENICK. Yes. Particularly in the State of Montana, the program's been used very strongly, and we have several of the counties in that that are up against the limit. And I would be in favor of continuing to look at that program to provide as much flexibility as possible, because there are different parts, particularly in a State of that size, to where the program can be used more effectively. And from an environmental standpoint, I think that's very important.
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The CHAIRMAN. Primarily, are those of you who are looking with interest at that, are you looking at it and viewing it in terms of some—basically, are you using a program as a method by which you voluntarily have some restraint on production, or primarily from the standpoint of just taking low productivity land out of—low productive land out of production?
Mr. CASPARY. I would think a combination of the two.
The CHAIRMAN. Generally what we've seen is that set-aside programs or other programs obviously is always the amount of land that—or is the land that a person can get by with that's the least productive and in reality doesn't have all that much impact on actually how much we produce, because the areas that are being produced are the best land and they're increased fertilizer or whatever farming practices to maximize production. And I think we need to be cautious, because we're looking at potential ways to have an impact on production if in fact we are, of whether or not those programs are ones that actually work.
Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman. And I want to thank you for your leadership and Ranking Member Stenholm for calling all these hearings and giving us an opportunity to try to see if we can come to some consensus on where to head. And as we all now, it's a difficult thing to try to get farmers together. I also appreciate the testimony of the witnesses that are here today.
What I'd like to do is direct the discussion to some extent towards what's going on right now with the budget situation. We just passed the budget in the House last week, and the Senate I guess is taking it up this week. And in your testimony all of you or most of you brought up the issue of certainty, that farmers need to know what's going to be happening.
I think we all recognize that without the payments of the last couple of years, we'd all be in big trouble. But what I hear back home is what I heard a lot of you say, is that people need to know about in the future what's going to happen.
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One of the problems is there's in this budget another $6 billion that's been put forward, which will help us through this current year, but there was no additional money for any baseline out into the future. And the Blue Dogs, Representative Stenholm and I, have been working with the group to try to address this issue, and we put forward a budget that created considerably more baseline for agriculture, and we got 171 votes, right? That is the most we've ever gotten, so we're making some progress.
But we are concerned that if we're going to get this certainty, we've got to somehow or another get this baseline into the budget, not only for the next couple of years, but out in the future as well when we get to the point of rewriting the farm bill.
So I guess my question is, I assume that your answer is going to be that you think this is important that we should get this additional money into the budget, but I will ask you all that. And if that's the case, I'm also wondering if you would help us somehow or another convince the Senate. We've sent our budget over to some people in the Senate that I think may offer it, and we would like to see some help in trying to put some pressure on in the conference committee process or someplace to try to get this increase. But I guess my question is, do you think this is important? Do you think that this is something we ought to be doing?
And then second, we are also looking at maybe redirecting the way that some of this money is being put out there. Under the current system, I guess they envision that the AMTA payments would continue. Some of us think that maybe we ought to look at redirecting this to something more along the line of the supplemental income program that's been proposed, a counter-cyclical program rather than one that's based on some historic average that was out there before. So number—first of all, do you support trying to get this extra money in the budget? And second of all, would you be willing or consider—be willing to consider changing this program AMTA system to some other kind of system that's counter-cyclical, using the money in a different way? More targeted toward producers and toward prices rather than just a fixed amount. I'd ask each of you.
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Mr. PENICK. I might start with that. One of the things that I think's really critical going on in agriculture right now is that farmers are trying to get from one production year to the next, and I think we all understand that. But I think it's also very critical that farmers look to the future and are looking to the future in trying to determine how they're going to position themselves to be competitive.
We are dealing with a short-term crisis here, and we have done a pretty effective job of keeping folks stable during this period of time, but they're not able to plan long-term into the future and position their operations to be competitive, particularly as we move more to a global market. And so getting the baseline out over an extended period of time with a view as to how agriculture will position itself from a global perspective and its ability to compete is critical to whether we're going to have a viable agricultural industry as we look down the road.
Then I think we hit these peaks and these valleys in agriculture that we have to step up to and support. A lot of our programs right now are based on yield. And like the loan deficiency payments and the ability of how much you grow then increases how much you receive. And the producers that we see that actually are getting hurt during this period of time are those producers that have weather-related problems where they don't have that opportunity to take the advantage of the programs that are currently in place.
So I think it is a twofold problem, and I think the major issue is how do we position agriculture in this country and the producers of goods and services to be competitive globally with a good base loan program long-term? And we would be very interested in trying to help to support that and get that done.
Mr. HAGUE. I agree with a lot of that. And what I would add is as I said in my testimony, what we need is some certainty, and I think if we have some planning ahead and some certainty where when we look at cash flows when we're doing projections for these producers, we have some certainty as to what lies ahead in the future. So, yes, I think that would be good.
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And I would also add to that that we, the American Bankers Association, would look forward to the opportunity to work with this committee, with Congress, with other groups, with anybody we can to come up with a better mouse trap if there is one.
Mr. CASPARY. Yes. In our testimony we agreed with your synopsis of those two of adding at least a second year if not a longer term so that we could get the problem addressed now so that you could spend next year on your reconsideration of the farm bill addressing that problem alone, and also on the counter-cyclical, so the ICBA would be willing to help support your initiative.
Mr. GLAUB. I guess one of the biggest concerns is sitting here representing the American Society of Farm Managers & Rural Appraisers, we represent a larger group, the absentee landowner. And this person very strongly materially participates in that production, and we get concerned that sometimes they forget that they are a producer.
A number that I have been bouncing around, and I think it's rather conservative, that 66 percent of the agricultural assets are owned by somebody who's 66 years old or older. In the next 10 to 20 years, $7 trillion is going to change hands. This is the little old lady who lives in Poplar Bluff, MO, that owns 900 acres that I manage for her. This is an individual whose mother set up a trust for him. His land got foreclosed on—or not foreclosed, but condemned in Indiana, and we're now doing a 1031 tax free exchange through a partial farm ground in Arkansas. If you take away the ability for that absentee landowner to participate in the program, then I think you're going to hurt the very person that you're wanting to support, because we will be forced to go to cash type rents. That will close the opportunity for the young farmer to get in, because you're putting all the risk on the operator. I mean, the market we have to capture the value of those programs in there. You create some of the value of the asset. That's an unknown.
I agree with your philosophy. We need a program like that, because at the end of this program, we really don't know where we are, and we're making major investments in assets with an unknown of what its productivity or capabilities will be after the end of the existing program. So your support is greatly appreciated. We just have a concern that you also realize that that absentee landowner is a farmer and that particularly in my area of the Delta, we're making major contributions in land improvements, drainage, irrigation to update and adapt the technology so that operator can be both more productive and profitable.
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The CHAIRMAN. The gentleman's time has expired. Mr. Pombo.
Mr. POMBO. Thank you, Mr. Chairman. I believe that one of the greatest challenges that face this committee and Congress in general is the regulatory environment that we've created that we expect our producers to produce in and to compete in that world market.
We talk a lot about the international market, the world market price and our efficiencies and ability to compete in that at the same time we continue to create a regulatory environment that makes it more and more difficult for our producers to compete in that world market.
Mr. Vroom, you mentioned in your testimony about the Food Quality Protection Act and our efforts to bring some reasonableness to the implementation of that. And I appreciate all the work that you've done and the people on your staff have done in trying to bring that about.
I would like you to give the committee a little bit of an idea as to what happens to our efforts to compete on that world market when we begin to lose the crop protection methods that are currently available to us.
Mr. VROOM. Thank you, Mr. Pombo. I think it's clear that while it is very important that the United States remain a world leader in terms of protecting health and the environment that we can't allow political pressure from environmental activists and others who don't care to slow down and really understand the real underpinning of science or to allow in the case of many of the issues surrounding our concerns of implementation of the Food Quality Protection Act, accurate data to be assembled to answer the appropriate new questions about safety and health, but just push to a rush to judgment kind of an answer that the only answer is an equal amount of other kind of political pressure to offset that.
And as I mentioned in my oral remarks, it's not wasted on us in the crop protection industry that this is an election year and these kinds of issues will weigh on the electoral politics both at the Federal and also at local levels. So the fact that this committee and members like yourself who have paid so much close attention to the excruciating detail of policy and science that have to be merged together to keep America continuing to be in a leadership position using sound science and public policy to be the best protector of health and the environment anywhere in the world but without unnecessarily sacrificing our competitiveness is absolutely crucial.
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We've seen many examples. The organo phosphates I mentioned in my oral remarks being the first class of chemistry to go through FQPA review. We know that just tiny changes in details at the most minute level of policy at EPA in interpreting the Food Quality Protection Act can sacrifice huge numbers of uses of organo phosphates for uses on, for instance, California fruits and vegetables, which stand to compete in world markets. And yet we also import a lot of fresh fruits and vegetables, particularly during the winter months that likely could come in and never have detectible residues of organo phosphates if they are lost for use by California growers, be produced in Mexico or Chile with organo phosphates, and by the time they reach the border import inspections by FDA, the residues are dissipated and those farmers outside the United States have a real competitive advantage over the American farmer.
And if there's no health reason, no environmental reason to take that step, then we should prevent that. And I believe that that's what your oversight and this committee overall, Mr. Chairman, and the legislation Mr. Pombo and Mr. LaHood have introduced would seek to do.
Mr. POMBO. I thank you. And I think you may give some of the groups too much credit by calling them environmental activists. I think what they really are is fund-raising organizations in search of a cause to raise money off of. I'd also like to thank Mr. Holt for the work that he has done, the extensive work he has done on H–2A reform. As he knows, Mr. Chambliss and myself and others are going to shortly introduce a bill on H–2A reform. We are currently negotiating with other committees of jurisdiction to come up with a bill that hopefully will become law very shortly. So I want to thank you for all the work that you've put into that subject. And I thank the chairman.
The CHAIRMAN. Mrs. Clayton.
Mrs. CLAYTON. I thank you, Mr. Chairman, for having this hearing. And there are issues of credit, obviously, and there are issues of regulatory control, and apparently there are issues of labor.
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The questions of the credit, most of you acknowledge and express appreciation for the improved guaranteed loan program and also I think at least in three of your testimony, acknowledged that the limitation on the guaranteed loan program perhaps had some limitation that we ought to look at that because although it might have been well conceived to have 15 years in the beginning, that that may be more limiting.
Corresponding to that same notion that the crisis now financially means that we need to be more flexible on that, obviously none of you would care about this, but I want to mention this to you. But the direct loan piece is related to the guaranteed loan piece. One, those who have moved from the direct loan portfolio supposedly are now at a different level of risk vulnerability, and they are now able to move to you. But the same financial crisis that put a burden on the guarantee borrower I would submit is also having problems on that guaranteed loan who's going directly to the Government. That's the poorest of the poor farmer.
And if you would help me understand how those two could work together so that as we try to make instruments we have more flexible to meet the current situation, we also try to coordinate these two programs. Anybody who would like to respond to that.
Mr. CASPARY. The cost of money in at least the corn and bean area is where I'm from, Illinois—the cost of getting into farming is very high. Without having enough land to farm, it would be very difficult to address I believe maybe your concerns of the very poorest. Possibly if they were looking at it as a supplemental income to a farm—or a factory job, it might work. But there again, the cost of actually getting into it——
Mrs. CLAYTON. Well, I really wasn't speaking about farmers who were getting into it. I'm looking at the Census demographic data, and I know there is a large percentage of the small farmers who are at poverty level. And I also know that in the farming community, you have a higher percentage of the farmers who are at poverty than you have those who are working elsewhere. So they would perhaps be your less efficient or wouldn't have large acreage. These are the ones that are already trying to supplement. The wife may be a part time worker as a teacher or a lay person, and the husband is—these are small farmers. And these are people who need that direct loan and may eventually go to your guaranteed loan, because I think we want to see people go—move up, and we want to see people move out of the guaranteed loan where they don't have to have the Government at all.
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But I think there is a relationship, and I just want the discussion on the record to reflect that there ought to be somewhere where we tie that relationship in to make sure—because I think it was our economist who—and I want to express appreciation before my time goes out for your work and I will talk with you more on that. Because I studied demographics just to see how the profile of demographics in rural areas are reflecting.
It is true that the person who owns the land has an advantage. He has assets. But that person who owns the land more than likely is that 55 or 65—no, I guess it was our appraiser who was bringing the question that we're going to lose that asset. If you examine that older lady, too, you may find that she is also, but for Social Security, would be poor.
So if you're not careful, we're going to find ourselves having denied by accident a large section of people who are already in farming whether they're aging out or because we just haven't taken the time to relate the two. And I'm very much interested in the whole credit piece, because I that indeed is one of the ways the Government can supplement and have a public-private partnership.
But let me just move my other comments to another area. The immigration piece in terms of the—and Mr. Pomeroy, I want to talk with you to see whether there is any way I can—I usually have a little problem with that, but I want to see if I can work with it.
What you have described, Mr. Holt, is indeed compelling. And I think we have to do something about it. The question I would have is all the other things that our Government—other than agriculture perhaps—but if we have such a crisis and we know that we have to depend on such a large pool of persons who are truthfully saying they are all here illegally, and so we have complicity all around, there may be other things other than the agriculture piece that's adding to that. So I think we need to acknowledge some things here and to see if we can work with them. I guess that's more of a comment. I'll just stop there and invite Mr. Holt to have a conversation with me further.
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Mr. HOLT. Well, Mrs. Clayton, I certainly agree with you that this problem is not unique to agriculture. I think it's more severe in agriculture, because agriculture tends to be an entry point for illegal aliens, and particularly in seasonal agricultural work. That's something that the workforce has traditionally aspired ultimately to move up and out of and into other industries. So the problem is not unique to agriculture, but I think it's most severe in agriculture.
The CHAIRMAN. Mr. Lucas.
Mr. LUCAS of Oklahoma. Thank you, Mr. Chairman. One of the challenges, of course of agricultural policy is that from the eyes of the rest of the economic world, sometimes our love and our desire to be involved in it causes us to make economic decisions that the rest of the world perhaps would not make in any other business.
So from that perspective, Mr. Glaub, let me ask you, being in the unique position as your background material indicates, having clients who are corporations and individuals and trusts, what kind of a rate of return do those sort of folks expect off of their agricultural investments to make or to continue to own that property—to own those resources?
Mr. GLAUB. I'm afraid rather small. You're looking at a 2 to 8 percent range, depending on the areas. Again, I use that 66 rule as an example of most of the people that we deal with are second, third generation landowners. There may be as much emotion in owning this land as there is return, although we're trying to provide professional expertise and knowledge and adapt to new technology, and we were bringing up regulations as doing that in the Delta and particularly the wetlands situations, and some of that's tying our hands and adding taxes to us indirectly when you have to pay a survey for an environmental and stuff like that.
But most of these people are looking for very long-term returns. This is a capital-intensive industry, and the landowner is one that's holding the very large part of the capital.
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Let me touch a little further to answer your question some. We're working with a lot of young guys, getting them started. And this organization probably puts more farmers into business than any organization, and it's something we're proud of and enjoy doing. And the guys actually doing the operation are probably making 50 percent more to 100 percent more than the landowner. To tell you the truth, you don't make a lot of money buying the land and hanging onto it, you make your money by improving it and adapting the technology that the other gentleman here presented and going to the newer higher levels of production.
Mr. LUCAS of Oklahoma. And I would take it then probably more in the individual category, they're willing to accept that 2 or 3 percent as are many on-farm landowners, whereas perhaps the corporate entities with their greater options and alternatives for use of their resources I would suspect probably insist on the higher rate, the 6, 7, 8 percent?
Mr. GLAUB. Yes, sir. There is a trend of pension funds, other things like that investing, and you can definitely see them moving to the permanent crops and have the higher returns like California citrus, the pistachios and things like that that are in the, oh, 15 to 20 percent return. But it's a total high capital long-term investment. Of course, the other side of the investment is the long-term holding, and like I was talking about, a large amount of land is held by these people that may not be making a half a percent return because it's right next to a major community, and this family wants to hang onto the land, and they're willing to accept the farm income and don't want to put it into a commercial lot.
Mr. LUCAS of Oklahoma. Fair enough. Mr. Hague, one of the things I think we focused on in this session of Congress is not only do we prepare for where the next farm bill goes, but we work on how to fine tune the situation our producers need. One of those challenges, of course, making sure that the resources are there to work through what's been a couple of tough years and what will be another tough year. And one of the important things in our budget resolution recently passed setting some of those resources aside. But within the scope of fine tuning that, you, I think, are the only member of our panel today who is from or represents producers in the southern High Plains area.
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As you know, not everyone can take full advantage of the flexibility of the 1996 farm bill simply because you don't always have enough moisture nor do you have enough soil to fully utilize all of those options. Could you for a moment expand from your perspective on one of the efforts that I've worked on in an effort to give our producers more options by extending the concept of LDP not only from grain harvested by silage and hay cut concept of a graze out, what potentially had that option been available last fall, as was urged on USDA here in Washington by the appropriations process, what difference that might have made in your region of the country?
Mr. HOLT. That would make a lot of difference in our region of the country, because as you say, that's where we are. We're in the plains. We're in wheat country, and we have a lot of wheat producers that don't have really other options. You pretty much grow wheat. And so the LDP on graze out is vitally important to our producers. And it—what it does, it's another option to give them a chance to make a profit. And I think we're talking here about programs and what we can do and so on. We've got LDP, and here's one out there that we should be using, we need to be using, and in my estimation, it's not only a matter of fairness but LDP on graze out is very consistent with what we're all trying to accomplish, and that is to raise the market price of grain.
So, yes. I am very, very sold on LDP on graze out. And what I would add to that, Congressman, is that we needed it last fall, we need it now.
Mr. LUCAS of Oklahoma. Thank you, sir. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman. I've had several farmers in my office, and we've been meeting with farm groups, and a lot of them are talking today about supply management. I'd just like to ask all of you, first of all, (a) do you think that's a good idea? And (b) do you think it's practical? Whoever one wants to start.
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Mr. PENICK. Whether it's practical or not—and today's time may be different than how we looked at it 15, 20 years ago, because of the global movement, I think that tends to limit. There's only seven or eight major pockets in the world that can have an influence on the volume of production in this country.
We all look at our individual areas and say, OK, if we have a drought or whatever in May, it's going to reduce the supply and things will get back into order, but that's no longer the case. The case is that with the open markets and the ability to move grain around the world, supply management is going to be very difficult. And the difficulty may not be necessary as to putting it in place. The difficulty is going to be whether it has an impact. And to be honest with you, I'm not sure that it will.
Mr. GUTKNECHT. Mr. Hague.
Mr. HAGUE. That's correct. We're faced with world markets now. There's no question about it. And so supply control and as you say one-seventh, whatever it might be, may be not very effective, particularly when someone else is adding to theirs.
Mr. GUTKNECHT. Mr. Caspary.
Mr. CASPARY. In an ideal world, supply control would be great. The problem that I would see with supply control if we did it in the United States and if foreign countries would step in and increase their supplies, which we have no control over, I'm not sure that it would be practical.
Mr. GLAUB. I don't see how we can expect supply control to work. Coming from the South where we raise, the Japanese will not let us open our market to them. They get paid $27 a bushel for their rice, and we're getting paid $3. There's an imbalance there. And as long as we have those type of imbalances, I think you can use the European Common Market on wheat and soybeans the same way. When somebody else gets paid three times as much as you do to produce a crop, and their government is putting that excess on the market, I don't think we the farmers can control the supply. The U.S. Government might be able to and compete government to government, but not the farmer.
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Mr. GUTKNECHT. Mr. Urmston.
