U.S. GOVERNMENT PRINTING OFFICE

60–375 WASHINGTON : 1999

HELPING AGRICULTURAL PRODUCERS RE-GROW

RURAL AMERICA

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

WASHINGTON, DC, SEPTEMBER 29, 1999

Serial No. 106–34

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

JAMES M. TALENT, Missouri, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

DONALD A. MANZULLO, Illinois

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

DAVID M. MCINTOSH, Indiana

RICK HILL, Montana

JOSEPH R. PITTS, Pennsylvania

JOHN E. SWEENEY, New York

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

EDWARD PEASE, Indiana

JOHN THUNE, South Dakota

MARY BONO, California

NYDIA M. VELA ́ZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

CAROLYN MCCARTHY, New York

BILL PASCRELL, New Jersey

RUBE ́N HINOJOSA, Texas

DONNA MC CHRISTENSEN, Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

DENNIS MOORE, Kansas

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

SHELLEY BERKLEY, Nevada

HARRY KATRICHIS, Chief Counsel

MICHAEL DAY, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on September 29, 1999 ..................................................................... 1

WITNESSES

Kruse, Charles, President, Missouri Farm Bureau .............................................. 4

Ludwig, Dale, Executive Director, CEO, Missouri Soybean Association ............ 7

Stockman, Bruce, Executive Director, Minnesota Corn Growers Association .... 9

Ward, Jeff, Director, National Pork Producers Council ....................................... 11

Flanigan, Virgil, Professor, Director, University of Missouri-Rolla .................... 26

Kalaitzandonakes, Nicholas, Agriculture Department, University of MissouriColumbia ............................................................................................................... 28

Christianson, Rodney G., CEO, South Dakota Soybean Processors, Inc ............ 29

Watkins, Dayton, Administrator, U.S. Department of Agriculture ..................... 33

APPENDIX

Opening statement: Talent, Hon. James M. .......................................................... 47

Prepared statements:

Kruse, Charles .................................................................................................. 50

Ludwig, Dale ..................................................................................................... 52

Tumbleson, Gerald (Stockman, Bruce) ........................................................... 54

Ward, Jeff .......................................................................................................... 59

Flanigan, Virgil ................................................................................................. 66

Kalaitzandonakes, Nicholas ............................................................................. 73

Christianson, Rodney G. .................................................................................. 79

Watkins, Dayton ............................................................................................... 91

Additional Material:

Testimony of the American Bankers Association .......................................... 98

Letter from Aida Alvarez, Administrator, Small Business Administration,

to Chairman James M. Talent ..................................................................... 126

(1)

HELPING AGRICULTURAL PRODUCERS REGROW RURAL AMERICA

WEDNESDAY, SEPTEMBER 29, 1999

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, Washington, DC.

The Committee met, pursuant to call, at 10:00 a.m., in Room

2360, Rayburn House Office Building, Hon. Jim Talent (chairman

of the committee) presiding.

Chairman TALENT. Good morning. I want to welcome the participants here today for the Small Business Hearing entitled, ‘‘Helping

Agricultural Producers Re-Grow Rural America’’.

Your willingness to take the time to testify at this hearing about

the opportunities and needs of agricultural producers as they pursue the development of value-added enterprises will provide us

with invaluable insight into what Congress needs to do to assist

these entrepreneurs.

Thomas Jefferson is of course, remembered for many things. In

particular, Jefferson believed that the love of land and business,

farming and commerce, was a part of America’s fiber. But on several occasions Jefferson referred to the virtues of agriculture and

the first importance of it to our nation’s prosperity.

In his first inaugural in 1801 Jefferson wrote, ‘‘Encouragement

of agriculture and of commerce as its handmaid, I deem one of the

essential principles of our government and consequently, one of

those which ought to shape its administration.’’

Although Jefferson’s America was one in which the majority of

the people were engaged in the production of food and fiber, I still

believe that his spirit of admiration for agriculture and his dedication for the encouragement of agriculture, should remain true

today.

He could never have imagined what our agricultural system has

become. On average, each and every American farmer and rancher

feeds and clothes himself and 126 other people. We have the safest,

most abundant, and cheapest food system in the entire world. Our

agricultural producers truly deserve to be honored for their hard

work in providing our nation with the most affordable, most abundant, and safest food supply in the world.

This plenty that American producers provide to our citizenry has

allowed our nation to prosper beyond any of the expectations of Jefferson. However, record high disasters and record low commodity

prices are hurting America’s farmers and ranchers. I believe it is

one of the essential principles of our government to ensure that our

agricultural system remains viable.

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Plainly, we must help producers through these tough times.

While it is obvious that producers need near-term assistance, it is

important that we do not become short-sighted and loose vision of

the opportunities for the future.

The future depends on the expansion of export markets for our

farm products and the development of new and innovative producer-owned marketing systems, which is what this hearing is

about. The current world demand, unfortunately, has been down

for our agricultural products. This is directly affecting the livelihood of U.S. producers.

For example, historically the Southeastern region of Missouri,

due to the availability of river transportation to the world market,

has enjoyed at worst, a neutral basis, the difference between cash

price and futures price, and often a positive basis on corn during

August.

This August though, corn producers in Southeastern Missouri

were faced with cash, farmgate prices as much as 50 cents below

future prices. This downturn in world demand is caused by the

Asian economic crisis and the unfair trade barriers on U.S. agricultural products by the EU, based on the fear of biotechnologicallyenhanced crops.

On top of this, our government continues to hold our producers

hostage by using food as a weapon in foreign policy through trade

sanctions. We must as a government, advance the position of U.S.

agricultural products on the world market.

This can be done through lifting of trade sanctions, aggressively

negotiating the removal of EU trade barriers on biotechnologicallyenhanced crops, ensuring the health of the emerging markets of

Asia, and utilizing and strengthening the trade promotion programs of our government.

The greatest opportunity of the future is the development by agricultural producers of new and innovative marketing systems for

their products. In August, two House Committee on Small Business

field events were held to examine agricultural, tax, regulatory and

trade issues that are critical to the agricultural community.

At both of these events an underlying theme surfaced from the

witnesses: the need and desire of producers to reach up the agricultural marketing chain and capture some of the profits generated by

processing their raw commodities.

Agricultural producers have an inherent, innovative quality and

I was impressed that even during this time of extremely adverse

pricing and production conditions, producers and farm organization

representatives are energized about looking for inventive, entrepreneurial opportunities for the future.

I believe that our American agricultural system depends on these

innovative producers and can be enhanced with the establishment

of producer-owned, value-added enterprises. We need an agricultural system in which producers are the vertical integrators and no

longer totally rely on the existing highly consolidated, agricultural

marketing chain, or on the volatile world market.

With this system producers will be in the position where

farmgate prices effectively have much less meaning as their profit

concern will be the soybean crush margin, the price of ethanol, and

the pork or beef slaughter margin made by their processing plants.

3

This was the overwhelming consensus of farm groups at our field

events. It is one of the reasons we are having this hearing today

and I hope we can gain a further understanding of how we in the

government can nourish the entrepreneurial fire of current and future agricultural small business owners without impeding their

success, by ensuring that the American agricultural system remains viable and becomes more profitable. We can re-grow rural

America for generations to come.

I am very much looking forward to the witnesses. I want to of

course, defer to my colleague, Ms. Vela ́zquez, for any comments she

may wish to make.

[Mr. Talent’s statement may be found in the appendix.]

Ms. VELA ́ZQUEZ. Thank you, Mr. Chairman, and good morning.

Thank you for holding this hearing. I know how important this

issue is for rural America. One of the benefits of being in the small

business community is that our members come from such diverse

backgrounds that we can truthfully say that we have experts in

most fields: from regulations to access to capital, to agriculture.

Today, I have the pleasure of yielding to the gentleman from Illinois, Congressman Phelps, who also serves in the Committee of Agriculture and who has been working on this issue.

Mr. PHELPS. I want to thank the gentlelady for yielding and providing me this unique opportunity as a new member especially, and

I thank the Chairman for holding this hearing and commend him

on his leadership in this area. I greatly appreciate all of you being

here this morning to discuss a topic which is particularly important

to me as a member and not only of the Small Business Committee

but also the Agriculture Committee.

I am pleased to be able to participate in a hearing that ties the

two together so well. In my opinion, they are inseparable. Over the

past few years America has experienced an unprecedented economic boom. Unfortunately, this prosperity has not been enjoyed by

everyone. Many of our communities, especially those in agriculture,

are in crisis.

My Congressional district covers 27 counties in Central and

Southern Illinois. Every one of the communities I represent is

deeply impacted when agriculture experiences tough times, and

these are indeed some of the toughest in recent memory.

We are all well aware of what is happening in rural America.

Rural America has not, not only shared in the good economic times

but has possibly suffered more severely because of the crisis in agriculture. Many have regarded rural problems as being temporary

when indeed, they are permanent.

Although it is clear that we must continue providing emergency

relief to help our farmers survive the current crisis, this will not

solve the underlying problems facing agriculture communities. This

Congress should look to the future and support policies that help

farmers help themselves.

One area that deserves our close attention is providing farmers

with tools that will enable them to fully participate in the process

of bringing to market the goods they produce. We all know that

farming is inherently a risky business and enterprise.

Farm production levels can vary significantly from year to year,

primarily because farmers operate at the mercy of nature and flucVerDate 20-MAR-2000 14:56 Mar 27, 2000 Jkt 062234 PO 00000 Frm 00006 Fmt 6633 Sfmt 6602 E:\HEARINGS\60375.TXT pfrm01 PsN: 60375
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tuations in the marketplace. When commodity prices fall, as they

have done in the past year, not only do producers suffer but consumers see no corresponding benefit. Shoppers continue to pay the

high prices set by middlemen while our farmers begin to go out of

business.

An obvious conclusion presents itself. We should help farmers

take control not only of production but also of processing and marketing their own products, of course. An excellent model of exactly

this kind of arrangement already exists: the farmer co-operative.

Today, about 30 percent of farmer’s products are marketed through

co-ops, including some well-known brand names that can be found

in supermarkets throughout the country.

Another way farmers can achieve stability is by finding new markets for their products and new products for their markets. Increasingly, farmers are beginning to look for new ways to process

what they grow, thus creating new, value-added products to be sold

in the new markets.

I look forward to hearing about some of these innovative strategies from our panelists this morning. Today’s hearing will focus on

the barriers that prevent many farmers from forming or joining cooperatives and how some of these might be removed.

In addition, we will discuss incentives and assistance that can be

provided to spur innovation in processing and marketing. Our

panel this morning includes representatives from producer and

processing groups, members of the academic research community,

and Department of Agriculture officials who will share with us how

they are helping farmers with access to capital, technical assistance, education and research.

When rural America is struggling, an entire way of life is threatened. Our purpose today is to generate a discussion about what we

can do to keep our heartland alive and help it grow and become

even stronger.

I would again like to thank the Chairman for his leadership and

sensitivity to this subject and ranking member for her recognizing

the importance of this issue, and I look forward to hearing the testimony of our distinguished panelists. Thank you, and I yield back.

Chairman TALENT. I thank the gentleman and if our first panel

of witnesses will come forward we will get going with the testimony.

And I am honored today to welcome my long-time friend, Charlie

Kruse, to this hearing of the Small Business Committee. Charlie

has a very impressive bio with a number of achievements. I think

he probably just as soon be introduced as a row crop farmer from

Dexter, Missouri. He is also president of the Missouri Farm Bureau.

Thank you for coming, Charlie, and why don’t you share with us

your thoughts on the opportunities of value-added agriculture.

STATEMENT OF CHARLES KRUSE, PRESIDENT, MISSOURI

FARM BUREAU

Mr. KRUSE. Thank you, Mr. Chairman. I certainly want to commend you for holding this hearing. And to the members of the

Committee, commend you all for taking time to talk about this very

important issue.

5

As Chairman Talent said, my name is Charles Kruse. I am a

fourth-generation farmer from Stoddard County, Missouri, in

Southeast Missouri, where my family and I raise corn, soybeans,

wheat and cotton. I serve as President of the Missouri Farm Bureau, our state’s largest general farm organization.

Again, Chairman Talent, I want to commend you and the members of the Committee for your continued interest in empowering

agricultural producers to take advantage of the benefits of adding

values to the commodities we produce.

The Missouri Farm Bureau participated in both the field hearings that Chairman Talent mentioned were conducted last month,

and we believe this Committee is determined to address the difficult issues we are facing. This morning’s hearing is especially

timely as Congress is debating how to assist farmers and ranchers

during the economic crisis we are facing.

Let me assure you, this is indeed a crisis. The devastating combination of low prices and disastrous yield have come together at

a very inopportune time. Corn and soybeans are being harvested

in Missouri as we speak here today, and yields in many cases of

less than 50 percent of average are all too common. And I am sure

that is true in all the other states represented here.

In the short term we must have economic assistance from Congress. Farm Bureau’s top priority is getting economic assistance to

producers in a timely fashion. We simply cannot have a repeat of

1998. Assistance is needed now, not a year from now.

Economists at the Food and Agricultural Policy Research Institute at the University of Missouri are projecting that farm prices

will improve over the 2001–2002 period. However, until that time

we can expect dismal prices to continue. Our goal is to help farmers hang on and government assistance is crucial.

Yet, government cannot be expected to solve agriculture’s woes

alone. There is no simple solution. We must have a system of policies and programs that allows our agricultural sector to prosper.

This will require the cooperation of every sector including public,

private, and academia.

The purpose of this hearing, ‘‘Helping Agricultural Producers ReGrow Rural America’’, is especially important. I have heard Chairman Talent highlight this issue during meetings in Missouri and

we have heard the message loud and clear from our members.

We recently held a series of six regional meetings around the

state in which we listened to our members’ thoughts on how the

crisis is affecting their family, their farms, and rural communities.

A common theme emerged from the meetings: we must look for

ways to capture a greater share of the consumer food dollar.

Some states are already doing a very good job of this. New generation co-operatives have been formed to process commodities into

products ranging from pasta to ethanol. These states have made a

commitment. Missouri too, is making a commitment.

