**STATEMENT OF KEITH COLLINS**

**CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE**

**BEFORE THE U.S. HOUSE OF REPRESENTATIVES**

**SUBCOMMITTE ON COMMODITIES AND RISK MANAGEMENT**

**May 20, 2004**

Mr. Chairman and members of the Subcommittee, thank you for the
opportunity to provide a brief review of the performance of the farm
economy and the commodity programs of the Farm Security and Rural
Investment Act of 2002 (2002 Farm Bill). The goal of the U.S. Department
of Agriculture (USDA) has been to implement the 2002 Farm Bill in an
effective and timely manner to the benefit of producers, consumers and
taxpayers. This morning, I will highlight a few of those accomplishments
and discuss the performance of the 2002 Farm Bill.

## USDA Farm Bill Implementation

USDA's primary goal over the past two years has been to implement all of
the 2002 Farm Bill's provisions as quickly, efficiently and equitably as
possible. This has been an enormous challenge, given the passage of the
bill in the middle of the 2002 program year. Because we had been
preparing for implementation prior to passage, the key provisions were
quickly put in place for the 2002 crops. We estimate that 95 percent of
the 2002 Farm Bill has now been implemented. The few remaining
provisions are will be implemented over the next several months. The
following activities illustrate the current status of key 2002 Farm Bill
provisions.

The commodity provisions of Title I are fully operational, and producers
are receiving their authorized benefits. To date, over \$15 billion in
commodity program payments, including direct, countercyclical, loan
deficiency, peanut quota buyout and milk income loss contract (MILC)
payments, have been issued. The final report of the payment limit
commission was issued and the study of national dairy policy will be
released soon.

Under Title II, we are implementing the largest conservation programs in
USDA history. One new signup for the Conservation Reserve Program (CRP)
has been held, the final rule published last week, and we are now
considering when to hold the next signup. The revamped Environmental
Quality Incentives Program (EQIP) was launched last May, and the Farm
and Ranchland Conservation Program and the Grassland Reserve Program
have also been implemented. To help with technical assistance for
program implementation, we issued a rule which makes available
non-Federal and private sector providers of technical assistance. We are
now developing the final rule for the unprecedented Conservation
Security Program (CSP) and expect to have it in place this summer.

Under the trade authorities of Title III, USDA has issued a final rule
implementing the McGovern-Dole International Food for Education and
Child Nutrition Program and implemented the Technical Assistance Program
for Specialty Crops.

In rural development, Title VI, we have implemented the broadband, rural
local television and value-added agricultural product development
programs. We have proposed a rule for guaranteeing electric and
telephone notes and are implementing the Rural Business Investment
Program with the Small Business Administration.

Under the first-ever energy title in a farm bill, Title IX, we awarded
grants under the joint USDA/Department of Energy (DOE) Biomass Research
and Development Program, the Renewable Energy and Energy Efficiency
Program and the Biodiesel Fuel Education Program. We also issued the
final rule for the Commodity Credit Corporation (CCC) bioenergy program,
which supports expanded ethanol and biodiesel production. In addition,
we proposed a rule for the Federal Biobased Product Preferred
Procurement Program (FB-4P), which will require all Federal agencies to
prefer biobased products in their procurements, and we expect to issue a
final rule soon.

We continue on track to implement the Country of Origin Labeling
provision. A proposed rule covering all affected commodities has been
issued, and the final rule will be issued later this year. As directed
by the Consolidated Appropriations Act, 2004, the program will initially
be in effect for fish, fruits and vegetables.

Finally, we are implementing the provisions of Section 10708 of the 2002
Farm Bill on the compilation and public disclosure of data to assess and
hold USDA accountable for the nondiscriminatory participation of
socially disadvantaged farmers and ranchers in the Department's programs
and expect to issue a report to Congress in the next several months. In
the fall, we expect to have procedures in place to track farm program
benefits provided directly or indirectly to individuals or entities
under Titles I and II, as required by Section 1614.

Collectively, the provisions implemented and those few that remain in
the process of implementation are helping to stabilize the farm economy,
support the quality of life in rural areas and generate new economic
opportunities for farmers and rural residents.

# 

# State of the Farm Economy

When USDA began implementing the farm program provisions of the 2002
Farm Bill in the summer of 2002, the Dow Jones Industrial Average had
slipped below 8,000, the price of corn was under \$2 per bushel,
soybeans were under \$5 per bushel and cotton was selling for 35 cents
per pound. The farm economy had been weak for so long, beginning with
the 1998 crops, many suggested such prices might be the norm for the
future. At that time, the 2002 Farm Bill was poised to be costly and a
highly significant part of future farm income.

The story today is remarkably different, as the U.S. agricultural
economy has sharply rebounded. The index of prices received by farmers
in April was the highest for any month since USDA started keeping
records in 1910. Prices have strengthened despite generally good U.S.
harvests in 2003 and disruptions in livestock and poultry trade caused
by animal diseases. With good harvests and strong prices, U.S. net cash
income surged to a record high in 2003 and producers are having another
strong income year in 2004.