Mr. URMSTON. This is a little out of my area, but I guess my comment would be would we appear as to be an unreliable supplier if we started dictating supply and demand once again.
Mr. VROOM. I would agree with everything that's been said. There's clearly a trend for a global marketplace, and we ought to be putting our focus on reducing things like I've talked about, regulatory barriers, disparities that are truly unfair with regard to protection of intellectual property that distort a lot of things.
For instance, I honestly believe that one of the overarching reasons that our Government hasn't been tougher on Argentina with regard to this terrible disparity in difference of protection of intellectual property on herbicide-resistant soybean varieties is because Argentina has been a reliable partner for the United States in WTO talks. So you have to understand that there's some balance there. But we're losing a lot of ground on that front. So, shooting ourselves in the foot by taking additional acres out of production does not seem to be a viable alternative at this time.
Mr. HOLT. Well, this is a little off the subject of what I testified about, too, but an agricultural economist is never going to miss an opportunity to make a comment about supply control. I think it's a little bit like trying to use immigration policy to affect the wages and working conditions of domestic farm workers. It only works if you're dealing with a closed economy. And when you're dealing with an open economy, which we are clearly dealing with and which we're calling for, those kinds of mechanisms are not going to be effective whether you're talking about regulating farmers' incomes or the wages of domestic farm workers.
Mr. GUTKNECHT. So I take it all of you would generally—the consensus is if there are things that we could do at the Federal level, what we've got to do is expand the markets, look for ways we can convert more of what we grow into other things, whether it's ethanol, biodiesel, other value-added products, rather than try to sort of go back to the old tinker with the supply side with set-asides and so forth.
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Mr. GLAUB. Sir, we've got a unique one going on in a lot of the country. South Texas, the cattle industry is basically disappearing to the deer hunters. We see duck hunters in the Delta that seem to have more money than us farmers trying to buy farmland. And if we lower the profitability, I could see a significant amount of acres in our country going into recreational use that will no longer be in productional use.
Mr. GUTKNECHT. Well, with all due respect, that would not surprise me. The average rate of return on the S&P 500 has been significantly better than 2 percent over the last 5 years.
Mr. Chairman, my time has expired. Thank you very much.
The CHAIRMAN. Mr. Smith.
Mr. SMITH. Thank you, Mr. Chairman. What percentage interest rate are you charging your good farmers this spring?
Mr. PENICK. In our particular case, we work on a differentiated rate, depending on the risk profile of each individual customers. But our best customers would be at that prime to slightly below prime for operating money, all the way from that point up to 2 percent above prime. That's the general answer to your question.
Mr. HOLT. I would say that our pricing would be very similar to that. What we do, and we talked about with the FSA programs, we use the FSA programs a lot, and with those programs we use the interest assistance anytime it applies. So we can get a farmer interest assistance. And we also are using programs like the agriculture link program which Oklahoma has. So in a lot of cases, those farmers, we're able to get them substantially better rates by using those programs that are available to us.
Mr. SMITH. Give me the range. Are you talking about 6.5 to 8.5 percent?
Mr. HOLT. We just did a loan last week for a farmer, and we used the programs I just mentioned, and we priced him at 5.75.
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Mr. SMITH. That's a no-risk loan, I assume?
Mr. HOLT. No, that is not. That is an FSA guaranteed borrower.
Mr. SMITH. Oh, that's an FSA? Okay.
Mr. HOLT. Right.
Mr. SMITH. And so——
Mr. HOLT. So there is risk in that loan. However, there is protection with the guarantee.
Mr. SMITH. Mr. Caspary, go ahead, but maybe include in your answer, would you if we're going to look at saving some of the direct loan money as opposed to the guaranteed loan, would you—what's your recommendation? Expand the guaranteed loan even if we reduce the direct loan?
Mr. CASPARY. Yes. My rates at my bank which this year has been about 7.5 to about 8.9 percent.
Mr. SMITH. How much of a prerequisite is crop insurance on deciding on lending?
Mr. CASPARY. We have highly encouraged people to take crop insurance—it's not mandatory, but it would be the next thing to mandatory. If there's any risk out there that they can't cover by collateral, then we almost have it mandatory for crop insurance.
Mr. SMITH. Would that be consistent with any of the other lenders?
Mr. PENICK. Yes. We're a preferred lender also, just recently become one, and utilizing those programs have allowed that to get down. Looking at the guaranteed program we look at that like we do all other risk management tools. If an agricultural producer brings us a budget and a proposal that has the type of risk management tools in it like crop insurance—in some cases in the potato industry in Idaho we have some revenue protection programs in place—when they can bring us those type of programs that reduce the risk and guarantee that, then we're able to work with them more effectively in the interest rate area.
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Mr. SMITH. What's—whoever makes the next comment sort of include what's a family farm? How interested should we be in payment limits preserving whatever the family farm is in terms of size? What's it going to do to rural communities if there is greater concentration I guess is maybe part of my question?
Mr. PENICK. I will respond very quickly to that. I think one of the major challenges that this committee has with the next farm bill is deciding exactly what they want rural America to look like. Because if they—if you choose and you identify what a typical family farm looks like from a historical perspective, that will be a much different outcome than if you drive through America today and you look at what the typical family farm looks like now. The typical family farm in the Northwest may be 2,000 to 3,000 dairy cows with two or three generations effective in that compared to where 10 years ago if I look at our coastal dairies, that may have been a much smaller number.
I think that's going to be very critical as we take a look at the next farm bill of exactly what we want rural America to look like, because that's going to have a major impact on the direction that the bill has to go, particularly if you compare that to being competitive globally.
Mr. SMITH. Huge ramifications. Mr. Caspary.
Mr. CASPARY. Just a quick comment. Last year at our agriculture committee meeting I asked the question, what was a family farmer, and I was very surprised. I thought it would be a fairly easy question to define, and it turned out to be very difficult. What I considered a family farmer 20 years ago doesn't resemble a family farmer of today.
Mr. GLAUB. The family farm is a rather unique item. I worked for 10 years for a family farm in the Delta. It's been owned since 1886 by the same family. That family has expanded and gone. At the peak, that family owned 67,000 acres, and it's now divided into like five different branches of the family. And it's still a family farm. The same thing we see in the family farm even as the operators, they're getting bigger. Dad's there, two or three sons working together, and you may have four or five grandsons all coming into the same family operation.
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When I grew up as a kid, Grandad farmed 80 acres. Today my cousin farms 6,000 acres. And it's still a family farm, but it's a change in technology.
Mr. SMITH. My real question was is what kind of impact and how should we develop some policy decisions in terms of where we go. Farm policy has tremendous impact on that concentration in bigger and bigger farms, regardless of whether it's a family or a corporation.
Mr. GLAUB. What you do in that particular, is if you take the ability for that family not to take that Government payment, you've got 25 operators on that farm that all of a sudden have to go to a cash rent.
The CHAIRMAN. Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you. Gentlemen, are there any programs that are working as far as assisting beginning farmers to help the next generation move onto the farm? Or is this simply a matter of the farm economy? Is there something that we are doing that works, or is there something we could do that would make a difference beyond just a general improvement in the profitability of agriculture?
Mr. HAGUE. There are some beginner farmer programs out there, and we're using some of those to help our borrowers. Mostly what that does is it allows us to, because of some tax exemptions, to pass a lower rate onto that beginning farmer, and we're doing that.
But apart from that, it doesn't seem to me like there's very much we're doing for the beginning farmer. And when you look at beginning farmer trying to get in the business, it's next to impossible in my opinion. You just cannot make it cash flow, and you just cannot show a return on investment that anyone would be happy with. So I think it's—and I think what you're saying is it's very, very difficult for a young farmer to get in right now, if you don't get in with your family.
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Mr. PENICK. A point that I think would be important to make is, we talk about beginning producers and we concentrate on that, and in Farm Credit System we have—our board of directors are all agricultural producers and focus on that, and the impact of that is—what they're really worried about is whether the next generation will be able to farm, and I really think that's where the focus of agriculture from the beginning producer needs to move, is how do we make sure that that next generation of agricultural producers have the opportunity to carry on those operations and be successful.
We effectively use the FSA guarantee programs. We work with these producers trying from a mentor standpoint to get those folks in place to do that. But the focus I think in the future is going to be how we keep additional generations in U.S. agriculture, because I think that's where the real key is going to be.
Mr. MORAN. Yes, sir?
Mr. GLAUB. I think that's an excellent point. And one of the biggest problems with the start-up programs is the delay of timing information and a little bit of education for the start-up guys. I've got an ex-intern right now that just graduated from ASU, and he's getting started. He's up to 1,000 acres this year, having a little trouble picking up acres because of competition, but I think he will make it.
But on the flip side, what I have seen I have had a college classmate of mine quit last year. He was not forced out of business. His decision was, should I take my $2 million and invest it in another crop, or should I take that $2 million and invest it in the stock market and rent out the 1,500 acres that I own to somebody else? And the most discouraging thing to be is this guy's got a son who's 6-foot 5, weighs 285 and is playing line for the University of Arkansas, and he's talked him out of coming back to farm. And he had a 6,000 acre operation pretty well free and clear.
And that is not a unique situation. We are seeing a lot of top farmers. I had a young farmer who in his early thirties this year that was one of my pride and joys that I started him in business. He came into the office and he said, ''I've had 2 bad years. I've lost all my equity and equipment. I'm not putting my house up for this next crop. I quit.'' I just lost another operator who's a tough old hard boy that'll work. He will probably never come back to farming. He's been up and down three times. He just got forced out, and he just went to work for a co-op, and we'll probably never see any of these gentlemen back on a farm.
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Mr. MORAN. Do lenders, and I guess farmers as well, does the estate tax that we decry so often, do you see it in an everyday way affecting decisions about the next generation being able to return to the farm?
Mr. GLAUB. One of the biggest problems is those who do not do proper pre-estate planning. The shock of the estate. You also get into a generation that wants to spend a little more money, and they say grandad's worth $5 million. Well, grandad lived on that 1 percent of every return, and the kids are used to doing 15. And that's some of the big problems we have. And then you've got to refinance that dip.
Mr. CASPARY. I think the estate planning that has been available has been used mostly, so it's not a major problem, together with the fact that you are raising the limits on that. It could be raised higher, that would be one comment.
We keep talking about the family farmer. I think it might be useful to look at it in terms of how it's affecting the rural towns. So many of our towns are not necessarily farmers. I mean, the farmers surrounding that was what built the town originally, but what's left is, in that article, for example, in Earth, TX, the people that are left in these towns are older. They can't sell their homes. There's no place to go to work. So included in the agriculture area is I think we really need to concentrate to a certain extent on the rural towns as well as just strictly the farmers.
Mr. MORAN. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Stenholm.
Mr. STENHOLM. Mr. Glaub, you stated in your record it should be clear to everyone in Congress in America that the Agriculture Market Transition Act never was or will be a transition to the free market for agriculture as was described to be when passed into law. Do others at the table agree with that statement? ''It should be clear to everyone in Congress and America that the Agriculture Market Transition Act never was nor will be a transition to the free market for agriculture as was described.'' Mr. Penick?
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Mr. PENICK. That's a really interesting question, because again, if we look at traditional agriculture in this country and what we wanted to look like, that program was not going to be successful.
Mr. STENHOLM. Well, it couldn't possibly be.
Mr. PENICK. No, it could not.
Mr. STENHOLM. I happen to agree very strongly with it. It is absolutely impossible to achieve that goal in a market that's controlled by other governments as ours is, as the world market is. So, I mean, to me it's a pretty simple statement. I'm trying to see if Mr. Glaub and I are wrong.
Mr. HAGUE. I think there are good concepts with Freedom to Farm. And frankly, I think some of our farmers like the freedom to make free market decisions. What we're faced with right now of course are grain prices that are at historical lows. So what we're willing to do, as I said earlier, we're willing to work with this committee, Congress, other groups to try to come up with something better.
Mr. PENICK. I'd like to make a comment about that that might be of interest. In the Northwest, we have a wide variety of commodities that are raised. And basically the wheat industry in the Palouse and in Montana are those that are strongly supported by the programs in the cattle business, because their back-up commodity is wheat usually. But if you take a look at just our portfolio, and you look at those commodities that are not supported by programs, the average age in the next generation's movement into those commodities is much stronger than it is in the wheat industry and the cattle industry. And I think we have to look at what's causing that. I don't have the answer to that and I'm sure that there's smarter people than I that are trying to figure that out.
But something about our programs are keeping us very structured the way we are in those commodity programs of the wheat, the corn and the soybeans and those. But yet the other industries out there in agriculture are looking like what we're trying to get those ones to do. And there's an answer there and there's a reason there. I'm not sure what it is, sir.
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Mr. STENHOLM. You're putting your finger on something that I'm very interested in pursuing the answer to. Because it's very interesting when you look at a 25-year history and you will find that in the so-called program crops, we have not exported any more in 1999 than we did in any previous 5-year cycle that you might wish to choose. Therefore, it matters not what our price is, what our export programs have been, are, or what have you. We do not export any more in 1999 than we did in 1974. Have your economists take a look at that as I'm asking everybody to take a look at as to what's the significance of that. And I suspect, Mr. Penick, that the question that you pose is one that we've got to look at.
Mr. Glaub also stated in your testimony it's time for our Government to adopt a see you and raise you attitude. And that's something, again, I think we have to look at this. Because no matter how many times we talk about the free market, there is no such thing. These market—of these crops we're talking about are controlled by governments and government policies. And the question is, is our policy adequate to meet that competition? And everything is pointing that it's not. It's not.
A question for the three lenders. On a scale of 1 to 10, with 10 being a perfect 10, the guaranteed lending program, how would you describe it today? As it's working, as you understand it and as you have testified to it. But if you had to say today, with zero being miserable and 10 being perfect, would number would you put on it? Quickly.
Mr. CASPARY. Six.
Mr. PENICK. Before I'd become a preferred lender working through the pass process, maybe a 1 or a 2. Working through the preferred lender process, I might move that process up to a 4. I'm hoping that once we now have that in place and the ability to use it, which has great benefit to us, I think that that'll move it up maybe to a 6 or a 7.
Mr. HAGUE. Working with it before preferred lender, I, too, would give it about a 3. With preferred lender, I'd give it a 6.
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Mr. CASPARY. I'd say 6.
Mr. STENHOLM. Quickly, Mr. Holt, regarding the need of an employer worker program that you have testified to, I could not agree more. We have got to come up with a better program. You're pointing out that the invasion of privacy. Somehow, some way the Congress has got to get over that so that we can have a counterfeit-proof identification of who's legal and who's not. Otherwise, we're never going to get there. We have got to get over that one. And we have got to develop a program that will give certainty. Because as you point out, the importance of this to all of agriculture is just absolutely critical. So I look forward to working with you on that.
Final question for Mr. Vroom and Mr. Urmston. We're now beginning to hear a lot of discussion about the differential in pricing between our seed and our chemicals and our production in foreign countries. The same thing we're hearing in pharmaceuticals, in which we hear that you can go to Canada and Mexico and buy the same thing much cheaper than we can here. We're hearing the same thing, and I believe it to be true. Why? And how can we justify that in a competitive marketplace if our producer would have to pay more for the same product?
Mr. VROOM. Well, Mr. Stenholm, I think I've already mentioned a couple of times our concern about intellectual property differentials and the political realities in terms of maintaining our relationship with Argentina as a member of the Cairns Group in the larger agriculture trade negotiations in the context of the WTO perhaps being one reason, as well as reluctance of the State Department to be as tough on the Argentine Government with regard to the complete disregard that they have allowed to prevail in Argentina with regard to ability of the companies to get patent protection for the biotechnology seeds that have been developed and introduced both by those companies and by, importantly, vast black market introduction of especially soybean seed that can be replicated, unlike hybrid seed corn.
And I think if you'll look at the GAO's study that was done at Mr. Ewing's request, you can see that the comparison of cost in the study of hybrid seed corn genetically enhanced for insect resistance is relatively the same, and the comparison of soybean genetically enhanced seed, U.S. versus Argentina, is vastly different. And that is purely due to the fact that the Argentine Government is not only providing patent protection opportunity for the seed on both sides of the two crops but is absolutely turning their backs and allowing this black market trade to virtually make most of that saved seed at a zero cost or nearly zero cost to the farmers, even below even competitive other traditionally bred seed. Mr. Urmston can speak more specifically to that.
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The other factor is that we have such vastly different regulatory requirements in terms of health and safety. The sovereignty of the respective national governments of wanting to hold on to the ability to make these decisions and not further harmonize and standardize testing requirements, and the fact that the rest of the world really is waiting to see how the United States is rally going to implement these major, still pending science policy questions.
Mr. STENHOLM. With all of those problems, why would we want to even sell to them? Why not just confine ourselves to sales at home?
Mr. VROOM. Well, that might have been a better idea at this point in time. However, I think that the companies went to Argentina, as they have for many years, accepting the promises that things would be lifted up. As you may know, the trade-related intellectual property provisions in the WTO took effect January 1, 2000 for implementation in the developing world. They've been in place since 1995 for the rest of the world. And——
Mr. STENHOLM. I'm sorry. I'm going to have to interrupt you there and say we've got a vote and we've got to go. I want one other quick question to each of you. I assume, based on your testimony, that everyone at the table is in support of permanent normal trade relations with China? If so, answer yes.
[Panel nods.]
Mr. STENHOLM. Let the record show that all of the heads were shaking in affirmative. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you. We appreciate very much your time and information and willingness to come down and visit with us, and I'm sure we'll have an opportunity to do that again in the future.
The hearing is adjourned.
[Whereupon, at 12:22 p.m., the committee was adjourned; subject to the call of the Chair.]
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[Material submitted for inclusion in the record follows:]
Statement of Jim Caspary
Thank you, Chairman Combest and Congressman Stenholm for the opportunity to present the views of the Independent Community Bankers of America (ICBA) on current and future farm policy issues. ICBA applauds your efforts in trying to reach a consensus on what our future farm policy should be through the hearings the committee has been conducting this spring.
We know that reaching consensus is not an easy task. We are hopeful that your efforts this spring can lay the groundwork for implementing the types of policies that will adequately assist our farm families, our rural citizens and the Main Street businesses that depend on them. Certainly the hearings are timely given the financial and emotional distress that many farmers are facing and the recent farm aid packages that Congress has enacted.
I am the president of the First National Bank of Clifton, Clifton IL. I am also the chairman of ICBA's Agriculture-Rural America Committee. First National Bank of Clifton is a small midwestern agricultural bank with $24 million in assets that has been serving the community of Clifton since 1902. It is located in the north central part of Illinois where the primary agricultural commodities are corn and soybeans. The bank owns an insurance agency which sells crop insurance and is one of the largest providers of crop insurance in the State of Illinois.
SERVING AGRICULTURE AND RURAL COMMUNITIES
Mr. Chairman, 75 percent of ICBA member banks are located in small communities of under 10,000 population and our members have a long-standing interest in providing credit to American agriculture and our rural communities. ICBA is the only national trade organization that exclusively represents the interests of our nation's community banks.
STRENGTHENING THE FARM SAFETY NET
ICBA was an early and outspoken advocate of farm aid packages over the past couple of years. Beginning in September 1998, we urged Congress to pursue a number of options that included:
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income assistance for producers;
crop insurance reform;
temporary disaster aid;
increased funding for FSA's guaranteed loan program;
targeted expansion of the CRP;
pursuing an aggressive trade agenda;
increased food aid donations;
funding alternatives for community banks and and a number of other positive initiatives.
In January 1999 we sent to Congress a comprehensive proposal to strengthen the farm safety net. An updated summary is attached to the end of my statement.
