STATEMENT OF KEITH COLLINS\
CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE

BEFORE THE HOUSE OF REPRESENTATIVES

COMMITTEE ON AGRICULTURE

October 18, 2007

Mr. Chairman, members of the Committee, thank you for the invitation to
discuss recent developments in and prospects for change in the farm
economy. As we conclude 2007, the farm economy has witnessed
unprecedented increases in income and asset values the past few years.
With strong food and fuel demand, prospects overall look bright, but
they are also generating a range of issues related to the consequences
and sustainability of the forces driving the current prosperity. Several
key factors are shaping the current situation, including global economic
growth; the foreign exchange value of the dollar; new production and
processing technologies; global weather patterns; rising input costs for
energy, labor, and land; and new product markets, particularly
bioenergy. I will describe these developments in output and input
markets and the challenges and opportunities they present for U.S.
agriculture.

**Macroeconomic and Trade Developments**

**Global macroeconomy supporting U.S. farm markets.** Strong global
economic growth and population increases have helped drive higher food
consumption over the past several years. World Gross Domestic Product,
or GDP, continues to look strong, despite a slowing U.S. economy.
Foreign economies grew by an estimated 4.1 percent in 2006, the third
highest rate in the last 20 years and substantially stronger than the
weak growth of less than 2 percent experienced earlier in this decade.
This year, we estimate foreign economic growth to be 4.0 percent, with a
slight decline to 3.8 percent in 2008. A little slower growth in the EU
and developing countries is expected next year, but developing country
growth is still likely to be a strong 6.5 to 7.0 percent, compared with
7.0 percent expected this year.

The U.S. economy grew nearly 3.0 percent in 2006, but is expected to
decline this year and remain slow through a good part of 2008.
Macroeconomic forecasts are variable, as some forecasts call for slow
growth based on continued housing market fallout, slower employment
growth, and more modest consumer spending. Advocates of stronger growth
cite the stimulative effects of the recent interest rate reduction of
the Federal Reserve and strong export growth, as well as low rates of
unemployment and inflation.

For U.S. agriculture, despite lower domestic economic growth, strong
foreign economic growth and the reduced value of the dollar are likely
to support global commodity demand, keeping pressure on global supplies
and prices particularly for meats, grains, dairy products, fruits and
vegetables and processed products.

**U.S. agricultural exports setting records.** With strong foreign
economic growth particularly in developing countries, crop production
shortfalls around the world, and sufficiently available U.S. supplies,
U.S. agricultural exports are likely to continue to expand this year.
USDA's forecast for U.S. agricultural exports for FY 2008 is a record
high \$83.5 billion, up from \$79 billion in FY 2007. Imports, too,
continue to grow and are expected to be \$75 billion this fiscal year
compared with \$70.5 billion a last year. Nearly half of imports are
horticultural products and another fifth are sugar and tropical products
such as cocoa, coffee and rubber. This year, the agricultural trade
balance is forecast to be + \$8.5 billion, the same as last year.

Wheat exports are forecast to be up in volume and value due to less
foreign competition. Corn exports are forecast up in volume and value
due to a record-large corn crop and less competition, while higher
cotton export volume and value reflects large, available U.S. cotton
stocks and strong Chinese demand. Livestock exports are forecast to rise
as the volume and value of beef exports increases. Horticultural exports
are being helped by the decline in the value of the dollar. Canada and
Mexico continue to be our number 1 and 2 markets, accounting for 32
percent of expected exports this year. Japan is number 3 with an
expected 12 percent share, while for the first time, China has moved up
to number 4, with an expected 10 percent share, slightly above the
European Union our number 5 export market.

**U.S. Dollar depreciation spurs exports and farm prices.** The U.S.
dollar has depreciated almost 25 percent on average against major
foreign currencies, since 2002. This year alone, the dollar has dropped
15 percent against the Brazilian real, 13 percent against the Canadian
loonie, 7 percent against the euro, 4 percent against the Chinese yuan,
and 12 percent against the Australian dollar. This depreciation has
helped boost U.S. exports to an all-time high, and kept prices higher
than they would otherwise be.

An excellent illustration of the relationship between agricultural
prices and exchange rates occurred during the week of September 17, when
the Fed cut its Federal Funds rate target by 50 basis points. The result
was a decline in the value of the dollar relative to other currencies,
by about 2 percent on average. Very little other news that week directly
affected agricultural commodity markets -- no unexpected USDA reports,
no abrupt weather changes, no policy changes, etc. Nonetheless, wheat
cash prices rose by 1 percent, corn by 3.5 percent, soybeans by 6
percent, and cotton by 5.5 percent.

Despite record exports, the positive impact of the dollar's long-term
depreciation is limited by a number of factors. Trade restrictions in
many countries and imperfect market conditions in developing countries
limit the ability of a dollar decline to translate into lower prices for
U.S. agricultural products. In addition, the weak market infrastructure
and lack of market information that often characterizes the broader food
and fiber systems in developing and transition economies limits the
price signals that would translate into higher demand for imported
goods.