The improvement in agriculture is the result of some transitory supply
factors and some more enduring demand developments. On the supply side
for the 2003/04 crops, adverse winter weather in the Former Soviet Union
countries and drought in Europe reduced wheat and coarse grain
production. In addition, the soybean harvests in the United States and
South America were reduced by a variety of factors, including drought
and disease. For the 2004/05 crops, dry weather is reducing U.S. winter
wheat production.

While these declines in production are likely to reverse in coming
years, several positive demand developments appear more persistent. The
global economy has substantially strengthened, boosting farm product
demand. The variable and generally slow foreign economic growth since
1998, which was 1.6 percent in both 2001 and 2002, finally improved to
2.2 percent in 2003 and further improvement to 3.3 percent is expected
this year. U.S. growth, at a near standstill in 2002, rose to 3.1
percent in 2003 and is expected to be above 4.5 percent this year.

The improved foreign economies, combined with lower global production,
are increasing U.S. farm exports this year. USDA projects U.S. farm
exports will reach \$59 billion in fiscal year (FY) 2004, nearly equal
to the all-time high. Had it not been for the finding of BSE in December
and subsequent decline in U.S. beef exports, U.S. agricultural exports
this year would be record-high.

Two added factors contributing to stronger exports are the lower U.S.
dollar and China's growing net imports of agricultural products**.** The
trade-weighted value of the dollar, measured against the currencies of
countries that import U.S. agricultural products, was 6 to 7 percent
lower in 2003, compared with 2001 and 2002. The trade-weighted value of
the dollar, measured against the currencies of countries that compete
against the U.S. in global agricultural product markets, was 15 to 20
percent lower in 2003, compared with 2001 and 2002. The reduced value of
the U.S. dollar makes U.S. farm products cheaper in foreign currency
terms and reduces the cost of our agricultural products relative to
other potential suppliers.

China's strong economic growth, booming demand for food, accession into
the World Trade Organization (WTO) and declining stocks of grain and
cotton have caused U.S. agricultural exports to China to rise from \$1.4
billon in FY 2002 to an estimated \$5.4 billion in FY 2004. China's
domestic uses of cotton and soybean meal have each nearly doubled during
the past 5 years. U.S. exports of cotton and soybeans to China from
October 2003 through March 2004 total \$3.6 billion, more than double
the level for this period a year earlier.

The improved U.S. economy has strengthened domestic demand for food.
Sales in grocery, food and beverage stores during the first quarter of
2004 were up 3.3 percent, compared with one year ago. Domestic demand
for some key industrial uses is also very strong. Ethanol production in
February set another monthly record, up 25 percent from a year earlier.

On May 12, USDA issued its first official supply, demand and price
forecasts for the 2004/05 crop years. With planted acreage based on the
Prospective Plantings report released on March 31 and trend yields, USDA
projects record high U.S. corn, soybean and rice crops in 2004, a good
cotton crop, but a U.S. wheat crop about 11 percent below the 2003
level, which had a record-high yield.

Even with the increase in U.S. production and a rebound expected in
European grain production, world markets are likely to remain robust, as
stocks going into the upcoming crop year will be the lowest in many
years. World grain demand during the current marketing year is expected
to outpace production for the fifth consecutive year. By the end of this
summer, global grain stocks as a percent of use will be the lowest since
1976 for rice, the lowest since 1972 for wheat, and the lowest on record
for coarse grains. Stocks are also low for soybeans and cotton.

Regarding animal agriculture, U.S. production of red meat and poultry
was down fractionally in 2003 and is forecast to be only slightly higher
in 2004. Combined with stronger consumer demand, livestock and poultry
prices remain above recent historical levels despite the discovery of
BSE and the outbreaks of Avian Influenza. And, stable milk production
last year followed by lower production in the first quarter of this year
resulted in surging milk and dairy product prices.

With this market resurgence, farm cash receipts are expected to be a
record high \$215 billion in 2004. With spending on energy-based inputs
up over the past two years, government payments down and a reduction in
cattle revenue due to BSE, net cash farm income is forecast to decline
from the record-high of 2003, but will still equal the average of the
past two years.

With another sound income year in prospect, farmland values will likely
rise again. These developments should continue the improvement in the
farm sector balance sheet that we saw in 2003.

Finally, consumers will continue to have abundant affordable food,
although with strong farm prices, retail food prices are expected to
rise 3-3.5 percent this year, compared with 2.2 percent in 2003, as
retail prices for red meat, dairy products, poultry, eggs, fresh fruits
and vegetables and fats and oils increase.

**Performance of the 2002 Farm Bill**

The current state of the farm economy illustrates the important
relationship between the performance of the farm economy and the
performance of the 2002 Farm Bill. The 2002 Farm Bill provides a support
structure for major crops and milk that is primarily countercyclical to
the performance of commodity markets. When markets for major crops and
milk are strong, as they are now, the support structure becomes
generally benign; when these markets are weak, the support structure
plays a more expansive role in augmenting farm income.