ICBA FARM POLICY RECOMMENDATIONS
We believe the farm income packages have been extremely important to rural America from the standpoint of preventing an agricultural credit crisis and helping farmers survive a very difficult period. Let me briefly make a few recommendations that we hope the committee could explore in the weeks and months ahead.
FARM AID PACKAGES
A Multi-Billion Dollar Farm Assistance Package. We once again urge Congress to pass a major farm aid package as soon as possible this year since the low price and export problems facing our farmers are still present. We appreciate the $6 billion in income assistance included in the House Budget Committee's fiscal year 2001 Budget Package and are hopeful this package can be worked out quickly.
Consider Two Years of Farm Assistance. We urge Congress to consider providing for two years of funding to cover next year as well in case further aid is necessary. This would allow considerable progress to be made in writing the new farm bill in a timely manner without the distraction of passing another farm assistance package. This would also provide producers and their lenders with more certainty for planning purposes.
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FUTURE FARM BILL POLICY
Counter-cyclical Income Mechanisms. The current farm policy does not provide sufficient aid in times when prices are low. Future farm policy could incorporate policy tools that provide the producer enough income protection that future farm aid packages are unnecessary. Perhaps this should be a combination of tools. Counter-Cyclical Policy & Income Tools could include: (1) Automatically calculated supplemental income payments. We appreciate Congressmen's Stenholm's efforts in developing a supplemental income payment program based on a 5-year gross revenue.
(2) A special fund that is part of the multi-year budget that can be drawn down or paid out to producers when prices are low. This would remove farm policy from the crisis mentality that can develop both in Congress and in the farm community when prices fall precipitously or remain depressed for several years.
(3) Broad Access to Revenue Insurance products. Ensuring farmers have access to adequate revenue insurance tools at affordable rates to provide an option of insuring their income across a wide variety of crops throughout the U.S. This would help farmers manage their risks better.
There may be a significant number of ideas to consider in this realm that could better protect farm income during low price periods while not infringing upon the planting flexibility that current farm policy allows. We will continue to explore these and other ideas.
Modernize the Conservation Reserve Program. We believe the CRP needs to be modernized. We urge consideration of an acreage level of between 40 to 50 million acres. Since this would be a slight increase above current authority, the additional acres should be targeted to ensure that not too much land is set aside in any one particular area. In addition, we urge congress to provide producers with more choices in regard to length of contract periods. Retiring land for 10 year periods may simply be too long to remove land from production. Providing the option for 3 or 5 year contracts would be consistent with providing producers with greater flexibility that matches their farming needs.
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Increase Funding & Options for the FSA Guaranteed Loan Program. We have witnessed a dramatic increase in the demand for FSA guaranteed loan funds as lendershave sought greater protections due to the low prices and as the size of the loans guaranteed has increased. It is important to ensure that this program operates smoothly without interruptions so that farmers can have access to credit to meet their planting needs rather than be told there is no more money because the government underestimated the demand. Allowing funds to remain
available until expended, rather than be lost at the end of the budget year, will be helpful this year. The downside of this approach is that it is still dependent on the government appropriating sufficient funds.
We have made three suggestions to improve the program on our attached summary including providing long-term contingency funds in times of severe financial distress. ICBA's Agriculture/Rural America committee is developing further recommendations for this program which we plan to submit in the future to assist with rewriting these authorities in the farm bill.
Raising Deposit Insurance To Increase Funding Options. Mr. Chairman many community banks across the nation have witnessed an erosion of their deposit base as young people leave rural areas and older citizens pass away and have their estates redistributed to their heirs who often do not live in rural areas. It would be especially beneficial for rural community banks to double the current deposit insurance level to $200,000 and index it to inflation. Deposit insurance levels were last raised in 1980—20 years ago—the longest period in the history of the FDIC that we have gone without raising the coveragelimit.
If deposit insurance had been indexed to inflation in 1980, the current protection level would be $197,000. Raising the level would not substantially elevate the risk exposure of the insurance funds, which now hold almost $40 billion in reserves. A higher guarantee would help community banks attract more funds and better compete against large banks which have more options with which to access lendable funds. The end result would be more loanable funds to
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American citizens and this would be especially important in rural areas as we move forward into a new century.
Pursue An Aggressive U.S. Trade Policy. Mr. Chairman we are concerned with the falling value of U.S. exports since so many of our acres are grown for export markets. Certainly the Asian crisis has hurt U.S. agriculture enormously. But we are also concerned with statistics that show the U.S. market share in agricultural trade has fallen from 24 percent in 1981 to 18 percent today. Despite the fact that world trade in agriculture doubled between 1981 and 1998.
Certainly we need to pursue a broad trade agenda. Congress should act quickly this year by passing Permanent Normal Trade Relations (PNTR) status for China. The bilateral agreement between our two governments appears to offer significant market access opportunity for U.S. farmers to a nation that has a quarter of the world's population. And because GATT and WTO agreements were developed as rules for trade among market economies, China's eventual membership in the WTO also affords the U.S. an opportunity to help China move toward Democracy and market oriented economic principles while benefiting U.S. farmers.
We also urge support for establishment of a permanent Chief Agricultural Negotiator in the Office of the USTR as contained in HR 434, the Trade and Development Act, which is now in conference. This will establish a permanent advocate and specialist on behalf of U.S.
agricultural interests in a position responsible for enforcing trade agreements relating to U.S. agriculture. We would also like to see the World Trade Organization open its dispute settlement process by allowing more public transparency to instill greater public confidence in WTO decisions.
Crop Insurance Legislation & Future Review. We compliment Congress on the fine crop insurance bills that are now moving to conference.
These bills will make crop insurance more affordable to producers and should attract greater participation, helping us to move away from the need to pass ad hoc disaster bills beginning with the 2001 crops. Obviously it will be important how the regulations are written and implemented and we urge very close Congressional monitoring of how the new program functions so that any necessary changes can be made.
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Crop Insurance Legislation Conference Considerations. As the House and Senate begins the process of reconciling the two crop insurance bills we make the following recommendations. Since the subsidy rates differ between the two bills, we recommend that the subsidy rates be highest at the higher levels of coverage and lowest at the lowest levels of coverage to encourage producers to buy higher protection levels.
We also urge members to remove the controversial Aassociation marketing provision which seems to discriminate against commercial lenders and crop insurance agents. We believe crop insurance reform legislation should treat all insurance providers equally.
We are also concerned about requiring FSA staff to conduct insurance audits. We note that FSA staff is already stretched quite thin and this is particularly evident in the guaranteed loan program where many lenders complain the county office staff is too overworked. And we encourage conferees to adopt the language pertaining to release of the $40 million for CRC durum producers.
Beyond Farm Policy. A Troubling Report From the FDIC. The recent FDIC Regional Outlook report for Kansas City examined some of the challenges confronting FDIC-insured institutions serving rural communities. Emerging trends suggest that if rural areas continue to lose population, many banks and thrifts may eventually be located in counties with population bases that will make it difficult to maintain infrastructure and public services.
The FDIC report noted that population continues to decline in a significant number of rural counties. In addition, in over 20 percent of these rural counties the exodus rate is accelerating. Insured institutions in these counties have reported slower loan and deposit growth, higher concentrations of agricultural loans, and a greater reliance on nontraditional funding sources, such as Federal Home Loan Bank borrowings, than institutions in counties with growing populations.
Integrating Broad Rural Development Policy. Clearly Mr. Chairman, farmers and citizens in our rural communities are affected by more than just farm policy. For example, there are a number of tax initiatives that would benefit farmers and rural lenders as we have referenced in our one-page summary. In addition, we need to focus more attention on closing the so-called Adigital divide@ that can often limit internet access in rural areas.
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We should explore options to look at improving rural access to capital through commercial lenders including for rural entrepreneurs. And we need to ensure adequate health-care choices exist for rural citizens. We encourage this committee, which can have such a positive influence on the quality of life of our rural citizens, to also explore how to better answer some of these broader challenges that lie beyond the scope of farm policy. Legislation that not only addresses farm policy, but a number of other rural needs as well, could be concurrently through Congress at the time the next farm bill is written.
We have often heard there were other solutions in addition to farm policy that were expected to be passed to complement the 1996 farm bill. We urge efforts to orchestrate a legislative push for a broad rural agenda at the time the next farm policy is written.
Summary. Mr. Chairman, we appreciate the committee's efforts on behalf of American agriculture and believe your continuing series of hearings on farm policy solutions will be helpful. Agriculture is undergoing dramatic changes and it is important to consider how farmers and those they interact with can best adapt to these changes in a way that is beneficial to a vibrant rural economy.
We hope the recommendations presented today will help provide a useful starting point in reaching a consensus on future farm policy changes. And we hope efforts will be made to pursue a broad policy mix to benefit our rural economies for many years to come. ICBA and its Agriculture/Rural America committee stands ready to help you grapple with these issues and meet the challenges that confront us. Thank you for this opportunity to present our views.
Testimony of Ted L. Glaub
My name is Ted Glaub from Jonesboro, AR. I am the president of the American Society of Farm Managers and Rural Appraisers. Our organization was founded in 1929 and is comprised of professional farm managers and rural property appraisers. We currently have membership in 36 State chapters across the United States. We estimate that 46 percent of the farmland in America is owned by absentee landowners.
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Our farm managers influence decisions on over 25 million crop acres and our rural appraisers complete approximately 175,000 appraisals annually. The Society's 75 largest farm management companies manage 14,631,190 acres of farmland with 21,801 operators. These companies represent a portion of our membership. There are many other members for which we do not have acreage figures.
We believe that this astoundingly high percentage of absentee landowners represents a valuable asset to American agriculture. It provides a source of capital for the farmers, many of whom would not be able to farm or get a start in farming without it.
Typically, absentee landowners enter into either cash leases or crop share leases with individual farmers. In the case of crop share leases, the absentee landowners share in both the risks and the rewards of the operation.
Congress has properly recognized that in the case of crop share leases, the landowner is and should be eligible for farm program benefits. We urge you to continue this policy, for to do otherwise would simply convert many such leases to cash rent leases, leaving producers in the position of accepting all of the risk.
Farmland is what it earns and the government directly impacts the net farm income generated by agriculture. That net profit is used by absentee landowners and farm operators alike to purchase additional farmland. There is a direct correlation between farm income and land values. Therefore, agriculture policy has a direct and lasting impact on our nation's farm values. Agriculture policy should be designed to stabilize net farm income and provide a predictable profit to those who invest in our farmland.
Mr. Chairman, it is neither our role nor our intention to offer suggestions on specific commodity policy. We feel that responsibility is better lodged with the national commodity organizations, which do a tremendous job in representing their membership. Neither is it our intention to catalogue the woes that have beset American agriculture in recent years. You know them all too well.
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We would, however, like to offer our views on the overall direction of farm policy to succeed the Agriculture Market Transition Act or Freedom to Farm. Our landowner clients and their operators with whom we work are well pleased with the flexibility in planting decisions current farm law allows. We feel we are better able to make those types of decisions without mandatory acreage set-asides and recommend to you an extension of that policy in future farm law.
It makes little sense to us, to idle valuable productive farmland that our clients have either bought or leased. Such a policy only telegraphs to our highly subsidized foreign competition the signal to increase their production of a specific crop because we are reducing production of ours. Additionally, such policy increases our variable costs by idling valuable land while, at the same time, hurts our prices by stimulating overseas production. It is a ''lose-lose'' policy for American agriculture.
By now, it should be clear to everyone in Congress and America that the Agriculture Market Transition Act never was or will be a transition to the free market for agriculture, as it was described to be when passed into law. There is simply no way, Mr. Chairman, to transition to something that does not exist. Our Congress must face the fact that so long as foreign governments subsidize the production and export of their commodities, there can be no ''free market'' in agriculture. Therefore, the Agriculture Market Transition Act—a phase out of future farm programs to a non-existent free market—might as well be laid to rest right here and now, once and for all.
Furthermore, so long as Americans demand a ''cheap food'' policy, Americans will have to understand they cannot enjoy that without the government's assistance to our farmers. Economics dictate that either government pays or consumers pay. History teaches that consumers don't want to pay. The obvious conclusion is, like it or not, government will have to pay. It will have to continue to subsidize the ''cheap food'' policy and price conscious consumer.
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The concept of subsidizing cheap food through production, enabling financial assistance to production agriculture, is something we just might as well get ready to talk about. And we would add parenthetically that you cannot subsidize enough production for the consumer's ''cheap food'' policy when you limit financial assistance to $30,000 per producer or any other number that has been discussed.
We understand the politics of payment limitations, but there is a dire need for an understanding in the Congress and the press of what is needed to subsidize a cheap food policy that competes with a more heavily subsidized foreign production base. That's the reason that Secretary Glickman's current proposal is a non-starter for any sort of rational farm policy for American agriculture.
It is time for our government to adopt a ''See you and Raise you'' attitude with our foreign competitors in the trade area. You recall, as well as we, the commitment given to agriculture at the time the 1996 farm bill was passed. Trade was one of the areas Congress promised progress as an offset to phasing out farm programs.
Four years later, we have no fast track negotiating authority and we are facing a ridiculously close vote prospect on whether or not we should trade with the largest market in the world, China. The ''free market'' we were supposed to transition into is not something we as a country have even voted to sit down and talk about.
The largest potential market in the world may or may not be granted permanent normal trading relations with us. Not much comfort, Mr. Chairman for American farmers to be asked to ''transition into.'' But if we clear these two hurdles, the job of getting American agriculture into a ''free market'' through negotiations is huge. We believe that until we really get tough with the European Union and other highly subsidized agricultural producers, we will never get there.
Until they understand and believe our willingness to put the full resources of this country behind achieving a truly ''free market'', they will never enter into the reforms necessary to bring such a free market into existence. We hope this committee will exert its enormous influence on the Congress and the administration to adopt such a ''get tough'' policy before you ask us to transition into something that does not exist.
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I will not recite the other commitments Congress made to agriculture when the 1996 act was being developed. I'm sure others will. There remains today a real need for regulatory reform that will make some sense out of pesticide and herbicide use policy. In some areas of the country the wetlands determination issue is still a quagmire. Death taxes continue to plague the estates of small family farmers. We are encouraged and commend the committee for the progress on crop insurance reform and urge its speedy resolution and enactment. I would like to elaborate on these and other issues but I know my time is and would request the opportunity to submit a more detailed written testimony for the record.
Again, we greatly appreciate this invitation to present our views and thank you all for what you do for American agriculture. At this time, I would be pleased to answer any questions. Thank you.
Statement of Terry Hague
Mr. Chairman and members of the committee, I am pleased to be here on behalf of the American Bankers Association (ABA) to participate in this important hearing to examine Federal agricultural policy and to discuss additional ways that the banking industry can work with Congress and the administration to help ensure a sound economic footing for American agriculture.
I am Terry Hague, chief executive officer of Farmers Exchange Bank in Cherokee, Oklahoma. In addition, I am a member of the ABA's Agricultural and Rural Bankers Committee, and I am chairman of the Oklahoma Bankers Association. The ABA brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership—which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks—makes ABA the largest banking trade association in the country.
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For those of you who are not familiar with my State, Cherokee is located about 140 miles northwest of Oklahoma City and 20 miles south of the Kansas border. In our area, farmers produce alfalfa hay, wheat, milo, soybeans and cotton. In addition we have cow calf operations, stocker cattle and some hogs. My county, Alfalfa, has some of the very best farmland in Oklahoma.
My bank has $72 million in total assets, and the largest portion of our asset base is made up of loans to farmers. At present we have over $30 million in loans to some 500 producers, and a great deal of the rest of our loan portfolio is to businesses that either supply the producers in our area or are dependent upon their financial health to be able to survive. You could say that when the farm economy cools off in Alfalfa and surrounding counties, downtown Cherokee freezes. My bank became a USDA, Farm Service Agency Preferred Lender (PLP) in 1999 and we have successfully utilized the new authority to make additional and needed guaranteed loans to our customers.
Mr. Chairman, as you begin the long and difficult process of trying to design a new Federal farm policy, those of us who labor to support agriculture every day wish to thank you and this committee for your prompt and effective response to the critical needs of farmers and ranchers. By acting swiftly in 1998 and 1999, you helped avert what could have become a serious and extended period of economic disruption and financial ruin for many farmers and ranchers.
Agriculture continues to face an uncertain future. The banking industry, with more credit extended to American agriculture than any other lender, shares the concerns that our producers have about the future economic viability of agriculture. Our industry provides the vital credit that farmers and ranchers need to be successful. At the end of the third quarter of 1999 banks had over $76.8 billion outstanding to farmers and ranchers—an increase of 1.3 percent over last year.
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I want to state for the record that I lend money to farmers and ranchers in Cherokee not because I have to, and not because some regulator tells me that I must, but because agricultural lending has been good business for my bank. Further, agricultural lending has been good business for thousands of other banks in the country and that is why the banking industry has made such a significant investment in the industry. Agriculture is a capital-intensive business. Each year my customers must borrow large amounts of money to be able to plant crops, purchase livestock, buy machinery and equipment and improve their land.
As an agricultural banker, it is my job to assess the risk in every loan and to assess the potential for repayment on every loan we make. We do our very best to examine all aspects of the deal before we make the loan. It is important that I make such a careful assessment, because it is not my money that Farmers Exchange Bank loans out, it belongs to the Main Street merchants, the hospital, the schools, the local restaurants and the men and women that live and work in and around Cherokee. I know that on an intellectual level you know this, but this is a reality that I must work with every day.
In saying all of this, I want to tell you what the banking industry would like the most out of a new Federal agricultural policy; further, I believe that my farm customers would join me in advocating for this as well. I can sum it up in one word: certainty. If we knew at the start of each year what we could calculate into our customer's cash flow projections, we would have a greater level of confidence about the credit that we are extending. We would be able to make more credit available in a more timely manner. Our bank regulators would have a greater level of comfort in the loans that they are examining. Our farm supply businesses would be able to better project their annual performance, and that would make it easier for my bank to determine their repayment ability and on and on. As you labor to craft a new policy for agriculture, please keep this in mind and if you can just provide some certainty you will have accomplished much.
Despite A Difficult Agricultural Economy, Agricultural Banks Remain Strong. Despite low commodity prices for key agricultural commodities and regional weather and disease problems, widespread negative effects on banks' farm loan portfolios have not materialized. The sound state of farm banks today is the result of the strong non-farm economy, improved credit underwriting standards and high levels of government assistance in 1998 and 1999 that enabled farmers to meet their debt obligations.
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The reason agricultural banks can help meet the credit needs of their customers is because they remain strong. Agricultural banks tend to be better capitalized than other small banks. The average capital ratio at an agricultural bank stood at 10.8 percent as of the third quarter of 1999. As of September, almost all agricultural banks met the regulatory definition of being ''adequately'' capitalized and more than 98 percent of all agricultural banks meet the definition of being ''well'' capitalized. Farm banks were able to build capital during the 1990's because they have been profitable.
Loan quality remains strong for agricultural banks. As of September 1999, in aggregate farm banks reported $1 billion in farm production loans as delinquent (30 days or more past due) or 2.2 percent of the outstandings. Non-performing farm production loans (past due 90 days accruing interest and non-accruals) was 1.4 percent. Additionally, $700 million in farm real estate loans were delinquent as of the third quarter 1999. As a percent of the portfolio, delinquent farm real estate loans stood at 2.3 percent. This compares favorably to the previous year's ratio of 2.5 percent. Furthermore, over 80 percent of all farm banks have less than 2 percent of their total loan portfolio as non-performing as of September 1999.