**U.S. farm income now consistently strong.** Cash receipts for
producers are forecast at a record \$276 billion in 2007, up \$37
billion from 2006 and \$60 billion from 2003. Cash production expenses
are forecast to be a record \$222 billion in 2007, up \$17 billion from
2006 and \$45 billion from 2003. With receipts rising faster than
expenses, net cash farm income is forecast at \$86 billion this year, up
sharply from last year and 4 years ago. The three highest farm income
years ever have occurred during the past 4 years. While some states on
the East Coast, in the Southeast, and in the Mountain region faced
drought this year, production losses were not enough to significantly
affect national income measures.

For most field crops, 2007 cash receipts are forecast to be a record
high. For example, cash receipts for wheat, corn, soybeans, and rice are
all expected to rise to all-time highs. In contrast, cash receipts for
cotton and fruits and nuts are expected to decline this year due to
large cotton supplies and weather problems for tree fruits like peaches,
pears and oranges. Cash receipts from all livestock species are forecast
to exceed \$100 billion for the fifth straight year and exceed the
previous record high set in 2005 by \$14 billion. Receipts for cattle,
dairy, and poultry are all expected to set record highs. Government
payments to producers in 2007 are expected to total nearly \$14 billion,
down only \$2 billion from 2006. In 2007, producers are forecast to
receive \$5.3 billion in direct payments, \$3.1 billion in conservation
payments, \$2 billion in disaster payments, and \$1 billion in tobacco
transition program payments. In addition, producers are forecast to
receive \$2.2 billion in counter-cyclical payments and marketing loan
assistance benefits, with upland cotton accounting for nearly all of
these payments.

The \$45 billion increase in cash production expenses since 2003 is
mainly due to an \$13 billion increase in farm origin inputs (livestock,
feed), \$12 billion more in energy-based input costs (fuel, fertilizer,
electricity, and pesticides), \$4 billion more in labor expenses, and
\$10 billion more in other operating expenses.

The balance sheet of U.S. agriculture is also expected to strengthen
again in 2007. Consistent with recent trends, increases in debt are
forecast to be offset by larger increases in farm asset values, with
farm real estate values expected to rise 14 percent in 2007. As a
result, the farm sector's debt-to-asset ratio should drop further to new
a historic low level of 10.7 percent in 2007. Annual increases in farm
equity continue to greatly exceed annual net cash farm income, with the
increase in equity in 2007 expected to be \$236 billion compared with
\$86 billion in net cash farm income.

**Developments in Farm Output Markets**

**Major crops: global supplies tight.** For the 2007/08 marketing year,
global wheat demand is again forecast to exceed global production
causing global wheat stocks as a percent of use to fall to the lowest
level on record. Record world production of coarse grains in 2007/08 is
expected to maintain global coarse grain stocks at near last year's
level, while declining world oilseed and cotton production and
increasing demand are forecast to lead to lower global stocks of both
commodities. In the United States, supplies of feed grains are expected
to increase in 2007/08 leading to a rebound in carryover. In contrast,
U.S. carryover of wheat, soybeans, rice and cotton could all decline in
2007/08 as total use is forecast to exceed production.

For the United States, good grain, oilseed and cotton harvests and
strong demand have supported above average farm income in recent years.
Market fundamentals continue to look strong as growth in demand,
particularly for producing biofuels, has led to much higher prices for
corn. Reduced plantings of soybeans and cotton in response to strong
grain prices along with increasing demand have also pushed soybean and
cotton prices higher while weather problems in several foreign countries
have caused wheat prices to surge.

**Corn supplies up in 2007/08.** Producers responded to higher prices
and returns for corn in late 2006 increasing corn planted acreage by
15.3 million acres in 2007 to 93.6 million acres, the largest area
planted to corn in over 60 years. Much of this increase in corn
plantings came from soybeans. Area for cotton, hay, and other crops also
declined to meet the demand for more corn production. With higher
acreage and improved yields, corn production is forecast at a record
13.3 billion bushels in 2007/08, 26 percent more than last year. Total
corn use is forecast to reach a record 12.6 billion bushels in 2007/08,
reflecting the expanding ethanol industry, continued strong global
demand for corn and increasing U.S. corn supplies. Despite greater total
use, stocks of corn at the end of 2007/08 marketing year are forecast to
increase by over 50 percent to 2.0 billion bushels. The farm price of
corn is forecast to average \$3.20 per bushel during 2007/08, compared
with \$3.04 per bushel in 2006/07 and the record high of \$3.24 in
1995/96.

**Corn acreage likely down in 2008/09.** Corn planted area for 2008 is
expected to fall as prices and returns for competing crops, such as
wheat and soybeans, have improved relative to corn in recent months.
December 2008 futures prices for corn are currently more than 30 cents
per bushel below the peak of December 2007 futures last February.
Current cash prices are more than \$1 per bushel below their levels in
late February. Although world demand remains strong for feed grains,
record U.S. corn supplies are expected to put downward pressure on corn
prices over the coming months. Given the current outlook for the
2008-crop corn and competing crop prices, corn planted area next spring
could decline 6 to 8 percent from 2007 to around 87 million acres. Even
with the potential for a 6 to 8 percent reduction in planted area next
spring, 2008 corn area would still be 8 to 12 percent above the
1997-2006 average. Lower production combined with continued growth in
the corn-based ethanol industry could reduce carryover stocks adding
additional support to prices in 2008/09.

