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74–835 2001

REGROWING RURAL AMERICA THROUGH

VALUE-ADDED AGRICULTURE

HEARING

BEFORE THE

SUBCOMMITTEE ON RURAL ENTERPRISES,

AGRICULTURE, AND TECHNOLOGY

OF THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

WASHINGTON, DC, JULY 17, 2001

Serial No. 107–18

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

DONALD MANZULLO, Illinois, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

JOHN THUNE, South Dakota

MIKE PENCE, Indiana

MIKE FERGUSON, New Jersey

DARRELL E. ISSA, California

SAM GRAVES, Missouri

EDWARD L. SCHROCK, Virginia

FELIX J. GRUCCI, JR., New York

W. TODD AKIN, Missouri

SHELLEY MOORE CAPITO, West Virginia

BILL SHUSTER, Pennsylvania

NYDIA M. VELAZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

WILLIAM PASCRELL, New Jersey

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

JAMES R. LANGEVIN, Rhode Island

MIKE ROSS, Arkansas

BRAD CARSON, Oklahoma

ANIBAL ACEVEDO-VILA, Puerto Rico

PHIL ESKELAND, Deputy Staff Director

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE, AND TECHNOLOGY

JOHN THUNE, South Dakota, Chairman

ROSCOE BARTLETT, Maryland

FELIX GRUCCI, New York

MIKE PENCE, Indiana

BILL SHUSTER, Pennsylvania

TOM UDALL, New Mexico

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

DAVID D. PHELPS, Illinois

BRAD CARSON, Oklahoma

BRAD CLOSE, Professional Staff

(III)

C O N T E N T S

Page

Hearing held on July 17, 2001 ............................................................................... 1

WITNESSES

Nelson, Wayne, President, Communicating for Agriculture and the Self-Employed .................................................................................................................... 2

Jorde, Terry, President & CEO, Country Bank, USA .......................................... 5

Reis, David, President-elect, Illinois Pork Producers Association ....................... 8

Truitt, Jay, Executive Director for Legislative Affairs ......................................... 11

APPENDIX

Opening statements:

Thune, Hon. John ............................................................................................. 27

Udall, Hon. Tom ............................................................................................... 32

Prepared statements:

Nelson, Wayne .................................................................................................. 39

Jorde, Terry ....................................................................................................... 45

Reis, David ........................................................................................................ 56

Truitt, Jay ......................................................................................................... 61

(1)

REGROWING RURAL AMERICA THROUGH

VALUE-ADDED AGRICULTURE

TUESDAY, JULY 17, 2001

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE, AND TECHNOLOGY, COMMITTEE ON SMALL BUSINESS, Washington, DC.

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

2360, Rayburn House Office Building, Hon. John R. Thune [chairman of the Subcommittee] presiding.

Chairman THUNE. Let’s get this hearing this morning under way.

I want to welcome our witnesses this morning and others who are

interested in the subject. This is a subject that is near and dear

to my heart, and today’s hearing has been called to discuss how we

can regrow rural America through value-added agriculture.

Agriculture is the lifeblood of many rural States’ economies, and

value-added enterprises will greatly aid the revitalization of rural

communities. Producers want and need to reach up the agriculture

marketing change and capture the profits generated from the processing of raw commodities in order to compete in an increasingly

concentrated marketplace.

The family farmer is America’s original small business owner,

and in today’s concentrated ag marketplace, producers have often

been forced to accept lower prices for their commodities. This trend

toward consolidation has been very pronounced during the last decade. For example, the hog industry has consolidated rapidly with

the four largest firms’ share of hog slaughter now reaching roughly

57 percent compared with 32 percent in 1980. In the cattle sector,

the four largest beef packers account for about 79 percent of all cattle slaughtered, compared with 36 percent in 1980.

In addition, from 1984 to 1998, consumer food prices increased

3 percent, while the prices paid to farmers for their products

plunged 36 percent. The average wheat farmer, for instance, earns

about 3 cents on every box of Wheaties and about 5 cents on a loaf

of bread.