Further evidence of the strength of farm bank portfolios is reflected in the relatively low charge-off rates for both farm real estate and production loans. The charge-off rate for farm real estate loans stood at 0.03 percent—below the charge-off rate reported in 1997. For farm production loans, the charge-off rate was in line with the rate reported the last several years at 0.21 percent.
Despite the positives that I have reported to you, continued low commodity prices and the uncertain nature of future Federal assistance to agriculture has raised bankers' concerns about their farm customers.
These concerns are reflected in the ABA's 1999 Farm Credit Survey Report. According to the survey, many ag bankers believe the quality of their farm loan portfolio will deteriorate in the future. Bankers reported that they anticipate a slowing in the rate of loan repayments, an increase in the rate of loan renewals and extension, an increase in loans 30 days or more delinquent, and an increase in the rate of loan charge-offs.
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In summary, while our members have done a good job of coping with the economic problems faced by their farm and ranch customers, the future is uncertain.
To deal with the uncertainty in agriculture, the ABA formed the Task Force on 21st Century Agriculture in 1999.
ABA TASK FORCE ON 21ST CENTURY AGRICULTURAL BANKING
In 1999 ABA assembled bankers from all over the country to discuss what tools bankers will need to meet the demands of their customers immediately, and what they will need to continue our honored role as the largest provider of credit to this vital national industry. In August 1999 the Task Force released their report of findings.
Our report, Positioning Agriculture and Rural America For the 21st Century, is the result of months of meetings and discussions that we held. I have attached the complete report to my written statement. We have developed specific and actionable recommendations from the banking industry that will help to ensure that the flow of credit to agriculture is unimpeded. I am pleased to report to you that thanks to the support of Congress and the Administration, many of the recommendations made by the Task Force have been accomplished or are well underway.
For example, both the Senate and House have now passed major Federal crop insurance reforms that meet the criteria for meaningful change that the task force identified. We look forward to prompt reconciliation of the two bills so that our producers will receive the benefits of the new program in time for the 2001 planting season. I hope that more of my customers will perceive a greater value in the new products that the legislation will make available.
In November 1999, Congress passed the Gramm-Leach-Bliley Act that modernizes the financial services industry. Included in this legislation are provisions that will allow banks like mine to utilize my farm and small business loans as collateral for additional advances from the Federal Home Loan Bank System (FHLB). By utilizing FHLB advances, I will be able to provide longer terms and lower interest rates to my farm and small business customers. The ABA is working with the FHLB system to help them develop their new programs. We can not overstate how important this new source of lendable funds will be to farms, ranches and small businesses.
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ABA has worked closely with the USDA, Farm Service Agency (FSA) to make the rollout of the PLP program a success. We believe that the new program has done much to help banks deliver credit, and we believe that there is more that we can accomplish with the support of Congress and USDA.
The USDA, Farm Service Agency Guaranteed Loan Program is a Model
Public/Private Partnership That Has Worked For Agriculture
Mr. Chairman, the banking industry would like to take this opportunity to thank you for your leadership, vision, determination and work to make the Farm Service Agency's guaranteed loan program a workable credit program for farmers, ranchers and their lenders. It was just one year ago in this hearing room that we reported to you our enthusiasm about the potential for the Preferred Lenders Program (PLP). We are happy to report that, in our opinion, the PLP has been a great success.
Today nearly 80 lenders have received PLP status from FSA and additional applications are in process. Last year, at this time, there was only one. My bank received PLP status in the second half of 1999 and we have found that the program is working well for us and for our farm customers. Today, thanks to our PLP status, we can deliver credit more efficiently to our farm customers than ever before.
When ABA testified before you last year, we predicted that as the farm economy continued to decline the need for the guaranteed loan program would increase significantly, and indeed it did. In fiscal year 1999 FSA obligated $2.55 billion in guaranteed loans, a $1.11 billion increase over fiscal year 1998. Today, nearly 50,000 farmers and ranchers receive credit that is guaranteed by the FSA. At the end of fiscal year 1999, the outstanding guaranteed loan portfolio was $7.3 billion. The portfolio of FSA guaranteed loans continues to perform well. At the end of fiscal year 1999, only 2.4 percent of the principal of these loans were delinquent, which is very comparable to the banking industry's non-guaranteed loan portfolio for the same period.
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The Guaranteed Loan Programs offered by the USDA, FSA are one of the most cost-effective and highest impact tools that Congress can provide to farmers and ranchers during difficult economic times.
Last year when ABA testified before this committee, our enthusiasm about the FSA guaranteed loan program was tempered by the fact that we were faced with critical funding shortages. Because you and others recognized the need, Mr. Chairman, Congress acted twice last year to ensure that there would be adequate funding in fiscal year 1999 and fiscal year 2000. We thank you for responding to us and we believe that funding for the remainder of fiscal year 2000 will be adequate. We also understand that any un-obligated funding remaining at the end of fiscal year 2000 will be available to be used in fiscal year 2001.
Recommendation: We urge you to continue to make funding for the FSA guaranteed loan programs a priority. With the continued uncertainty in the agricultural economy, there must be a dependable level of funding for FSA programs. Recent improvements to the program have established the guaranteed loan program as a credible tool for the private sector to use to deliver credit to farmers and ranchers. In order for this tool to continue to work, funding must be available.
ADDITIONAL USDA, FSA PROGRAM RECOMMENDATIONS
We strongly recommend that Congress repeal the 15 year term limit on guaranteed loan eligibility. For many years the banking industry has worked with USDA to successfully graduate farm borrowers from direct USDA loans to guaranteed loans and then on to non-guaranteed bank credit. However, we are currently in a very difficult economic period and many of our farm borrowers, because of the eligibility term limits, are facing an unnecessary obstacle to credit. By changing the law now, Congress will be able to help a number of farmers and ranchers get the credit they need this spring. We do not believe that Congress envisioned the kind of economic situation that we currently face when it acted to place a limit on a borrower's eligibility. Clearly, economic realities justify an immediate change.
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Recommendation: Given the fact that the agricultural sector is expected to be under continued financial stress, borrower term limits should be eliminated.
The successful introduction of the PLP program and other program improvements in 1999 should be viewed as the beginning step in a process of constant program delivery improvements. Last year, under your direction, Congress corrected a program delivery problem that was a source of great misunderstanding between the banking community and the FSA, the 110 percent cash flow rule. The elimination of this confusing program requirement has had an immediate, positive effect on the delivery of credit to borrowers.
There continues to be widespread confusion about what happens if a customer fails to achieve a 100 percent cash flow. If a farmer has a cash flow coverage of less than 100 percent, this means that he was unable to meet all of his operating and debt obligations. Even in the best of years, many farms may not experience 100 percent cash flow coverage. Does that mean that he automatically goes broke? Absolutely not. In many cases the farmer may have additional debt as a result, or may have some unpaid trade accounts. In other cases, if the shortfall is severe enough, the viability of the farm may be in jeopardy, or it may be necessary for the farmer to restructure debt.
My point is that an exclusive focus on cash flow coverage being the primary determinant of credit worthiness is flawed, and that this may be an artificial barrier to credit for many farmers and ranchers. When we underwrite a loan at my bank we look at other factors such as available collateral for example. In many cases, I might be willing to make a loan to the producer even if his cash flow is not 100 percent, if I know about other, offsetting factors. Given the current economic situation, it seems that we should be exploring additional ways to determine the credit worthiness of a customer and not relying on one determinant alone.
Recommendation: FSA should consider lowering the percentage of guarantee if the cash flow coverage is less than 100 percent if the bank has indicated that they will approve and fund the loan. Give my bank the option of making the loan (and taking on the additional risk) if we feel that there are other factors that offset the cash flow deficiency. By flatly denying the guarantee if the cash flow coverage is less than 100 percent FSA immediately forecloses on all options for the customer.
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FSA's current system of guaranteed loan program delivery reflects a time when there were nearly unlimited resources available to USDA. Over the last 40 years the predecessor agencies (FmHA and ASCS) deployed a vast delivery network that was highly local, heavily dependent on labor and one that demanded many skilled workers. Today, while many services still require direct farmer contact by the FSA, guaranteed lending is not one of them. It is the bank that makes the direct contact with the customer, it is the bank that does the on-site inspections and appraisals, and it is the bank that commits the funding for the loan.
Today there are many PLP lenders that are operating in multi-county and even multi-state regions. My own bank, as a PLP, can apply for and receive permission to make FSA guarantees in Kansas or any other State where we can demonstrate we can adequately manage the accounts. However, lenders must still place the individual applications in the local county office. All to often, this is where lenders encounter glaring inconsistencies in processing. Some States have recognized that this is not an efficient way to utilize scarce resources, and they have consolidated guaranteed lending into specialized offices. We strongly encourage USDA to continue in this direction because the banking industry has the local infrastructure necessary to deliver credit. FSA's role is to provide the necessary oversight of the private sector lenders and this can be done much more efficiently.
Recommendation: FSA should consolidate guaranteed loan making and loan servicing at State offices, or in specialized districts in very large States to ensure consistency and efficiency of program delivery.
SUMMARY
I hope I have been able to convey to you the substantial commitment the banking industry has to agriculture as well as the concerns that agricultural bankers like me have for our farm and ranch customers. The American Bankers Association, which has long recognized the importance of agricultural lending to the banking industry, created the Center for Agricultural and Rural Banking last fall. It is ABA's hope that by committing additional resources to the challenges faced by the agricultural community we will be better able to work with Congress, the administration and the public to help solve the long term problems of agriculture.
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I want to assure you that bankers will work with their customers to restructure debt, to provide credit for operating expenses for the coming year, to find ways for beginning farmers to get started and to provide the financial services and financial stability that rural communities need. We will continue to provide credit to those farmers and ranchers who can make the necessary and rapid adjustments to the new global environment. Even in this uncertain environment, competition for safe and sound credit opportunities is strong, and that competition among lenders benefits the producer.
Credit, however, cannot be used as a replacement for earnings and profits. One of the key lessons learned in the farm crisis of the 1980's is that agricultural businesses must be profitable in order to successfully manage their debt obligations. This was a hard-learned lesson, but a lesson never to be forgotten.
The ABA looks forward to working with you as you address the challenges facing our nation's farmers and ranchers. I will be happy to answer any questions that you may have at this time.
Testimony of Jay Penick
Thank you for the opportunity to appear before the Subcommittee, Mr. Chairman. I am Jay Penick, president and CEO of Northwest Farm Credit Services. Northwest Farm Credit Services is an agricultural credit association providing financing and related services to farmers, ranchers, timber producers, agribusinesses and others in Montana, Idaho, Oregon, Washington and Alaska. At year-end 1999, we owned and serviced $3.5 billion in agricultural loans.
I am appearing today on behalf of the institutions of the Farm Credit System. Farm Credit is comprised of about 180 cooperatively-owned, financial services institutions. Our mission, as stated in the Farm Credit Act, is straightforward. It is ''to accomplish the objective of improving the income and well-being of American farmers and ranchers by furnishing sound, adequate, and constructive credit and closely related services to them, their cooperatives, and to selected farm-related businesses necessary for efficient farm operations.''
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My testimony will focus on two specific areas—current credit conditions and the outlook for the future.
The institutions of the Farm Credit System continue to meet the credit needs of our customers. At year-end 1999, Farm Credit's loan volume was $70 billion, an increase of $2.3 billion from the previous year. Nonaccrual loans, those loans having serious credit weaknesses, represent 1.36 percent of gross loan volume. Nonaccrual loans are down from 1.77 percent as reported at year-end 1998. To put the recent loan performance in perspective, we can compare it with past performance when agriculture was severely stressed. In 1987, the level of nonaccrual loans was 10 percent of gross loans. By 1990, that figure had declined to 5.1 percent of gross loans.
Mr. Chairman, we recognize that the performance of our loan portfolio is the result of several key factors. First, the macro economic conditions over the past several years have been favorable. Specifically, the favorable interest rate environment and low inflation. This has allowed many producers to manage their balance sheets and build equity. USDA reports that since 1986 farm equity increased nearly 59 percent. Since the time it hit a low point in 1989, farm debt has increased moderately. Debt peaked at $172.8 billion in 1998. This is well below the levels reached during the 1980's when total farm debt approached $200 billion.
While the overall farm balance sheet remains strong, with low prices starting into their third year, U.S. producers are increasingly at risk of financial difficulty. Agricultural producers have been able to meet debt obligations and keep loans current because of the government support provided over the last two years. You know all too well the amount of assistance that has been provided. We have seen its impact. The low level of nonaccrual loans I cited earlier demonstrates its impact. Today, most farmers have been able to hold their operations together and avoid serious financial stress, but our real concern is for what the future might hold.
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We continue to carefully review the performance of individual borrowers, and we are carefully monitoring accounts payable and land values. The value of farmland is driven by a number of factors including its proximity to urban areas, interest rates, as well as cash receipts to farmers. Nevertheless, we recognize that a sustained period of low commodity prices almost certainly will cause land values to decline. There is also evidence that farmers are increasing their credit card debt in order to finance their operations. Lenders learned a valuable lesson in the 1980's that asset based lending is a very short term approach that will get you in trouble. Today, we rely heavily on the ability of borrowers to demonstrate repayment capacity. But as you can well imagine, many producers are finding it more difficult to do so. Complicating things further are the recent upward trends in both interest rates and energy costs.
Mr. Chairman, twice a year the Farm Credit Council conducts a survey of all Farm Credit associations regarding credit conditions. The survey does not obtain specific numbers, but it is helpful in identifying trends. The most recent survey showed that the depth of problems in the agricultural sector vary by region. To illustrate this point, 27 percent of Farm Credit associations reported for 1999 that the number and dollars of non-performing assets were higher than 1998 results, 35 percent said they were about the same, and 38 percent reported smaller numbers and dollars of non-performing assets.
The survey also shows that Farm Credit associations are expecting an increase in non-performing assets during 2000. One-third of the associations predict that numbers and dollars of non-performing assets will move higher. Forty one percent predict increases for 2000, while 11 percent predict a decrease in their level of non-performing assets.
The survey also asked Farm Credit associations to comment on farm financial stress in 2000. Not surprisingly, 62 percent of the associations believe farm financial stress will increase as the year progresses and only 2 percent believe stress will decrease. The remainder predict the current level of stress will persist throughout 2000. It is clear that a majority of system institutions believe 2000 will be a trying time for many farmers and a trying time for farm lenders. With USDA projecting a significant decline in farm income in 2000, we are anxious to learn what Congress will do to provide additional assistance to farmers this year.
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Mr. Chairman, we continue to do whatever we can to help our borrowers as they struggle to cope with low commodity prices. System institutions are actively engaging their members to help individuals deal with deteriorating economic conditions. Farm Credit is proactively working with stressed producers. In some cases repackaging loans to defer payments, restructure loan terms and lengthen repayment schedules. Always, however, Farm Credit undertakes these actions with a firm eye on what is in the best long term interest of the producer or cooperative, while maintaining a financially sound institution that can continue to serve agriculture. When farmers decide to get out of farming while they still have some equity, we work with them to make their transition as successful as we can. When others have decided to try one more year, we will work with them to develop a financing package that will offer them the best chance to survive long term. To meet that demand, Farm Credit will do everything we can to offer our customers the most flexible financing options and to do so at competitive rates.
As we work with borrowers, they continue to express frustration over the availability of effective, risk-management tools. What is available to producers today is not providing them the protection they want or at a price that makes sense to them. We applaud the leadership provided by this committee to improve the existing crop insurance program. We are also gratified that the Senate has adopted their version of crop insurance reform, and we hope there will be a speedy conference and new law signed by the President. In these volatile times, both farmers and lenders need programs that will instill confidence for the future.
Several Farm Credit institutions have taken up the challenge of finding an alternative means to provide risk management for farmers. They, along with the National Association of State Departments of Agriculture, are providing financial support for the research and development of a whole farm, cost of production insurance product. This type of program will not guarantee an income for a farmer. It would, however, provide protection so a farmer could recover his cost of production in the face of weather and/or price disasters. This effort is still in the development process, and we would be happy to arrange for a briefing for members and staff as the research progresses. The goal is to design an improved risk management tool that will bring about stability for farmers.
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Mr. Chairman, as a lender we constantly face a difficult dilemma. As borrowers come in for loan renewals, we have to evaluate them based on their financial projections, and estimates of whether they will cash flow, and then we have to make the determination as to whether we can adequately secure a loan. Given USDA projections, it is increasingly difficult to develop farm plans that project profitability.
I mentioned earlier that demand for loans has gone up as has our loan volume. What I didn't say then is that every day we are seeing customers—good customers—who are being forced to substitute credit for what income had covered a year ago. Good managers are prepared to do this as part of adjusting to the ups and downs of the farm business cycle. But this is a strategy that will sink even good managers if this down cycle continues to be both broad in its impact across commodities, and it lasts for a prolonged period of time.
Just like our customers, Farm Credit institutions have used the last few good years to build up capital reserves. Our institutions are financially strong today. As of December 31, 1999, the system's capital as a percentage of total assets was 14.9 percent, and risk funds (capital stock and surplus and the allowance for loan losses) covered 21.7 percent of system loans. In addition, we have streamlined operations and reduced overhead. Our continued agricultural focus has allowed us to retain experienced, high quality loan officers who understand agriculture and the economic cycles producers go through. Agriculture will not receive less attention from the Farm Credit System because times are tough.
The Farm Credit Act contains a whole section on the rights of borrowers, including those who are experiencing difficulty in meeting their loan obligations. It provides specific guidance on notices to borrowers, on the restructuring of distressed loans, and on the use of credit review committees as an appeal process that requires farmer director involvement. These provisions worked well in the 1980's, and they remain in place as a guide for loan servicing actions. However, you should know that system institutions go well beyond what the law requires in order to work with customers during tough times.
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Mr. Chairman, our safety and soundness regulator, the Farm Credit Administration (FCA), continues to do a very effective job of examining system institutions and ensuring that we are following sound lending practices. They do a good job. We also applaud their efforts to give system institutions the operating flexibility they need to continue to serve farmers, ranchers their cooperatives and the businesses they rely on in a cost effective manner. Farm Credit must be able to modernize its delivery structure and methods to keep up with the change that agriculture continues to undergo. We urge you to be supportive of FCA as they act to adjust their regulations to accomplish this goal.
Finally, Mr. Chairman, I want to briefly talk about the FSA guaranteed loan program. Loan guarantees are a risk management tool for lenders. If the programs are too cumbersome, too time consuming, too bureaucratic, too unpredictable in their application of guidelines and too unpredictable in terms of funding availability, their usefulness, even as a risk management tool, decreases. While FSA has been making progress to adddress these concerns, Farm Credit institutions have had mixed experience with these programs. The pattern of usage within Farm Credit reflects this experience.
The FSA reports that Farm Credit has about a 15 percent share of farm loan guarantees as compared to 80 percent for commercial banks and 5 percent by others. Some Farm Credit critics view this as very poor performance. I just mentioned that Farm Credit institutions have mixed experiences working with FSA. I would also like to note that there are twenty times as many agricultural banks as system institutions and they have just a little over 5 times the market share.
Farm Credit, as a whole, could increase its use of the guarantee program. In fact, as the USDA continues its positive actions to consolidate State office operations, we suggest that strong consideration be given to consolidate all guarantee loan decisions at the State office as well. Many lenders, not just Farm Credit, are forced to deal with many different county decision-makers to approve loan guarantees. Having State-centralized decision making would make the FSA guarantee program more efficient for all lenders.
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The current managers of the guaranteed program are to be commended for recognizing that their customers for this program are the lenders that actually use it. To their credit they have sought user input and have made changes that will make the program more user friendly.