**More ethanol growth expected, but plant margins now much thinner.**
U.S. ethanol production capacity is now estimated at 6.9 billion
gallons, up 2 billion gallons from a year ago. Production capacity is
expected to increase sharply over the coming 18-24 months, if the 76
plants currently under construction are completed. The new construction
would add 6.7 billion gallons of additional ethanol production capacity,
bringing total capacity to 13.6 billion gallons potentially as early as
late 2009.

Ethanol prices have weakened since mid-summer as additional plants have
come on line adding to ethanol supplies and contributing to some
infrastructure bottlenecks. For example, prices at ethanol plants in
Iowa and Nebraska have fallen nearly 50 cents per gallon since late July
2007. During the same period, futures prices on the nearby contract have
lost about 40 cents per gallon. Historically, ethanol prices have been
at a premium to gasoline. Until recently, ethanol premiums averaged 50
cents per gallon compared with unleaded gasoline. This situation has
suddenly reversed, with wholesale ethanol prices in Nebraska, for
example, 39 cents per gallon below the wholesale price for gasoline
during September. The outlook for ethanol prices appears even less
favorable in the futures market, with the nearby Chicago Board of Trade
contract for ethanol trading 50 cents per gallon below the nearby New
York Mercantile Exchange contract for reformulated gasoline blendstock.
This shift in the ethanol/gasoline price relationship has sharply
reduced returns for ethanol producers. With current retail gasoline
prices at \$2.80 per gallon, wholesale prices without federal and state
excise taxes would be about \$2.20 per gallon. Nearby futures for
ethanol are trading at \$1.57 per gallon, 71 percent of the
\$2.20-per-gallon estimated wholesale gasoline price and about equal to
ethanol's energy value relative to gasoline.

The recent declines in ethanol prices have sharply reduced profitability
for ethanol producers. This year's record corn production is bringing
some relief to declining ethanol producer margins. However, despite the
expected record corn harvest, corn prices remain strong supported by
strong demand, record-high wheat prices, and strong soybean prices. We
estimate that a 40 million gallon Midwest ethanol plant, receiving the
late September price of \$1.52 per gallon for ethanol and paying \$3.00
per bushel of corn, was earning 17 cents per gallon above variable costs
of production and 3 cents below total variable plus capital costs of
production. In the current price environment, the 51 cents-per-gallon
ethanol tax credit is important in sustaining ethanol demand and prices
at levels that are forestalling some plant shut-downs.

**Soybean supplies down in 2007/08.** High corn prices relative to
soybeans caused soybean planted area to drop by 16 percent to 63.7
million acres this year. Lower planted area, combined with slightly
lower yields, is forecast to lower soybean production to 2.6 billion
bushels, down 19 percent from last year's record production. Total
soybean supplies in 2007/08 are projected to decline about 13 percent
from last year record, as high carry-in stocks partially offset the
decline in this year's production. With lower exportable supplies, U.S.
soybean exports are expected to drop about 13 percent from last year's
record 1.1 billion bushels. Despite lower total use, carryover levels
are forecast to decline by over 60 percent. The farm price of soybeans
is forecast to average a record \$8.35 per bushel for the 2007/08
marketing year, compared with \$6.43 last year and the previous record
high of \$7.83 in 1983/84.

**Soybean area forecast to rebound in 2008/09.** U.S. soybean planted
area is forecast to rebound to 70 million acres in 2008, regaining more
than half of the 11 million acres lost primarily to corn in 2007. The
soybean to corn price ratio, which declined to below 2 in the spring of
2007, strongly favored corn planting. In contrast, current March 2008
futures imply a soybean to corn price ratio of 2.7, favoring soybeans
over corn. Rotation practices also favor a switch back to soybeans.

**Returns to Biodiesel shrink.** U.S. biodiesel production continues to
rise, setting new production records each month. Twenty percent of
2007/08 soybean oil production is expected to be used to produce about
580 million gallons of biodiesel. This compares with only 8 percent of
soybean oil production being used for biodiesel in 2005/06 when about
200 million gallons were produced. Similar to ethanol, biodiesel profit
margins are eroding due to sharply rising soybean oil prices. Soybean
oil is the feedstock for 85-90 percent of domestically produced
biodiesel. The price of soybean oil has increased over 40 percent over
the past year causing biodiesel returns above soybean oil costs plus
other variable costs to decline from around 80 cents per gallon to near
zero. Vegetable oil prices are expected to remain strong due to strong
demand, particularly for biodiesel in the EU, which is likely to keep
biodiesel production capacity low and slow expansion.

Although EU demand for vegetable oils will continue to pressure the
profitability of U.S. biodiesel production, the EU also presents an
export opportunity. Due to the \$1 per gallon tax credit for blending,
U.S. produced biodiesel is competitive in the EU biodiesel market. Since
March 2007, net exports of biodiesel have accounted for more than 25
percent of U.S. biodiesel production. As long as U.S. biodiesel remains
competitive in world markets, U.S. production is likely to grow despite
weak margins.