The 2002 Farm Bill was developed under a budget resolution that
increased funding for farm commodity programs above the projected
spending level under a continuation of the Federal Agriculture
Improvement and Reform Act of 1996 (1996 Farm Bill), the so-called
baseline. This increased funding was motivated by the low farm prices
prevailing at the time and the desire by Congress to continue to
supplement the level of support provided by the 1996 Farm Bill, as had
been done by disaster and economic assistance legislation enacted in the
four years prior to 2002.

**Principal payment programs.** The 2002 Farm Bill augments the incomes
of major crop producers by authorizing direct payments, marketing
assistance loan benefits and counter-cyclical payments. Direct payments
are similar to the production flexibility contract (PFC) payments of the
1996 Farm Bill. These payments are unrelated to what or how much of a
commodity a producer grows and the price received by producers. Direct
payments are determined by a producer's fixed payment acreage (85
percent of crop base), fixed direct payment yield and fixed payment
rate. The 2002 Farm Bill established direct payment rates slightly above
the PFC payment rates that prevailed in the final year of the 1996 Farm
Bill's existence for food and feed grains, upland cotton and rice.
Direct payments were also introduced for soybeans, other oilseeds and
peanuts---crops that were not eligible for PFC payments under the 1996
Farm Bill. Other oilseeds are defined as sunflower seed, rapeseed,
canola, safflower, flaxseed, mustard seed, or, if designated by the
Secretary, another oilseed. The Secretary has designated crambe and
sesame seed as other oilseeds.

Marketing assistance loan rates were increased for feed and food grains,
compared with the 1996 Farm Bill levels; held the same for rice; held
about the same for upland cotton and other oilseeds; and reduced for
soybeans. New marketing assistance loan programs were introduced for dry
peas, lentils, small chickpeas and peanuts.

A new concept, countercyclical payments, was implemented for food and
feed grains, upland cotton, rice, soybeans, other oilseeds and peanuts.
Countercyclical payments may be viewed as an extension of the "market
loss payments" authorized in prior disaster and economic assistance
legislation and are similar to deficiency payments used in the 1980s.
Under the 2002 Farm Bill, countercyclical payments became an integral
part of the support structure for major crops, rather than an
after-the-fact addition that depended on passage of annual legislation.
Like direct payments, countercyclical payments are decoupled from a
producer's current plantings but depend on the level of market prices.
Payment levels are determined by a producer's fixed payment acreage (85
percent of crop base), fixed countercyclical payment yield and a payment
rate that varies depending on market price.

**Federal farm program spending.** Federal spending on farm price and
income support programs is sharply below the levels projected at the
time the 2002 Farm Bill was enacted. The FY 2003 Mid-Session Review of
the President's Budget released in July 2002, following enactment of the
2002 Farm Bill, projected that outlays on commodity programs during FY
2003 through FY 2005 would total \$52.6 billion. However, the FY 2005
President's Budget released in February 2004, which reflected the
improving farm economy, estimated outlays for FY 2003 through FY 2005 at
\$35.3 billion, about \$17.3 billion less than the level projected in
mid-2002. Since the February estimates, the farm economy has continued
to strengthen and a more current estimate of the reduction in farm
program outlays over the period may be about \$20 billion.

Current estimates of spending on direct payments are about the same as
the initial 2002 Farm Bill projections. About \$5.3 billion is being
paid to producers annually in the form of direct payments. For the 2002
through 2005 crop years, direct payments are expected to account for
over half of all payments to producers under commodity programs.

In mid-2002, USDA estimated that countercyclical payments for the 2002
through 2005 crop years would total \$23 billion. The President's Budget
released in February of this year estimates payments over the same
period will fall by nearly 50 percent to \$12.2 billion and that figure
would be lower if based on more recent price forecasts.

Loan deficiency payments, the primary benefit distributed under the 2002
Farm Bill's marketing assistance loan program, depend on production and
market prices. In mid-2002, USDA estimated that loan deficiency payments
for the 2002 through 2005 crops would total \$12 billion. The FY 2005
President's Budget estimates payments over the period will amount to
slightly over \$3 billion and that figure, too, would be lower if based
on USDA's most recent price forecasts.

As farm program payments have declined, payments have accounted for a
much smaller share of U.S. farm income. In 2000, payments to producers,
including disaster and economic assistance payments (excluding
conservation payments), were \$21.2 billion, equal to 11 percent of U.S.
farm cash receipts and 37 percent of U.S. net cash farm income. In 2004,
these payments are expected to total only \$7.6 billion, equal to 4
percent of U.S. farm cash receipts and 14 percent of U.S. net cash farm
income.