Farm Credit institutions will continue to make use of the FSA guaranteed loan program when it is necessary and appropriate for managing our risk as we serve individual customers. We urge the Congress to continue to provide the funding necessary to keep loan guarantees available. But I stress that we would prefer to see a healthy agriculture economy where loan guarantees would not be necessary and where credit would not need to be a substitute for income.
Again, thank you Mr. Chairman for the opportunity to be here this morning. We look forward to working with you during 2000 for the betterment of agriculture and rural America.
Statement of the American Seed Trade Association
Thank you, Mr. Chairman and members of the committee. It's a pleasure to be with all of you this morning. The American Seed Trade Association is pleased to offer our unique comment and perspective on current and future agricultural policy. Our 900 plus members provide support in many ways to farmers here at home and our customers play a direct role in that success. Clearly, the farm bill offers many opportunities and programs that we believe, make our farmers the most productive and efficient in the world.
As you may know, Mr. Chairman, the ASTA has represented the interests and commitment of the seed industry since 1883. And, with that responsibility, we have worked hard to ensure a steady stream of new and improved genetics for our customers. In the past year alone, our mission has changed substantially, just has all of agriculture. It is our view that future farm bills must continue to address market concerns, trade opportunities and development, profitability for farmers and efficiency issues, in general. It is a big job, but one that is clearly easier when those of us in the support role take advantage of forums like this.
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No doubt, in your field hearings around the country you have heard and will continue to hear about profitability. For members of the seed industry, the fiscal health of the American farmers is of utmost importance. As you know, each spring, farmers across the land begin a process that includes more than seed selection. It involves, economics, marketing, weather forecasting, and conservation. These four themes will dominate my remarks this morning.
ECONOMICS
Profitability and return on investment are critical to our customer's success. Each planting season, before the seed is even in the ground, members of the seed industry are working hard to bring new and improved varieties to the marketplace. Clearly, in today's challenging economic environment, seed selection is the first major purchase made each spring. And, when considering that investment, the seed industry is ready and able to provide information and value to the farmer. Our success as an industry hinges on the performance of our genetics. And, with the advent of biotechnology and related technologies, farmers have more choices than ever before. While biotechnology is but one tool in the arsenal, it is one that complements traditional breeding. Whatever the decision, new and improved varieties are abundant and our ability to provide the choice and selection is proven and unyielding.
It is clear that any new future agricultural policies must include provisions and take into account the necessity for profitability. Fair prices and honest returns drive business everywhere, especially agriculture. And, while market forces continue to be defined and evolve, it is important that the seed industry and American farmers continue to talk and listen. The seed industry remains responsive to our customers, and believe that appropriate agricultural policies that complement their proficiency, efficiency and stewardship are crucial. We believe that the investment of seed is an important foundation and that selection affects the livelihood and financial health of our customers. It is up to all of us, though, to find ways to identify and enhance new uses and new markets.
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As an example, ASTA strongly believes that ethanol programs offer much promise and opportunity. This potential market of 500 million bushels of corn could significantly complement efforts to improve air quality as well as add up to 35 cents to the value of every bushel of corn and sorghum. The USDA estimates that by 2004, ethanol could replace Methyl Tertiary Butyl Ether (MTBE) as an oxygenate in gasoline. This action alone could potentially utilize an additional 600 million bushels of corn annually.
MARKETING
On the issue of marketing, ASTA believes that enhanced funding of P.L. 480, the Export Enhancement Program and the Foreign Market Development Act, could all add significant benefit to our farmers. One good example is the ASTA's leadership in gaining the listing of seed to the lists of commodities on the PL 480 docket. Last spring, the first ever shipment of seed under PL 480 was shipped to Russia. This shipment consisted of approximately 15,000 MT of seed. Now, in 2000, the USDA is considering additional requests.
ASTA remains steadfast in its belief that identifying and enhancing new markets around the world must be a priority and long-standing objective. Our work in Africa, Asia and the former Soviet Union all confirm this belief. Perhaps our biggest success stories trace back to our participation in the USDA's Cooperator Program. It is through this important program that ASTA has been able to expand U.S. market share and help to increase American farmer profitability through overseas marketing.
CONSERVATION, STEWARDSHIP AND INVASIVE SPECIES
No one can accurately forecast the weather, but our customers, can gauge with some degree of certainty, that conditions will change and challenge. That is why, ASTA agrees wholeheartedly with scores of witnesses that have asked for crop insurance reform. Like many, ASTA urges continued consolidation and technological upgrades of Farm Services Agency offices. Fairness in crop insurance rates should also be a priority. As you probably know Mr. Chairman, each year, we work very closely with our customers to ensure that a steady stream of seed is available each planting season. Our growers are very important to us. And, with that shared commitment and important relationship, we work closely with officials at the Federal Crop Insurance offices at the county and national level to insure that the program works.
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We believe some modifications are necessary and those adjustments will help to insure continued efficiency and fairness. Likewise, we believe that loan deficiency payments provide a certain level of counter cyclical price protection. LDPs are not sufficient in protecting our growers from extreme low prices. We would respectfully suggest that consideration and debate include a combination of crop insurance and Supplemental Income Payment programs.
Turning now to conservation, ASTA works hard to provide products for fragile lands and pastures. We endorse the CRP and believe that it should be maintained at maximum enrollment. Each planting season, the seed industry unveils scores of new varieties that promote good stewardship. The seed industry believes strongly that preservation of our resources and our ongoing commitment to efficient and responsible stewardship benefits all citizens.
On a related note, Mr. Chairman, ASTA has been working hard to coordinate efforts and provide much needed information to officials at the Federal, State, and local levels on invasive species. And, while Secretary Glickman has been showcasing efforts to interdict, control and eradicate harmful species, like citrus canker and pesky beetles around the country, ASTA remains concerned that in our collective haste to fix very real problems, some actions could potentially disrupt the availability and limit the use of long-standing and legitimate agricultural products.
As an example, livestock producers use grasses for forage that could be considered alien under the conditions of the 1999 Executive Order. Farmers and ranchers and seedsmen have expressed grave concerns over some attempts to limit public comment and input on lists that are being developed and considered at various levels. ASTA would respectfully urge the committee and others to monitor this situation closely and seek appropriate scientific background and perspective from not only seedsmen, but environmentalists, academia and farmers. Accordingly, ASTA believes that interdiction programs administered by the Animal Plant Health Inspection Service (APHIS) should be fully funded.
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FINAL OBSERVATIONS
On a final note, Mr. Chairman, I would be remiss if I didn't spend a little time reflecting more on the promise and opportunity that seed research offers farmers. While much is said and reported on biotechnology and plant breeding in general, I must convey our collective support and commitment to genetic research and varietal development. Farmers count on us and we have a tremendous obligation and responsibility to ensure that they have an ongoing selection of genetics that will feed a growing world, efficiently, responsibly and thoroughly.
That is why, ASTA has been a strong advocate for increased funding for research in general, but also for the important National Plant Germplasm System (NPGS). We believe that absent full funding, genetic resources will be lost. We strongly encourage support of this critical program that benefits not only agriculture, but all mankind. Clearly, all of us share an obligation to collect, preserve and catalog germplasm that may in some cases, hold the secrets of yet to be discovered medicines, as well as reveal our past and future as a society.
In summary Mr. Chairman, ASTA is mindful that as research continues to shape and affect all of us in agriculture, we must continue to coordinate all efforts to support farmers, those who export, those who process and virtually everyone in the food chain. At the end of the day, we are all consumers. While the story begins with the seedsman, there are many players. The future holds much promise and opportunity that goes beyond what our farmers already do and do better than any in the world: feed the world.
Already, biotechnology is a part of everyday life in the United States. Since 1996, growers have increasingly selected genetically enhanced varieties. According to USDA Secretary Glickman, approximately 44 percent of soybeans and 36 percent of all corn in the United States in the last year was grown from these varieties.
In selecting these varieties farmers have helped to provide the foundation for foods that are better tasting, fresher, and more disease and insect resistant. Biotechnology can improve the quality, taste and nutritional benefits of food. It can do so in a responsible and environmentally friendly way. By protecting our environment, genetically enhanced crops have been developed that are herbicide tolerant, or are more resistant to insect or virus damage. In so doing, they require fewer chemical applications. Biotechnology crops also require less land and other natural resources, and can be grown in less than ideal climate conditions.
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American farmers have recognized the benefits of these new seed products. Many new and exciting food products are in the pipeline. Scientists are developing foods that contain enhanced levels of vitamins C and E to help reduce cancer and heart disease. They are also developing corn that provides blood-replacement components. Still other plants will make antibodies against bacterial lung infections in patients with cystic fibrosis and bananas that will deliver the Hepatitis B vaccine. Scientists involved in this work estimate that, in some cases, these enhanced food products of biotechnology could deliver a vaccine in developing countries at a cost of 2 cents a dose versus $125 for an injection.
Many parties are involved in the debate today. What is at stake for farmers, especially here at home is significant. The seed industry believes strongly in providing improved genetics that meet the needs of our customers. To date, our customers consistently tell us that they like these varieties and that they want all of us, the regulators, the seed industry, our Congressional leaders and our elected officials to work hard to advance markets and consumer acceptance around the world. We recognize the task is huge—our collective efforts though are required.
The American farmer needs help. The seed industry stands ready to provide the genetics and the technical know-how. We can help with the stewardship, we can help with the selection. All of us though, are needed in market development, consumer education and acceptance.
ASTA appreciates your leadership Mr. Chairman. Hopefully, at the end of the day, you and your colleagues will have a better sense on what's right with American agriculture and what we can all do to offer a new idea or approach to make farming more profitable. We believe by providing excellent genetics and innovative products American farmers can continue to do what they are known for around the world—innovators and pioneers that provide food and fiber to a growing world responsibly and efficiently.
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Thank you and I'd be pleased to answer any questions.
Testimony of Jay J. Vroom
I am Jay J. Vroom, President of the American Crop Protection Association (ACPA). ACPA is the U.S. industry trade association representing basic manufacturers, distributors, and formulators of crop protection and biotechnology products. These companies serve American agriculture from basic research and development of new products that protect crops from pests and weeds to the manufacture and marketing of these tools to our farmer customers. Our members include corporations and cooperatives, both large and small, which operate in a competitive and changing agricultural world.
I am here today also representing ACPA's affiliate association, RISE (Responsible Industry for a Sound Environment,) which represents our industry's specialty, largely urban-use pesticides. While today's hearing focuses on agricultural policy, I would be remiss if I did not point out the direct linkage that exists between both the markets and regulatory environment of agricultural and specialty pesticides. First, the market synergies of both sectors support common investment in product discovery, testing and development. In many cases, active ingredient molecules are used in ag and non-ag markets. Often the same companies discover, make and sell these products, benefiting customers on both sides of the equation. Together with RISE, we seek uniform and fair, science-based regulation of all pesticide products, no matter what the market.
Additionally Mr. Chairman, I want to emphasize the essential public health benefit of many specialty uses of pesticides to control disease vectors such as the recent outbreak of mosquito-born encephalitis, to reduction of cockroach ''dust'' that is a major contributor of childhood asthma. This committee has always paid close attention to the issues affecting specialty pesticide regulation and use, and we ask that you continue to maintain that important balance. By the way, we expect the synergies that have existed between the ag and non-ag synthetic technologies and products will continue as new biotechnology tools grow in both market arenas.
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We commend Chairman Combest and this committee for holding today's hearing about the impact of current and future farm policy on the input sector. As you examine a wide variety of alternatives to existing farm policy, we encourage you to continue considering the implications for the suppliers of farm goods and services.
As this committee knows well, crop protection provides essential inputs for American farmers that enable them to produce sufficient food to feed a growing and hungry world. Farmers need a variety of crop protection tools in order to select the best match for their individual farming operations. Their needs can vary widely from year to year, depending on crops grown and rotation schedules, weather, pest populations, and product rotation to control pest resistance.
Despite the wide variety of crop protection tools on the market, when our customers experience low prices and low profitability, so do we. Over the past several years, this fact has caused flat to depressed sales of crop protection products. For example, last year sales by ACPA members were down 8.6 percent. Many companies have been forced to layoff a significant number of employees and some parent companies are channeling investments into more profitable sectors, away from crop protection. These trends will likely continue until profitability returns to the American farm.
BIOTECHNOLOGY & STEWARDSHIP
Before I turn to the subject of today's hearing, I would like to highlight two major opportunities for American consumers: biotechnology and stewardship.
As most would agree, biotechnology holds tremendous promise. But, its future depends upon public perception, our regulatory system, and demand in domestic and international markets, farmer acceptance, and threats to overrule science from misuse of the precautionary principle.
ACPA's Biotechnology Committee is pleased to work with growers and other stakeholders during these challenging times. In concert with representatives of the entire food chain, from technology providers to growers to food marketers, we will continue to promote sound public policy and inform consumers about biotechnology.
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Mr. Chairman, as you and others on the committee know, agricultural biotechnology companies are about to launch a major, nationwide public information effort—in part as a response to suggestions received from you and the entire committee. The program will be undertaken by a new entity called The Council for Biotechnology Information, and I have been named to serve on its North American Governing Board. The Board met for the first time just before this hearing. I will be happy to answer any questions about available details concerning the impending launch of this important effort to provide to the American public a volume of more balanced and factual information about today's modern crop biotechnology products and their potential for the future.
An immediate challenge we face is that current registrations for all biotechnology products with plant expressed protectant qualities will expire in 2001. We hope that the Environmental Protection Agency will do all it can to ensure that registrations are renewed and renewal decisions made before seed sales for the 2001 growing season begin in August 2000.
We remain firmly committed to providing relevant and useful information to regulators, our customers and the public to ensure that American growers continue to provide quality products for domestic and international markets. We look forward to working with you in reaching our common goal of fair access to world markets for American agricultural producers adopting this technology.
Regarding stewardship, the crop protection industry is making a significant commitment and investment for long-established pesticides, new chemistry and genetically modified products. We are committed to a partnership with the agricultural supply chain and farmers in support of a stewardship program that provides for continuous improvement in the manufacture, handling and storage of crop protection and production products. Increasing the level of professionalism throughout the supply chain to end-users is a key component. Through incentives and encouragement, the goal of the program is to, via an industry voluntary program, train and certify all users of crop protection and production products, including farmers, in order to facilitate safe and effective use, even beyond the high level of stewardship already in place today.
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The crop protection industry also is making significant investments in e-commerce, including development of common platforms and standards to enable all in the supply chain to participate in a transparent and efficient way. Farmers will play a vital role as technology partners while the Internet and electronic information systems transform the way they purchase agricultural inputs and manage their operations. The benefits of e-commerce technology include: start-to-finish product/container tracking, immediate access to use and regulatory compliance information, accurate and integrated field records with history of crops, crop yield, inputs, input efficacy and precise, informed emergency response. E-commerce is an evolving technology with an important role in our overall commitment to stewardship. ACPA's affiliate association, RAPID, is a leader of these technology developments in U.S. agriculture.
CURRENT AND FUTURE FARM POLICY
Many farmers are experiencing serious financial problems due to low prices and, for many, low crop yields resulting from natural disaster. These valued customers have needed the emergency assistance Congress provided for the last two years. However, pain continues to ripple throughout the farm economy, our members included.
For this reason, ACPA has supported the emergency market loss and disaster payments to infuse cash into the farm economy to supplement AMTA payments. AMTA payments were originally conceived to supplement reasonable market prices, not severely depressed prices. Unless Congress wants to continue to provide $6–8 billion a year in supplemental, unpredictable payments, it will be necessary to develop new approaches and solutions.
New policy approaches should recognize that most of the principles of the 1996 farm bill were (and are) sound: increased planting flexibility with less government intervention in farm decisions that gives growers more choice and independence in their operations. Farmers have more freedom to make planting decisions.
However, the elimination of AMTA payments scheduled by 2003 will leave production agriculture without a ''safety net'' in the face of extremely low prices. Barring an unforeseen turnaround in commodity prices, Congress will likely face continued need to provide emergency assistance to growers. Various options to change farm policy are surfacing, which will be considered in preparation for the 2002 farm bill or before. As you deliberate these important options, we urge that you provide a broad underpinning to support our customers, including ensuring that all of a producer's production remains eligible for loan and that eligibility for income support not be determined by farm size or income. We also recommend that any alternative sources of farm support continue to recognize the importance of pesticides and biotechnology in crop management and as a pillar of IPM.
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In addition to farm policy, Congress has additional opportunities to help improve the fundamental outlook for American agriculture. We encourage Congress to help increase exports, build domestic demand, reduce agriculture's regulatory burden, and provide affordable, workable risk management tools to growers.
We recognize and appreciate that this committee is addressing many of these issues. Hopefully, Congress will enact Permanent Normal Trade Relations with China and support its accession to the WTO, which will help build new foreign demand for U.S. production. Reform of U.S. sanctions policy, improved agricultural trade policies in the WTO and retooled U.S. government export credit programs also would help boost exports. With this committee's action last year on crop insurance and recent Senate approval, Congress is closer to sending a bill to the White House that will increase affordable options for a broad array of producers and crops.
However, agriculture's regulatory burden has grown heavier since passage of the 1996 farm bill. Regulatory obstacles threaten unnecessary loss of pesticides, hinder our ability to provide farmers with new products, and may impose millions of dollars in new user fees upon us, and ultimately, our customers.
Together with our customers we face:
Capricious EPA implementation of the Food Quality Protection Act (FQPA)
Time delays to register new pesticides at EPA
Lost effective patent term and other threats to intellectual property
$30 million in proposed increase of EPA tolerance fees
TMDL's
International harmonization challenges
Threats to FIFRA preemption
EPA's new 6(A)(2) rule
Despite these challenges, USDA has grown as a strong advocate for American agriculture in efforts to gain sound, science-based FQPA implementation, encourage new product registration; provide valuable data to EPA for more reliable risk-assessments and generate analysis about agricultural impacts of legislative and regulatory proposals. Yet USDA's role needs to expand so that agriculture has an even stronger voice in EPA decisions.
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Food Quality Protection Act
FQPA requires EPA to impose new, more challenging safety standards for pesticides and to reevaluate the maximum pesticide residues permissible on food. ACPA supports the law's fundamental goals, including additional protection of infants and children. However, FQPA should be implemented according to the latest, most accurate and sound scientific principles to prevent the unnecessary loss of pesticides.
Unfortunately, politics has overtaken science at EPA. The Agency frequently is using theoretical ''worst case'' assumptions in risk assessments to decide the fate of pesticides. This was most visible last August when EPA unnecessarily cancelled 42 crop uses of two major products, methyl parathion and azinphos methyl. This will continue to happen until EPA is forced to fix the way that it implements FQPA. The following describes some of ACPA's concerns over current FQPA implementation:
EPA is creating policy ''on the fly'' to implement FQPA. This has involved several major, sudden capricious reversals and decisions on individual products and on broader policies, without informing or consulting stakeholders. Instead of giving ample time to generate new data called for by FQPA, EPA penalizes pesticides for not having data ''data EPA hasn't even required!
EPA is ignoring credible, reliable data about individual pesticides, and selectively using questionable data from studies to help make what is often a political case against products.
EPA has not yet published current comprehensive data requirements needed to determine whether a pesticide meets FQPA's new safety standards. As a result, pesticide companies must frequently guess which tests to conduct, and these may or may not satisfy EPA reviewers.
EPA is making pesticide decisions before finalizing and publishing the science policies upon which the Agency says that it will base decisions.
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EPA's estimates about pesticide exposure and risk are often inflated by unsupportable assumptions, judgements, models and data, which do not resemble reality. This causes EPA to significantly overestimate actual risk to farmers and consumers, forcing unnecessary cancellation of uses and products.