Our Missouri General Assembly provided a boost earlier this

year by creating new incentives for producer-owned ventures. This

will indeed give us an important boost as our producers continue

working to establish ethanol and pork producing plants in our

state.

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But there is a void remaining. While interest in these new ventures is growing, little attention has been paid to the availability

of technical assistance. Producers and organizations alike need access to information that will convert an idea into an enterprise.

Where do we turn for product research, feasibility and marketing

studies, legal assistance, and information on financing options? The

information is available but it needs to be user-friendly.

Perhaps we should consider creating special teams comprised of

representatives of state and federal agencies and colleges and universities. These teams could provide timely information on subjects

ranging from financing options and environmental permits to tax

incentives and equipment design. Ideally a ‘‘cook-book’’ could be developed that interested parties could use to help jump-start the

process.

At the federal level, we have a unique opportunity to assist producers. Earlier this year, Farm Bureau supported and Congress appropriated, $145 million to the USDA’s Section 32 Fund. These

funds were appropriated to provide direct cash payments to hog

producers who continue to suffer from extremely low prices.

Unfortunately, Secretary Glickman has announced that only $100 million will be paid in direct payments. If the remaining

funds are not used for direct payments, we believe they should be

used to fund programs that will encourage producers to add value

to their products.

For example, these funds could be used to provide grants to

groups to assist with start-up costs. We are encouraging USDA to

work with agricultural organizations to develop the parameters of

such a program.

In Missouri we have a group working to construct a new pork

processing plant for independent producers. They could make good

use of grant funds to assist with legal fees and other start-up costs.

Mr. Chairman, in closing let me reiterate that encouraging producers to add value to their products is a key to our long-term

prosperity in agriculture. We believe there is a need to: (1) establish diverse teams or entities to focus on the needs of those considering value-added ventures; (2) develop a ‘‘cook-book’’ so to speak,

that provides information on pertinent issues and available assistance; and (3) encourage USDA to use the remaining funds appropriated under Section 32 to develop programs to assist producers

interested in adding value to their products.

Agriculture remains the anchor of our rural communities and our

nation will continue to reap the benefits of this relationship well

into the future if we can simply ‘‘tap into the vein’’ of value-added

processing.

Thank you very much for this opportunity to testify, Mr. Chairman. I will be glad to answer any questions at the appropriate

time.

[Mr. Kruse’s statement may be found in the appendix.]

Chairman TALENT. Thank you, Charlie, and really appreciate

your idea about using some of that money appropriated for the

pork producers to assist in these value-added. Let us hope that Secretary Glickman looks favorably on that.

Next, another good friend, Dale Ludwig. I want to thank Dale for

appearing before the Committee. He is the Executive Director and

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the CEO for the Missouri Soybean Association and the Missouri

Soybean Merchandising Council. He also farms in Cape County in

Southeast Missouri.

And during his tenure as Executive Director, the idea of valueadded has become a major and an important one with the Soybean

Association, and Dale has been a leader in proselytizing it around

the country. Welcome, Dale.

Mr. LUDWIG. Thank you very much, Chairman, for this opportunity to share some ideas and comments. I will try to keep my

comments brief but I would ask that my written testimony be included in the official record.

Chairman TALENT. Sure; without objection.

STATEMENT OF DALE LUDWIG, EXECUTIVE DIRECTOR/CEO,

MISSOURI SOYBEAN ASSOCIATION

Mr. LUDWIG. As you said, I am Dale Ludwig. I serve as Executive

Director of the Missouri Soybean Association, and Merchandizing

Council representing soybean farmers in the state of Missouri. I

also farm. I raise corn, soybeans and we have a livestock operation.

But the soybean farmers in Missouri certainly are—they are one

of the greatest examples I think, of farmers trying to help themselves; as one of the groups I represent, the people that actually

pay in check-off dollars to help develop technology.

I am proud of that group or both the groups that I work for, but

especially that, because they are trying to help themselves. And we

have actually been able to develop pieces of technology that farmers own, and I think that will be important when we take a look

at some of the other opportunities that we have here.

I think Mr. Kruse did an outstanding job of kind of explaining

how Missouri and all of agriculture are having some tough times

and so I won’t go into that, but would prefer to talk about, what

are some of the opportunities that we see in agriculture, especially

as it relates to value-added type things.

What we have done in our office is try to take a look at the

things that actually have worked. What things have other companies done and what sort of commonalties if you will, can we put

together that we believe are going to help some of these groups in

agriculture be successful?

A couple of pretty basic things but, economies of scale is one. If

you look at, you have to have a basic size component that is going

to allow you to have the staying power and spread your fixed costs

over a large number of units. But also, vertical integration seems

to be one that many companies that have been successful, have

gone into as well.

If we look at agriculture and some of the things that we have

tried to do with generating additional volume, short-term it certainly is an answer to bring prices up somewhat, but if we look at

the long-term opportunities for producers to actually capture more

value out of agriculture, we are going to be able to have to do that

in additional industries and not only count on, because of alternative uses we increase the overall value of a unit of that crop.

With that in mind, this whole vertical integration idea is something that we believe is extremely important. Let me give you a

8

couple of examples of some things that are going on in Missouri,

and not necessarily unique to Missouri.

In Northern Missouri we have a group of farmers that have gone

together to look at the possibility of putting in a crushing facility

for soybeans there; where we would produce protein and oil. As a

result of that we allow those producers an additional market. We

create additional demand in that area that pushes the price up.

But maybe more important, and we believe more important, is they

have an opportunity to capture additional value from that enterprise.

It is owned by farmers. It actually does the two things that we

have talked about: economies of scale, because we pull all these

people together; and the vertical integration.

Our next step in that vision is a number of other types of industries or businesses that too, would be potentially producer-owned.

I talked about the technology earlier that was developed as a result

of check-off dollars. It is owned by farmers, they could use it to

generate additional small businesses that farmers would own along

with neighbors perhaps, and even potentially, customers.

And we think that those additional steps, that vertical integration and additional opportunities to capture value, is what is going

to make agriculture successful in connection with small business in

rural America. Creating additional jobs for people outside of agriculture is part of the bigger picture that is going to make agriculture stronger long-term.

Short-term, again as Mr. Kruse said, there are some real issues

that need to be addressed. But what we are trying to do is look

longer term into the future and see what opportunities are going

to be there.

But maybe the most important thing, the message that I want

to leave with you today, is farmers are professionals. They have expertise in producing crops. But when it comes to technology and

understanding technology and how to go into a business and be

able to adjust some of the things that are going to make it successful, they don’t have that expertise.

And maybe even more important is, business structures. We

throw in some legal advice, but especially business structures. How

do we work through a business arrangement as we have producers

moving into areas that we haven’t been in before? This is some of

the expertise that we need to have and this is one of the things

that you can do for us, so we hope that you will do that.

We can do that through grants; giving grants to form some of

these self-help business groups and technology groups. But also the

other part that I feel extremely strongly about is tax credits. And

tax credits will help to put an infusion of cash into some of these

new businesses that are going to help us to compete with larger

producers. And long-term, if we are going to be successful we have

to help them pay down that, and tax credits will allow us to do

that.

I would be happy to answer any questions. Thank you.

[Mr. Ludwig’s statement may be found in the appendix.]

Chairman TALENT. Thank you, Dale, and one of the reasons I

want to have this hearing is, we know something on this Committee about starting new enterprises and how the government can

9

assist in providing technological assistance to do that. So I was

hopeful that we could focus the Committee’s attention on that problem as it relates to rural America and maybe come up with some

good ideas in cooperation with you.

Our next witness is Bruce Stockman from Minnesota. Bruce, I

was under the understanding that there was going to be a substitute here for you today so I don’t have your bio here. So I am

going to let you introduce yourself as the Executive Director of the

Minnesota Corn Grower’s Association. It’s good to have you here,

Bruce.

STATEMENT OF BRUCE STOCKMAN, EXECUTIVE DIRECTOR,

MINNESOTA CORN GROWERS ASSOCIATION

Mr. STOCKMAN. Thank you very much. I appreciate very much

being here. Actually, I am a replacement and the reason why I am

a replacement is, I work for farmers who are busy harvesting. And

our President, Gerald Tumbleson, was to be here, and he is absent

for that reason.

Mr. Chairman, I appreciate very much you and the Committee,

the other panel members of this Small Business Committee for

having this hearing today. It is extremely important in our opinion,

that this subject be brought forward. There are many conversations

that are occurring with pretty broad-based knowledge that agriculture is not enjoying what the rest of the economy has been.

And obviously, there are a number of reasons why that has taken

place. Our concern is for the farmer. Some things we can control

and some things we can’t, and for those things that we can make

an impact on, that is what we would like to work on.

The reason why I come here to you from Minnesota today, the

Chairman asked on behalf of his staff and others, for someone from

Minnesota to share some of the things that we have been doing.

I have been in Minnesota since 1990 as Executive Director. I

came there from Missouri. I worked for the National Corn Growers

and I originally grew up in Eastern Kansas as a farmer. And what

we are trying to do in Minnesota builds on those experiences in

that we over the past few years, have stimulated the creation of

well over 100 closed co-ops.

You would say, well why do we need help if we have that many

new ventures? What is the problem? The problem is as follows. In

many cases, farmers have joined together, created these new-age

co-ops, these closed co-ops, and in doing so they moved from one

commodity to another.

They moved to ethanol and co-products, they moved to pork or

dairy, or whatever the co-op is that they created. And what they

found out is that there are some things they don’t know about that

new business. They found out that there are some resources that

are difficult to obtain. There is no point central to find and access

state, federal, foundation and other efforts that are all trying to

help.

Twenty percent of our economy, and in our case in Minnesota it

is actually greater than that, but at least 20 percent of our economy is based on the new dollars that are created by agriculture.

Whether you are in the implement business or you are selling vehiVerDate 20-MAR-2000 14:56 Mar 27, 2000 Jkt 062234 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HEARINGS\60375.TXT pfrm01 PsN: 60375
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cles or you are the grocery store in town, if the farmers are hurting

in rural America, so is the rural America economy.

And that is the case. I am sure that many of you have visited

with many of those people. All of them are looking for solutions.

One of the things that we found as a problem in creating the 11

farmer-owned ethanol plants and the many co-products that they

produce, with 8,000 farm families invested in those, we have created a partnership with state and federal governments as incentives and farmer-owned dollars.

In moving to that new level of production we have created $200

million of additional demand for our corn in the form of ethanol annually, just in Minnesota alone. So what I am saying to you is that

just creating a value-added by itself isn’t enough. It has to have

some extra value, something different. It has to have a niche in the

marketplace. Something other than just be competitive at another

commodity level.

I brought with me an example of something that yet can be. The

diversity of what we have in the state is broad. This is a shirt that

is not being made in that way. This is a fiber that is made from

corn. I will share it if you want to pass it amongst the Committee

members.

Chairman TALENT. Please do. Thank you.

Mr. STOCKMAN. The technology was developed in Minnesota; the

production is occurring in Nebraska. It is made from Nebraska

corn. And it is compostable and degradable. I suppose if it was flavored it would be edible, but it would actually be kind of bland.

Anyway, the purpose of——

Chairman TALENT. I suppose I can grill it or anything.

Mr. STOCKMAN. Yes, you could, if you would like a grilled shirt.

The reason why I brought it as an example is, it is one of those

opportunities that creates a niche. You will find that fabric like

that is blended with cotton or wool or other fabrics and it adds

value to those commodities as well.

Because that currently is being sold in the form of prills. They

make it into like a polymer and it is shipped abroad and it is being

made in Japan as we speak. Wouldn’t each one of you like to have

a production facility owned by the real community and farmers in

your district producing that as a locally-owned product?

That is the kind of thing we are talking about; for medicines to

all kinds of unique technology. The problem that we have is that

we need a point central, a library, a resource center, consultants;

some network. And as Charlie put it, a cook-book. We need a mechanism to bring this point central to help facilitate the resources

that are there.

We need the encouragement of producers and for them to be the

self-help they can be. This is a long-term fix; it’s not short-term.

And so the other things that are being worked on for short-term

we also want to encourage.

But this is something to invest in our future. And our whole society depends on it because corn and other commodities are not just

food. They are food, fiber and fuel. Thank you.

[Mr. Stockman’s statement may be found in the appendix.]

11

Chairman TALENT. I am going to be interested in the question

time in asking in greater detail what you mean by point central.

So please be thinking about it.

Our final witness on this panel is Mr. Jeff Ward. He is the Director of Producer Education for the National Pork Producers located

in Des Moines. Jeff has had a lot of experience in the banking industry. I also understand he is a graduate of the University of Missouri at Columbia, which is a fine university.

Jeff’s responsibilities at National Pork include issues relating to

the environment, genetic improvement, animal care and valueadded marketing. Jeff, thanks for being here and please share with

us your thoughts about value-added opportunities.

STATEMENT OF JEFF WARD, DIRECTOR, PORK PRODUCER

EDUCATION, NATIONAL PORK PRODUCERS COUNCIL

Mr. WARD. Thank you, Chairman Talent. It is a pleasure to be

here today. As you said, I am Director of Producer Education at the

National Pork Producer Council and due to various economic factors over these past couple of years I have spent a great deal of

time studying how you put value-added groups together and assisting groups in doing that.

As most of you know, live hog prices in December last year

dropped below ten dollars a hundred-weight for the first time since

’55. When you adjust that for inflation, those were the lowest prices

than even we had in the Depression. So we obviously had a crisis

that needs to be addressed.

The University of Missouri estimates that the producer sector

lost $2.6 billion in equity in ’98 and another one billion in equity

drained to the industry in 1999. So as we look at this there is definitely a need for producers to be able to take advantage of the pork

marketing chain.

And 1998 also saw producers received their smallest percentage

of consumer dollars in history. We had an increased supply of market hogs with a reduced slaughter capacity system that created an

economic disaster. This happened however, during a record year for

pork consumption and in some cases, pork retain prices.

As this unfolded it became very evident that the dollars in the

pork chain were at or near the consumer. So my job over the past

couple of years has been, how do we get producers closer to that

consumer?