The problem facing Congress is how to help farmers become price

makers instead of price takers. To many of us, expanded opportunities for value-added enterprises are the answer.

While producers have great interest in pulling together to add

value to their products, two primary barriers stand in the way.

First, producers do not have the technical expertise to launch extremely complex business ventures like value-added cooperatives.

Farmers are outside their arena when it comes to putting together

2

processing plants. Second, producers are currently cash-strapped.

Even if enough investment capital could be accumulated to initiate

development of producer-owned value-added processing, many of

the consolidated players in the market could squeeze producerowned entities out before becoming profitable.

To help jumpstart the process, I, along with my colleagues Jo

Ann Emerson of Missouri and Dennis Rehberg of Montana, have

introduced two bills to assist farmers who want to create new

value-added enterprises. H.R. 1093, the Value-Added Development

Act for American Agriculture, provides $50 million in grant money

to States to form agriculture innovation centers. The ag innovation

centers would provide desperately needed technical expertise, engineering, business, research and legal services to assist producers in

forming producer-owned value-added endeavors.

H.R. 1094, the Value-Added Agriculture Investment Tax Credit

Act, allows producers to receive a 50 percent tax credit on investments in producer-owned value-added enterprises. The bill provides

a maximum tax credit benefit of up to $30,000 per year per producer, and the tax credit may be applied over a 20–year period.

Congress needs to help provide opportunities for producers to

create new value-added ventures, and these two bills are an inexpensive way to accomplish that very goal.

Again, I want to thank our witnesses for appearing before our

Subcommittee this morning, and we look forward to hearing your

testimony.

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

Chairman THUNE. Before we begin receiving testimony from the

witnesses, I do want to remind the witnesses that we would like

each of you to keep your oral testimony to 5 minutes. In front of

you on the table is a box, which is not lit up yet, but should be,

which will let you know when your time is up. When it lights up

yellow, you will have 1 minute remaining, and when 5 minutes has

expired, a red light will appear. Don’t worry. There is no trap door

or anything there, but that should signal that you should begin

wrapping up your remarks.

Our first witness today is a gentleman from my home State of

South Dakota, who has a long history of involvement in agriculture

and a very keen interest in this particular issue. He is Mr. Wayne

Nelson, a grain farmer from Winner, South Dakota, which is out

in God’s country in South Dakota, west of the Missouri River,

which is where I call home. And Wayne is the president of the

group Communicating for Agriculture and the Self-Employed, and

also is, as I happen to know from visiting with Wayne and from

past history, he is an active farmer as well in the Winner area.

So we will start, Wayne, with you and welcome you to the Committee and look forward to hearing your testimony.

STATEMENT OF WAYNE NELSON, PRESIDENT, COMMUNICATING FOR AGRICULTURE AND THE SELF-EMPLOYED,

WINNER, SD

Mr. NELSON. Thank you.

Chairman Thune and members of the Committee, I thank you for

the opportunity to speak to you today about an issue that has long

been a priority to the members of our organization, an issue that

3

we believe is a vital part of long-term strategies for the success of

rural America, how to spark the development of successful valueadded agriculture enterprise.

As the Chairman said, I have a farm in western South Dakota;

been farming there with my wife, Pat, for 30 years. But I also have

the privilege of serving as president of Communicating for Agriculture and the Self-Employed. CA is a national nonprofit rural organization made up of farmers, ranchers and rural small business

people from across the Nation. We work on a variety of legislative

and public policy issues, but none are more important than the one

goal of keeping rural America alive and healthy in terms of our individual farmers and our rural communities.

Mr. Chairman, we want to thank you for calling this important

hearing to discuss ways to enable value-added agriculture to help

farmers and build new jobs and a stronger economic base for rural

communities. There are many reasons value-added agriculture development is important, but we feel the most fundamental reason

is simply low farm income. This is the fourth consecutive year of

drastically low farm prices. Today on my farm in South Dakota, we

are preparing to harvest wheat in the next few days. The price of

wheat is about 2.60 a bushel, which is about a dollar a bushel

under the cost of production on my farm.