**Changes in program structure.** In addition to the performance of the
price and income support provisions, the 2002 Farm Bill featured some
substantial changes in the structure of farm programs that merit
discussion. One change was that producers were provided the opportunity
to update crop acreage bases and payment yields, which then remain fixed
for the life of the 2002 Farm Bill. Producers could update bases for all
crops, or they could retain historical bases and add oilseeds to their
current base acreage, subject to certain restrictions. Payment yields
for direct payments were the payment yields established under the 1996
Farm Bill, except for oilseeds, which were based on recent yields but
factored back to the 1981-85 period. Payment yields for countercyclical
payments were the payment yields established under the 1996 Farm Bill or
they could be partially updated, based on alternative methods, but only
if bases were updated. Peanut payment yields for direct and
countercyclical payments were determined using recent yields.

Prior to passage of the 2002 Farm Bill, there were 211.5 million base
acres of crops eligible for 2002-crop PFC payments. Reflecting the
additional crops eligible for payments, producers enrolled 269.3 million
base acres of crops eligible for 2002-crop direct and countercyclical
payments, including 211.4 million base acres of crops previously
eligible for PFC payments, 53.5 million acres of soybeans, 2.9 million
acres of other oilseeds and 1.5 million acres of peanuts. For the 2002
crops, producers on 91 percent of all eligible farms accounting for 98
percent of total base acres elected to enroll for direct and
countercyclical payments. About 45 percent of all enrolled producers,
accounting for 40 percent of base acres, elected to update bases and
partially update program yields for countercyclical payments.

While total base acres for crops eligible for PFC payments was nearly
unchanged under the provisions of the 1996 and 2002 Farm Bills, there
were considerable differences for individual crops. The largest absolute
change in enrolled base acres occurred for corn in which 2002-crop base
acreage increased from 81.6 million acres under the 1996 Farm Bill to
87.9 million under the 2002 Farm Bill, a 7.6-percent increase. Upland
cotton base acreage increased from 16.2 million acres under the prior
farm bill to 18.9 million, or 16.3 percent; and rice base acres rose 9
percent, from 4.1 million acres to 4.5 million. In contrast, 2002-crop
base acreages of wheat, grain sorghum, barley and oats all declined
under the 2002 Farm Bill. Wheat base acreage for the 2002-crop dropped
by 2.2 million acres, or 3 percent; grain sorghum base fell from 13.6
million acres under the 1996 Farm Bill to 12.1 million, or 11 percent;
and barley base declined from 11.1 million acres to 8.8 million, or 20
percent. The largest decline in acreage bases under the 2002 Farm Bill
occurred for oats, falling by more than 50 percent, from 6.5 million
acres to 3.1 million.

The changes in base acres are not surprising and reflect economic
incentives. Per acre direct payments are generally higher for corn, rice
and upland cotton than for other crops eligible for direct payments, and
projected per acre countercyclical payments for corn, rice, and upland
cotton were generally above those for other crops during the period when
acreage bases could be established by producers under the 2002 Farm
Bill. As a result, most producers who reduced plantings of corn, rice
and upland cotton since 1991-95, the previous period used to establish
bases under the 1996 Farm Bill, appear to have maintained their bases,
while producers who increased plantings of these crops since 1991-95
appear to have increased their bases. In addition, upland cotton
plantings have increased in recent years in the Southeast. Since
1998-2001 plantings of wheat, sorghum, barley and oats were considerably
below established bases, so declining base acres for these crops were
expected.

Producers planted an average of 73.5 million acres of soybeans during
1998-2001. In comparison, producers enrolled only 53.5 million acres of
soybean base under the 2002 Farm Bill. To establish all 73.5 million
acres as soybean base, producers would have had to update all bases on
the farm, and that would have meant losing corn base. It appears
producers believed that maintaining corn base was preferable to
establishing a soybean base. This is consistent with differences in
expected direct and countercyclical payments for corn and soybeans at
the time producers had to establish acreage bases under the 2002 Farm
Bill.

For wheat, feed grains, rice and upland cotton, direct payment yields
averaged across all enrolled producers were within 2 percent of payment
yields for PFC payments. For soybeans, which did not have a PFC yield,
the direct payment yield averaged 30.8 bushels per acre.

Producers elected to update program yields for countercyclical payments
on 39 percent of total base acres enrolled under the 2002 Farm Bill. The
average payment yield for countercyclical payments exceeds the payment
yield for direct payments by 4.6 percent for wheat, 5.7 percent for
upland cotton, 6.4 percent for rice, 10.7 percent for soybeans and 11.7
percent for corn.

**Other Commodity Programs---Peanuts, Pulses, Sugar and Dairy.** The
2002 Farm Bill replaced the two-tiered price support program of quota
and additional peanuts in place since 1977 with direct and
countercyclical payments, marketing assistance loans and a quota buyout.
To be eligible for direct and countercyclical payments, a producer had
to establish base acreage and a payment yield for peanuts. Producers
have enrolled 1.47 million base acres of peanuts with an average program
yield for direct and countercyclical payments of 2,989 pounds per acre,
compared with average plantings of 1.53 million acres and yields per
acre of 2,711 pounds during 1998-2001.