**Wheat prices record high in 2007/08.** For 2007/08, wheat acreage,
which had been trending downward over the past 25 years, increased by
over 3 million acres to 60.3 million, the highest since 2003. U.S. wheat
production is estimated at 2.1 billion bushels, up from 1.8 billion
bushels in 2006. Although U.S. production recovered from last year's
drought-reduced level, the 2007 crop failed to live up to early
expectations as an early April freeze and heavy harvest time rains
reduced production. Production prospects have also fallen sharply in
several major wheat producing countries. Heavy harvest rains affected
wheat production in Northern Europe and extreme drought and heat have
reduced the 2007 wheat crops in Australia, Canada, Eastern Europe and
parts of the Black Sea region. Higher expected exports, reflecting the
lower production in competitor countries, are expected to push up U.S.
wheat total use from 2.0 billion bushels in 2006/07 to 2.3 billion
bushels in 2007/08, causing U.S. ending stocks to decline to 307 million
bushels, the lowest in nearly 60 years. Reflecting this tight market,
the average farm price of wheat is forecast to be a record \$6.10 per
bushel in 2007/08, compared with \$4.26 per bushel for the 2006/07 crop.

**Wheat area to expand in 2008/09.** Producers are expected to respond
to record high prices by increasing wheat plantings again in 2008. In
addition, contracts on 2.5 million acres enrolled in the Conservation
Reserve Program expire on September 30, 2007. A large portion of these
expiring CRP acres are located in wheat producing States. Given the
current outlook for wheat prices next summer and the amount of expiring
CRP acres, wheat area is expected to increase 5 to 7 percent in 2008, to
around 64 million acres. Plantings of wheat should also be up in the EU
in 2008 as producers will not be required to fallow the usual 10 percent
of cropland. Many analysts anticipate that this will add an additional
1-2 million hectares to world wheat area in 2008. Prospects for sharply
larger world wheat area and production in 2008 are already being
reflected in futures prices for next summer's crop. July 2008 futures
for winter wheat are trading at about \$2 per bushel below the nearby
contract price.

**Cotton area and production shrinks in 2007/08 in face of low relative
prices.** In 2007/08, strong grain and improved soybean prices reduced
cotton plantings 29 percent to 10.85 million acres, the lowest area
planted since 1989. The Southeast and Delta regions each cut cotton
plantings by more than 30 percent and North Carolina, South Carolina,
Virginia, Louisiana, Mississippi, and Oklahoma experienced reductions of
40 percent or more. Lower acreage and production are projected to keep
total cotton supplies in 2007/08 about unchanged from the previous year.
With the prospect of stronger exports due to rising world demand, ending
stocks are projected to decline about one-third to 6.4 million bales.

**More cotton area declines in store for 2008/09.** With lower domestic
production and an improved export outlook, cotton futures prices
increased to a three-year high this summer. At the same time, world
prices have risen as world stocks are declining about 9 percent, putting
a floor under prices. Given prospects for continued improvement in
prices and returns, foreign production may increase in 2008/09,
especially in Brazil and India. However, rising cotton prices likely
will not be sufficient to attract acreage back to cotton production in
the United States, given the continuation of very favorable returns for
soybeans and corn. Thus, cotton planted area in the United States could
decline as much as 8 percent to about 10.0 million acres in 2008.

**Rice market tightens.** For 2007/08, rice planted area dropped to 2.75
million acres, down from 2.84 million acres the previous year and the
lowest rice plantings since 1989. Higher net returns for competing
crops---soybeans, soft red wheat and some corn, restrictions on the
planting of long grain varieties Cheniere and Clearfield CL131, and low
government payments contributed to the reduction in rice plantings.
Despite the decline in rice area, total rice production is up about 2
percent from last year to 197 million cwt, reflecting a record yield of
7,215 pounds per acre. Total supplies are about unchanged from last year
while total use is forecast to increase by 6 percent in 2007/08,
primarily reflecting much improved export prospects. Strong world rice
prices are expected to continue to support U.S. rice prices. World
2007/08 ending stocks of rice are projected at 71 million tons, down 6.2
million tons from last year and the lowest world carryover since
1983/84. The farm price of rice is forecast to average \$10.50 per cwt
in 2007/08, up from \$9.74 per cwt in 2006/07.

**Sugar to open to Mexican market.** In 2007/08, U.S. sugar production
is estimated at 8.45 million short tons, nearly unchanged from last
year's crop of 8.49 million tons. Sugar ending stocks are forecast to
increase about 9 percent to 1.9 million tons resulting in a stock-to-use
ratio of 18.2 percent, up from 16.7 percent last year. Import quotas for
sugar have been announced at the minimums established under the WTO. On
January 1, 2008, the tariff on Mexican exports of to the U.S. falls to
zero, generating uncertainties in the market and affecting USDA's
ability to operate the sugar program at no net cost to taxpayers. The
U.S. Sugar Program currently depends on the U.S. government controlling
domestic sales and imports to support prices above loan forfeiture
levels. Free trade in sweeteners between the United States and Mexico
will commence in January 2008, which could prevent the United States
from imposing domestic marketing allotments, if Mexican imports causes
total sugar imports to exceed the trigger for imposing domestic
marketing allotments of 1.532 million tons. Over the next several years,
Mexican food and beverage producers will have a strong economic
incentive to use corn-based sweeteners, rather than more expensive sugar
from domestic sugarcane. While Mexico is a large untapped market for
U.S. corn-based sweetener manufacturers, displacement of Mexican sugar
could pressure North American sugar market prices as the U.S. and Mexico
adjust to free trade in sweeteners.