One example that I will give as we go through this, and I was

really kind of given three questions on the e-mail I got about this

meeting, and the first one was, can producers do this? And I believe yes, they can.

In 1997 we had Dennis DiPietre at the University of Missouri

and Brian Buhr at Minnesota do a study for us to determine if

there were unmet or underserved pockets of demand. We heard

about niche markets in the previous speakers, and were there market niches that producers could slot themselves into that would

allow them to get closer to that customer?

The goal of the study was to determine if there were differentiated pork preferences among ethnic groups and if so, how do producers identify and capture those preferences? The results of that

12

study are in a book that is way too big to read to you today but

we can get a copy of that to you if you would like to see it.

But the study quite conclusively showed that—well if I can back

up a moment. As we studied this we picked the Hispanic consumer

in the United States to look at and it showed quite conclusively

that there were cut preferences, different carcass breaks that were

not found in the current commodity market.

And that there was also, when we did the economic work, a willingness by those consumers to purchase additional quantities of

pork if it was provided to them in a way that they preferred. The

study did provide a very direct insight into that market. But more

importantly we put this together in an educational format; if there

were other pork chains out there where producers could slot themselves into if they were not in an ethnically diverse area.

As a result of that study a group of smaller, independent pork

producers in Utah went together to attempt to access this market.

And if you are familiar with Utah demographics I don’t think you

can call it really an ethnically diverse state by any means.

But they started out with the proverbial seven pigs in the back

of a pickup one Saturday and delivered them to a market. They are

now marketing 44,000 head per year to these ethnic markets in the

Salt Lake Valley. So when I am asked if I think it can be done,

yes it can. It just takes an entrepreneurial spirit to pull this off.

The second issue that I was asked to address was: what are the

barriers to creation of these? And they have already pretty well

been alluded to with the previous speakers. But as I work with producer groups the first barrier seems to be a lack of knowledge or

resources when you start talking about market access and market

discovery issues.

There are various resources out there. Some of those are cost

prohibitive without some kind of assistance. We also have some out

there that are very self-serving and not looking out for the producers’ best interests. So any assistance, and I will get to that in

a moment, but any cost-share kinds of things would be very beneficial in that area to help provide technical assistance.

We had, as Mr. Kruse mentioned earlier, put together what we

are calling some technical assistance teams to help producers, but

the sheer magnitude of that project is going to prevent us at this

time to get to everybody that certainly needs help.

The second area that we see, and has already been mentioned,

is the lack of access to capital for start-up and operations. As you

look at these, a lot of the conventional sources of capital that producers have used in the past are not familiar with these kinds of

ventures; therefore they are requiring high equity input by producers to come into these things. They are requiring loan guarantees.

So one of the solutions to this, I guess I would encourage as you

are working through this, that the loan guarantee process be made

much more user-friendly and available to producers to work

through.

Finally I guess, and the third question in this was, what programs are needed to encourage? And I am going to just kind of

echo what the rest of the group has said. But in addition to the fiVerDate 20-MAR-2000 14:56 Mar 27, 2000 Jkt 062234 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HEARINGS\60375.TXT pfrm01 PsN: 60375
13

nancial and technical assistance, I believe it also needs to be in an

educational format so we don’t continually re-invent the wheel.

You have already seen here, we have Farm Bureau doing something, we have Corn Growers doing something, we have soybean

people doing something. There are all these factions out here that

doing something and in some cases we are all just re-inventing the

wheel. And so I think it also needs to be an educational process

where duplication of efforts can be reduced.

I think assistance in the area of business planning and marketing plans and feasibility studies are very important. We recently

did some case studies on three producer groups that have successfully added into value-added marketing opportunities.

And I guess really to our surprise as we worked through those,

they all had a very well thought-out, well written and a business

plan that they did follow on a day-to-day basis. And they all felt

that that was very key to their success.

Finally I guess, most of you are familiar that in June, National

Pork Producers announced the formation of a national co-op to explore further processing activities for pork producers. I think that

is one umbrella that some of this could come under because it will

allow other groups to attach to it and avoid that duplication of effort that I talked about earlier.

Finally, I believe by providing easier and increased access to

loans, grants and loan guarantees for feasibility and start-up and

operations, I believe will allow producers to have an opportunity to

determine their future in the pork industry.

Thank you.

[Mr. Ward’s statement may be found in the appendix.]

Chairman TALENT. Thank you, Mr. Ward, and all the witnesses.

I have a few questions and then I will recognize the Committee

members.

Mr. Ward, you talked first about niche marketing and I understand the relationship between that and value-added in the sense

that you are talking about both require a market-driven kind of

model. In other words, you have to be thinking in terms of not

what you are going to produce but what consumers want, and then

tailor your production to that.

How else does that niche marketing though, relate to valueadded? In other words, you don’t necessarily need for producers to

invest in processing or slaughterhouse to do the niche marketing,

do you?

Mr. WARD. No. In fact, the Utah group that I alluded to, they recently started out doing a custom, total slaughter arrangement

with two small slaughter facilities in Northern Utah.

Now, they do now own their own slaughter facility but I think

a key to that—and they were one of the case studies we did—was

the market dictated their growth into owning a slaughter facility.

They didn’t do the, build it and they will come sort of philosophy.

And I think the model that they put together there was a real key

one in their success.

Chairman TALENT. The mindset is the same, in developing either

value-added or niche marketing?

Mr. WARD. Right.

14

Chairman TALENT. You have to think of yourself not as a producer so much but as somebody who has got to figure out that market and then produce what they want. To think in a broader sense,

as a business person, in other words.

Mr. WARD. Exactly. And what they are doing, they are not necessarily extracting any more value out of that customer; i.e., a pork

chop selling for $2.30 instead of two dollars a pound. But they are

tying up more steps in that process getting to that consumer.

And the other thing, they are close enough to the consumer that

they are able to visit with them on a day-to-day basis and have direct feedback with what those customers want instead of having to

come through these various layers.

And one of the things that you will see there in the paper is, in

this market-driven model that especially exists in the pork industry, there is very little information sharing from the consumer to

the retailer to the packer/processor, down to the producer. And so

the closer you are able to get to that then the better knowledge you

have of that consumer and the quicker and the faster you can supply that product to them.

Chairman TALENT. Let me address the other question to the

panel as a whole, because I am sure other members of the Committee felt the same thing when they were listening.

When you all are talking about starting new enterprises whereby

entrepreneurs who are aggressive but need help with technical assistance, making sure they know what they are doing and then

some seed money to start up, I mean, you are talking about things

that the Small Business Committee is very familiar with in a number of different contexts.

So I would like to ask you all to try and address more specifically, how you think we can best help get you that kind of technical

assistance that you need. What kind of a program or incentive?

How we can do that in the ag market to help you the best. And

is there a model out there that you particularly like? Maybe in

Minnesota which seems to have gotten further in this area.

Bruce, is there a model for government assisting? For example,

we have a program called SBCD, Small Business Development Corporation. You guys are familiar with this in another context. They

provide assistance to entrepreneurs either with start-up or expansion-type operations.

Would it be good to vest them with some particular portfolio in

this area? Do we need a separate type centers, ag innovation centers? Give me some ideas on that.

Mr. STOCKMAN. Mr. Chairman.

Chairman TALENT. Yes; anybody on the panel.

Mr. STOCKMAN. I would like to answer that. Exactly what you

have suggested is what I was referring to when I said point central. I apologize for not explaining it further. That is in fact, the

problem that we had in Minnesota, and I assume elsewhere. Is that

there is no one place that can pull these resources together or advise where to find those resources.

Whether it is the Small Business Development Center or an innovative center, there needs to be a point central; a focus point

that can locate, be the library, find the consultant or at least recVerDate 20-MAR-2000 14:56 Mar 27, 2000 Jkt 062234 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HEARINGS\60375.TXT pfrm01 PsN: 60375
15

ommend consultants, suggest both state and federal as well as private resources that are available.

There are a number of tools that are available but there is no

coordination of those tools at this point, and that is really what I’m

asking for; is a center or something like that.

Chairman TALENT. Does anybody else want to comment on that?

Mr. LUDWIG. Real quickly. I think that what Bruce was talking

about is very much kind of what our vision was of having a center

that, although we talk about agriculture it’s more likely to be someone who would have engineering expertise that would be able to

help guide and direct, through general projects and then identify

some of those specialists as a result of specialty needs.

At this point in time I am not sure we can even venture to guess

what some of those needs are going to be long term. So I think it

was very close to what our vision was.

Chairman TALENT. Dale, tell me why you think—I mean, I agree

with you but I’m going to play devil’s advocate for a second here.

Why do you think that soybean producers can compete with ADM

and Cargill in the crushing business?

Mr. LUDWIG. Well, you know, that is a great question and it is

one that I have spent a great deal of time giving thought to. And

part of the answer is not even a great one but part of the answer

is that if we don’t figure out how to do that our future isn’t very

bright.

But the reason I believe we can is kind of twofold. And that is

part of the reason that I ended up my testimony saying, here are

a couple of areas that you can help and the tax credit one I think,

is one that is critical. You may have a better idea. You understand

how tax credits work better than I do and you may even have some

other areas how you do that.

But we have to help level the playing field, or in my opinion,

even tilt it towards these producers to put a larger percentage of

cash equity in that facility so that long-term they have some of

that staying power.

The other thing that is very, very important is when you talk

about—I don’t know if niche market is the right word—but in an

area where they have a much better opportunity to survive. And

that means you do a feasibility study, you do a business plan, you

go into areas where you are not going to compete head-to-head with

an ADM.

Quite honestly, I would not look forward to doing that as a producer group. So you go to an area where you don’t have to do that.

Chairman TALENT. One more question for Charlie. If we were to

get the Secretary to redirect the $45 million in pork producer’s

amount, how would you recommend that we invest that to have the

greatest impact on value-added?

Mr. KRUSE. As I said in my testimony, Mr. Chairman, we had

hoped that that money was going to be directed to hog farmers for

direct assistance but it appears that is not the case. So given that,

I think market feasibility studies, technical assistance. And I think

the common thread on this panel, everybody on this panel has

talked about the desire on the part of producers to get involved in

these kinds of activities.

16

I think there is a real eagerness, if you will, on the part of producers today, to really get involved in some kind of value-added

project. And it is not one of these situations where we as farmers

are saying government take our hand and walk us through this.

That is not it at all.

Farmers are willing to share in the risk, share in the investment.

We just need some help in bringing together technical assistance,

expertise, market feasibility studies; sort of a how-to. That is why

I mentioned in my testimony about perhaps having some kind of

a cook-book that we can work through together.

But hopefully we can encourage the Secretary to direct these dollars that way because I know you all in this Committee have been

very active in doing this in other sectors of the economy. I think

agriculture is in a situation now where we really need to do all

that we can to help farmers get involved in adding value.

And Mr. Chairman, as you said in your opening comments, to get

farmers to the point of being directly involved in the vertical integration that is taking place. I think that is a very good point.

Chairman TALENT. All right, thank you. I will recognize Mr.

Phelps.

Mr. PHELPS. Thank you, Mr. Chairman. Thank you all for your

testimony. It is very beneficial to us. Just real quickly, I think you

all have alluded to technical assistance item and the Chairman

covered that very much thinking that small business centers would

be a viable focal point to possibly work from.

Just for those of you, maybe Mr. Ludwig, it seems like that the

soybean community has been a leader possibly because of the ethanol that has been a product that has proven to show you can diversify agriculture.

And maybe you have mentioned some of these but from the priority list, one or two, what would be some of the lessons that you

have learned for trying to form co-ops and getting the job done as

you have in this particular area where soybeans and ethanol has

taken off, that you could give to the ag community who might be

looking to form a co-op? Are there particular barriers to avoid, are

there some prime target things? Steps 1 and 2 that you would recommend? Because your leadership in the soybean area has been

commendable.

Mr. LUDWIG. Well, you know, that is a great question and I appreciate you asking it. What I would like to do is just share some

of our experiences. Actually, in Minnesota they have had much

more experience with actually putting those groups together.

You know, I think that there are a couple of things that we have

tried to do, especially with soybean research. And a couple of those

things are, you hear a lot of people talking these days about environmental benefits, you talk about how things that are renewable,

all those things are fantastic.

And we believe that they are but one of the things that we have

learned is that as we take a look at this research and then try to

move it into some sort of business structure that people appreciate

the fact that it is environmentally friendly, that it is renewable,

that it is biodegradable, provided it costs less than the current

product that is in the market.

17

So bottom line, you have to deliver either additional value, a better product, or you then have to be able to deliver that product to

the current market at a lower price than what you had.

But the second part of your question is, what are some of the pitfalls? You know, and Bruce actually might be in a better position

because they have more co-ops there in Minnesota than what we

have in Missouri.

Mr. PHELPS. We just need to recognize success stories and build

on that and avoid the problems that you may have faced, because

you have the leadership in this area.

Mr. LUDWIG. Right.

Mr. PHELPS. Can you add to that, Mr. Stockman, from a Minnesota perspective?

Mr. STOCKMAN. Mr. Phelps, thank you for asking. I will try. In

effect, several of the groups experienced what their predecessor did.

Whether it is how to come together as independent farmers and

function as a Board; how to make policy decisions and stay out of

the management; how to decide and come up with a strategic plan;

where to go for resources; how to find those services that are currently offered and where do I go to find them.

All of that are the kinds of thing that I have seen almost every

one of these organizations as they come together, repeat in some

way. And so it seems to me that an innovative center or a center

of some sort could provide that how-to, that cook-book, that list,

even serving as advisors in some cases themselves directly, on

whether or not they’ve got their stuff together ready to take the

next step or whether they need to go back and start over.

Some of them have started with their feet running and really

didn’t know where they were going. And so there are all those

kinds of problems to get focused first.

I think another thing that has happened is that in many cases

they really say, I want to diversify and own something further up

the chain but it just moves them to a different level they didn’t anticipate. They need to know what else, where else, how else.

Mr. PHELPS. Thank you very much. Just one last question, Mr.