Nationally, peanut planted acreage was down 12 percent in 2002, remained
stable in 2003 and, based on USDA's Prospective Plantings report, is
expected to be up about 2 percent in 2004. It appears some producers
have decided it is more profitable to plant alternative crops or convert
peanut acreage into pasture or other uses, rather than continue to
produce peanuts.

Outlays under the new peanut program reached \$1.6 billion in FY 2003 of
which \$1.2 billion was paid out in quota compensation payments. In
addition to quota compensation payments, producers received \$97 million
in direct payments, \$161 million in countercyclical payments and about
\$50 million in marketing assistance loan benefits for peanuts in FY
2003.

Under the peanut marketing assistance loan program, the loan rate is
\$355 per ton, compared with a U.S. average loan rate for quota peanuts
under the 1996 Farm Bill of \$610 per ton. The reduction in the loan
rate has led to a lower average price for peanuts and has reduced
imports of peanuts and peanut products. For example, prior to
implementation of the 2002 Farm Bill, Argentina completely filled its
import quota but has shipped only 36 percent of its quota in the past 12
months.

Establishing the loan repayment rate for peanuts has been complicated by
a lack of transparent and consistent price information covering all
segments of the peanut industry. USDA continues to work with the peanut
industry to improve price discovery mechanisms and provide more price
transparency for both domestic and international market transactions.
USDA has contracted with a third party to examine options for improving
the price information used in determining the loan repayment rate and is
hopeful that these efforts will lead to more transparent and consistent
price information.

U.S. peanuts exports have also declined, reflecting lower production and
increased domestic use. During the 2001 crop year, 700 million pounds of
U.S. peanuts were exported. U.S. peanut exports fell to 490 million
pounds this past season and are forecast to be unchanged this marketing
year.

For program pulse crops, transparent and consistent price information
for administering the marketing loan program has been difficult to
obtain, similar to the problems faced with peanuts.

The 2002 Farm Bill continued the price support program for sugar. As
under the 1996 Farm Bill, the loan rate for raw cane sugar is \$0.18 per
pound and the loan rate for refined beet sugar is \$0.229 per pound.

The 2002 Farm Bill established a new marketing allotment program for
sugar processed from sugar beets and sugarcane. The 2002 Farm Bill
directs the Secretary to set the overall allotment quantity (OAQ)
pursuant to a statutory formula at a level that will result in no
forfeitures of sugar to the CCC. Under the formula for determining the
OAQ, the Secretary must estimate sugar consumption, carry-in stocks and
reasonable carry-over stocks. Reflecting uncertainty regarding these
estimates, USDA gradually increased the OAQ over the course of the
2002/03 marketing year, as market prices remained above forfeiture
levels. It also became increasing clear that "consumption" as reported
by the industry included actual deliveries as well as sales for delivery
in the future, making it difficult to interpret trends in U.S. sugar
consumption. For the year, U.S. production plus imports slightly
exceeded total use and the CCC was able to sell its sugar stocks without
causing loan forfeitures.

At the start of 2003/04, USDA set the OAQ at 8.55 million tons and held
0.3 million tons in reserve. The reserve portion of the OAQ reflected
uncertainties regarding carry-in, consumption and imports. In April,
USDA announced that the reserve would be cancelled. For the marketing
year, production plus imports are projected to exceed total use by 0.6
million tons. As a result, stocks are projected to increase from 1.7
million tons at the beginning of this marketing year to 2.2 million tons
at the beginning of the 2004/05 marketing year.

Despite the projected increase in stocks, the Prospective Plantings
report indicates that producers intend to plant the same amount of
acreage to sugar beets as last year. Assuming normal yields and no
significant increase in imports, carryover stocks are projected to rise
to 2.3 million tons at the end of the 2004/05 marketing year.

The 2002 Farm Bill continues the price support program for milk at
\$9.90 per cwt. through December 31, 2007. The Dairy Export Incentive
Program continues through 2007. The 2002 Farm Bill also authorized a new
program that provides direct payments to dairy producers, the Milk
Income Loss Contract (MILC) program. Under the MILC program, dairy
producers receive direct payments if the monthly Class I price in Boston
is below \$16.94 per cwt.

USDA began issuing payments under the MILC program in October 2002 and
has paid out \$2 billion in MILC payments to producers since then. At
the time the 2002 Farm Bill was enacted, the Congressional Budget Office
(CBO) projected MILC payments would total \$1.0 billion through
September 30, 2005, the life of the program. The payment rate has ranged
from a high of \$1.82 per cwt. in April 2003 to a low of zero in during
September through December of 2004. Reflecting the recent surge in milk
prices, no payments will be made under the MILC program in May, and no
payments are projected over the next several months.

The 2.4-million-pound annual cap on payments has been effective in
shifting payments to areas of the country with smaller herds. For
example, Arizona, California, Idaho and New Mexico account for about
one-third of total milk production. Producers in these four States have
received about 10 percent of total MILC payments. In contrast,
Minnesota, New York, Pennsylvania and Wisconsin also account of about
one-third of total milk production and producers in these four States
have received nearly one-half of total MILC payments.