**Specialty crop sales stabilize.** Excluding greenhouse/nursery crops
and mushrooms, U.S. fruits and vegetables harvested area will total
about 11 million acres in 2007. Vegetables, potatoes, and pulses account
for about 65 percent, and the remainder is citrus and non-citrus fruits
and tree nuts. In 2007, specialty crops will continue to provide a
significant source of cash revenues for U.S. producers. Cash receipts
for fruits, nuts, vegetables, and nursery/greenhouse products in 2007
are forecast at \$53 billion, up \$1.2 billion or 2 percent from 2006,
while total U.S. agriculture will increase \$37.1 billion, or 16
percent. Higher cash receipts for vegetables and greenhouse/nursery
crops are more than offsetting lower values for fruits and tree nuts.
While per capita consumption of fruits and vegetables has seen little or
no growth for several years, limited production of these commodities has
raised farm and retail prices. In 2007, grower prices through September
are up 6-7 percent from a year earlier and retail prices are up about 4
percent.

**Livestock & livestock products: U.S. production and exports setting
records.** U.S. red meat and poultry exports are expected to reach a
record high in 2008. Pork exports are forecast to lead the way, reaching
record high of 3.1 billion pounds carcass weight, or 14 percent of
production. After stalling in early 2006, poultry sales increased as
foreign concerns about AI abated. Broiler exports are forecast to
increase to 5.6 billion pounds in 2008, equally the previous record high
set in 2001. Beef exports are expected to increase with the gradual
expansion of exports to Japan and Korea. However, Korea's import
restrictions and Japan's age limits on imported beef from the United
States continue to limit growth. Although total beef exports are
expected to increase 29 percent to 1.9 billion pounds in 2007, the level
of exports will remain below the 2003 pre-bovine spongiform
encephalopathy level of 2.5 billion pounds.

Total U.S. production of meat and poultry is forecast to be record-high
in calendar year 2008, but nearly flat growth in supplies of beef are
expected to help maintain livestock prices near this year's levels. For
livestock and poultry producers, feed prices will be an important
component of producer production decisions in the upcoming year.

**Cattle prices record high this year and strong again in 2008.** Beef
production is currently forecast to increase 0.4 percent in 2008,
following a 0.7 percent decline in 2007. Steer prices are expected to
average a record-high \$92.11 per cwt this year and average \$91.50 per
cwt in 2008, compared with \$85.41 per cwt in 2006. Poor forage
conditions resulted in increased cow slaughter during 2006 and 2007 as
many producers lacked sufficient forage resources to support their
herds. During the last several months, relatively larger numbers of
heavier cattle have been placed on feed. With improved forage supplies
in the Plains this year and higher grain prices, cattle are remaining on
pasture longer and coming into feedlots at heavier weights. These
heavier feeder cattle will generally be fed for shorter periods,
consuming less feed. The *Cattle* inventory report released on July 20,
2007, showed a total July 1, 2007, cattle-and-calf inventory of 104.8
million head, 400,000 head below the July 1, 2006, inventory, suggesting
that cattle inventory growth has stalled.

The 2007 U.S. cattle import forecast is 2.2 million head. Adequate
precipitation in Mexico has allowed ranchers to keep more of their
cattle on pasture and has kept imports of Mexican cattle below last
year's levels. Imports from Canada through July are above the year
earlier levels due to higher feed costs in Canada and restructuring of
their slaughter industry. The recently announced minimal risk rule
expanding Canadian cattle eligible for import to the United States is
expected to increase U.S. cattle imports late in 2007 and 2008.

**Hog slaughter reaches record high.** Pork production in 2007 is
estimated up 2.9 percent, marking the 7th year of expansion. During the
first week of October, weekly hog slaughter was estimated at a record
2.32 million head, and slaughter is expected to remain large into early
2008. The estimated weekly average carcass weight was 199 pounds,
unchanged from the previous week and a year ago. The most recent *Hogs
and Pigs* report released on September 28, 2007, suggests continued
expansion in pork production in 2008. U.S. inventory of all hogs and
pigs on September 1, 2007, was 64.6 million head, up 3 percent from
September 1, 2006. The increase in 2008 production primarily will
reflect increased slaughter as weight gains will be limited as producers
respond to higher feed prices. Hog prices are expected to reflect the
increased production, declining slightly from 2007's \$47.73 per cwt to
\$46 per cwt in 2008.

**Broiler production to rebound in 2008.** Broiler producers have
endured several periods of low returns due to relatively low broiler
prices in 2005 and 2006 and higher feed costs. Consequently, producers
reduced chicks placed and broiler production is expected to fall by 0.2
percent in 2007. With tighter broiler meat supplies, whole bird prices
are estimated to average a record-high 76.6 cents per pound in 2007, up
from 64.4 cents per pound in 2006. Higher broiler prices and improved
returns are expected to lead to 2.4 percent increase in broiler
production in 2008. In 2008, broilers prices are forecast to average 75
cents per pound.