The markets have been consistently low for all the major crops.

Livestock and dairy prices have swung widely, but the damage of

low price periods has outweighed recent periods of recovery.

The second reason to strengthen value-added agriculture has to

do with the changes under way and the structure of the farm economy. It is now abundantly clear that vertical integration in agriculture is here to stay. This is a cause of great worry to many

farmers. But the results of this trend are by no means necessarily

bad. Vertical integration can have many benefits. The question is,

can farmers participate, and will they share in the rewards?

Vertical integration from the farmer’s field to the grocery shelf offers a better opportunity to better line up supply with demand.

Both of these opportunities, if the new system is working right,

should result in additional income for farmers in this kind of a system.

In this new farm economy, the old tools we have used to try to

shore up and protect farm income simply aren’t enough to do the

job. We need a bigger tool box and some new tools. CA believes

that it is vital that we continue to have farm income support programs. The last 4 years of low prices makes it clear the farm programs have been and will continue to play a vital role in providing

a safety net for farmers.

CA also sees a need for new policies and programs involving education, oversight, and regulation of contracting. We also see a need

for stronger Federal antitrust oversight and an effort to preserve

competition in agricultural markets and supply chains.

We commend the Chairman and others for introducing H.R.

1526, the Agriculture Competition Enhancement Act, which would

put limits on mergers to prevent excessive concentration. We also

believe that one of the best ways to address vertical integration is

to find ways for farmers to participate as equity holders of valueVerDate 11-MAY-2000 10:54 Sep 20, 2001 Jkt 074835 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 E:\HR\OC\B835.XXX pfrm01 PsN: B835
4

added enterprises, both cooperatives and through various joint ventures.

We don’t want the landscape of rural America to look like a few

giant farms and a few giant corporate processing facilities located

hundreds of miles away in large cities. We like the present mix of

family farms, and would like to see processing facilities located in

rural communities providing more jobs and income.

In my home State of South Dakota, we have an example in a

small town in eastern South Dakota. Farmers are operating their

own soybean processing facility that has created a better market

and a better price for their product.

We think there are some new tools that would also help. We offer

our support and encouragement to approve H.R. 1094, the Farmers

Value-Added Agriculture Investment Tax Credit Act. As you know,

this bill calls for showing—allowing producers to receive a 50 percent tax credit on investments and producer-owned value-added enterprises. The tax credit could be for up to $30,000 a year and applied for over 20 years.

Additionally, the companion bill, H.R. 1093, calls for USDA to

administer grants that would go for establishing innovation centers

to provide technical assistance, market and business development

services for the new value-added ventures. These are good legislative proposals.

We also believe that it is important for us to find ways for new

beginning farmers to get started in agriculture and to participate

in value-added agricultural enterprises. CA would like to see enacted a bill that would exempt State Aggie Bond loan programs

from the overall bond cap. This proposal is included in H.R. 2347,

introduced by Representative Nussle, that is the TERFF Act, the

same ag package that was introduced by Senator Grassley in the

Senate a couple of months ago. We would also like to see a legislation develop that would allow the Farm Service Agency loan guarantee to be used on Aggie Bond loans. We support the entire H.R.

2347, the entire TERFF package, which has some very good ag tax

incentives to help both farmers and the rural communities that the

farmers serve.

In summary, CA believes we need new additional tools in the agricultural policy tool box to put our family agricultural system back

on sound footing. Value-added agriculture is not a panacea, but is

one of the more important strategies that we need to pursue more

seriously than we have in the past.

We have all talked a good story about value-added agriculture

and the need for farmer participation for many years now, but the

truth is we have not—it has not been an easy goal to achieve, and

we need to work harder at trying to achieve this goal.

Thank you very much, Mr. Chairman.

Chairman THUNE. Thank you, Mr. Nelson.