**Implications for Market Efficiency.** The 2002 Farm Bill continued the
market-oriented planting flexibility provisions of the 1996 Farm Bill. A
producer may plant any commodity on base acres, except under certain
circumstances, fruits, vegetables and wild rice, without loss of direct
and countercyclical payments. The decoupling of payments from planting
decisions enables producers to choose the mix of crops that best meet
economic, conservation and other objectives. This freedom of choice in
determining the mix of crop to produce eliminates inefficiencies caused
by government-imposed planting restrictions. While there has been some
criticism that the 2002 Farm Bill "recoupled" production through its
base and yield updating provisions, planting data to date suggest
producers continue to make planting decisions on market conditions, not
base allocations.

Producers have responded to the evolution toward greater planting
flexibility and reliance on market returns, as well as agronomic
considerations, by shifting the mix of crops produced. For example, 57.8
million acres were planted to soybeans in 1990, down from a peak of more
than 71 million in 1979. With the increased planting flexibility
beginning with the 1996 Farm Bill, soybean acreage grew to 64.2 million
acres in 1996, to 74.0 million in 2002, and a record high 75.4 million
expected in 2004. Expansion has occurred in the Midwest as producers
have moved to corn/soybean crop rotations on more acreage, and the Upper
Midwest and Western States, as improved seed varieties have led to
higher yields in these regions. In contrast, producers have elected to
reduce plantings of wheat and minor feed grains in the face of better
alternatives and continued dry conditions in some areas. For example,
USDA expects 59.5 million acres planted to wheat in 2004, compared with
77.0 million in 1990 and over 75 million in 1996.

Farm program benefits are received by about one-third of all U.S. farms
and cover about 80 percent of principal crop acreage, consequently farm
programs do not directly affect a substantial portion of U.S.
agriculture. While market forces have increased in importance for the
portion of U.S. agriculture covered by farm programs, certain programs
such as marketing assistance loans and MILC payments remain coupled to
production decisions, which has the benefit of providing more support
when production increases and prices decline, but risks prolonging
recovery by blunting supply adjustment.

**Conservation Programs.** The support provided to commodity producers
was also enhanced by the expansion of conservation programs in the 2002
Farm Bill and these deserve mention. Several existing programs were
reauthorized and new programs added to assist producers in addressing
conservation concerns on working lands. At the time the 2002 Farm Bill
was enacted, CBO projected outlays under the conservation provisions of
the 2002 Farm Bill would be \$6.5 billion during FY 2002-07 and over
\$14 billion during FY 2002-11.

Some of the major conservation provisions of the 2002 Farm Bill include:
(1) an increase in maximum enrollment in the CRP from 36.4 million acres
to 39.2 million acres; (2) a steady increase in the level of funding for
the EQIP to \$1.3 billion in FY 2007; (3) an increase in maximum
enrollment in the WRP to 2.275 million acres; (4) establishment of a
Grassland Reserve Program (GRP), in which up to 2 million acres may be
enrolled to assist producers in restoring and conserving grassland; and
(5) creation of the CSP to assist producers in implementing and
maintaining conservation practices on working lands.

To implement the many conservation programs under the 2002 Farm Bill,
USDA developed and issued new program rules, trained and updated its
workforce and partners on program changes and sought to deliver the
programs to America's farmers and ranchers in a timely and efficient
manner.

The final rule implementing EQIP was published on May 30, 2003, after
evaluating and considering 1,250 public comments. During FY 2003, USDA
approved 30,251 EQIP contracts and obligated \$483 million in EQIP
funds. In FY 2004, USDA has allocated over \$900 million in EQIP funding
to the States.

USDA conducted the first general sign-up for the CRP under the 2002 Farm
Bill from May 5 through June 13, 2003. Over 71,000 offers for about 4.1
million acres were received and 38,000 offers were accepted for 2.0
million acres. There are currently 34.7 million acres enrolled in the
CRP. Given the record high average farm prices this spring and tight
crop stocks situation, we have decided to wait until this summer before
deciding when to conduct another general CRP sign-up. This will give the
Department time to more fully evaluate the supply/demand outlook for
major crops for the upcoming marketing year, which will be heavily
influenced by this summer's weather.

USDA is aggressively moving forward on implementation of the CSP. We
conducted 10 national listening sessions and met with numerous
stakeholders in various States prior to issuing the proposed rule. The
public comment period closed on March 2 and the Department is evaluating
the more than 14,000 public responses. USDA's next step is to conduct a
thorough review of the comments, which will be used in developing the
final rule. We are on schedule to publish a final rule early this summer
followed by program sign-up.

The GRP assists landowners in restoring and protecting grassland. On
June 30, 2003, USDA announced the first sign-up for the GRP under a
"Notice of Availability of Program Funds." In FY 2003, 241,000 acres
were enrolled in the GRP at a cost of \$51.3 million. On May 11, USDA
released an interim final rule for the GRP. Following publication in the
Federal Register, the Department will begin signup, with applications
filed any time during the year.