**Milk prices record high.** Milk production is estimated to increase by
2.0 percent in 2007, reflecting a modest expansion in the dairy cow herd
and below average growth in milk production per cow. High feed costs and
tight supplies of high quality forage especially during the first half
of 2007 reduced the growth in milk production per cow. Demand for dairy
products, both domestically and for export, has been very strong
reflecting very limited supplies from competing exporters, especially
Australia and the EU. Prices of cheese, butter, nonfat dry milk, and
whey are all up sharply in 2007 boosting the all-milk price to a record
\$19.00 per cwt. With product prices above support, no Commodity Credit
Corporation net removals of dairy products are forecast.

In 2008, milk production is forecast to increase by 2.6 percent as high
milk feed price ratios are expected to encourage producers to continue
to expand production. Domestic and export demand are forecast to remain
strong in 2008 with drought continuing to adversely affect milk
production in Australia. For 2008, the all-milk price is forecast to
average \$18.15 per cwt, the second highest on record.

**Food prices rising.** In 2007, the Consumer Price Index (CPI) for all
food is forecast to increase 3.5 to 4.5 percent. The annul CPI for all
food increased an average 2.6 percent during the past 4 years, with a
low of 2.1 percent and a high of 3.4 percent. Higher commodity and
energy costs are driving the CPI increase. Future increases will depend
on energy price increase and the extent to which agricultural market
prices stabilize.

**Developments in Farm Input Markets**

**Fuel prices and farm expenditures up, but effects cushioned by high
farm output prices.** As crude oil prices have increased from \$19 per
barrel in 1999 to \$80 today, farmers and others have been paying
increasingly higher fuel prices. The annual average fuel price paid by
farmers during 2007 is likely to reach a new high for the fifth
consecutive year. However, this year's increase is more restrained, with
the September 2007 gasoline price index up 8.2 percent from a year ago
and the diesel price index up 6.7 percent. Total expenses for fuels were
\$6.8 billion in 2003, accounting for 3.6 percent of total cash
production expenditures. In 2007, fuel expenditures are estimated at
\$11.6 billion, accounting for 5.6 percent of total cash production
expenses. Of all types of fuels, expenditures on diesel fuel have
increased the most. In the aggregate, fuel expenditures are not a major
component of farm production expenditures, and with strong commodity
market demand and prices, their increases have not had a significant
effect on U.S. farm income. However, energy expenses vary by farm type
and farm location and may be more significant in specific situations.

**High energy prices cause restructuring of fertilizer marketplace.** In
2000/01, the International Fertilizer Development Center reported that
U.S. anhydrous ammonia production capacity was 16.5 million tons of
nitrogen. By 2006/07, capacity had dropped by nearly 40 percent to 9.6
million tons. Prices of natural gas, the major component of nitrogen,
rose more in the United States than in other key regions causing a shift
in both ammonia and urea nitrogen production to overseas suppliers.
Nitrogen imports now account for more than 50 percent of available U.S.
supplies, compared with only 21 percent of available supplies in
1996/97.

Nutrient demand by U.S. and foreign farmers is expected to remain strong
over the next several years reflecting high global commodity prices and
expanding crop production. Thus fertilizer prices, and nitrogen in
particular, are expected to remain at or near record-high levels.

The U.S. demand for fertilizer expanded during the most recent
fertilizer year ending June 30, 2007. This year's high corn prices and
93 million planed corn acres led the increase in demand for all three
nutrients: nitrogen use is estimated to be 6-8 percent higher than the
previous year; phosphate use, up 4 percent; and potash, up 5 percent.
For the past 3 years, farmers have paid record prices for fertilizer
materials. This past spring, during April 2007, farmers paid on average
\$523 per ton for anhydrous ammonia, up only slightly from \$521 per ton
in 2006, reflecting a slower rate of increases in energy prices.

Fertilizer prices are likely to remain strong, supported by energy
prices and global fertilizer demand. India and China are purchasing
large volumes of nitrogenous, phosphatic, and potassic materials. Brazil
is also a strong market for phosphates. Although U.S. farmers have
increasingly relied on imports, and thus have to pay additional handling
and transportation costs, supplies should be adequate. Domestic
production of nitrogen is estimated to be up in 2007, as the fertilizer
industry is currently realizing very strong margins. For example, it
takes 33 million Btus of natural gas to produce a ton of ammonia, so
with natural gas prices now at \$6 per million Btus, the natural gas
cost is \$200 for a ton of ammonia, which is now selling to Midwest
farmers for about \$575 a ton.

**Farm labor supply remains a question for the future.** Total costs for
hired and contract farm labor are estimated at \$26.3 billion in 2007,
representing about 12 percent of total farm cash expenses. In July 2007,
the peak month for hired farm labor, there were 1.2 million hired
workers on the Nation's farms and ranches, a 1-percent increase compared
with July 2006. The average wage rate paid by farm operators increased
to \$10.04 per hour, \$0.32 per hour higher than July 2006.