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

Chairman THUNE. And I neglected to mention earlier, and I

should have, the gentleman from Pennsylvania, Mr. Shuster, is

with us, and we have now been joined by Ms. Moore Capito from

West Virginia and the Ranking Member of this Committee, Mr.

Udall from New Mexico.

5

And I would like to open up if anyone would like to make any

opening remarks, or we can proceed with the witnesses. Anybody

have a comment?

Mrs. CAPITO. No.

Mr. UDALL. I would just ask that my opening statement be put

in the record so we can get directly to the witnesses, Chairman

Thune.

Chairman THUNE. Very good.

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

Chairman THUNE. I appreciate your comments, Mr. Nelson, and

we will now turn to Ms. Terry Jorde, who is president and CEO

of the Country Bank, USA, Cando, North Dakota. Ms. Jorde is also

a member of the Independent Community Bankers of America,

which represents a lot of the small community and independent

banks in rural areas of the country, places like many of us represent here this morning.

So we welcome you to the panel and look forward to your testimony.

STATEMENT OF TERRY JORDE, PRESIDENT AND CEO,

COUNTRY BANK, USA, CANDO, ND

Ms. JORDE. Thank you, Chairman Thune and members of the

Committee. And thank you for holding this important hearing. As

you said, my name is Terry Jorde, and I am on ICBA’s Agricultural-Rural America Committee and president and CEO of Country

Bank, USA. Our agricultural bank is located in the small community of Cando, a town of about 1,300 people in Towner County,

North Dakota. I have lived in Cando for 22 years, and I am married to a potato farmer.

Over three-fourths of the community bank members of the Independent Community Bankers of America are located in communities of under 20,000 people; 86 percent are in communities of less

than 50,000. Our membership has a strong interest in ways to help

rural communities diversify and add value to ag commodities. Our

bank has tried to be a catalyst for rural development and has

worked hard over the past decade to create new jobs.

Cando established an economic development group called the

Durum Triangle Development Corporation back in 1978. That organization has now evolved into a countywide development corporation whose nine-member board consists of two community bankers

and an attorney, our hospital administrator, a city council member,

a county commissioner and various other people from our county.

This group, along with two local banks in Cando, financed the first

totally integrated pasta plant in the Nation.

About 20 years ago very little durum wheat was milled in North

Dakota. Now, well over 10 percent of all U.S.-produced durum is

being milled there. Pasta plants such as this one have created over

500 jobs in my local area.

Our bank has also helped originate a loan to a local foundry that

casts small agricultural implement parts. We were able to convince

a Canadian foundry owner to locate an American plant in Cando.

We brought lots of people together with various types of expertise,

a couple of bankers, an attorney, a State legislative representative

and the president of the local electrical cooperative. We worked toVerDate 11-MAY-2000 10:54 Sep 20, 2001 Jkt 074835 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 E:\HR\OC\B835.XXX pfrm01 PsN: B835
6

gether to create a financial package utilizing State and Federal

programs, an example of community involvement, to attract new

business ventures. This business opened in 1995 and now has

about 90 employees.

Let me suggest four basic principals for rural development

through value-added initiatives. Number 1, target resources to

rural communities based first on population. Number 2, provide

tools to complement, not compete with, the private sector. Number

3, target resources to various sizes of businesses, including individuals. And, number 4, maintain the population infrastructure.

First we must target resources to rural communities. Given a

choice, new business will always locate in urban areas unless given

an incentive to do otherwise. The labor pool is larger, and the risks

are lower. But we do need to create new jobs in rural areas if we

are to survive. This implies a population-based criteria such as the

business and industry programs required that loans go to communities of 50,000 or less.

Targeting rural areas provides off-farm jobs, maintains the local

tax base, maintains population which can keep local leadership in

a skilled work force, and maintains the infrastructure and services

needed to sustain economic life.

Second, we should complement efforts of the private sector. Rural

bankers are keenly aware that the future of their locally owned institutions are directly tied to the future of their rural communities.