Chairman. Mr. Ward, in your testimony you alluded to the problems that led to our disaster in the pork industry. An increased

supply of market hogs combined with a reduced slaughter capacity

created this situation for producers, and also, even though there is

a record high year for pork consumption.

And I guess my question is, why do we not have those indicators

far enough ahead to try to get organized to avoid at least some of

that, if not most of it? Did it come that quickly? I mean, usually

we have warnings even of hurricanes, but it seems like we ought

to have some experience somewhere in the industry saying that the

vertical integration such as the poultry industry experience, this is

coming down the pike. We had better get ready for it.

Mr. WARD. Sure. Very good question and certainly one that we

have had to answer before. And there were obviously, very strong

indicators that we were going to be up in production about ten percent in ’98. The proverbial straw that broke the camel’s back I

guess, was the plant in Detroit that closed last summer.

The system was going to be loaded and prices were going to be

down but not to the level they went. You could see that coming.

18

And then when we lost that 12,000 or 14,000 head a day capacity

out of that Detroit plant last summer that was literally the straw

that broke the camel’s back and ultimately caused it to drop where

it did.

We were probably, and I don’t have those numbers in front of

me, but I believe mid-20s to low-30s were what most of the economists were predicting for that incident.

Mr. PHELPS. So we have two extra-large processing elements that

are critical to the whole process?

Mr. WARD. Exactly, and one of the things as we are looking at

this, and we have announced this national co-op to explore potentially building some plants to address some of that issue, but you

have this and you have producers that are in charge of these situations through closed co-ops or whatever it is, is one way of somewhat addressing that concentration issue because you are putting

producers back in control of their own destiny and getting them ultimately closer to that consumer.

Mr. PHELPS. Thank you. I yield back, Mr. Chairman.

Mr. BARTLETT [presiding]. Thank you very much. Let me at this

time recognize Mr. Thune.

Mr. THUNE. Thank you, Mr. Chairman. I will pass for the moment and reserve my questions for the second panel.

Mr. BARTLETT. Thank you very much. Let me now recognize Ms.

Christian-Christensen.

Ms. CHRISTIAN-CHRISTENSEN. Thank you, Mr. Chairman, and I

want to take this opportunity to thank our Chairman and ranking

member for calling this important hearing on how we can help agriculture re-growth in America.

I am the ranking member on the Subcommittee on Rural Business Enterprise and Agri-Business, and my colleagues and I on

that Subcommittee take a special interest in this subject.

Even based on my own experience in a place that is not very agricultural, the Virgin Islands, I hear the same issues raised and so

I agree with what I have heard all of the panelists say; that the

farmers are the experts but what they need is assistance with technology with business expertise, and with looking for those niches

that can make their businesses successful.

We have had good experience with the business and co-operative

services at USDA, and I was wondering, and I direct this question

to Mr. Stockman but anyone else can answer, again on the one-stop

center of expertise, the resource center.

What about the Rural Business and Co-operative Service at

USDA and what services are they providing that meet your needs

and what do you think that they could add to their services? Are

they a good source of that information; those resources?

Mr. STOCKMAN. I apologize for not being able to expound on that.

I guess that is part of the problem, is that the awareness of what

is available is part of this problem. And that is why a center or

something like that would bring those resources to better use.

I appreciate you asking that question. I am answering in this

way so you understand that that is part of the problem. It is not

that they are not functioning and I am not pointing fingers. I am

just saying that there is no way oftentimes to find where those resources are in an effective manner.

19

Ms. CHRISTIAN-CHRISTENSEN. And we have been discussing possibly holding a hearing just with that Department and rural development to discuss some of those issues on our Subcommittee. Did

anyone else want to answer that?

I don’t have any other questions for this panel, Mr. Chairman.

Thank you.

Mr. BARTLETT. Thank you very much. To maintain the rotation

to the two sides of the aisle, let me ask a couple of questions now.

You have been talking about two different things: vertical integration and niche marketing. These are of course, two different

things although they could be combined. Recently as everybody

knows, we have had large disparities between the consistency of

pricing of milk at the farm and pricing in the store. Our dairymen were getting as much as $18 a—I say as much as;

that is really very low if you had indexed it—getting as much as

$18 per 100 for milk on the farm. And then it has now dropped

down to about $12 per 100. And in the store there was not a ripple.

This obviously begs for vertical integration. What happened to

that six dollars per hundred? The farmers didn’t see it and the consumer didn’t see it. It certainly didn’t drop in the store. So that obviously begs for vertical integration.

We will pause for a moment while the beepers tell us that there

are a series of votes on, which is what those bells mean.

I am particularly interested in your comments about alternative

uses. I was reminded of that this summer when we had a severe

drought in our area. Our pastures dried up on our farm. And I

bought barley for less than $80 a ton. Hay would have cost me a whole lot more than $80 a ton and

barley is a whole lot easier to haul and handle than hay is, so I

simply bought barley and saved the hay for winter feeding; which

was for farming, an alternative use of barley as a substitute for

hay. Two years ago I bought corn for about $80 a ton. Last year it was about a bit under $100 a ton I guess, and it is going to be what,

closer to $80 a ton this year. If you look at corn at $80 a ton, and

if you look at cord wood for your stove for your fireplace at $100

a cord, there is a whole lot more energy in that ton of corn than

there is in that cord of wood.

And if you are looking at pellet stoves, and corn comes already

pelletized, you are talking about $120 a ton at a minimum for pellets. Corn is a whole lot cheaper than that and I suspect has more

energy than that.

I go to dinners put on by farmers and they don’t offer me milk

as a drink. Well, they do now in our district because I have been

yelling about it. But ordinarily there wasn’t milk there as a drink.

My question is, what sort of energy are we putting in to finding

alternatives uses? I would like to see milk in vending machines. It

is not just a drink. It is a very high quality food. There isn’t any

reason that we can’t make it attractive to those who frequent vending machines, and milk ought to be there.

And by the way, you can pay almost as much for water as you

can for milk. And you pay a whole lot more for coca-cola than you

do for milk. What sort of energies as an industry are we putting

into looking for alternative uses for our products?

20

I saw the shirt with great interest that you had made from corn

fiber. That is an interesting alternative use. What sort of energies

are we putting in? And is there a concerted effort to find these alternative uses in niche markets?

Mr. LUDWIG. At the Missouri Soybean Association, we actually

have a national check-off; that we put nearly a million dollars a

year that go into research for alternative uses.

And part of that includes, I think, some of the most exciting at

this point in time, or even developing soy oils or identifying soil oils

that can be used for industrial purposes, and taking a look at all

the different things that we can potentially do beyond what we

have considered normal or regular, conventional uses for soy oil.

We have done some of the same things with protein but the protein seems to be a little tougher to identify, at least in conventional

soy beans. But there is no shortage of effort that goes into that,

and certainly, you know, again I think that we need to recognize

farmers for farmers actually taking their dollars and putting dollars into research that has the opportunity to affect or direct their

future.

And there is no question that in our industry it is a great deal

of effort is going into those areas.

Mr. BARTLETT. Mr. Stockman.

Mr. STOCKMAN. I would love to comment on that. It is true with

most of the commodities, and corn in particular, there is well over

3500 different kinds of products currently available to be made

from corn alone.

I went to a general discount store recently with a manager who

I knew, and I asked, would you do a project with us? And the idea

of the project was a contest for their customers, but the idea was,

they had a form to fill out of how many things in that general type

of a store were made utilizing corn in one way or another.

And after they got to about 75 percent of the products in the

store they quit. They said, enough. They literally were putting

these marks on the shelves of everything practically, with the exception of steel or rubber. And in some cases they can make a rubber type of material. But their rubber was not.

The point is, there is a lot of technology on the shelf ready to pull

off. The missing link is how to match that opportunity of something

with the opportunity in the marketplace. The marrying of the idea

along with the need is the missing link, and that is where these

centers I believe, could help.

Mr. BARTLETT. Thank you very much. As you have heard, several

bells have gone off. We have a series of votes, I gather. This might

be a good time to break for votes and we will return as soon as we

can.

If there is just a single vote it will be in 15 minutes or so. If it

is a series of votes the second vote and a third if there is one, will

not be more than five minutes each. So it shouldn’t be too long

until we return. We will stand in recess until the end of the vote.

[Recess.]

Mr. BARTLETT. Thank you very much. We want to make sure

that there are no members who wish to ask questions of this panel

who have not yet had a chance to return from the vote. So if we

can occupy for a few moments until we see if there are any of those

21

who will return, then we will be able to excuse this panel and convene the second panel.

The Chairman promises to return and to be with us in a few

minutes. I hope that is true because I need to leave in a few minutes.

Let me return to the subjects that we were discussing before the

break for a vote and that is the opportunities for niche marketing,

for diversification.

It is clear that we need both vertical integration and niche marketing. And my concern is that this is a role in the diversification

which could very well be niche marketing. But is there a role there

for government? Generally, I see government trying to play too

much of a role.

And my concern is that I am not sure that government at either

the state level and particularly the federal level, is stepping up to

the opportunity of providing a structure in which our agricultural

people can look at not only vertical integration but also diversification and niche marketing.

And I am wondering if you have some suggestions as to what we

might do; appropriate legislation that would help us to use the relatively few dollars that we have to help farmers to be more productive in opening up future opportunities for them by looking at other

opportunities for diversification and niche marketing.

Mr. Ludwig.

Mr. LUDWIG. Well, again to paraphrase real quickly what Mr.

Stockman said earlier, I think we have done a great job at developing technology, and maybe the missing links are the technology

expertise and actually then molding that technology into real products. And that is the thing we have to move forward on; is turning

these things into real products, into real businesses.

And I think that one of the things that is going to help that the

most—and I mentioned tax credits before. And I think that is an

excellent way to infuse some capital into some of these things. You

have a commitment on the side of those people who are going to

be involved, and then you incentivize them for doing that.

And that is part of the reason that I keep talking about that side

of the equation. I think in some cases we have more government

than we need, but in this particular case we are taking people that

are truly interested in doing it, because they are willing to put

their dollars into it, and then we incentivize them on the other side

for having done that.

Mr. BARTLETT. Anyone else have a comment?

Mr. STOCKMAN. I guess I would add to that, the shirt that I used

as an example before I will use as an example one more time.

Right now that is being utilized by private industry. Part of the research for the polylactic acid was partnered with organizations

such as ours, and in Missouri and other places.

There have been several different technologies that have come

from that. One, a company specialized in themselves and in developing it further now are developing markets accordingly. There is

no reason why government couldn’t assist farmers capturing those

opportunities rather than just let those who happen to have the

capital ready to do it.

22

So both division and capturing that opportunity, and then also

linking it to the producer and the consumer.

Mr. BARTLETT. Looking at that shirt I was reminded of a marketing opportunity that we are missing. When our dairymen got

into trouble recently I was amazed—now a very small percent of

the people in our district are dairymen—but I was amazed at the

enormous support that dairymen have. And it is because almost everybody can remember visiting their grandfather’s farm.

And although very few of our people live on farms today they

have a great nostalgia for the family farm. And Americans want to

support the family farm. And if that shirt were in the store and

it cost a little bit more than one made in China but it was advertised as a product of American farmers made from corn, I think

that you would have a lot of people paying the few pennies more

for that shirt as compared to the shirt that is made in Taiwan or

Korea or China.

I think we are missing a marketing opportunity because I think

America is 100 percent behind the family farm and I think that we

need to exploit that in our advertising.

Mr. STOCKMAN. I applaud you. We agree wholeheartedly. And

pulling that together will make a difference.

Mr. LUDWIG. I also believe that, you know, people in general

have a good, warm feeling about family farms, but maybe the point

that they don’t understand is that the more people that we can

keep involved in production agriculture and the more competition

there is there, the better there is for consumers long-term as well.

It is something that truly is good for the average person in this

country, average consumer, that oftentimes they probably don’t recognize. But if we are successful at developing some of these new

businesses and are able to bring new products, in many cases better products, products that are indeed, more friendly to the environment, there are many benefits there that oftentimes we don’t

think about, and maybe we in one way or another need to do a better job at just communicating with them.

Mr. WARD. Yes, I would agree with that. We have a group in

Iowa right now, a producer group that has gone together and are

doing some packaged, pre-cooked, different kinds of products. And

they have been very successful. Now obviously, they do have a differentiated product which has given them an advantage, but it is

so-and-so county family farm-something on the label.

And I guess I thought they would succeed because they put their

plan together right but I have been real pleased with the growth

and the way they have been able to market that product and get

it on store shelves and then ultimately having the consumers buy

it. So I would agree with that.

Mr. BARTLETT. Thank you very much. There is another dynamic

in this support for the American farmer that I think that we can

exploit to the advantage of agriculture.

I think that a lot of our people are supporting the family farm

because they recognize that this is a part of our heritage; that

when we have lost that we have lost something. I think they recognize that the young men and women that came off our farms were

kind of a breed apart from what comes out of suburbia and the cities today. And I think there is a lot of nostalgia, there is a lot of

23

concern that we are losing something in America if we lose the

family farm.

So I think that we can exploit the broad support for the family

farmer across America in getting a bigger market for many of these

alternative products—you know, they are used to buying soybean

oil and they are used to buying bread.

But if they are now buying a shirt which is made from corn fiber

and if they are now putting soybean oil in their diesel car, which

I understand is quite doable with a modest modification, I think we

are going to find big support for the American farmer.

I am on the National Security—it used to be the National Security Committee; now it is the Armed Services Committee. I have

an additional interest in agriculture in this country and that is

from a national security viewpoint.

You know, I am concerned that we are now importing much of

our manufactured goods. You know, we don’t need to be importing

food and fiber that we can grow on our farms, and if we keep going

the way we are we will be importing more and more of that and

I think ultimately it is a national security concern.

We have held this panel for a few moments to see if there are

additional questions. Ms. Millender-McDonald, do you have questions for this panel before we excuse them and reconvene the next

one?

Ms. MILLENDER-MCDONALD. Well, thank you so much, Mr.