It is difficult to determine the extent to which labor shortages are
currently affecting agricultural production. Data show that U.S.
production is forecast to increase in 2007 for most commodities,
including those sectors of the farm economy that rely heavily on hired
farm labor, such as specialty crops. For example, fresh vegetable and
melon production is forecast to increase by 2 percent in 2007, while
processed vegetable production is forecast to increase by 10 percent
over 2006 levels. The U.S. pear crop is expected to be 4 percent larger
than last year's crop and 7 percent above the 2005 crop. The 2007 U.S.
grape crop is forecast to be 9 percent larger than a year ago, but 11
percent smaller than the record-large crop in 2005. Alternatively, the
2007 U.S. apple crop is forecasted to be 7 percent smaller than the 2006
crop, the third smallest since the 1990s.

Farmers are concerned about current and potential labor shortages in the
future. Data collected through the National Agricultural Worker Survey
(NAWS) conducted for the U.S. Department of Labor (DOL) found that in
2005-06, 53 percent of the hired crop labor force lacked authorization
to work in the United States. Replacing 53 percent of the hired
agricultural work force with workers with proper documentation would
represent a significant adjustment within certain parts of the
agricultural sector. Should employment conditions tighten, the H-2A
program should provide some relief.

Under the H-2A program, agricultural employers who anticipate a shortage
of domestic workers are allowed to hire nonimmigrant foreign workers to
perform agricultural labor or services of a temporary or seasonal
nature. Complexity, cost, and historical lack of enforcement against
individuals without proper documentation employed in agriculture
resulted in only limited use of the H-2A program. In FY 2006, employers
requested 64,000 workers under the program and DOL certified 59,000
workers. The 59,000 certified workers represent only 5 percent of the
number of hired workers in U.S. agriculture. California, the state with
the greatest demand for farm labor, requested only about 4,000 H-2A
workers in FY 2006. For the existing H-2A program to replace the current
agricultural work force without proper documentation, the number of
workers certified by the program would need to increase by a factor of
10. Such an expansion would be a serious challenge for the current
program. Thus, the Administration is now revising the H-2A program rules
to provide farmers with an orderly and timely flow of legal workers
while protecting the rights of both U.S. workers and foreign temporary
workers

**Farmland costs continue to soar.** For 2007, USDA expects the value of
farm real estate to increase by 14 percent from 2006, increasing to
slightly over \$1.9 trillion. If farm real estate values meet their
forecast, they will have more than doubled since 2000. Farm real estate
is the major asset on the farm sector balance sheet and is expected to
account for 86 percent of total U.S. farm assets in 2007. Farm real
estate is the principal source of collateral for farm loans and enables
farm operators to finance the purchase of additional farmland and
equipment or to finance current operating expenses. While a benefit for
existing landowners, high farm real estate values make it difficult for
individuals who may wish to enter farming and increases operating
expenses for individuals who rent farmland. For example, the U.S.
average cropland cash rent increased from \$79.50 per acre in 2006 to
\$85 per acre in 2007.

**Conclusion**

As we conclude 2007, the U.S. farm economy is coming off unprecedented
increases in income and asset values the past few years. Prospects for
expanding global food and fuel demand look bright. More normal weather
and farm production increases worldwide should lead to improved
supply-demand balance in key markets, such as wheat. With biofuel demand
expected to continue growing, although at a slower pace in the future, a
big challenge will be responding to that demand by producing on more
acres, producing more per acre, protecting the environment while
expanding production, and dealing with feed availability and costs for
the livestock sector. Market prospects are also highly subject to
technology changes, such as for crop yields or biofuel production, and
possible key legislative changes affecting biofuel, farm and trade
policy. Fortunately, the U.S. farm economy has evolved into a
profitable, well capitalized, skilled, and flexible sector that should
be able to successfully deal with macroeconomic events, changing foreign
competition, or reasonable policy changes.

Mr. Chairman, that completes my statement.

Farm Economic Indicators

  -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
  **[Ag.               **FY00**   **FY01**   **FY02**   **FY03**   **FY04**   **FY05**   **FY06**   **FY07F**   **FY08F**
  Trade]{.underline}                                                                                            
  (Bil. \$)**                                                                                                   

  Total exports        50.7       52.7       53.3       56.0       62.4       62.5       68.6       79.0        83.5

  Asia                 19.7       20.1       19.4       21.6       24.3       22.5       24.9       28.7        30.6

  Canada               7.5        8.0        8.6        9.1        9.5        10.4       11.6       13.1        13.6

  Mexico               6.3        7.3        7.1        7.7        8.4        9.3        10.4       12.6        13.2

  Total imports        38.9       39.0       41.0       45.7       52.7       57.7       64.0       70.5        75.0

  **[Farm Income (Bil. **2000**   **2001**   **2002**   **2003**   **2004**   **2005**   **2006**   **2007F**   **2008F**
  \$)]{.underline}**                                                                                            

  Cash receipts        192.1      200.1      195.0      215.6      237.3      240.7      239.3      276.4       NA

  Gov't payments       23.2       22.4       12.4       16.5       13.0       24.4       15.8       13.6        NA

  Gross cash income    229.0      237.4      222.3      247.8      267.4      281.3      272.5      308.0       NA

  Cash expenses        171.7      175.2      170.8      177.6      185.2      195.5      204.7      222.1       NA

  Net cash income      57.4       62.2       51.5       70.2       82.2       85.8       67.9       85.9        NA
  -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------