With thousands of small banks in rural areas, there is a vast network already available to act as catalyst to bring together people

and leverage resources to attract new business opportunities.

Greater use of guaranteed loan programs would be one obvious

tool. Small bankers can also participate in larger loans, especially

if they have guarantees.

Third, let’s not forget about individual entrepreneurs. For example, one of my customers is a farmer who started a business that

uses flax straw to make 20-foot erosion control logs that are

shipped all over the country to minimize erosion after flooding and

forest fires. He is further expanding his business to make hanging

flower basket liners for horticultural use.

He bought a closed schoolhouse for $1 for the manufacturing site,

and our bank has helped to fund this value-added project with the

help of an SBA 7(a) guaranteed loan. My point is that he began as

just one individual entrepreneur.

Finally, we must maintain population and infrastructure. The

2000 census revealed that in the 1990s, 676 counties, primarily

rural agricultural counties, lost population. Despite the efforts in

my county, we lost nearly 21 percent of our population. At some

point populations can fall below a critical mass, meaning the community is headed for an irreversible decline because they lack the

human resources needed to remain viable.

ICBA welcomes your legislative efforts to help producers capture

more from their raw products through value-added processing. H.R.

1093 provides grants to create special innovation centers to provide

much needed technological expertise to assist producers in forming

their own value-added business. H.R. 1094 provides a tax credit for

investments by farmers in value-added businesses. Farmers, like

everyone else in rural America, are limited in amounts that they

7

can invest. Such proposals have merit, especially if they are targeted to the rural communities. Congress should consider combinations of tax credits, grants and loan guarantees in ways that can

ensure community bank participation.

Mr. Chairman, there are other suggestions in my written statement for tax incentives and real development initiatives such as

Subchapter (S) reform for community banks, greater use of ethanol,

increased deposit insurance and index it to inflation. It is a source

of funding for the community, but hasn’t been raised since 1980,

eroding its real value in half.

Increase funding for USDA’s Business and Industry Guaranteed

Loan Program. Last year almost 400 projects could not be approved

due to lack of funding.

Limit or eliminate fees on guaranteed loan programs in rural

areas. The administration’s budget for both USDA’s B&I Guaranteed Loan Program and SBA loan programs recommend new fees.

To deal with some of these budgeting issues on a more permanent

basis, we suggest that Congress pass legislation prohibiting USDA

and SBA from raising loan fees without Congress’s approval, and

establish a large pilot program that would eliminate fees on small

business loans in rural areas. Eliminating fees would attract greater participation and enhance the strength of the portfolio. If fees

are too high, only high-risk ventures will seek financing through

SBA, thus increasing SBA’s potential for losses.

We need greater broadband access in rural areas. And again, we

also agree that we need to enhance the Aggie Bond Program.

And finally, Mr. Chairman, rural America has a critical need for

equity capital. The Center for the Study of Rural America recently

explored the issue of attracting equity capital to rural areas. They

concluded that few companies with high growth potential are located in rural areas. Urban areas can attract equity capital much

more efficiently than rural areas. Creating local wealth that is locally controlled should be an essential goal, and a double bottom

line is needed, both a good rate of return, but also providing the

rural communities with a major economic boost, like jobs.

Any serious attempt to boost the supply of equity capital has to

include banks. The ICBA has worked with the Coalition on Legislation to create a rural equity fund to help spur business development in rural communities. The equity fund would encourage private investments and value-added agricultural enterprises and

small business start-up and expansion. A healthy rural community

obviously needs many types of rural businesses. Unfortunately,

large venture capital funds are not interested in focusing on rural

America. There is plenty of venture capital for Silicon Valley, but

not much for the Red River Valley.

Mr. Chairman, I thank you for the opportunity to participate,

and we look forward to working with this Committee. I would be

happy to answer any questions.

CHAIRMAN THUNE. Thank you, Ms. Jorde.

[Ms. Jorde’s statement may be found in appendix.]