Chairman. I too, am very pleased to have the agriculture industry

to come before us, members of that industry. Those of us who are

in the urban and suburban side of this country tend to look now

at agriculture, or this member does, because I see the importance

of you more so than ever before; certainly as I sit representing the

two ports that make up the largest port system in the nation: the

ports of Los Angeles and Long Beach.

And it is important that we look at the empowering of you to further do value-added commodities. And so I perhaps, Mr. Chairman,

there were some questions that I wanted to raise but wanted to

more or less thank the Chairman for bringing this information or

this group to us because of the importance of agriculture.

And those of us who sit in the House who are urban and suburban, need to get more information on this so we thank you for

being here. And don’t think because we are in and out and have

not been here, we are not reading your script, because we have it.

I guess one of my questions is, what agriculture commodities are

best suited for these value-added businesses? That is a question

that may have been asked but I just need to know that. Either one

of you can answer.

Mr. WARD. I think probably all commodities can take advantage

of that and you know, when you think of pigs, when you think of

pork, you think of the products sitting there on the shelf in the grocery store, but currently the highest value per pound pork product

are these dried ears for dog chews. So you know, there are I think

opportunities in every commodity area.

Mr. LUDWIG. I think specifically here today there have been, you

know, a couple of the commodities that are represented are some

of the most important in the country if you look at what our largest

commodities are.

24

On the crop side it is obviously corn and soybeans and then livestock, pork, poultry, beef and dairy. And so those are the ones that

have the critical mass; the number of producers that are going to

be able to supply it at a lot larger scale if we have to if we are outrageously successful and can go to that.

But just an example of how we don’t necessarily—we cross a

bunch of different industries as we talk about value-added. One of

the things that we do in Missouri is grow soybeans that go into the

food bean market that go to Japan and they are loaded out in Long

Beach. They go through that port from Long Beach. And so it is

interesting how we actually affect, not just agriculture but rural

development as well as some of the largest industries in the country.

Ms. MILLENDER-MCDONALD. Absolutely.

Mr. STOCKMAN. Anything made from petroleum can be made

from, if you will, biomass; all these crops, corn included. It seems

to me that the greatest opportunity comes from those with the

most abundance.

If in fact, something was very scarce—gold, something like that—

the abundance is lacking so the creativity and the need for expanding value is not the same as it would be for something that’s very

plentiful. And so those things that are more plentiful and less expensive really create the greatest opportunity, and our commodities

right now are all in that shape.

Ms. MILLENDER-MCDONALD. How many of these value-added

businesses can we look to in exporting to other countries for our

percentage of exportation to other countries? Or can any of these

value-added businesses be as a future, an exportation type of commodity to other countries?

Mr. STOCKMAN. There are several things that are happening

quite frequently and that is, identity preserved in several different

ways. But our desire is not just to capture that. Our desire is to

create the jobs that make something special out of it first before

it is exported, rather than as a commodity or even an identity preserved commodity.

We think the opportunity for our economy and our country is

much greater to create those jobs right here first. Because of what

has happened in agriculture, the tradition has been shipping the

raw production because farmers are experts at producing. With the

technology and a whole lot of things, the volume of our commodities has grown quite rapidly.

But that is only part of the story. In fact, by giving it away or

selling it at a basic commodity price you have given away the biggest part of the opportunity because the margin in a box of cereal

goes from a few cents to several dollars, and that is where the margin is.

Ms. MILLENDER-MCDONALD. I couldn’t agree with you more that

we certainly should make ready jobs in this country for purposes

of our economic growth. But clearly, as I talk to other agriculture

folks that come through my district, being that I am representing

the ports, I am interested in international trade in agriculture.

I would like to see that growth market go across the seaways and

the airways as well. And so I will further listen to the other panelVerDate 20-MAR-2000 14:56 Mar 27, 2000 Jkt 062234 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HEARINGS\60375.TXT pfrm01 PsN: 60375
25

ists but do recognize the importance of your industry, even though

I represent the urban and suburban.

Thank you, Mr. Chairman.

Mr. BARTLETT. Thank you very much. I caution people not to

criticize our farmers and our farm programs with a mouthful. I can

remember as a boy that it was a general rule of thumb that 25 percent of your budget went for food. Today that is down to about ten

percent.

A few Americans know that and understand it and really appreciate farmers. It is our challenge to let every American know that

so that they will appreciate farmers even more, because farmers

have freed up a full 15 percent of income for other spending. They

don’t have to spend it on food because the farmers are producing

food so efficiently that the share of the family budget that used to

be 25 percent for food is now down to ten percent.

We are just missing I think, a lot of marketing opportunities to

sell farming. And it is not a tough sell by the way, to sell farmers

and farming to the American public.

Well, I want to thank the——

Ms. MILLENDER-MCDONALD. Mr. Chairman, can I just——

Chairman TALENT. Go ahead.

Ms. MILLENDER-MCDONALD. Let me concur with what you are

saying. We don’t see enough of the farmers in other areas of the

country other than in your rural areas. And so when you get out

and start doing your marketing across other districts can we better

appreciate.

Now we all eat your food and we certainly enjoy and appreciate

what you are doing. But to really get to the crux of how this is

done we need to have more interchange. And so I welcome any agriculture member to come to my district, even you, Mr. Chairman,

to talk about that.

Mr. BARTLETT. Thank you very much. Thank you very much. I

want to thank this panel. By the way, you don’t see the farmers

because they are working 16 hours a day; that is why you don’t see

them.

I want to thank this panel very much for their contribution. We

will excuse you and convene the second panel.

[Recess.]

Mr. THUNE [presiding]. We will reconvene. I am pleased to have

the second panel with us today and I would like to start by introducing Dr. Virgil Flanigan. I thought I might need a rocket scientist to explain some of the opportunities of value-added agriculture so the Chairman did invite Dr. Flanigan to enlighten us a

little bit on that.

Early-on his career he was on the design team for both the Saturn delivery vehicle and the Sidewinder missile, so he really is a

real rocket scientist. And over the past years Dr. Flanigan has developed and headed one of the most successful and visionary crop

utilization and processing research programs in the nation at the

University of Missouri-Rolla, which has focused on new uses for

soybeans.

So Dr. Flanigan, please share with the Committee your vision of

where producer-owned, value-added agriculture can take our agriVerDate 20-MAR-2000 14:56 Mar 27, 2000 Jkt 062234 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HEARINGS\60375.TXT pfrm01 PsN: 60375
26

cultural system, and then we will move on with the panel from

there.

STATEMENT OF VIRGIL FLANIGAN, DIRECTOR, CENTER FOR

ENVIRONMENTAL SCIENCE AND TECHNOLOGY, UNIVERSITY

OF MISSOURI-ROLLA

Dr. FLANIGAN. Thank you, Mr. Chairman. Just a little bit of my

present position. I am the Director of the Center for Environmental

Science and Technology at the University of Missouri-Rolla, but I

have been involved for the last 40 years in looking at agricultural

products and trying to use them as a, typically as an energy product.

And we have always had the problem when we do this of trying

to get good economics. We always had a renewable, environmentalfriendly, and biodegradable product but we always had the difficulty with economics. We always had to pay more money as compared to the alternate fuel.

So that always was something we had difficulty with. But in the

last five years I have started working with products, especially oils

from our commodities, and all of a sudden we begin to see economic

opportunity as well as opportunity based on biodegradable, renewable and environmentally-friendly.

And it is amazing the products. You know, just looking in our little operations, we are looking at making a product for jet airplanes,

we are looking at making a product for recycling polystyrene which

is a huge problem all over the world, and we are looking at building houses in Honduras, all using these oils from the commodities.

And I thought what I would do is, I might just go through a couple of our projects that are of interest, at least to me, and I hope

I can share with you my excitement for these products. We got

started basically, due to an opportunity of moving the Chemical

Weapons School from Alabama to Missouri. And it is Fort Leonard

Wood which is only like 25 miles away from Rolla and they were

having trouble with the fog oil they are using as an obscurant

smoke.

We looked at it and we looked at soybean oil and it appeared to

be a perfect replacement for the fog oil, the petroleum-based product. We tried that in the Army equipment; it worked beautifully

well. We also analyzed the soybean oil as compared to the fog oil

and we discovered that the soybean oil was really the only oil that

could meet the specifications.

The Army fog oil did not even meet its own specifications. It had

poly-aromatic hydrocarbons which are cancer-causing products. So

here we had a product which was perfectly suited for an Army application.

And when the Army was doing the poly-aromatic hydrocarbon

control they hydro-treated the product and it made the product expensive, so not only did we have excellent environment effects, we

also had the economics based on what they had to do to the fog oil

to make it usable.

As well, when we began looking at the oil in more detail we discovered that it absorbed infrared rays as compared to the petroleum oil which does not; which is totally transparent to the infrared. So the Army has to add graphite to the oil to make it infrared

27

opaque, where we can produce a product simply from the oil which

is infrared opaque.

So we had all of these advantages for the products and all we

are waiting for is for the Army to adopt the program. It will represent about a quarter of a million bushels of soybeans a year just

at Fort Leonard Wood to provide the obscurant smoke.

I think this leads to another important point when you think

about trying to produce these products and trying to get them

adopted. It has got to be bigger than the University of MissouriRolla; it has got to be bigger than the Center for Environmental

Science and Technology. We have to have the support of the Soybean Association, the Corn Growers Association.

We have to have the support of these people in terms of adopting

these products because without their support it will just drop. The

Army won’t adopt it and nothing will happen. So it is very, very

important that we form these kinds of groups.

I will just do one other quick demonstration here; one of our

products. This is a composite material that we made. It is carbon

fiber of composite. It is exactly like the material that is used in airplanes. We have added soybean oil to the resins in making this

product and it has extremely good characteristics.

If you think about it, that sounds good. You are going to make

little black rods, but what are you going to use the little black rods

for? Here is a product that, this is a rebar replacement made from

composites.

Okay, and in order to do this—now the reason they want to do

that is because of all the damage we have every year. We have salt

on the bridges. So if we could use a composite material we would

get rid of all the corrosion problems.

But the composite material is brittle so it doesn’t have toughness. So they have to wrap this with a braid by adding the soybean

material; the soybean oil, the epoxydized soybean oil to the resins.

We have gotten rid of the braid. We don’t have to have the braid.

Again, economic opportunity to produce a product which has a real

need in all of our infrastructure throughout the whole United

States.

We are also looking at esters—am I done? That was quick. Well,

there are lots of other products that we are working on. They are

really exciting. We have got a new way to separate the oil. We have

worked with co-ops. We think that engineering expertise is absolutely essential and I think my friend Nick is going to tell you a

little bit more about how important it is to have good financial and

management services.

So, thank you.

[Dr. Flanigan’s statement may be found in the appendix.]

Ms. MILLENDER-MCDONALD. Mr. Chairman, I know that this is

out of turn but I have got to leave for another committee. But I

just wanted to ask the professor, or Dr. Flanigan——

Dr. FLANIGAN. That is good. Professor is fine.

Ms. MILLENDER-MCDONALD. Scientist. You are saying that corn

and soybeans are important commodities for the production of oil

or any other, I guess, exploration that we are endeavored in. Are

you suggesting that you cannot get them to come to the table?

28

Dr. FLANIGAN. The Army? That is true. We have had great difficulty getting this adopted. But it is continuing and we are——

Ms. MILLENDER-MCDONALD. So the Army is the one that is precluding this match, is that what you are saying?

Dr. FLANIGAN. Yes, ma’am.

Ms. MILLENDER-MCDONALD. Very well. Thank you. Thank you,

Mr. Chairman.

Mr. THUNE. I thank the gentlelady for yielding back and the gentleman for his testimony.

Dr. FLANIGAN. Thank you.

Mr. THUNE. Even a guy with all those impressive degrees still

knows the red and the green.

Dr. FLANIGAN. Yes, I am a great sell.

Mr. THUNE. That is right. That is better than I can for many of

us on the panel. We sometimes tend to get long-winded. But next

we will move to Dr. Nick Kalaitzandonakes. And I don’t think that

is phonetically—by reading your name here that can’t be right but

I will take you at your word and I can tell you that is probably not

Norwegian since I come from a Scandinavian country.

But please, will you share with us? Nick joins us from the University of Missouri-Columbia, Agriculture Economics Department.

Is a renowned expert in the field of agri-business development and

the impacts of biotechnology on agriculture. So Nick, welcome, and

thank you for coming today to share your vision for value-added agriculture.

STATEMENT OF NICKOLAS KALAITZANDONAKES, UNIVERSITY

OF MISSOURI-COLUMBIA, AGRICULTURAL ECONOMICS DEPARTMENT

Dr. KALAITZANDONAKES. Thank you, Mr. Chairman. I have

thrown away my prepared comments since many points have been

covered. You already have my testimony. I would just like to reinforce some points that were made earlier. As an economist I know

that they are valid because we have data to support them.

Now farmers, want to participate in value-added because economics are pushing them that way. A larger portion of the food bill

is going towards value-added, post-farmgate. And that means that

a smaller portion is being captured by the farmers.

In addition, value-added is tied increasingly to technology and

unless you are either the owner or the manager of that technology

you are not capturing much of that value-added anymore.

So economics are working their way down to the farm and the

trend is very clear. Unless farmers can participate in that valueadded activity they are increasingly going to be capturing less and

less value from the foods they are producing. Point number one.

Point number two, there are increasing opportunities available

for capturing value—there was a lot of discussion about niche marketing and value-added markets and how these relate to each

other. What we do know is that opportunities for niche marketing

are increasing because we have a better understanding of what

markets look like. Right off my computer I can tell you what the

market in any particular location looks like in terms of demographics, in terms of income, in terms of product distribution, details that make us better at positioning products to markets.

29

So we are getting better at recognizing opportunities for product

positioning. Electronic data interchange, scan data, internet—all

contribute in that direction. So we are getting better at this and

we can position products better.

There is also no shortage of products and technology that need

to be positioned, as you have already heard from Dr. Flanigan. And

you have already heard that farmers can participate in creating

that technology and can take it post-farmgate.

Significant disconnect occurs every time in this product-market

coordination effort; this is where we need business planning, strategy for value capture and value creation, business plans, organizational design, contract design, and so on.