For example, the FQPA's requirement for reliable exposure data on drinking water is being ignored by EPA and replaced with highly inaccurate, worst-case computer predictions. This use of inaccurate information is having a negative impact on the availability of new and old products for the pesticide user community.
The American public must be assured that pesticides on the market are safe when used according to the label—both for farmers, consumers and others who apply them, and for the food supply. That is EPA's job. But EPA is going beyond ''regulating on the side of caution.'' In fact, the Agency appears to be regulating on ''phantom risk.''
The public advisory committee on FQPA implementation (TRAC) expired last fall. Despite requests from many food and agricultural groups, to date EPA has failed to reinstate TRAC to ensure public input in the decision-making process. We remain hopeful that EPA and USDA will soon announce a replacement for TRAC.
Legislation introduced in the U.S. House of Representatives and the U.S. Senate (H.R. 1592, H.R. 1334 and S. 1464) would hold EPA to the original congressional intent for implementing FQPA. These bills would not change the Act's safety standards or its protections for children. Under H.R. 1592 and S. 1464 specifically, EPA would have to base decisions on sound science, and when reliable data is not available, registrants and others would have to provide it according to EPA guidelines. The legislation would also establish a permanent advisory committee on FQPA implementation.
Currently, H.R. 1592 has 214 cosponsors, and we thank the 42 cosponsors from this committee (4/5 of the committee) for your support. The Subcommittee on Department Operations, Oversight, Nutrition and Forestry has held oversight hearings, and the hearing record demonstrates the need for this legislation to ensure that EPA implementation reflects congressional intent, not the Agency's political positioning. Due to its jurisdiction over the Federal Food, Drug and Cosmetic Act (FFDCA) and FQPA's pesticide tolerance reassessment, we are also urging the Commerce Committee to hold oversight hearings on FQPA implementation.
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FARMERS NEED NEW PESTICIDES: EPA DECISIONS ARE DELAYED
Allow and unpredictable EPA registrations of new pesticides and new pesticide uses are a significant regulatory burden for the crop protection industry and our customers. Fewer new pesticides are available since many move at a glacial pace through EPA approval process, causing a bottleneck for new pesticide registrations.
Having a wide variety of pesticides on the market is beneficial to growers for several reasons. Competition is enhanced. Customers have a broad range of choices from which to select the most efficacious, cost-effective product that meets their needs. They also can better manage development of resistance through pesticide rotation. Furthermore, additional products entering the market are needed to ensure an orderly transition for farmers to replacement pesticides for those that may be lost or curtailed under FQPA and the 1988 reregistration program.
EPA has been unable to keep pace with registration applications. Actual registration decision time is quite lengthy; on average, 4–5 years, which is far slower than in other developed nations with rigorous safety reviews like ours. Also the number of decisions per year has dropped steadily over the past 5 years, and until recently the Agency was refusing to accept additional registration applications for dozens of new pesticides. EPA just announced it will accept some additional applications for registration later this year, but it is unclear when the Agency will be able to act on these submissions.
All pesticides meeting the stringent standards for safety and use under the Federal Fungicide, Insecticide, Rodenticide and Insecticide Act (FIFRA) should receive EPA registration. EPA's responsibility is to grant a license to allow a pesticide to be sold only when the Agency concludes it is safe to use according to label instructions. Instead, EPA has established priority systems to selectively act upon registration applications for products the Agency prefers over others. We believe EPA should act expeditiously and responsibly to make science-based registration decisions on all registration applications. Further, several aspects of the competing priority systems are redundant and illogical.
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The registration process could be expedited in several ways while still preserving EPA's rigorous, important scientific scrutiny. Increased EPA accountability to Congress about meeting specific performance standards with increased efficiency would be an important step, for example.
EPA's registration process could be more efficient if it were streamlined and better organized. For example, simultaneous investigation and review of the different science components of a registration application could be conducted. To help Agency personnel manage the workload, more outside science reviewers could be utilized from EPA-accredited facilities. To fill ''data gaps'' created by FQPA, EPA could update its Part 158 testing guidelines so registrants would clearly understand which tests and methodologies to use before submitting registration applications. Currently, after initial EPA review, much time is spent repeating tests in a slightly different manner.
Limited Federal funding and an increasingly complex risk assessment process are causing this registration bottleneck. ACPA supports increased Federal funding for EPA's registration program to expedite registration decisions based on rigorous science, and to eliminate discriminatory treatment between products eligible for registration. We urge this committee to express its support to the Appropriations Committee for sufficient, targeted EPA resources to ensure this job gets done. As this committee is aware, ACPA's Board of Directors has authorized our Association to pursue the concept of a fee for registration service package with EPA. We remain guardedly optimistic that such a legislative proposal could gain Congressional consideration in the near future, thus providing yet another answer to the problem of gaining more timely registration decisions. We are committed to working closely with organizations representing farmers, other customers and other stakeholders in this process.
INTELLECTUAL PROPERTY
A perverse result of EPA's lengthy registration process is erosion of effective patent protection for crop protection products. The longer it takes EPA to register a product, the less patent life remains for that product in the marketplace. Current patent life technically is 20 years, but, effectively, only about 8 years since it takes 12 years on average to bring a pesticide to market. Much of this 12-year period is attributable to EPA's lengthy registration process.
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Patent protection is important to American agriculture because it provides incentive for the scientific research and development needed to bring new technologies and products to our customers. It also helps to ensure product quality and stewardship. New, high quality products meeting EPA's rigorous safety standards help farmers increase yields and meet consumer demand without resorting to production on marginal, environmentally-sensitive land. Farmers benefit by increased value from their land, and consumers here and abroad enjoy abundant, affordable food. This high yield, intensive use of our resources, coupled with sound stewardship, will become increasingly important for the U.S. to remain a principal supplier of food and fiber to a growing, hungry world population.
When lengthy registration delays eroded pesticide patent life in Europe, the European Union (EU) adopted a Supplementary Protection Certificate (SPC) mechanism to extend effective patent protection. With an SPC, the patent term is extended for up to 5 years after the patent expires to compensate for patent time lost while a manufacturer waited for registration approval. A similar law would benefit the U.S. crop protection sector as well.
Protection of intellectual property from piracy is a critical challenge. Our industry, which submits millions of dollars worth of proprietary data to EPA for product review, wants to ensure that all countries abide by the World Trade Organization's Trade Related Aspects of Intellectual Property Rights (TRIPs) requirements. TRIPs is the first international intellectual property agreement that protects trade secrets, especially proprietary data submitted by innovators to government. As of January 1, developing countries must abide by the TRIPs requirements. The United States Trade Representative must vigilantly and aggressively monitor TRIPs compliance by other countries.
Importantly, a special March 2000 issue of Farm Chemicals International focuses on intellectual property rights (attached). It is the first and most comprehensive discussion to date of the benefits of intellectual property to agriculture, including farmers, the farm input sector, the food industry and consumers worldwide. The magazine also describes in detail the challenges facing our industry's extensive investment in research and development absent comprehensive, worldwide patent protection and data compensation.
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New User Fees. EPA has proposed a new $30 million per-year user fee to pay for all tolerance actions by the Agency. While EPA's authority to collect tolerance fees has remained virtually unchanged over the years, the Agency wants to impose a near–800 percent increase in per tolerance fees (from $68,000 to $542,000). EPA also proposes to make these new fees retroactive to 1996.
For more than 40 years, section 408 of the Federal Food Drug and Cosmetic Act (FFDCA) has authorized the collection of ''such fees as will in the aggregate'' be sufficient over a reasonable term to provide, equip and maintain an adequate service for the performance of the Administrator's function under {section 408}.''
The impact of the new tolerance fee proposal is considerable. Many pesticides have tolerance levels set for a number of different crops. A single pesticide may be used on major and minor crops, perhaps having as many as 100 tolerances. EPA proposes to assess its new, high fees for decisions on each tolerance.
As well, EPA predicts no gains in productivity from the new tolerance user fees. Since nothing will be gained in the process, our additional regulatory costs will be passed on to others, including our farmer customers. The additional costs to industry will cause product lines to be dropped (especially for minor use crops), depriving farmers of needed risk management tools, or farmers will pay higher prices for the product, which will further pinch operating margins. This all will be further exacerbated because the EPA proposal is retroactive. Industry has submitted applications for products based on known financial and marketing costs. Companies may now be billed hundreds of thousands—perhaps into millions—of dollars in retroactive charges.
Last year Congress approved a 1-year moratorium on EPA's ability to implement the tolerance fee rule. We urge Congress to continue this moratorium, especially given production agriculture's financial distress.
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TMDL's. EPA's proposed final rule on Total Maximum Daily Load (TMDL) regulations is a vast over-reach that would impose costly and illegal controls on non-point sources. The proposals would change TMDLs from simple programs into a rigid enforcement tool for both point and non-point sources.
We are concerned that the rule would mandate the inclusion of non-point source into the TMDL program and by definition, treat ''threatened'' waters as ''impaired,'' thus significantly adding to the cost and coverage of the effort. The use of pesticides in silvicultural applications would be restricted without justification and aquatic pesticides would be treated as chemical wastes.
ACPA joins in a large and growing group of national and State organizations, as well as tens of thousands of individual farmers and ranchers, who oppose this rule in its present form. We urge Congress to step up its opposition to this proposal by insisting that EPA revisit the rule to address the common issues raised by agriculture and the States.
U.S.- Canada Harmonization. Lack of consistent and ''harmonized'' scientific testing and data requirements for pesticide registrations in the U.S. and Canada have been a major source of concern for the crop protection industry and our farmer customers. The result has been slower registrations and slower access to new products for farmers.
ACPA is committed to working with the NAFTA Technical Working Group (TWG) and our commodity partners to achieve harmonization of regulatory processes. We believe that new product registrations will be expedited, duplication of studies and analysis can be reduced, ultimately providing greater market competition in both availability and pricing. In order to get there, however, we need to continue working through the TWG to harmonize guidelines, define the ''core data set,'' and streamline the EPA registration process.
In an effort to expedite this process, ACPA is pleased to support the Administration's request to make U.S.-Canada joint registrations one of EPA's ''registration priorities,'' in order to expedite the registration of new products. We must note, however, that continually putting other priorities ahead of the rest of the registration queue will slow down all registrations, ultimately jeopardizing the availability of newer and safer products for our nation's farmers.
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FIFRA Preemption. FIFRA preemption, or primacy of the Federal pesticide label, is a key provision of FIFRA, under this committee' s jurisdiction. Recently, the U.S. Department of Justice (DOJ) and EPA unsuccessfully sought to undermine Federal preemption, even though over 200 State and Federal courts have upheld it over the years. FIFRA expressly prohibits States from imposing any requirements for pesticide labeling that are in addition to or different from those imposed by EPA under FIFRA. By mandating that each pesticide product be distributed with nationally uniform labeling regulated solely by EPA, Congress sought to ensure that a single Federal agency in possession of the necessary data, expertise, and experience would determine what warnings and other information should or should not appear on a pesticide's label.
Loss of FIFRA preemption would diminish farmer confidence in the credibility of EPA's regulatory process and, in turn, consumer confidence in the safety of the food supply. Pesticides are sold nationwide, and lack of Federal preemption would lead to different State labels for each product, resulting in a barrier to interstate commerce. This at a time when our new, e-commerce economy is taking the marketplace in exactly the opposite direction! Lack of preemption could reduce the availability of crop protection products, especially for small markets (minor use products), because of uncertainties and potential liabilities that would be attributed to the labels of the pesticide registrants.
A landmark legal case recently upheld FIFRA preemption. Earlier this month the Supreme Court of California soundly rejected EPA's arguments against preemption, submitted through DOJ's amicus curiae brief and oral arguments in Etcheverry v. Tri-Ag Service and Bayer Corporation. In rejecting the plaintiff's and EPA/DOJ's claims, the Court held that other decisions finding that FIFRA does preempt State tort claims were ''numerous, consistent, pragmatic and powerfully reasoned.''
This important legal victory upholding FIFRA cannot be overstated. We appreciate this committee's attention to this issue and continued vigilant oversight.
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EPA's New FIFRA 6(a)(2) Rule. Another important legal issue facing our sector is EPA's final rule under FIFRA Section 6(a)(2) that establishes new requirements to report adverse effects caused by pesticides, including all ''opinions'' concerning the toxicity of a pesticide. The rule eliminates the attorney-client privilege and attorney work product doctrine for such reporting. As a result, registrants are required to report adverse opinions from testifying and non-testifying experts retained by their attorney defending a product liability action.
EPA's new rule impairs the right of registrants to be represented by counsel and to defend themselves against litigation, completely prejudicing the legal process against them. The release of information concerning attorneys' strategies and opinions, as well as information gathered in preparation for litigation, will drastically bias any proceedings against registrants, as registrants cannot obtain any corresponding disclosure from adverse parties. FIFRA registrants are placed at a severe disadvantage, as protections provided to all other attorneys allowing them to fully investigate and research a case, and hold frank attorney-client discussions, are not available to defendants who happen to be FIFRA registrants.
Only Congress has the authority through explicit language to abrogate the work-product doctrine and the attorney-client privilege. The work-product doctrine and attorney-client privilege are simply too important and too firmly rooted in our system of justice to permit an agency to eliminate or curtail the doctrine by regulation. Nothing in the statutory 6(a)(2) language or the legislative history of FIFRA even suggests an intent on the part of Congress to abrogate any common law privilege, much less the well recognized protections provided by the work-product doctrine or the attorney-client privilege. Because FIFRA does not authorize abrogation of these common law privileges, EPA cannot issue a regulation that has such an effect.
In conclusion, thank you for the invitation to testify before this committee. ACPA and its member companies look forward to working with you for a more prosperous American agriculture.
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Statement of James S. Holt
Mr. Chairman and members of the committee:
I appreciate the opportunity to testify on behalf of the National Council of Agricultural Employers about the status of hired agricultural labor in the United States and the need to reform the H–2A alien agricultural worker program and adjust the current agricultural work force to legal status.
The National Council of Agricultural Employers (NCAE) is a Washington, D.C. based national association representing growers and agricultural organizations on agricultural labor and employment issues. NCAE's membership includes agricultural employers in 50 States who employ approximately 75 percent of the nation's hired farm workforce. Its members include growers, farm cooperatives, packers, processors and agricultural associations. NCAE was actively involved in the legislative process that resulted in the enactment of the Immigration Reform and Control Act (IRCA) of 1986. NCAE's representation of agricultural employers gives it the background and experience to provide meaningful comments and insights into issues concerning immigration policy and how it affects the employment practices of its members' businesses and the availability of an adequate agricultural labor supply.
My name is James S. Holt. I am senior economist with the management labor law firm of McGuiness & Williams and the Employment Policy Foundation in Washington DC. I serve as a consultant on labor and immigration matters to the NCAE. I am an agricultural economist, and have spent my entire professional career dealing with labor, human resource and immigration issues, primarily with respect to agriculture. I served 16 years on the agricultural economics faculty of the Pennsylvania State University, and for the past 20 years have been a consultant here in Washington DC. I also serve as a technical consultant to most of the current users of the H–2A program and to employers and associations who are attempting to access the program.
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In summary, my testimony here today is that the agricultural industry faces an imminent labor catastrophe. The commercial sector of U.S. agriculture is absolutely dependent on hired labor. One in every $8 of farm production expenses goes to pay for hired and contract labor. In the labor intensive fruit, vegetable and horticultural sectors hired labor accounts for closer to $1 of every $3 to $4 of farm production expenses. Yet the agricultural industry is heavily dependent on aliens who are not legally authorized to work in the United States, and growing more so by the day. Under current law there is nothing employers can do about this, and no alternative source of labor to turn to even if they could determine who was and who was not legal. Increased efforts to stem the flow of illegal immigration and to ensure accurate payroll accounting for Social Security purposes are now making it impossible to ignore this problem. The entire U.S. economy is facing a shortage of labor, including unskilled manual workers. Seasonal and migratory agricultural work is the last claimant for such labor. The current Federal program which is supposed to address the problem of insufficient seasonal agricultural labor—the H–2A provisions of the Immigration and Nationality Act—is paralyzed and unworkable. The H–2A program must be reformed and the current agricultural work force must be provided with a means for adjusting to legal status. The continued economic viability of U.S. agriculture is at stake. We urge this committee to support efforts to address this problem in the current Congress.
THE HIRED AGRICULTURAL LABOR PROBLEM IN THE UNITED STATES.
While the United States agricultural industry is overwhelmingly an industry of family farms and small businesses, it is also heavily dependent on hired labor. Labor is an essential input in farming, and essentially all commercial farms rely to a greater or lesser degree on hiring labor to perform certain essential tasks. The 1997 Census of Agriculture reported more than 650 thousand farms hiring labor directly, and reported 3.4 million hires by farmers. More than 225 thousand farms also hired contract labor. Total expenditures for hired and contract labor in 1997 were $17.8 billion. This was 12 percent of total farm production expenses, or $1 of every $8 spent by farmers. Farmers spent more for hired labor in 1997 than they spent for seed, fertilizer, agricultural chemicals, petroleum products, interest or property taxes. In fact, after purchases for livestock and feed, hired labor accounted for greater farm production expenses than any other category of expenses reported in the Census of Agriculture. In the labor intensive fruit, vegetable and horticultural sectors, hired labor costs average 25 to 35 percent of total production costs, and in some individual commodities the percentage is much higher.
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In modern U.S. agriculture most production processes are mechanized, even in the production of labor intensive commodities. Typically the farm family and perhaps a few hired workers do all the farm work most of the year. But hired workers are often needed for short periods to perform certain very labor intensive tasks such as harvesting, thinning or pruning. In many crops these labor intensive tasks, particularly harvesting, must be performed during very brief windows of opportunity, the timing of which can not be predicted with precision and which is beyond growers' control. The availability of sufficient labor at the right time to perform these labor intensive functions can determine whether or not the farm produces a saleable product for that growing season.
The United States has some of the best climatic and natural resources in the world for agricultural production, and especially for the production of labor intensive fruits, vegetables and horticultural crops. In a world economy where all resources, including labor, were mobile and there were no trade barriers so that all countries could specialize in those commodities in which they have a comparative advantage, the North American continent would be, as it in fact is, one of the major world producers of agricultural commodities, including fruits, vegetables and horticultural specialties.
During the last several decades, markets for labor intensive commodities have expanded dramatically in the United States and throughout the world. This dramatic expansion has resulted from a number of factors, including technological developments in transportation and storage, increasing incomes both in the United States and worldwide, and changes in consumers tastes and preferences which favor fruits and vegetables in the diet. National markets for labor intensive commodities, once protected by trade barriers and the perishability of the commodities themselves, have now become global markets, due to technological improvements and the strong drive for freer trade that has occurred over the past two decades.
Although it has been little regarded in policy circles, U.S. farmers have participated fully in the dramatic growth in domestic and world markets for labor intensive agricultural commodities. U.S. farm receipts from fruit and horticultural specialties have more than doubled, and from vegetables more than tripled, since 1980. Labor intensive commodities are the fastest growing sector of U.S. agriculture. At the same time, agricultural labor productivity has also continued to improve. As a result, while production of labor intensive commodities has expanded dramatically over the past two decades, average hired farm employment has declined by about one quarter. But the expansion of labor intensive agriculture has created tens of thousands of new nonfarm jobs for U.S. workers in the upstream and downstream occupations that support the production and handling of farm products.