<table>
<colgroup>
<col style="width: 18%" />
<col style="width: 8%" />
<col style="width: 9%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 11%" />
<col style="width: 11%" />
</colgroup>
<tbody>
<tr class="odd">
<td><strong><u>Commodity Prices</u> <u>1</u>/ <u>1/</u></strong></td>
<td><strong>Unit</strong></td>
<td><strong>2000/01</strong></td>
<td><strong>2001/02</strong></td>
<td><strong>2002/03</strong></td>
<td><strong>2003/04</strong></td>
<td><strong>2004/05</strong></td>
<td><strong>2005/06</strong></td>
<td><strong>2006/07</strong></td>
<td><strong>2007/08F</strong></td>
</tr>
<tr class="even">
<td>Wheat</td>
<td>$/bu</td>
<td>2.62</td>
<td>2.78</td>
<td>3.56</td>
<td>3.40</td>
<td>3.40</td>
<td>3.42</td>
<td>4.26</td>
<td>5.80-6.40</td>
</tr>
<tr class="odd">
<td>Corn</td>
<td>$/bu</td>
<td>1.85</td>
<td>1.97</td>
<td>2.32</td>
<td>2.42</td>
<td>2.06</td>
<td>2.00</td>
<td>3.04</td>
<td>2.90-3.50</td>
</tr>
<tr class="even">
<td>Soybeans</td>
<td>$/bu</td>
<td>4.54</td>
<td>4.38</td>
<td>5.53</td>
<td>7.34</td>
<td>5.74</td>
<td>5.66</td>
<td>6.43</td>
<td>7.85-8.85</td>
</tr>
<tr class="odd">
<td>Rice</td>
<td>$/cwt</td>
<td>5.61</td>
<td>4.25</td>
<td>4.49</td>
<td>8.08</td>
<td>7.33</td>
<td>7.65</td>
<td>9.74</td>
<td>10.30-10.70</td>
</tr>
<tr class="even">
<td>Cotton (Upland)</td>
<td>cents/lb</td>
<td>49.8</td>
<td>29.8</td>
<td>44.5</td>
<td>61.8</td>
<td>41.6</td>
<td>47.7</td>
<td>47.3</td>
<td>44.9 <u>2</u>/</td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td><strong>2001</strong></td>
<td><strong>2002</strong></td>
<td><strong>2003</strong></td>
<td><strong>2004</strong></td>
<td><strong>2005</strong></td>
<td><strong>2006</strong></td>
<td><strong>2007F</strong></td>
<td><strong>2008F</strong></td>
</tr>
<tr class="even">
<td>Hogs</td>
<td>$/cwt</td>
<td>45.81</td>
<td>34.92</td>
<td>39.45</td>
<td>52.51</td>
<td>50.05</td>
<td>47.26</td>
<td>47.73</td>
<td>44-48</td>
</tr>
<tr class="odd">
<td>Steers</td>
<td>$/cwt</td>
<td>72.71</td>
<td>67.04</td>
<td>84.69</td>
<td>84.75</td>
<td>87.28</td>
<td>85.41</td>
<td>92.11</td>
<td>88-95</td>
</tr>
<tr class="even">
<td>Broilers</td>
<td>cents/lb</td>
<td>59.1</td>
<td>55.6</td>
<td>62.0</td>
<td>74.1</td>
<td>70.8</td>
<td>64.4</td>
<td>76.6</td>
<td>72-78</td>
</tr>
<tr class="odd">
<td>Milk</td>
<td>$/cwt</td>
<td>15.05</td>
<td>12.18</td>
<td>12.55</td>
<td>16.13</td>
<td><p>15.19</p>
<p>1215.15</p></td>
<td>12.97</td>
<td>18.95-19.05</td>
<td>17.70-18.60</td>
</tr>
<tr class="even">
<td>Gasoline</td>
<td>$/gallon</td>
<td>1.47</td>
<td>1.39</td>
<td>1.60</td>
<td>1.89</td>
<td>2.31</td>
<td>2.62</td>
<td>2.80</td>
<td>2.87</td>
</tr>
<tr class="odd">
<td>Diesel</td>
<td>$/gallon</td>
<td>1.40</td>
<td>1.32</td>
<td>1.50</td>
<td>1.81</td>
<td>2.41</td>
<td>2.71</td>
<td>2.82</td>
<td>2.96</td>
</tr>
<tr class="even">
<td>Natural gas (wlhd)</td>
<td>$/K cu. ft.</td>
<td>4.01</td>
<td>2.95</td>
<td>4.89</td>
<td>5.50</td>
<td>7.45</td>
<td>6.41</td>
<td>6.34</td>
<td>6.95</td>
</tr>
<tr class="odd">
<td>Electricity</td>
<td>$/kwh</td>
<td>8.62</td>
<td>8.45</td>
<td>8.70</td>
<td>8.97</td>
<td>9.45</td>
<td>10.40</td>
<td>10.60</td>
<td>10.90</td>
</tr>
</tbody>
</table>

1/ Agricultural commodity price forecasts are from USDA, World
Agricultural Supply and Demand Estimates report, October 2007. Energy
prices are from Energy Information Administration, Short Term Energy
Outlook, October 9, 2007.

[2]{.underline}/Average price for August 2007.

F=forecast.

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