## 

## Conclusion

The 2002 Farm Bill was an outgrowth of concerns expressed by producers,
consumers, agribusiness, rural communities and many other stakeholders.
Two of those concerns were a desire for a stronger, built-in safety net
that producers and their lenders could count on when market prices
dropped to low levels and the need to have better tools for addressing
resource concerns on working lands. While it may be premature to assess
the 2002 Farm Bill's performance at the end of only its second year,
there appears to be general agreement the 2002 Farm Bill has put in
place a set of programs that address both of those concerns.

Commodity programs are functioning as envisioned, with current tight
supplies and higher prices for major crops leading to lower payments to
producers. Resources are being allocated by costs and returns largely
determined by market prices. Producers have the freedom to select their
most profitable enterprises. Our domestic programs have stayed within
the \$19.1 billion WTO commitment for the Aggregate Measure of Support,
and the 2002 Farm Bill's "circuit breakers" assure that commitments will
be met. We are also nearing the time when all the conservation programs
authorized by the 2002 Farm Bill will be fully operational and provide
new and improved tools for producers and others to address resource
concerns, especially resource concerns on working lands.

This does not mean the 2002 Farm Bill is without its challenges. Over
its remaining life numerous issues may be confronted: When market prices
decline, can higher payments be sustained in the face of Federal budget
deficits and competing funding needs? If not, what risk management
alternatives are feasible? Are the needs of all types and sizes of
producers being adequately met by the 2002 Farm Bill programs? And,
there are technical issues as well; for example, will price discovery
problems for new marketing loan programs such as pulses and peanuts be
solved?

This completes my testimony, and I will be happy to address any
questions.

Table 1. Farm Economic Indicators

  --------------------- ----------- --------- --------- --------- --------- --------- ---------- ----------
  [Commodity            Unit        1998/99   1999/00   2000/01   2001/02   2002/03   2003/04F   2004/05F
  Prices]{.underline}                                                                            

  Wheat                 \$/bu       2.65      2.48      2.62      2.78      3.56      3.40       3.55

  Corn                  \$/bu       1.94      1.82      1.85      1.97      2.32      2.50       2.75

  Soybeans              \$/bu       4.93      4.63      4.54      4.38      5.53      7.65       6.35

  Rice                  \$/cwt      8.89      5.93      5.61      4.25      4.49      7.50       8.50

  Cotton                cents/lb    60.20     45.00     49.8      29.8      44.5      62.7 1/    NA

                                    1999      2000      2001      2002      2003      2004F      2005F

  Hogs                  \$/cwt      34.00     44.70     45.81     34.92     39.45     46.00      45.50

  Choice steers         \$/cwt      65.56     69.65     72.71     67.04     84.69     84.50      85.50

  Broilers              cents/lb    58.10     56.20     59.10     55.60     62.00     73.00      71.00

  Milk                  \$/cwt      14.38     12.40     14.97     12.11     12.52     16.55      13.55

  Gasoline, all grades  \$/gallon   1.18      1.53      1.47      1.39      1.60      1.87       1.80
  2/                                                                                             

  Diesel 2/             \$/gallon   1.12      1.49      1.40      1.32      1.51      1.67       1.62

  Natural gas (wlhd) 2/ \$/K cu.    2.19      3.70      4.02      2.95      4.98      5.47       5.87
                        ft.                                                                      

  Electricity 2/        \$/kwh      8.16      8.24      8.62      8.46      8.71      8.98       9.13
  --------------------- ----------- --------- --------- --------- --------- --------- ---------- ----------

  -------------------- ------- ------- ------- ------- ------- ------- ------- -------
  [Ag.                 FY98    FY99    FY00    FY01    FY02    FY03    FY04F   FY05F
  Trade]{.underline}                                                           
  (Bil. \$)                                                                    

  Total exports        53.6    49.1    50.7    52.7    53.3    56.2    59.0    NA

  Asia                 19.7    18.5    19.7    20.1    19.4    21.6    22.1    NA

  Canada               7.0     7.0     7.5     8.0     8.6     9.1     9.9     NA

  Mexico               6.0     5.7     6.3     7.3     7.1     7.7     7.7     NA

  Total imports        36.8    37.3    38.9    39.0    41.0    45.7    49.5    NA

  [Farm Income (Bil.   1998    1999    2000    2001    2002    2003    2004F   2005F
  \$)]{.underline}                                                             

  Cash receipts        196.8   187.6   192.0   199.8   192.9   212.4   215.0   NA

  Gov't payments       12.4    21.5    22.9    20.7    11.0    17.4    10.3    NA

  Gross cash income    222.5   224.0   228.6   235.3   218.4   244.9   240.9   NA

  Cash expenses        165.5   166.6   172.1   176.1   170.2   181.9   185.0   NA

  Net cash income      57.0    57.5    56.5    59.2    44.1    63.0    55.9    NA
  -------------------- ------- ------- ------- ------- ------- ------- ------- -------

F=forecast.