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Aliens have always been a significant source of agricultural labor in the United States. In particular, labor from Mexico has supported the development of irrigated agriculture in the western States from the inception of the industry. As the U.S. economy has expanded, generating millions of new job opportunities, and as domestic farm workers have been freed from the necessity to migrate by the extension of unemployment insurance to agricultural workers in 1976, and the Federal Government has spent billions of dollars to settle domestic migratory farm workers out of the migrant stream and train them for permanent jobs in their home communities, domestic farmworkers have moved out of the hired agricultural work force, especially the migrant work force,. These domestic workers have been replaced by alien workers, largely from Mexico, Central America and the Caribbean.
As a result, the U.S. agricultural work force has become increasingly alien and increasingly undocumented. The U.S. Department of Labor's National Agricultural Worker Survey (NAWS) reported in its 1998–99 survey that 52 percent of seasonal agricultural workers working in the United States self-identified as not authorized to work in the United States. This was an increase from 37 percent in the previous survey only 3 years earlier, and from only about 12 percent a decade earlier. More than 70 percent of the new seasonal agricultural labor force entrants in the NAWS survey self identified as not authorized to work. Most experts agree that the statistics based on self-identification in the NAWS survey are likely very conservative. Evidence based on INS enforcement actions and verification of Social Security cards by the Social Security Administration often results in 60 to 80 percent or more of workers' documents being determined to be invalid or not pertaining to the person who presented them.
Throughout this period there has also been a legal alien agricultural worker admission program. This program was enacted as the H–2 program in the Immigration and Nationality Act of 1952. In 1956 Congress attempted to streamline the program and redesignated it H–2A. In recent years use of the H–2A program has declined to a low of approximately 15,000 workers annually, although in the past two years the number of admissions has increased substantially and will probably exceed 30,000 workers this year.
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The H–2A program has been used principally on the East Coast in fruit, vegetables, tobacco and, until recently, sugar cane. The program's structure and requirements evolved from government-to-government treaty programs which preceded it. Over the years the program has become encrusted with regulations promulgated by the Department of Labor and adverse legal decisions generated by opponents of the program which have rendered it unworkable and uneconomic for many agricultural employers who face labor shortages. Now that government policy is eliminating the illegal alien work force, many growers are caught between an unworkable and uneconomical H–2A program and the prospect of insufficient labor to operate their businesses.
The illegal alien seasonal agricultural work force in the United States consists of two groups. Some are aliens who have permanently immigrated to the United States and have found employment in agriculture. Typically these permanent immigrant illegal aliens move into nonagricultural industries after they become settled in the United States. The other component of the illegal alien seasonal agricultural work force is nonimmigrant migrant farm workers who have homes and families in Mexico. Many of them are small peasant farmers. The adult workers from these families, usually males, migrate seasonally to the United States during the summer months to do agricultural work. Anecdotal evidence suggests that until recently the number of such migrant illegal alien farmworkers working was substantial. Now, as a result of increasingly effective immigration control policies, some of these migrants are finding it necessary to remain in the United States during the off season for fear that they will not be able to get back in or because of the high cost of doing so, while many others are finding it impractical to continue their annual migration and are remaining in Mexico.
Congressional efforts to control illegal immigration began with the landmark Immigration Control and Reform Act (IRCA) of 1986. The theory of IRCA was to discourage illegal immigration by requiring employers to see documents evidencing a legal right to work in the United States, and thereby removing the ''economic magnet'' to illegal immigration. It did not work for at least three reasons. One was that one of the motives for illegal immigration to the U.S. was not simply to better one's welfare, but to survive, literally and figuratively. This survival drive overwhelmed any fear of employer sanctions. The second was that Congressional concern about invasion of privacy and big brotherism resulted in an employment documentation process that was so compromised that it was easily evaded by document counterfeiting. The third was that a serious effort to enforce IRCA, including the provisions against document counterfeiting, was never mounted. The result was that IRCA had little impact on the volume of illegal immigration, and a perverse impact on the hiring process. Whereas previously an employer who suspected a prospective worker was illegal may have been willing to risk refusing to hire that worker, with the discrimination provision of IRCA an employer ran great risks in refusing to hire any worker who had genuine appearing documents, even if the employer suspected the worker was illegal.
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With the passage of the Illegal Immigration Reform and Immigrant Responsibility Act (IRRIRA) in 1996, Congress recognized the failure of IRCA. In IRRIRA Congress decided to test the conventional wisdom that it was impossible to control illegal immigration at the border by vastly augmenting the resources and personnel of the INS for border enforcement. The resources for interior enforcement of employer sanctions provisions were also augmented. The result has clearly been to make the process of illegal border crossing more expensive and dangerous. The anecdotal evidence from farm labor contractors and agricultural employers across the United States is that many prospective border crossers, especially migrant farmworkers and prospective migrant farmworkers, have been unable to cross the border or have made the calculation that the cost of doing so is too high based on their prospective earnings in the U.S. We have received reports from all regions of the United States of reduced numbers of workers and short crews, and this has been one of the major factors leading to the labor shortages that were observed in the 1997 season and to an even greater degree in the 1998 season. As INS continues to ramp up its border enforcement personnel, these shortages appear to be becoming more and more severe, and we expect significant shortages and crop losses in some crops and some regions in the 1999 season.
Increased border enforcement has also had a perverse effect. It apparently has induced some alien farm workers, who in the past crossed the border illegally on a seasonal basis to work in the United States during the agricultural season, to remain in the United States during the off season for fear that they would not be able to get back in the next year. Some of these workers eventually try to smuggle their families in to join them. Many of these workers would prefer to maintain their homes and families in Mexico and work seasonally in the United States, but current immigration policies make this an unattractive option.
IRRIRA also set in motion the testing of a process which many believe is the only way to effectively control the employment of illegal aliens. IRRIRA established a program of pilot projects for verification of the authenticity of employment authorization documents at the time of hire. These projects are about midway through a 4-year pilot phase. Presumably, at the end of that time Congress will revisit the question of requiring mandatory document verification at the time of hire. If and when this happens, there will be a real crisis in agriculture, given the fact that upwards of 60 to 70 percent of the industry's seasonal work force apparently has fraudulent documents.
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In addition to the increasing effectiveness of border enforcement activities, additional INS resources for enforcement of employer sanctions are increasing the frequency of audits of I–9 forms. The I–9 form is the document completed by an employer and employee at the time of hire on which the employer records the employment verification documents the employee offers to verify the legal right to work in the United States. Employers are required to accept the documents offered by the worker if they reasonably appear on their face to be genuine, a test which virtually all documents meet. However, when INS does an audit of the employer's I–9 forms, the INS checks the authenticity of the employment authorization documents against government data bases, something it is precluded by case law and INS policy from doing at the request of an employer. At the conclusion of the audit, the employer receives a list from the INS of the workers whose documents have been determined to be invalid. Frequently, INS audits of agricultural employers reveal that 60 to 70 percent of seasonal agricultural workers have provided fraudulent documents. The employer is then required to dismiss each employee on the list who cannot provide a valid employment authorization document, something few can do.
Independently of the effort to improve immigration control, other forces are also affecting the agricultural work place. The Social Security Administration (SSA) is under a Congressional mandate to reduce the amount of wage reporting to non-existent social security accounts. Through its Enumeration Verification System (EVS), the Social Security Administration is now checking employers' tax filing electronically within a matter of days or weeks after they are filed to match names and social security numbers reported by employers with those in the SSA data base. Employers receive lists of mismatches with instructions to ''correct the mistakes in reporting''. Of course, in most cases the mismatch is not a result of a mistake in reporting, but a fraudulent number. When the employer engages the employee to ''correct the mistake'' the employee disappears.
It is not uncommon for employers to receive lists of mismatches from the SSA containing 50 percent or more of the names which the employer reported to the SSA. Confronting the employees on these lists can have devastating effects on an employer's work force. On the other hand, employers are concerned about their future liability under the employer sanctions provisions if they do not act on the SSA lists. The existence of lists from the SSA that the employer had allegedly not acted upon was cited in a recent INS prosecution of an agricultural employer for knowingly employing illegal aliens.
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While the incidence of INS I–9 audits is still relatively low, very large numbers of agricultural employers are receiving lists of mismatched numbers from the SSA. Thus, many agricultural employers are having to confront for the first time the reality of the legal status of their work force. Both the I–9 audits and the SSA verification program are having a churning effect on the agricultural work force. Farmworkers with fraudulent documents are rarely picked up and removed. Instead the employer is required to dismiss them. In effect, they are being chased from farmer to farmer as their employers receive SSA reports or are audited by the INS.
Increased border enforcement, increased interior enforcement and increased SSA verification activity have led to reductions in labor availability and destabilization of the agricultural work force. These trends will continue. The increase in border enforcement personnel authorized by IRRIRA will not be complete until fiscal year 2002. The SSA plans to continue lowering its threshold for rejection of employer tax returns due to name/number mismatches. These factors, coupled with the extraordinarily high levels of nonagricultural employment, have resulted in increasing frequency of farm labor shortages and crop losses. The problem is rapidly reaching crisis proportions, and could easily do so in the 1999 growing season.
Some opponents of an alien agricultural worker program argue that a program is not needed because employer sanctions cannot be effectively enforced no matter what the government tries to do. The implication of this argument is that employers should endure the uncertainties and potential economic catastrophe of losing a workforce and workers should continue to endure the uncertainties of being chased from job to job on a moment's notice. We find such reasoning unacceptable. It is an argument for the status quo, which all agree is unacceptable. Furthermore, it is unacceptable to refuse to address one public policy problem on the grounds that another accepted and enacted public policy will be ineffective. We must honestly face the issues that our policy of immigration control and employer sanctions confronts us with. We believe that calls for a workable alien agricultural worker program.
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ARE THERE VIABLE ALTERNATIVES TO A REFORMED H–2A AGRICULTURAL WORKER PROGRAM?
Opponents of the employment of alien agricultural worker programs suggest there are other ways to address the problem that would result from the removal of the illegal alien agricultural work force than the legal admission of alien agricultural workers.
One approach that is suggested is that agricultural employers should be ''left to compete in the labor market just like other employers have to do''. Under this scenario there would be no alien guestworkers. To secure legal workers and remain in business, agricultural employers would attract sufficient workers away from competing nonagricultural employers by raising wages and benefits. Those who could not afford to compete would go out of business or move their production outside the United States. Meanwhile, according to this scenario, those domestic persons remaining in farm work would enjoy higher wages and improved working conditions.
There are several observations one must make about this ''solution''.
No informed person seriously contends that wages, benefits and working conditions in seasonal agricultural jobs can be raised sufficiently to attract workers away from their permanent nonagricultural jobs in the numbers needed to replace the illegal alien agricultural work force and maintain the economic competitiveness of U.S. producers. Thus this scenario predicates that U.S. agricultural production would decline. In fact, given that the U.S. hired agricultural work force is, by most estimates, about 70 percent illegal, it would decline dramatically.
Seasonal farm jobs have attributes which make them inherently uncompetitive with nonfarm work. First and foremost is that they are seasonal. Many workers who could do seasonal farm work accepted less than the average field and livestock worker earnings of $7.22 per hour in 1999 because they preferred the stability of a permanent job. Secondly, many seasonal farm jobs are located in rural areas away from centers of population. Furthermore, to extend the period of employment, workers must work at several such jobs in different areas. That is, they must become migrants. It is highly unlikely that many U.S. workers would be willing to become migrant farm workers at any wage, or for that matter that, as a matter of public policy, we would want to encourage them to do so. In fact, the U.S. government has spent billions of dollars over the past several decades attempting to settle domestic workers out of the migratory stream. The success of these efforts is one of the factors that has led to the expansion in illegal alien employment. In addition to seasonality and migrancy, most farm jobs are subject to the vicissitudes of weather, both hot and cold, and require physical strength and stamina. Thus it is highly unlikely that a significant domestic worker response would result even from substantial increases in wages and benefits for seasonal farm work.
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Over the past decade U.S. farmworker wages and benefits have increased at a slightly more rapid rate than comparable non-farm workers, even with the influx of illegal aliens. More rapid farm wage increases can not occur for economic reasons. U.S. growers are in competition in the markets for most agricultural commodities, including most labor-intensive commodities, with actual and potential growers around the globe. Since hired labor constitutes approximately 35 percent of total production costs of labor intensive agricultural commodities, and 1 in 8 dollars of production costs for agricultural commodities generally, substantial increases in wage and/or benefit costs will have a substantial impact on growers' over-all production costs. U.S. growers are in an economically competitive equilibrium with foreign producers at approximately current production costs. Growers with substantially higher costs can not compete. If U.S. producers' production costs are forced up by, for example, restricting the supply of labor, U.S. production will become uncompetitive in world markets (including domestic markets in which foreign producers compete). U.S. producers will begin to be forced out of business. In fact, U.S. producers will continue to be forced out of business until the competition for domestic farmworkers has diminished to the point where the remaining U.S. producers' production costs are approximately at current global equilibrium levels. The end result of this process will be that domestic farmworker wages and working conditions (and the production costs of surviving producers) are at approximately current levels and the volume of domestic production has declined sufficiently that there is no longer upward pressure on domestic worker wages.
These same global economic forces, of course, affect all businesses. But nonagricultural employers have some options for responding to domestic labor shortages that agricultural employers do not have. Many nonagricultural employers can ''foreign source'' the labor-intensive components of their product or service without losing the good jobs. Since agricultural production is tied to the land, the labor-intensive functions of the agricultural production process cannot be foreign-sourced. We cannot, for example, send the harvesting process or the thinning process overseas. Either the entire product is grown, harvested, transported and in many cases initially processed in the United States, or all these functions are done somewhere else, even though only one or two steps in the production process may be highly labor intensive. When the product is grown, harvested, transported and processed somewhere else, all the jobs associated with these functions are exported, not just the seasonal field jobs. These are the so-called ''upstream'' and ''downstream'' jobs that support, and are created by, the growing of agricultural products. U.S. Department of Agriculture studies indicate that there are about 3.1 such upstream and downstream jobs for every on-farm job. Most of these upstream and downstream jobs are ''good'' jobs, i.e. permanent, average or better paying jobs held by citizens and permanent residents. Thus we would be exporting about three times as many jobs of U.S. citizens and permanent residents as we would farm jobs if we shut off access to alien agricultural workers.
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Another suggestion has been that recruitment of welfare recipients and the unemployed could replace the illegal aliens. Growers themselves, most notably the Nisei Farmers League in the San Joaquin valley, have tried to augment their labor supply by recruiting welfare recipients. While these efforts have resulted in some former welfare recipients moving into jobs on farms, the magnitude of this movement has been insignificant. In fact, welfare directors suggest that the long term impact of welfare reform is likely to exacerbate rather than reduce the shortage of domestic farm labor. Some seasonal farm workers currently depend on the combination of farm work in-season and welfare assistance during the off season. As limitations are set on persons' lifetime welfare entitlement, this pattern will no longer be viable. Seasonal farmworkers who supplement their earnings with welfare will be forced into permanent nonagricultural jobs. Other attributes of seasonal farm work are also deterrents. The preponderance of those now remaining on the welfare rolls are single mothers with young children. Many are not physically capable of doing farm work, do not have transportation into the rural areas and are occupied with the care of young children.
The unemployed also make, at best, a marginal contribution to the hired farm work force. Currently, the U.S. is enjoying historically low levels of unemployment and many labor markets are essentially at or above full employment. However, relatively high unemployment rates in some rural agricultural counties are often cited as evidence of an available labor supply or even of a farmworker surplus. First it should be noted that labor markets with a heavy presence of seasonal agriculture will always have higher unemployment rates than labor markets with a higher proportion of year round employment. By the very nature of the fact that farm work is seasonal, many seasonal farmworkers spend a portion of the year unemployed. Second, unemployed workers tend to share the same values as employed workers. They prefer permanent employment which is not physically demanding and takes place in an inside environment. They share an aversion to migrancy, and often have transportation and other limitations that restrict their access to jobs. The coexistence of unemployed workers and employers with labor shortages in the same labor markets means only that we have a system that enables workers to exercise choices.
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Many welfare recipients and unemployed workers can not or will not do agricultural work. It is reasonable to expect an alien worker program to have a credible mechanism to assure that domestic workers who are willing and able to do farm work have first access to agricultural jobs, and that aliens do not displace U.S. workers. It is not reasonable to expect or insist that welfare and unemployment rolls fall to zero as a condition for the admission of alien workers.
A third alternative to alien workers often suggested is to replace labor with technology, including mechanization. This argument holds that if agricultural employers were denied access to alien labor they would have an incentive to develop mechanization to replace the alien labor. Alternatively, it is argued that the availability of alien labor retards mechanization and growth in worker productivity.
The argument that availability of alien labor creates a disincentive for mechanization is belied by the history of the past two decades. From 1980 to the present the output of labor intensive agricultural commodities has risen dramatically while hired agricultural employment has declined. The only way this could have happened is as a result of significant agricultural labor productivity increases. Yet this was also the period of perhaps the greatest influx of illegal alien farmworkers in our history.
It does not appear that there has been a great deal of increase in agricultural mechanization in fruit and vegetable farming since a spasm of innovation and development in the 1960's and 1970's. Indeed, some of the mechanization developed during that period, specifically mechanical apple harvesters, have proven to be uneconomical in the long term because of tree damage as well as fruit damage. Agricultural engineers claim the reason for this is the withdrawal of support for agricultural mechanization research by the U.S. Department of Agriculture following protests and litigation by farmworkers in California that such research was taking away their jobs.
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But productivity increases can result from many different factors, of which mechanization is only one. Smaller fruit trees, which require less ladder climbing, trellised trees, and changes in the way trees or vines are pruned are also technological developments which improve labor productivity. The switch from boxes and small containers to bulk bins and pallets in the field has significantly improved labor productivity of some harvesting activities. Use of production techniques and crop varieties that increase yields also improves field labor productivity by making harvesting and other operations more efficient. These appear to be the techniques that farmers have used to achieve the large productivity increases obtained in the 1980's and 1990's. The fact that there appears to have been a slowing down in the pace of mechanization itself does not mean that growth in worker productivity has slowed.
The argument that alien employment retards productivity increases is also belied by logic. The incentive for the adoption of mechanization or any other productivity increasing innovation is to reduce unit production costs. If the innovation results in a net savings in production costs it will be adopted. It doesn't matter whether the dollar saved is a dollar of domestic worker wages or a dollar of alien worker wages. On the other hand, if the innovation results in a net increase in production costs, it will not be adopted. The only way one can argue that a reduction in alien labor will increase the incentive to mechanize is to argue that the reduction in alien labor will first increase production costs. But if, as is argued elsewhere in this testimony, the tendency for domestic producers' costs to rise in response to a withdrawal of labor is offset by shifting domestic market share to foreign producers, the incentive for additional domestic mechanization will never occur. In a global market, the profitability of mechanization, just like the profitability of everything else, is determined by global production costs, not by domestic production costs.
A fourth alternative to the importation of alien farm workers which has been suggested is the unionization of the farm work force. The implication of this scenario is that unionization would augment the supply of legal seasonal farmworkers and make alien farm workers unnecessary. Alternatively, it is argued that an alien agricultural worker program will make it more difficult for domestic farmworkers to unionize and improve their economic welfare.
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First, it should be noted that use of the H–2A program as a strike-breaking tool is expressly prohibited. H–2A workers may not be employed in any job opportunity which is vacant because the former occupant of the job is on strike or involved in a labor dispute. Secondly, there is no impediment to an H–2A worker becoming a union member. Indeed, the H–2A program has been used for decades in unionized citrus operations in Arizona. Recently, a farmworker union supported a grower's H2-A application as a means of providing legal status for its own members. If an employer seeking labor certification has a collective bargaining agreement and a union shop, the H–2A aliens, like all other employees, can be required to pay union dues and may become union members.