There was discussion about the issue of ‘‘farmer-owned, farmer

controlled,’’ brand having value in the marketplace.

In many cases, farmers may process a product only as a stepping

stone for creating a brand. And maybe the brand, this ‘‘farmerowned, farmer-controlled,’’ brand may have more value than a processing margin. So we have got to explore these kinds of opportunities and we have to be proactive about it.

And by proactive, what do I mean? There was discussion about

cook-book business assistance solutions. In many cases cook-book

solutions may work. But what we in my opinion, need is an increasing level of coordination between farmers and technical assistance people that design strategies up-front, even before products

and technologies are developed.

So that we go hand-in-hand with markets, products and technology to capture more value.

So I would like to close my statement by saying that where the

disconnect right now occurs is in the technology assistance and the

market assistance level, and we can do much better for the farmers. When that happens ample opportunities exist and can be captured in the marketplace. Thank you very much.

[Dr. Kalaitzandonakes’ statement may be found in the appendix]

Chairman TALENT [presiding]. Thank you, Doctor. Our next witness is Rodney Christianson who is the CEO of the South Dakota

Soybean Processors, Inc., and very interested in having you testify.

Appreciate your coming, Mr. Christianson because you are the

CEO of a successful, producer-owned, value-added cooperative, so I

am sure you have a lot of insights to offer the Committee, and

thank you for being here.

STATEMENT OF RODNEY CHRISTIANSON, CEO, SOUTH

DAKOTA SOYBEAN PROCESSORS

Mr. CHRISTIANSON. Mr. Chairman and fellow members of the

Small Business Committee. Thank you for the opportunity——

Chairman TALENT. Excuse me just a minute. If you will suspend

for a second.

Let me recognize Mr. Thune for a more extensive introduction.

Mr. THUNE. Thank you, Mr. Chairman, that’s not really necessary. I think Rodney is ready to go. But let me just add to what

you said by commenting on what I think is a remarkable success

story in the area of value-added agriculture and that is the soybean

crushing facility at Volga.

30

It really, truly is I think, what we are looking at in terms of a

model. I would certainly hope that it is the first of what will be

many successful ventures like that in the future, and Mr.

Christianson is here with us today. He is the CEO of that fine organization and I think has a great deal of insights into what makes

it work, what some of the problems are, what some of his concerns

are with respect to the future and how those might be addressed.

So I am delighted to have a fellow South Dakotan here with us

today to be able to talk about what I think are some of the really

salient high points in value-added agriculture but also perhaps

point to some of the things that we might be able to do to make

it more probable in the future.

Chairman TALENT. And I thank the gentleman for his comments.

We have models that are successful and they point the way, so tell

us how you did it, Mr. Christianson.

Mr. CHRISTIANSON. Thank you, Mr. Chairman and fellow members of the House Committee on Small Business. Thank you for the

opportunity to be here with you today to talk about helping American producers re-grow America.

As they mentioned, I am the Chief Executive Officer of South Dakota Soybean Processors. It is a direct 2100 farm family owned cooperative. Our producer members reside primarily in Minnesota

and South Dakota. Our goals as a farm-owned co-operative are to

add value to our members’ soybeans, to maintain a financially

strong business unit, and to return a maximum value-added patronage to our members annually.

Certainly the 2100 farm families that invested in South Dakota

Soybean Processors believed: (1) that it is possible for the U.S. producer to participate and find success in value-added processing;

and (2) for future viability, today’s producers need to capture a

larger and more equitable share of the food dollars by adding value

to their products.

If it is the desire of this Committee and Congress to create an

environment—and I will stress, create an environment—for agriculture producers to participate, your assistance should be targeted

to the following items: capital formation; producer education and

resource centers; and protection against potential anti-competitive

and near monopolistic practices of industry giants. Somebody mentioned before that, how do you compete against the giants?

From the early stage of conception the producer needs assistance

in the area of education and resource centers. As mentioned previously, a cook-book. Well, the cook-book that you should have is

for the process. The solution and how you implement those solutions are not a cook-book and you leave it to the creativity of the

producers to make those decisions.

After all, it is those individuals who will be investing their hardearned money. They have to have that control. But as they go

through that process, the challenges they face include overseeing

the development of a feasibility study and business plan, creating

a capital formation plan, particularly when security laws from

state to state vary, developing an organizational structure for the

co-operative, and then having the ability to attract the large number of producers to provide both the commodity to be processed and

the capital to start and build the operations.

31

Investments in value-added processing requires outside-the-box

thinking by the producers, and likewise for that core leadership

group, they need to apply their managerial skills outside of their

core competencies of running their farm. They have the skills, but

the application is different.

Programs targeted to assist producer education, development of

regional resource centers, and seed money for feasibility studies

would help create that environment that encourages new valueadded processing.

The project’s core leadership and potential producers/investors

will be told all the reasons why their project will fail out of the

gate. Producers and their leaders need to be equipped to make

solid, informed decisions to proceed or not to proceed. And they

can’t be afraid of making the decision not to proceed if it is not economically a viable project.

After the conception is completed and the decision is made to

venture into a value-added project, capital is absolutely needed as

the fertilizer to make the seed grow. A cooperative being undercapitalized is one of the top reasons for failure. Value-added processing is capital-intensive, cyclical in nature in both commodity

prices and margin structure, and is in a highly competitive, ever

consolidating corporate world.

If Congress had to choose only one method to assist agriculture

producers entering value-added processing, I would strongly urge

capital formation as the area that you should put your resources.

The use of low-interest loans, loan guarantees for individual producers to purchase co-operative stocks, and low interest or loan

guarantees directly to the co-operative would also encourage producer participation. Over the last year it is my understanding that $200 million was

available out of the Co-operative Stock Loan program through

Rural Development. This program could have provided producers

and lenders to producers up to 80 percent loan guarantees on the

purchase of value-added co-operatives. While well-intending as that

program was, one needs to question why this program was not utilized at any measurable degree. It is my understanding that the

complexity of this program prevented lenders from participating.

Certainly, simplifying red tape requirements for funding availability is essential if Congress truly desires to implement a successful assistance program.

SDSP would also specifically request that in such programs, the

requirements of ‘‘new’’ co-operative qualifications be dropped from

the program. Unlike the co-operative systems that have been in existence for several years returning 20 to 30 percent of the profits

to members through patronage dividends each year, the valueadded co-operative is driven to have a maximum value-added payment every year.

SDSP has returned 70 percent of our profits each of the two

years that we have declared a patronage dividend to our members.

Therefore, should SDSP desire to expand into major projects, we

will require receipt of capital from our existing members or new

members. It only makes sense to support value-added ventures as

a whole, whether a new, high-risk co-operative or a proven, stable

successful one.

32

The last area that I request your consideration is how and will

Congress be willing to provide a level playing field so that a producer entering into a value-added project will have an opportunity

to return an equitable return for their investment?

I am confident that the U.S. producer who invests in value-added

processing is willing to compete fairly in those chosen industries.

The question I would raise, will Congress be willing to provide a

level playing field for that producer-owned venture against industry giants and the food transportation industry?

Many producers have severe reservations about investing in

value-added agriculture due to anti-competitive action by industry

giants. SDSP has had a couple of situations that we have struggled

with, both with the rail transportation system where there is a lack

of competitive corridors in all areas, and also with the Chicago

Board of Trade and some changes that they’ve made.

And if you have questions we can go into that. You have that in

your written testimony for the details on it. But I think that it is

important that you take a look at it, and again, I am going to

stress that the U.S. producer that invests in value-added agriculture is willing to compete fairly with those chosen industries.

But let us be honest and realistic at the same time. The business

and the profits captured by agricultural producers will be considered business and profits lost by a major competitor.

A successful campaign that will encourage farmer investment

will include assistance with capital formation, producer education

and resource centers, and protection against special, anti-competitive or near-monopolistic practices of industry giants.

On behalf of our 2100 farm families I would like to thank you

again for this opportunity.

[Mr. Christianson’s statement may be found in the appendix.]

Chairman TALENT. Thank you, Mr. Christianson. I hope that you

could give some further thought to helping the Committee to determine what those assistance centers or ag innovation centers or

whatever you want to call them, what they ought to look like, to

help us learn from your experience and then provide some shortcuts to some people maybe in other states.

We have learned over the years, everybody starting in a new

kind of business needs some assistance in technical assistance. And

some of our programs have been very good. Some of them have

missed the mark. And it just depends a lot on how you set them

up. And since you have a real life experience I hope you would be

available to help us.

Mr. CHRISTIANSON. I will try to help you on that.

Chairman TALENT. Okay. The next witness is Mr. Dayton Watkins. He is the current Administrator of the Rural Business Co-operative Service of the USDA. This division is part of the USDA’s

world development mission area.

Mr. Watkins, thank you for appearing today to tell us what the

USDA has been doing to encourage producer-owned, value-added

endeavors and to share any other observations you may think appropriate.

33

STATEMENT OF DAYTON WATKINS, ADMINISTRATOR, RURAL

BUSINESS-COOPERATIVE SERVICES, UNITED STATES DEPARTMENT OF AGRICULTURE

Mr. WATKINS. Mr. Chairman, thank you very much. Thanks to

the Committee. Thank you for your vision for wanting to hold this

hearing this morning.

As you know, the Department of Agriculture falls under the

House Committee on Agriculture, and it is very rare, certainly during the time that I have been with the Department of Agriculture,

that we have had an opportunity to come before the House Small

Business Committee. I applaud you and I am thrilled to have this

opportunity.

The Rural Development Mission Area views producer-owned,

value-added enterprises as a means of assisting the individual producer increase profitability of their operations. We view them as

critical to the stability of economies in many rural communities.

Value-added enterprises create new employment opportunities in

which most of the income generated from these investments tend

to stay in rural areas and supports other businesses.

I should point out that it is not only Rural Development that is

involved in providing assistance to producers as they enter into the

value-added arena. A number of agencies have contributed significant time and resources to specific projects, and success of these

enterprises is dependent on this cooperation.

The Alternative Agricultural Research and Commercialization

Corporation, the Natural Resources Conservation Service, the

Farm Service, Agricultural Marketing and Research and Extension

components of USDA have been involved very actively and aggressively in these endeavors.

A most recent example that involves a variety of sources of technical assistance and very little financial assistance in Northern

Florida, a co-operative was created by limited resource farmers and

they are providing fresh vegetables and fruits to the local school

districts.

This co-operative evolved through efforts of many parts of the

USDA, including Natural Resource Conservation, Agricultural

Marketing, and the Florida A&M University. The Rural BusinessCooperative Service provided some assistance in helping the co-operative organize and a local bank provided the financing for a processing and packaging facility.

The Rural Business has a variety of programs that we are using

to finance value-added facilities. But the flagship program that we

have in the agency is our Business and Industry Loan Guarantee

program. This program is used to provide loan guarantees or direct

loans to value-added processing entities, growers and producers

who are forming such entities, and for those growers to obtain financing to purchase stock in those co-operatives.

For the past few years, the Business and Industry Loan Guarantee program had a program budget of one billion dollars. To

stimulate agriculturally-related value-added projects we have a policy of setting aside $200 million of our B&I Program authority for

value-added, grower, producer co-operatives. In 1998 we funded $36 million in value-added co-operative trans- actions, and in 1999, year-to-date, we have financed $44 million. As

34

an example, we provided $20 million guarantee to a sugar beet

processing plant in eastern Washington.

We have also provided a government guarantee to a swine processing plant in Minnesota. We are also using this program to participate in projects financed in part by the Agricultural Research

and Commercialization Corporation. One such project is a soybean

processing plant in Michigan.

Other financing programs available from Rural Development

Mission Area include the Rural Business Enterprise Grant program through which we are able to assist small and emerging businesses with facilities, feasibility studies and marketing studies, and

the Rural Economic Development Loan and Grant program.

The Rural Business-Cooperative Services also provides technical

assistance, research assistance and the like, to existing and new cooperatives. The Cooperative Development Grant program provides

technical assistance to cooperatives through a network of co-operative development centers that are located throughout the country.

These centers have been instrumental in the establishment of

new ventures. Examples would be a pasta plant in North Dakota,

a bakery in Colorado and many others.

In addition to Co-op Services here in Washington, D.C., we have

a series of co-operative development specialists that are employed

at the state levels and those who do not have full-time co-operative

specialists have co-operative specialists who have collateral duties.

In other words they get involved in other business services that we

provide through Rural Business.

Mr. Chairman, let me conclude my comments with the next to

the last paragraph in my testimony which says that, unfortunately

the producer interest in co-operatives, in value-added enterprises

increases when commodity prices are low and wanes when prices

begin to rise.

It is fairly difficult and it has been difficult for USDA and our

Co-operative Services Division to convince small producers and ag

producers throughout the country that it is to their economic benefit to participate in value-added co-operatives, though we are continuing in that fight and we think it is the direction we should, as

the Agricultural Department of the United States, should be going.

Thank you very much and I will be here to answer any questions

that may arise.

[Mr. Watkins’ may be found in the appendix.]

Mr. PHELPS [presiding]. Thank you, Mr. Watkins. I have been

given the scary assignment of holding the Committee in this hearing on the minority side. That may be a little bit unusual, too, but

maybe we can do this with your help.

I have several questions probably for all of you. I think we will

be joined here very shortly with other members.

Dr. Flanigan, you had mentioned—first of all, the dear

gentlelady had mentioned from California, her interest in ports,

and you alluded to the fact that, in answer to her question, that

the Army has had some slow response or resistance. Why do you

think that is? Are there competing interests or just a lack of focus

on programs that we need to make sure happens from the Congressional view?

35

Dr. FLANIGAN. I think that the first thing as you well know, the

environmental permits for this kind of an operation are very difficult to obtain. So when you switch from one product to another

product that is going to require some effort. And I think there is

some lack of enthusiasm in terms of going through that exercise

again.

Even though I think the soy oil really shows so many positive

characteristics as compared to the petroleum-based product. But I

think that is one of the main ones. They are really reluctant to——

Mr. PHELPS. Transitional costs, then?