1/ August through March average.

2/ Source: Energy Information Administration, *Short Term Energy
Outlook*, May 11, 2004.

  -------------- --------------------------- -------- -- -- -- -------- -------- -------- -------- --------- ---------
  **Table 2. CBO                                                                                             
  Estimates of                                                                                               
  Farm Commodity                                                                                             
  Program                                                                                                    
  Spending                                                                                                   
  (\$Bil.)**                                                                                                 

                                                                                                             

                                                               **FY     **FY     **FY     **FY     **FY      **FY
                                                               2002**   2003**   2004**   2005**   02-05**   02-12**

  CBO Baseline,                                                13.368   11.417   9.496    8.167    42.448    83.895
  March 2002,                                                                                                
  Commodity                                                                                                  
  Programs                                                                                                   

  CBO 2002 Farm                                                14.333   18.583   17.526   15.946   66.388    144.429
  Bill, March                                                                                                
  2002, Title I                                                                                              
  1/                                                                                                         

  CBO Baseline,                                                13.177   12.123   10.071   10.901   46.272    144.881
  March 2004,                                                                                                
  Commodity                                                                                                  
  Programs 2/                                                                                                

  Change from                                                  -1.156   -6.46    -7.455   -5.045   -20.116   0.452
  Farm Bill                                                                                                  

                                                                                                             

  *1/ Calculated                                                                                             
  as CBO                                                                                                     
  estimates of                                                                                               
  outlay changes                                                                                             
  due to Title I                                                                                             
  of the Farm                                                                                                
  Bill added to                                                                                              
  the CBO March*                                                                                             

  *Baseline for                                                                                              
  Commodity                                                                                                  
  Program                                                                                                    
  outlays.*                                                                                                  

  *2/ USDA                                                                                                   
  estimate for                                                                                               
  FY 2002 and                                                                                                
  CBO March 2004                                                                                             
  Baseline                                                                                                   
  thereafter.*                                                                                               
  -------------- --------------------------- -------- -- -- -- -------- -------- -------- -------- --------- ---------

  ------------ ------ ------ ------ ------ -- -------- -------- -------- -------- --------- ---------
  **Table 3.                                                                                
  USDA                                                                                      
  Estimates of                                                                              
  Farm                                                                                      
  Commodity                                                                                 
  Program                                                                                   
  Spending                                                                                  
  (\$Bil.)**                                                                                

                                                                                            

                                              **FY     **FY     **FY     **FY     **FY      **FY
                                              2002**   2003**   2004**   2005**   02-05**   02-12**

  USDA                                        13.271   8.289    7.345    6.347    35.252    68.97
  Baseline,                                                                                 
  February                                                                                  
  2002,                                                                                     
  Commodity                                                                                 
  Programs                                                                                  

  USDA                                        15.022   19.928   17.716   14.973   67.639    129.461
  Baseline,                                                                                 
  July 2002,                                                                                
  Commodity                                                                                 
  Programs                                                                                  

  USDA                                        13.177   12.125   11.166   12.002   48.47     117.542
  Baseline,                                                                                 
  February                                                                                  
  2004,                                                                                     
  Commodity                                                                                 
  Programs                                                                                  

  Change from                                 -1.845   -7.803   -6.550   -2.971   -19.169   -11.919
  July 2002                                                                                 
  ------------ ------ ------ ------ ------ -- -------- -------- -------- -------- --------- ---------

  ----------------------- ---------- -- -- ------------- ------------- ------------- ------------- -------------
  **Table 4. USDA                                                                                  
  Estimates of Farm                                                                                
  Commodity Program                                                                                
  Spending (\$Bil.)**                                                                              

                                                                                                   

                                           **2002/03**   **2003/04**   **2004/05**   **2005/06**   **2002-05**

  [Direct                                                                                          
  Payments]{.underline}                                                                            

  USDA Baseline, July                      5.226         5.226         5.226         5.226         20.904
  2002                                                                                             

  USDA Baseline, February                  5.296         5.210         5.310         5.284         21.100
  2004                                                                                             

  Change                                   0.07          -0.016        0.084         0.058         0.196

                                                                                                   

  [Counter-cyclical                                                                                
  Payments]{.underline}                                                                            

  USDA Baseline, July                      6.976         6.363         5.820         3.859         23.018
  2002                                                                                             

  USDA Baseline, February                  1.829         2.45          3.942         3.976         12.197
  2004                                                                                             

  Change                                   -5.147        -3.913        -1.878        0.117         -10.821

                                                                                                   

  [Loan Deficiency                                                                                 
  Payments]{.underline}                                                                            

  USDA Baseline, July                      5.209         3.681         2.111         0.992         11.993
  2002                                                                                             

  USDA Baseline, February                  0.546         0.483         1.001         1.021         3.051
  2004                                                                                             

  Change                                   -4.663        -3.198        -1.110        0.029         -8.942
  ----------------------- ---------- -- -- ------------- ------------- ------------- ------------- -------------

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