But there is no reason to believe that unionization will result in an increase in the availability of legal labor, nor, indeed, any reason to believe that the membership of farmworker unions is more legal than the rest of the agricultural work force. Farmworker unions and farm employers are fishing out of the same labor force pool. The argument that increased farmworker unionization will increase the supply of legal labor is based on the supposition that farmworker unions will be successful in negotiating higher wages and more attractive working conditions than in nonunion settings, and that this will attract more domestic legal labor. Yet wages and working conditions in union and nonunion settings are not (and in competitive global markets cannot be) significantly different. Furthermore, the same reasons described above why higher wages and benefits for seasonal agricultural work, even if they were economically feasible, would not attract significantly more legal workers into seasonal agricultural work, are as applicable in a union setting as in a nonunion setting.
The reality is that an alien agricultural worker program is probably union-neutral. Existence of such a program will probably not make it significantly more difficult or easier to organize farm workers.
WHY DOES THE H–2A PROGRAM NEED TO BE REFORMED?
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There are two broad reasons why the H–2A program needs to be reformed.
First, the program is administratively cumbersome and costly. Even at its present level of admission, fewer than 30,000 workers annually, the program is nearly paralyzed. Secondly, the program sets minimum wage and benefit standards that many employers cannot afford or cannot qualify for. As a result, the program's ''worker protections'' are cosmetic. They ''protect'' only about 30,000 job opportunities in an agricultural work force estimated at more than 2 million. The vast majority of agricultural workers, legal and illegal, get little or no benefit from the H–2A ''protections''.
The first reason why the current H–2A program must be reformed is that it is administratively cumbersome and costly. The regulations governing the program cover 33 pages of the Code of Federal Regulations. ETA Handbook No. 398, the compendium of guidance on program operation, is more than 300 pages. Employers must apply for workers a minimum of 60 days in advance of the date workers are needed. Applications, which often run more than a dozen pages, are wordsmithed by employers, by the Labor Department and by Legal Services attorneys. Endless discussions and arguments occur over sentences, phrases and words. After all this fine tuning, workers see an abbreviated summary of the order if they see anything at all. In hearings in Oregon this spring workers often testified that they were referred to H–2A jobs without even being told the wage rate that was offered.
Each employer applicant goes through a prescribed recruitment and advertising procedure, regardless of whether the same process has been undertaken for the same occupation by another employer only days earlier. The required advertising is strictly controlled by the regulations and looks more like a legal notice than a help wanted ad. Increasingly, the Labor Department is requiring that advertising be placed in major metropolitan dailies, rather than the local newspapers that farm job seekers are most likely to read, if they look for farm work in help wanted ads at all. The advertisements rarely result in responses, yet they are repeated over and over again, year in and year out.
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Certifications are required by law to be issued not less than 20 days before the date of need, but the GAO reported in 1997 that they were issued late more than 40 percent of the time.
Even after all this, the employer has no assurance that the ''domestic'' workers referred to it are, in fact, legal. Most State job services refuse even to request employment verification documents, much less verify that they are valid. It is the experience of H–2A employers that a substantial and increasing proportion of the ''domestic'' workers referred, and on the basis of which certification to employ legal alien workers is denied, are in fact illegal aliens themselves. State employment service officials have even been known to suggest to H–2A growers that they should go back to employing illegal aliens and save themselves and the employment service all the hassle.
Finally, a high proportion of the workers referred to H–2A employers and on the basis of which the employer is denied labor certification for a job opportunity, either fail to report for work or quit within a few hours or days. This then forces the employer to file with the Labor Department for a ''redetermination of need''. Even though redeterminations are usually processed within a few days, the petition and admission process after redetermination means that aliens will, at best, arrive about 2 weeks late.
The second reason why reform is needed is that the current H–2A program requires wage and benefit standards that are unreasonably rigid or not economically feasible in many agricultural jobs, and effectively exclude those jobs from participating in the H–2A program.
The so-called Adverse Effect Wage Rate (AEWR) is one such standard. The Adverse Effect Wage Rate is a minimum wage set on a State-by-State basis by regulation, and is applicable to workers employed in job opportunities for which an employer has received a labor certification. The Adverse Effect Wage Rate standard is unique to the H–2A program and does not exist in any other immigration or labor certification program. It was established to create a minimum wage standard in jobs where foreign workers were employed, because the Federal minimum wage law did not cover agriculture at that time. AEWRs were initially set at the level of the then non-agricultural Federal minimum wage. Over time, AEWRs were adjusted by a variety of methodologies. Since 1987, each State's AEWR is set at the average hourly earnings of field and livestock workers for the previous year in the State or a small region of contiguous States. For the 2000 season, AEWRs range from $6.39 per hour in Kentucky, Tennessee and West Virginia to $7.76 per hour in Iowa and Missouri. The average AEWR is $7.22 per hour.
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The AEWR sets a minimum wage standard that makes it uneconomical to use the H–2A program in many agricultural occupations. The AEWR standard, in effect, makes the average wage in one year the minimum wage in the ensuing year. Since the AEWR is set at the average of the wages for all agricultural workers in the State, it will be above the actual wages paid for about half of the agricultural employment in the State, and below the actual wage for about half of all agricultural employment in the State. Obviously, this standard will not be a deterrent in using the H–2A program in occupations in which the actual wage is above the average wage for all agricultural occupations. But it can be an uncompetitive and unrealistic standard for an occupation in which the actual wage is below the average of all agricultural wages in the State. Since, by definition, half of all employment will always have an actual wage below the average wage, this standard will always set an uncompetitive wage for some occupations, no matter how much agricultural wages rise.
Another example of an unreasonably rigid standard is the requirement to provide housing. The current H–2A program requires an employer to have housing for all the job opportunities for which an employer applies for labor certification except those job opportunities from which local workers will commute daily from their permanent residences, and to provide that housing at no charge to the workers. Agricultural employers are only required to provide housing to workers if they participate in the H–2A program or use the Department of Labor's interstate clearance system to recruit workers. Only a tiny fraction of U.S. agricultural employers do either.
The U.S. Department of Agriculture stopped reporting the percentage of hired agricultural employment that included employer-provided housing after 1995. But up to that time only about 15 percent of agricultural employment included employer-provided housing, either free or at a charge. Given that this percentage had remained relatively unchanged for many years, it probably reflects current practice reasonably accurately. Since many employers who provide housing do so only for year round employees such as foremen and supervisors, it is likely that the proportion of seasonal workers provided housing is even lower. In other words, the vast majority of seasonal agricultural workers currently arrange their own housing. Employer-provided housing tends to be provided to seasonal workers only in those areas dependent on migrant workers that are so remote that community-based housing is unavailable.
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The requirement for employer-provided housing is one of the greatest current obstacles to expanded use of the legal alien agricultural worker program. Providing housing is extremely expensive, and there are many other community obstacles to overcome as well. In areas where the housing stock is already adequate to accommodate the seasonal agricultural work force, agricultural employers are understandably reluctant to invest large sums to construct employer-provided housing. Even where the housing stock is not currently adequate, employers are reluctant to invest in housing unless there is assurance of a workable program for securing labor to live in the housing.
There certainly can be no disputing the proposition that there must be adequate housing for both domestic and alien seasonal agricultural workers. The policy question then is under what conditions this housing should be employer-provided, and in those circumstances how we get from where we are now to a situation where there is adequate employer-provided housing.
WHAT REFORMS ARE NEEDED?
The H–2A program must be reformed by modernizing and streamlining the administrative processes, especially the procedures for domestic worker recruitment and the labor market test, and eliminating those administrative requirements that add cost or inflexibility to the program without providing any corresponding benefits to domestic farmworkers.
Rather than the cumbersome and antiquated paper process of the interstate clearance system, and the expensive and unproductive advertising that are now used to disseminate information about available jobs and to recruit domestic workers, NCAE has suggested bringing this process into the 21st century. We have suggested a computerized farmworker registry system modeled after the Labor Department's America's Job Bank and America's Talent Bank systems. Domestic workers who were interested in seasonal farm work would list themselves and their interests and experience with the registry. They would indicate whether they were only interested in working locally or whether they were also willing to consider work in other areas and/or, if they choose, specify specific areas. Growers who wanted to participate in the H–2A program would be required to list their jobs with the registry. Job offers listed with the registry would be examined to assure they included the required terms and conditions of employment, just as paper job orders are now scrutinized. If a job met the program requirements, the registry would be searched to identify qualified workers who might be interested in filling the job. Qualified workers would be provided with the information about the job and asked if they were interested in taking the job. Information about qualified domestic workers who had accepted the job would be provided to the employer. To the extent that sufficient qualified workers could not be located who were willing to accept the jobs, the employer would receive a ''shortage report'' authorizing the employment of sufficient aliens to fill the unmet need. Upon receipt of the shortage report the employer would be authorized to import sufficient aliens to fill the employer''s need or to employ H–2A aliens already in the United States who were available for new assignments. In short, this process would work exactly as the current job service recruitment system now works in filling H–2A jobs, except that it would utilize 21st century technology rather than early 20th century technology.
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Employers who used the registry and the Labor Department would be required to widely advertise the existence of the registry to potential farm workers. To assure that workers who were referred through the registry were, in fact, legal workers, the registry would check the validity of work authorization documents through the INS and the Social Security Administration, before listing the worker on the registry. This check would not obligate the worker to do anything more than show valid work authorization documents, just as the law currently requires. The registry would also presumably be able to assist workers whose documents did not pass the validation check, but who were, in fact, authorized to work to correct the problem with their documents.
Second, the program must be reformed to establish realistic wage and benefit standards that will, in fact, assure the economic viability of the jobs as well as providing benefits to the workers. This is an essential balance that must be struck. To claim that wage and benefit standards ''protect'' domestic workers when jobs at those wage and benefit level do not exist and are not economically competitive, is deceptive and ultimately harmful to farmworkers.
The Adverse Effect Wage Rate (AEWR) must be replaced with a wage standard which is related to the competitive market wage in the occupation. NCAE has suggested that the prevailing wage in the occupation and area of employment be set as the minimum wage for employers to qualify for legal alien agricultural labor. In the H–2A program the prevailing wage is defined as the 51st percentile of wages of workers in the occupation and area of employment. This standard assures that employers who pay substandard wages are not permitted to employ aliens, but sets a standard that is viable in a competitive market. (Employers would still, of course, be subject to the Federal, State or local minimum wage, if higher.)
The prevailing wage in the occupation and area of employment has widespread application and acceptance in other wage regulation programs. For example, it is the minimum wage for Federal contractors under the Davis-Bacon and Service Contract Acts. It is difficult to understand how the prevailing wage standard could be good public policy in one setting and bad public policy in another.
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A second reform that is needed is to provide flexibility in the provision of housing. Flexibility is needed both to enable employers to initially get into the program in order to provide legal status for their current illegal work force, and to accommodate circumstances where there is adequate housing in the community to accommodate the seasonal farm work force.
As noted above, only about 15 percent of agricultural employment currently includes employer-provided housing, and the percentage is probably lower for seasonal agricultural workers. For employers without housing, a transition period is needed to enable employers to meet housing requirement. If agricultural employers have a workable, functioning program for the legal employment of alien workers, they (and their lenders) will have the confidence to invest in additional housing. Such a transition period does not mean lessening farmworker benefits. Most farmworkers are not now provided housing, and any mechanism which increases the housing stock will benefit farmworkers.
In addition to a transition period, some assistance in financing farmworker housing will be needed. The U.S. Department of Agriculture's Farmers Home Administration (FmHA) has a program of low interest loans to assist farmers and community organizations to provide in-season migrant housing. However, the regulations governing the program preclude housing aliens in the housing and set unrealistically restrictive standards for employer borrowers. The FmHA rules for migrant housing programs needs to be reformed, or some other mechanism for assisting in the funding of in-season migrant housing for domestic and alien farmworkers must be found.
Employers also face daunting community opposition when trying to construct migrant farmworker housing. Even employers who were willing and able to finance the housing have been prevented from constructing it by community opposition. While there is widespread agreement that there should be adequate housing for migrant workers, the not-in-my-backyard response quickly arises when actual projects are proposed. This opposition can take the form of restrictive zoning, unrealistic construction standards, or outright opposition to the presence of migrant farm workers. Some mechanism is needed to assist farmers who want to construct migrant housing that meets Federal migrant labor camp standards on their own property to pre-empt local restrictions.
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Finally, flexibility should exist in the way housing is required to be provided. The vast majority of seasonal farmworkers are currently living off the farm. Some agricultural communities have adequate housing for seasonal farm workers, and experience shows that many farmworkers prefer not to live on the farms. Some communities do not have adequate housing for seasonal farmworkers, and in those communities the housing stock must be increased. But the current requirement that the employer maintain a housing unit for every migrant worker, whether or not the worker chooses to live in it, leads to the absurd situation where employers must maintain vacant housing merely to meet the standard to qualify for H–2A certification, while the workers live elsewhere. NCAE has proposed that in communities where the housing stock is adequate to accommodate the seasonal agricultural work force, that employers be allowed the option of providing a monetary housing allowance in lieu of employer-provided housing. This has been portrayed as reducing farmworker benefits. In fact, workers are now living in this housing without the benefit of housing allowances. Clearly the provision of housing or a housing allowance will increase farmworker benefits.
A third reform that is needed is to amend the IRRIRA to assure that the current agricultural work force can obtain legal status under the program. NCAE would propose going even further and permitting aliens who have made a commitment to working in the United States and complying with the law, and who want to apply for permanent residency, to have a realistic opportunity to become permanent residents.
Under the current provisions of the IRRIRA, persons who have accumulated 365 days or more in illegal status in the United States after April 1998 are debarred from immigration benefits for a period of 10 years. Admission to the United States as an alien worker is one such immigration benefit. Thus, this provision would debar most aliens who are currently in the U.S. agricultural work force from participating in the H–2A program, reformed or otherwise. Employers who choose to use the program would have to recruit a whole new work force of persons who were not inadmissible under the bar—in effect, persons who had not previously worked in the United States. This makes no sense whatsoever, and would cause chaos in the agricultural industry as well as in the immigrant community. Clearly the logical solution is to provide a waiver of the IRRIRA bar to aliens who wish to continue working as legal seasonal agricultural workers.
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NCAE also feels that aliens who are presently substantially committed to the U.S. agricultural work force and who have otherwise comply with U.S. law should be permitted to continue working in agriculture in the U.S. and earn the opportunity to move into permanent agricultural work, or to move up and out of the agricultural work force if they so desire. For many participants in the seasonal agricultural work force, seasonal agricultural work is an entry-level occupation. They ultimately aspire to better jobs in or out of agriculture. We believe a program of earned adjustment to legal status for the current agricultural work force is a fair way of solving the immediate labor problem which reform of the H–2A program is a way of preventing future recurrence of the problem. Both components are important to a viable solution.
WHAT WILL BE THE IMPACT OF A REFORMED H–2A PROGRAM ON FARM WORKERS?
For domestic farmworkers, the reformed program will assure them first access to all agricultural jobs before they are filled by legal alien labor. It will assure that this access is real, by assuring that there is widespread and easy assess to information about the available jobs. It will protect the wages in jobs approved for the employment of aliens by making the prevailing wage the minimum wage—in effect a Davis-Bacon Act for farmworkers. It will assure housing or a housing allowance and transportation benefits to migrant farmworkers who have no such assurance at present. In short, it will raise the standards for domestic farmworkers in all H–2A-approved occupations.
It will also provide all of the above benefits for currently illegal alien farmworkers, the majority of the seasonal agricultural work force. In addition, it will free them from the fear, indignity and economic costs of apprehension and removal, or of being thrown out of work on a moment's notice. It will also free them from dependence on ''coyotes'' and the costs and physical dangers of illegal entry.
For domestic workers in the upstream and downstream jobs that are created and sustained by U.S. agricultural production, it will assure the continuation and growth in these employment opportunities.
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For agricultural employers, it will assure them an adequate, legal work force if they are willing and able to meet the requirements of the program. It will give employers the certainty that will enable them to plan their businesses and make investments more effectively.
Why is a workable alien agricultural worker program good public policy?
In the absence of effective control of illegal immigration and enforcement of employer sanctions, the status quo will continue— illegal alien migration, little use of the legal alien worker program, fewer protections for domestic and alien farmworkers, crop losses due to shortages of workers, and vulnerability to random INS enforcement action for employers. This will be true whether or not the legal guestworker program is reformed, because without effective immigration control and document verification, agricultural employers as well as all other employers will continue to be confronted by a workforce with valid appearing documents and no practical way to know who is legal and who is not. No one can defend or advocate for continuation of the status quo. The current system of illegal immigration and an agricultural industry dependent on a fraudulently documented workforce is bad for employers, workers and the nation.
But if the Nation achieves reasonably effective control of illegal immigration and enforcement of employer sanctions—which is the objective of current public policy—then agricultural production in the United States, particularly of the labor intensive fruit, vegetables and horticultural commodities, will be drastically reduced, with attendant displacement of domestic workers in upstream and downstream jobs, unless a workable agricultural guestworker program exists.
In conducting the public policy debate on creation of a workable alien agricultural worker program, it is important to be realistic about what the public policy options are and are not. The public policy options are not between greater and lesser economic benefits for domestic farmworkers. The level of wages and benefits that U.S. agriculture can sustain for all farmworkers, domestic and alien, are largely determined in the global market place. The public policy options we face are between a larger domestic agricultural industry employing domestic and legal alien farmworkers and providing greater employment opportunities for domestic off-farm workers, and a drastically smaller domestic agricultural industry and drastically fewer employment opportunities for domestic off-farm workers with a wholly domestic farm work force. In either case, the level of economic returns to farmworkers will be approximately the same, namely those economic returns that are sustainable in the competitive global marketplace.
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The National Council of Agricultural Employers believes the national interest is best served by effective immigration control and a workable alien agricultural worker program that enables the United States to realize its full potential for the production of labor intensive and other agricultural commodities in a competitive global marketplace, and which supports a high level of employment for domestic workers in upstream and downstream jobs while assuring reasonable protections for domestic and alien farmworkers. The Council believes an alien agricultural worker program that is workable and competitive for employers and that protects access to jobs and the wages and working conditions of domestic farmworkers, and that provides legal status, dignity and protections to alien farmworkers working in the United States, is important to accomplish now.
We also believe that there are other important public policy issues related to seasonal agricultural workers. Many individuals and families that engage in seasonal agricultural work face serious economic and social problems that should be addressed. Seasonal farm work alone is not sufficient to sustain a reasonable standard of living for most persons who engage in farm work at any reasonable wage rate. There are serious problems of housing, medical care and child care for workers who migrate, especially with families, and for persons who engage in intermittent employment or work for many different employers. Many of these problems extend far beyond the work place. In fact, for this component of our population, it is when they are not working that these problems are most severe.
The National Council of Agricultural Employers congratulates the House Agriculture Committee for recognizing the important problem of farm labor. To the best of our knowledge, this is the first time this committee has included testimony about agricultural labor in its farm policy hearings. We also appreciate the hard work that members of this committee have put in to finding a legislative solution to this problem. In particular, we want to commend Mr. Pombo, Mr. Chambliss and Mr. Bishop for their commitment to finding solutions that are workable for agriculture and fair to alien and domestic farmworkers. We strongly urge the committee to become involved in and support their efforts. The National Council of Agricultural Employers stands ready to work with the committee not only to develop a workable alien agricultural worker program, but to find workable solutions to the social and economic problems of those who engage in seasonal farm work. These issues should be addressed now. Congress should not wait any longer to fix an indefensible status quo. The economic and social costs are too high.
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"The Official Committee record contains additional material here."