Dr. FLANIGAN. Yes, even though I think, you know, we have

talked to EPA and we have talked to the DNR in the state and

they are both very encouraging in terms of making the switch to

the soy product.

Mr. PHELPS. Is there any co-operative effort in trying to, I guess

convince them that it doesn’t have to be so abruptly? Is there not

a gradual plan to get there that could pay for itself as they go

along, so to speak? I think that would make sense.

Dr. FLANIGAN. It does to me. We have suggested that. We have

not gotten very far with that. It doesn’t have to happen instantaneously, needless to say. It could be spread over five years, probably. But they haven’t been willing to do that.

Mr. PHELPS. So there is just a resistance there in strategic planning, sounds like.

Dr. FLANIGAN. Yes. And that is why it is so important, I think,

to have the support of these farmer groups because they really can

apply pressure that I as a researcher—you know, it is very hard

for me to apply very much pressure, needless to say. I think with

continuing pressure we will get there. It is just a matter of how

long it takes.

Mr. PHELPS. Can you elaborate or clarify for me—I have some

general understanding of esters. It is a biodiesel component, I

guess. That is a lucrative market also, isn’t it, that we can capture?

Can you elaborate?

Dr. FLANIGAN. In fact, if we go back to this product here, the

smoke, we have looked at the methyl esters as well as the soy oil

and we can even make a better smoke with methyl ester. And it

has some improved properties. Methyl ester is going to be a real

product of choice in the future.

When you look at polymers I think you almost always end up

going to methyl esters. And now we have developed some other

esters—and I don’t want to get into a long chemistry talk because

everybody will go to sleep on me—but we have developed some new

esters that even tie up the soy oil and the other vegetable oils

much better in terms of making polyers.

So there are all kinds of positive things in the relationship to

esters. And we have got the ester for paint and we have got a patent and it is being sold presently. And the technology is being sold

and it gives us all kinds of opportunities to try to get money back

to the farmer.

But it is not the methyl ester that you are used to in the soy diesel. It is another one using another product. So there are all kinds

of opportunity there and I think we are going to see more and more

esters being produced all the time.

36

Mr. PHELPS. So essentially your R&D funding has come through

Congress or is it the private sector?

Dr. FLANIGAN. No, most all of it has been from check-off funds.

Mr. PHELPS. Okay.

Dr. FLANIGAN. Now we are working over in the hog area as well

and that is all through some local state—we are looking at manure

incineration in some of those, and odor detection, odor measurement. That is coming from other sources.

Mr. PHELPS. I see. I see.

Dr. FLANIGAN. Other state sources, not federal sources, though.

Mr. PHELPS. The soy oil that you refer to, there are several advantages in your written testimony over petroleum-based oil. Is

lower cost you say, and——

Dr. FLANIGAN. Well, it is in this case because they have to go

through severe hydrotreating. But I think if you go in the markets

you are going to see—Rodney can tell me better what today’s price

is probably than I can. But it is going to be two dollars a gallon

or close to it. And so it is 25 cents a pound. Where gasoline, needless to say, is not that high, even with the rising prices.

So that is why you have always got to be very careful when you

are talking about these fuels when you want to look at them as

fuels. Because it is difficult to maintain economic advantage, which

I think you have got to have for the most part.

Now, Nick will argue with me there. He says with brands we

might be able to change that. Which is true.

Mr. PHELPS. Would you like to elaborate on that? Do you believe

it is?

Dr. KALAITZANDONAKES. Sure. We have many, many examples

right now where the bran is worth a whole lot more than the product itself in terms of how much money it brings relative to processing margins and so on. There are co-ops that have been very,

very successful in marketing their products as ‘‘farmer-owned,

farmer-controlled’’ or ‘‘farmer-produced,’’ and create a whole lot of

value out of that image.

So in many cases, processing may be a good way of adding value

and capturing some of the value. In many cases it is simply a stepping stone towards capturing value from other assets; in this case,

a brand.

Mr. PHELPS. In your opinion—I am going to call you Dr. Nickolas

if that is okay.

Dr. KALAITZANDONAKES. Sure. Absolutely.

Mr. PHELPS. In your opinion, I am interested in looking at your

managing innovation of value-added products. There needs to be

a—what is the single, most important coordinating factor? I mean,

if we have these centers set up similar to what we have in small

business and it is why I felt like the Chairman’s vision of bringing

agriculture and small business together was very resourceful.

How can it be made to convince farmers that they are in good

hands if you have a management problem, I guess barrier. You

need a success story as you have had, like we said in the soybeans

which Mr. Christianson has so ably indicated, how do we get there

past this organizational problem? Do we need strong leadership

somewhere? The private sector and government hand-in-hand?

37

Dr. KALAITZANDONAKES. Absolutely. And we need to put those

things together in such a way that they make sense. Managing new

technology fails typically in one, unique way; it doesn’t matter

what industry you are looking at. And that is bringing technology

to the right market and the right market to the technology.

In other words, putting those two together. A lot of very, very

good technologies fail when they get to the market because they do

not have a really good business plan or a good strategy for positioning.

In other cases creating value does not mean that you can actually capture any. So how you put this together right is by making

these functions go hand-in-hand.

In other words, the technology side and the business side have

to go together, and hopefully in a pro-active mode. The strategy

and the business plan go before the technology is actually developed rather than after. But in some cases we do have really good

technologies that we can market ex-post.

Mr. PHELPS. Mr. Watkins, thank you for your testimony, your

input from the Department’s standpoint. It seemed like one of the

main difficulties that farmers have faced, at least in the past when

trying to form co-operatives, and you have alluded to—all of you

have sort of referred to capital being so important in the process;

accessibility to capital.

Especially when we are talking about farmers who are already

in dire times. What is your Department doing to facilitate the—to

encourage individual farmers to participate in co-ops? Are there incentives or things in place to help decide that?

Mr. WATKINS. Well, thank you very much, Mr. Chairman, for the

question. Prior to 1996 farmers who wanted to join a co-operative,

a marketing and distribution co-operative, either had to use their

own financial resources to buy their shares in a co-operative, or

they had to go to a lender, borrow the money, and then they would

have to, in the normal underwriting of the loan, they would have

to pledge their assets.

They would either have to pledge their land, their house, put up

a personal guarantee, their next several year’s crop production, or

whatever. It made it very difficult for farmers to pledge their assets

because now they’re moving into other than agricultural production

but a new business venture. A lot of those business ventures did

in fact, fail and farmers did in fact, lose their property.

In 1996 the Agricultural Committee, through its wisdom, added

in the 1996 Farm Bill, an opportunity for my agency to use the

Business and Industry Loan Guarantee program to guarantee a

farmer’s purchase of stock in a co-operative. The incentive is that

a farmer now can go to a lender, borrow the money, and not have

to pledge his assets but pledge the stock that he purchased in the

membership co-operative.

Now that, in and of itself, is an opportunity and it should in fact,

create a groundswell of small producer’s participation in valueadded processing and production.

However, to get to that point they need to be educated. They

need to understand the opportunities of value-added processing;

they need to understand the economic opportunities. They also

need to be fully aware of the risk involved in participating in valueVerDate 20-MAR-2000 14:56 Mar 27, 2000 Jkt 062234 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 E:\HEARINGS\60375.TXT pfrm01 PsN: 60375
38

added processing. And we are in the process right now throughout

the Department of Agriculture, of providing that information.

We have the Co-operative Services Division within my agency.

They provide technical assistance, education and feasibility studies

to grower/producer groups who are interested in considering value

added cooperatives. Even before they decide to form a co-operative,

if they contact us we have people who are around the country who

go out and provide technical assistance and education.

In addition, the 1862 Land Grant Colleges and Universities,

which are predominantly agricultural universities around the country, many of them have Small Business Development Centers located on those facilities.

Farmers need to begin to access them as other small businesses

that are involved in whatever their industries are around the country, to gain access to technical expertise and assistance.

There are many other things, Mr. Chairman, that we are doing

in the Department. We are currently—we have developed the specific part of the regulation that will address the stock purchase

part of our B&I program. We have streamlined it, we have made

it user-friendly, we have made it efficient and less bureaucratic for

farmer groups who are becoming involved in value-added cooperatives to gain access through their local lenders.

Mr. PHELPS. So your long-range goals are somewhat in place?

Mr. WATKINS. Our long-range goals are in place. It is a highly

visible objective and goal and priority for the Department of Agriculture to move more small producers into value-adding processing

activity and to get them into niche markets.

And let me add, very recently I began discussing the development of a partnership with the Foreign Agricultural Service Agency in USDA. What they want to do—heretofore, they have focused

most of their time and efforts with big co-operatives in terms of

moving them into international markets.

They now understand that the philosophy in USDA is to develop

additional economic opportunities for small producers who are in

value-added. Well, one of the problems with putting small producers in value-added is that once you get into value-added you

need a market for the distribution and sale of your product.

Foreign Agricultural Service is partnering with us to help those

small producers who develop value-added co-operatives find opportunities to export their product in foreign markets.

So yes, we are well on our way to a long-term strategy within

the Department of Agriculture, focusing on value-added and small

producers and having them fully participating in that stream of

economic opportunity.

Mr. PHELPS. And what local agencies through your Department

actually will communicate that?

Mr. WATKINS. Well, all the agencies within Rural Development,

which would include my agency, Rural Business and Co-operative

Services. But it will include the Foreign Agricultural Services, the

Agricultural Marketing Service, Natural Resource Conservation

Service. So most of those agencies within Agriculture that have a

role or an involvement in either identifying market opportunities in

the international and within the domestic market, and those that

provide assistance directly to the farming community—which is the

39

farm services agency—and then my agency which provides the assistances to other than agricultural production businesses.

Mr. PHELPS. As I turn the chair back over to Congressman

Thune I realize that allowing farmers, it has been said could be an

advantage, to deduct from their taxes the dividends from their

membership in co-ops.

Is that a big problem? Is that something we can help develop

through your agency? I know it may take action through Congress,

but is that an encourageable item you think?

Mr. WATKINS. Frankly sir, I have not seen that as being an issue

for creating and for farmers going into value-added co-operatives.

It may be. It has not been an issue that has surfaced to me.

Mr. PHELPS. And it might be that Mr. Christianson is going to

elaborate on it because I know in your statement too, it caught my

eye that creating the capital formation plan, the securities laws

vary from state to state——

Mr. CHRISTIANSON. Well, with regard to taxes, any economic incentive that raises their return on their initial investment is beneficial. As the patronage comes to the producer today, it is considered normal income, so not only income taxes but also social security taxes apply to it unlike investments in other corporations. The

dividends that come to them should be taxed differently, I believe.

Any time you add value and increase the potential rate of return

on the investment, I think you are going to get more people involved.

Now with regard to securities, as you go across states, and again,

most value-added businesses are going to require large commodity

volumes. In the development phase, in order to raise capital from

farmers in other states like Minnesota, North Dakota, Iowa, the

hurdles to involve farmers from multiple states are different and

you end up doing the same thing four or five times, which is costly.

Our group itself decided not even to try in Nebraska because of

some of the securities issues in that state. So even though that

may have been an area that we may have gotten some interest—

and again, Minnesota Corn Processors had success expanding down

there—SDSP chose not to take that hurdle.

Mr. PHELPS. I see. Thank you very much.

Mr. WATKINS. Thank you.

Mr. THUNE [presiding]. If I might just—and forgive me if I am

asking questions that have already been asked—but elaborate on

some of the testimony and some I think line of questioning maybe

you have already gone down.

One of the things I was reading in a South Dakota publication

the other day from the Department of Agriculture was that the

number of producers who use computers in their operations is like

31 percent. Which would seem to me in this day and age, somehow

we have got to be pushing that up higher.

You know, if this in fact is a business operation that relies upon

information for decision-making, that somehow—and to me it

comes back to one of the things that we talked about and that is

sort of the education curve and how do you get this information

and this body of knowledge that you all are talking about, out in

the hands of actually the producers and whether or not there is a

federal role in that.

40

We all struggle with the current budgetary constraints that we

are under here at the federal level as to what should be the federal

role in terms of education, you know, and technical assistance. And

I am just curious to successful models with channeling information

for producers that want to add value to their products.

I mean, what is working out there? And if there isn’t something

what is the federal role? And I understand that Mr. Watkins is involved in that on a day-to-day level, but are there other ways, better ways that we can improve the technical assistance that we provide?

Mr. Christianson.

Mr. CHRISTIANSON. Well, let me respond as I look at successful

models, and I am going to take note of two particular local organizations in the Dakotas. First the Quintin Burdick Center on the

North Dakota State University campus has been focusing on providing education at the Board level for new generation cooperatives. The governance and responsibilities that a former

Board member has in running a value-added co-operative, particularly with regard to the size, structure, and organization of professional personnel they hire to manage their cooperative, is much different than that of the local co-operative they all have been very

familiar with in the past. The Quintin Burdick Center is trying to

address that issue and they are through the development stage and

I think can be used as one example.

Then in South Dakota, through farmer groups like the Soybean

Council, the Corn Growers, Pork Producers, as well as cooperatives

such as South Dakota Soybean Processors and South Dakota

Wheat Growers Association, have funded a non-profit organization

led by an executive director. We are trying to focus on learning

where the resources are so that a new farmer group coming along

may be able to do one-stop resource shopping, if you want to say.

The intent is to not replace the work of the Soybean Council or

the check-off dollars through the Pork Producers—but to help coordinate that. The other goal is to work together where help and

support is needed, either from the state level or from the federal

level. We don’t want different groups of farmers thinking that the

pie is a fixed piece and then fighting over it, but asking how do we

move the whole process forward?

Certainly the other models I think are a success, are those organizations that use check-off dollars like the United Soybean Board.

That is a farmer-directed group doing a lot toward trying to understand and develop additional markets. Why would not that type of

model also work toward farmers becoming owners of businesses?

And certainly the Small Business Administration has been successful in the business environment all the way along.

So I think there are several models out there that you can take

a look at. And then the question is, how can the federal government help with some of the funding sources to establish and maintain resource centers?

Mr. THUNE. Anyone else want to comment on that?

Dr. KALAITZANDONAKES. Well, I can give you another example

from Illinois where processing is not involved; where farmers got

together and formed an LLC and basically got into identity preserved markets. They have very innovative contracts to deliver to

41

specific end-users, specific soybeans from specific varieties with

specific properties. That adds value to them and to the end-user;

they share that.

So back to the point. I don’t think that there is any singular

model to be had, and that is part of what we are discussing here

in terms of the technical and business assistance; in that forming

the right strategy in particular markets, even particular local conditions, is part of how farmers can be helped.

I don’t believe that there is a cookie-cutter, singular model that

we can put in place and make it work.

Mr. THUNE. Okay.

Mr. WATKINS. Mr. Chairman, through our Co-operative Development Grant program, which is funded at the tune of about

$1,750,000 a year, we are able to fund non-profit organizations

within states that focus on co-operative development.

And in 1999 we funded about ten. The average grant to them was about $180,000 apiece. And they have been quite successful.

They have worked with local universities within their jurisdiction.

They have probably worked with Small Business Development Centers as well, and other resources within the state to encourage

grower groups participating in value-added processing.

That might be a model for the Small Business Committee to consider in the future.

Mr. THUNE. Well, it just seems to me that there are in the existing infrastructure, ways out there of doing this. To me, value-added

is really emerging as, not the salvation but certainly an important

part of the future of agriculture in this country.

And if we can redefine the mission or the role or whatever of

some of these existing mechanisms that we have in place to provide

that sort of assistance so they are more focused on, you know, cooperatives, value-added enterprises, things like that, it would seem

in my judgment to make a lot of sense.

But just one other question if I might. I see the Chairman is

back. I will be happy to yield back to him in just a moment.

One of the things that I have heard—I did it during the month

of August; a 36-county tour across South Dakota. Granted, that is

only about half of the counties we have in South Dakota, but I was

primarily in rural communities, smaller towns, towns that there is

a tremendous amount of frustration because of the economic difficulties that they are having out there.

And much of it is tied to agriculture. There are fewer and fewer

producers farming more and more land, and so you don’t have the

population base to support a lot of those small towns. So there is

a real sense of frustration and sort of, and in some ways almost

resignation, about where do we go from here.

But one of the things that everybody was focusing on in terms

of identifying, trying to define the problem of this whole issue: concentration. And I know Rodney, in your testimony you referenced

this situation with the railroad and how at least at the transportation level, the lack of competitive alternatives is dramatically impacting your ability to market your product at a reasonable price

and the cost of freight factored into that.

My question I guess for you and for anybody else who would care

to take a stab at it is, to what degree is this going to be a factor?

42

How is it going to impact and what can we do to address that?

There have been some suggestions that we come up with legislation

that would prevent for example, vertical integration; that would

prevent packers from owning their own livestock unless they are

ready for active slaughter, and some things that are legislative in

nature in terms of solutions.

And I don’t know that that is the track we want to be going

down. But it is a concern for producers and I am just curious what

your observations might be with respect to that issue.

Mr. CHRISTIANSON. Well, certainly what I would stress for a producer to make that investment, the concern of consolidation and

the market power of industry giants is a hurdle that they need to

get over.

I am not asking for any particular movement that prevents the

flow of world economics. The pressures we are experiencing and it

is not only happening in the United States, it is a world economic

issue driven by consumers and by the shareholders of large corporations.

We want to have a level playing field. You have heard from agricultural industries that want to have a level playing field in the

world market because different countries, depending on the socioeconomics of that country, have advantages and disadvantages.

I believe that small producer-owned co-operatives against the industry giants could be viewed and looked at in that same way.

There are areas of oversight that this government has that are

available to use oversight in regulating actions we consider anticompetitive in nature.

And let me refer to the Burlington Northern example. Now, their

motivation and their view of marketing is that they are providing

their customer marketing opportunities by allowing them to purchase meal from a variety of shippers located on the BNSF line. So

the BNSF believes that they are doing the market justice.

Our view from where we sit is that we have located our facility

and have made other capital investments to more fully utilize rail

systems, to put us as the high-quality, low-cost producer to particular market segments.

Now, what the BNSF has done is increase our transportation

rate to that particular location that puts our other competitors on

a level playing field with us. But if a company has invested capital

to expand their capacity so they have a lower unit cost, the end

user might as well go for that option.

One example in the written testimony is, we have shipped a fair

amount of our meal up to Sweet Grass, Montana to be exported to

the Canadian consumer. We pay $500 more for every car that goes

that direction even though we travel 212 miles less.

So from our perspective, the BNSF has taken an opportunity to

capitalize on our producers’ investments by keeping a little bit

more of the profits in BNSF’s pocket. And either the consumer or

SDSP is going to have to pay that.

Our approach is to try to introduce other transportation competition by first loading 1500 trucks with meal, shipping them 125

miles on South Dakota roads, and then reload them into the Canadian Pacific line. So we are not going to lay there and take that

43

business because it is 30,000/35,000 tons we have been putting

through there in the last two years.

That is our recourse today. We would like to have a recourse that

could challenge BNSF’s rate structure effectively. When our cost

per mile, due to the lack of competition, is 54 percent higher than

other suppliers on the BNSF, we don’t see that as just. But we are

willing to compete and deal in that market.

Chairman TALENT. Would the Chair yield just for a minute?

Mr. THUNE. If not the Chair, I will at least yield the microphone

with the Chair.

Chairman TALENT. No actually, I want you to continue because

I want to develop this record as much as possible. This is an initial

hearing and I am very hopeful the Committee will follow-up in this

direction because again as I have said several times, what I have

heard from the ag community—and in a united way.

I mean, there are certain things the ag community is debating

right now. But the importance of value-added, it isn’t. And Mr.

Watkins, if you have any contrary information on that please tell

me. But this is something I get a sense from every part of the ag

community that value-added is important.

And we are very glad to have you here today. We have not before. Just so often when we encounter Small Business issues they

were rural issues, they were ag issues. And so we did start a Rural

Enterprises Subcommittee and we certainly want to work with you

and the ag committee on all these issues and we are grateful for

the work the Department has done.

But I want us to follow up with this. And so I am going to have

to go. I am sorry I have had to duck in and out but I would hope

that you and Mr. Phelps if you want to, and others from the Committee with real experience on ag issues, would help us develop legislation or whatever we can do to help in developing these valueadded enterprises.

So I am going to let you stay in the Chair and please, as long

as the witnesses don’t mind, continue developing this record.

Mr. THUNE. Thank you.

Chairman TALENT. I will yield to Mr. Phelps if he has something.

Mr. PHELPS. I too, am going to have to go but I just wanted to

commend you again for your being able to identify the value of

these communities coming together, because agriculture is the

backbone of not only this Nation, but of course the hub of rural

America.

So to the Congresswoman, the ranking member who has given

me the opportunity I want to thank her because her interest, even

though she does not have a lot of agriculture——

Chairman TALENT. We are told that she has a farm in her district. And Ms. Vela ́

zquez is going to try and find it. But she does

have a farm and it really is—I want to also state for the record my

respect and appreciation to her for her cooperation. Because this is

not something that is immediately big in her district. But she recognizes the importance of it as well.

Mr. PHELPS. For those members of the first panel I didn’t get a

chance to say that I had the tee shirt, so forth. The only other

thing I could say that might increase the market would be these

biodegradable golf tees that I have seen. Very little I have used;

44

I don’t play much. But believe me, that could be an increasing market, especially the number I use trying to get off the tee.

Thank you for the opportunity.

Chairman TALENT. I yield back and I thank you, Mr. Thune. I

just would encourage you again, to put on the record anything that

you need. Mr. Christianson’s statements about how we need to put

some things in the law to give them some assurance they won’t get

snuffed out by some larger enterprises is I think important, taking

some of the risk out of this investment.

And we have to decide how much we can do and how much we

start getting into jurisdictional problems here, and I don’t want to

get any inside baseball-type things. But that is very interesting

and I had not heard that related before your testimony.

Mr. THUNE. I thank the Chairman for yielding back. I don’t have

any further questions. If anybody else would care to comment on

that last question on the concentration issue just for the record. If

not, we will conclude and let you all get to lunch.

Mr. WATKINS. Mr. Chairman, let me suggest that the concentration issue is very important to us at the Department of Agriculture,

and the Secretary’s Office has been involved in having studies done

and has created a task force within the Department to focus on

that issue.

Further, there is a task force that is comprised of the Economic

Council of the President that is also looking at the concentration

issues. So we are very much involved in it.

Let me also add that, you know, we have had considerable experience in the Department of Agriculture in forming co-operatives

and in forming value-added co-operatives, as a matter of fact. The

Co-operative Services program was created and has been in place

for 73 years. So we have a cadre of experts who are knowledgeable

in the area and they provide services and assistance throughout

the country in rural America.

And we serve on panels and participate with professors at the

various local universities who are experts in their field as well. And

we have had successes and we have had failures. I would just like

to go on record with a couple.

I mentioned in my testimony a sugar beet processing facility that

was created in Washington State. The Co-Op bank last year provided $120 million to this value-added group of beet growers who

wanted to create this facility. And they invested the money, they

built the facility, installed all of the equipment. And on the day

that they turned on the electric switch the equipment didn’t work.

They came to us this year and asked, would we guarantee a $20

million additional loan to the company, to the growers, for them to

now correct the problems and begin to operate their plant.

We did our review and analysis of transaction, they came in with

a business plan, feasibility studies. They convinced us that they

had the management and technical expertise now to go forward

and to operate this business and to be successful. And so we did.

We guaranteed the $20 million deal. So we are waiting to see what

happens.

In Maine, several years ago we financed a group of potato growers who decided that they wanted to do value-added to their potatoes so that their potatoes could compete with Idaho potatoes headVerDate 20-MAR-2000 14:56 Mar 27, 2000 Jkt 062234 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 E:\HEARINGS\60375.TXT pfrm01 PsN: 60375
45

to-head in the marketplace. They met all of our requirements for

a B&I loan guarantee. They borrowed about $8 million; they built

a new facility; they installed their equipment.

As a start-up business they had startup problems. One of the

major problems that they had was that they had miscalculated

their market and they had miscalculated their ability to enter that

market. And so they ran through their entire equity investment

that they made in their company and came back to us for additional financing.

Based on our review of the financials and our analysis of their

financials going forward, the company could not assume any more

debt. The only thing they could do was to find additional equity to

put in your company.

In the meantime, if they found that equity, we will put a moratorium on the payment of principal and interest on the debt until the

company could be restructured and reposition to be successful.

Lastly, they also have to find the management and technical expertise needed; not those of growers but those of business people who

have been in this industry, who know this industry, who are experts in this industry.

They have been able, in fact, to do that and just recently I got

an e-mail from one of my staff who said that he was shopping at

a Giant store in a local community here in Washington and he saw

this company’s potatoes in there; which is new because we haven’t

seen any in the local market since we financed this company.

We also have a group of 500 growers in North Dakota. They decided that they wanted to do value-added oils: cremly oil, sunflower

seed oil, other oils. They had their marketing and feasibility study,

they had their business plan, they had their management and executive team in place. And we thought that their deal was an outstanding deal and we agreed to provide the guarantees.

That was in 1995. They called me several months ago and asked

me would I, because of problems that they had in this startup business, would I waive their, or forgive, $2.5 million of a $5 million

loan?

Unfortunately, in the Business and Industry Loan Guarantee

program and in my agency which I tend to believe to be the business agency of USDA, we don’t forgive loans that we make to business people. If there is a problem and we have to foreclose, then

we foreclose and we sell the assets but we try to do the best that

we can to replenish the funds so that other business people who

are interested in their business activity in rural America can gain

access to these resources.

Long story short, yes, we would like very much to keep these 500

growers who decided to go in value-added processing, in business.

And we came up with several scenarios for them to stay in business, one of which was, we will not forgive the $2.5 million loan.

We will put a moratorium on the payment of principal and interest.

We will, as a matter of fact, not charge you interest for the next

20 years. We will allow you to pay us a minimum payment every

year based on the amount of profit that you make out of your business, but we want you to stay in business.

As I understand, they didn’t like that idea and decided not to accept it. Our only alternative is to foreclose on that plant, tear down

46

the assets, sell them to whoever is interested in buying them, and

close that business activity.

Doing value-added business is just as risky as any business that

the Small Business Committee has extensive knowledge on and extensive experience with.

The same businesses that are technology-based that are located

in urban and suburban communities, where you must know your

market, you must know that you have the technical and expertise

to enter that market, and that you are capitalized to the point that

you can withstand the barriers that will be thrown in your direction to keep you out of it.

We are not talking about new markets that these value-added

companies that are owned by growers are going to be participating

in. These markets and these products, for all practical purposes,

are already being produced. Someone in the middle is producing

the product. That person in the middle, that entrepreneur, that

business that is located in rural America, is the competitor.

So entering into value-added businesses is not as simple as it

may seem. It is very risky, it is very difficult. But there, if you do

it right, the opportunities for entering that business for growers is

phenomenal. Thank you.

Mr. THUNE. Well, and I guess producers look at this in some regards as sort of the last hope, and that is why we want to make

sure that everything is in place to do it right and there are some

very notable success stories. But understanding again that there is

a tremendous amount of risk in small business venture.

So I want to express my appreciation to the panel. I thank you

for your observations, insights. I look forward to exploring this

topic further in the future. I do think that there is a real crossover

between small business and ag.

I also serve on the Ag Committee but I can certainly speak from

firsthand experience that most of the small business in our part of

the world in a lot of ways, is tied directly to agriculture.

And so there is a lot of overlap there and these are issues that

are important I think to the future of this country since small businesses create a lot of the jobs. And I hope will continue to do that

and hopefully keep a lot more people on the farm, too.

So thank you again. We will, by unanimous consent, keep the

record open for an additional ten days. If there are additional questions, comments on behalf of members of the panel so that we can

get those answered. And I want to thank you again for coming, and

with that, the hearing is adjourned.

[Whereupon, at 1:14 p.m. the Committee was adjourned.]

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