Chairman THUNE. And we next will hear from Mr. David Reis,

who is the president-elect of the Illinois Pork Producers Association. Mr. Reis farms and lives in Willow Hill, Illinois. Mr. Reis.

8

STATEMENT OF DAVID REIS, PRESIDENT-ELECT, ILLINOIS

PORK PRODUCERS ASSOCIATION, WILLOW HILL, IL

Mr. REIS. Thank you.

Chairman Thune and members of the Committee, as you said,

my name is David Reis. I am a pork producer and a fifth-generation family farmer from Ste. Marie. I am currently serving as president-elect of the Illinois Pork Producers Association, and it is an

honor to appear here today before the Subcommittee on behalf of

the over 240 members who are independent pork producers that

make up our newly formed cooperative to share with you some

thoughts of what we were trying to accomplish in this ever-changing agricultural industry.

As has been said before, like many industries in this country, agriculture is truly going through a period of extensive change and

consolidation. The result is the family farm is giving way to a system of contracted and integrated corporate operations. While some

producers and organizational groups have resorted to spending

their time and resources trying to stop this trend, we at American

Premium Foods have chosen to be proactive and engage in activities that will allow us to not only control our own destinies, but

also to create more jobs and preserve rural economic activity as

well.

In our industry, the only way for family farms to survive this

consolidation is for them to coordinate and capture the profits from

processing their current commodity, live hogs, into value-added

food products. We must stop selling hogs and begin marketing

pork.

American Premium Foods Co-op was organized in late 1999 after

a year of business plan development and membership recruitment.

We plan to construct a pork packing and fresh processing facility

that is producer—wholly producer-owned. The plant will be capable

of handling 2,800 head per day on a single-shift basis. Each carcass

will be individually tracked through the plant, and producer members will be paid for the wholesale value of the primal cuts for their

hogs. The profits from additional processing will be paid to them,

individual members, according to the producer’s percentage owner- ship in the plant. Our $30 million facility will employ 210 people

and have an annual payroll of approximately $6 million.

We have, during the course of this project, received a lot of support from various State agencies and groups wanting us to get up

and go, and we really don’t have a business model to follow in the

United States, producer-owned cooperative. There are some smaller

ones, but none of this size. Department of Commerce and Community Affairs, Department of Ag, even the State of Illinois issued us

a $1.7 million grant to help us with our start-up costs, and just a

couple of weeks ago we found out that we were awarded a $500,000

grant from the USDA through their Value-Added Agricultural

Product Market Development Program that was new last year.

Our project, however, hasn’t been without its fair share of frustrations and attacks from the industry critics, because we are the

first venture of this size. We had no business plan to model. We

were deemed high-risk start-up. We were even told by some people

to be aware of snake oil salesmen; that this project, a project of this

size, just couldn’t be put together by farmers.

9

You have heard it mentioned here before that most of the producers’ equity and ability to invest in such a project was wiped out

with the 8-cent hogs in 1998.

As you can tell, it was easy for people to sit back and give us

reasons why we couldn’t do this, but our group of directors and the

leadership has held its course for 21⁄2 years now. We believe that

what we are trying to do is worth fighting for because we feel what

is at stake is our independent operations. And everyone from the

local extension office to the commodity groups to the halls of Congress are promoting value-added. And I can tell you it is not that

easy, that these projects just don’t happen overnight. But the

longer it takes to get these things up and going, the more consolidation continues.

It was just announced a few weeks ago that Seaboard Corporation was scrapping their plans to build a new plant in Kansas,

which further backs up our beliefs that the only way that increased

growth in the packing industry is being incurred is by acquisitions

and mergers. They are coming into the smaller plants, the bigger

packers, and buying them. So they are really not increasing shackle space, they are just buying up other plants. And we have all

seen in recent weeks with the high cost of gasoline and fuel what

happens to an industry when they quit investing in itself. And it

is a major problem with the shackle spaces that are available in

the pork and beef industry.

So what can Congress do to help? We need common-sense solutions and assistance if more projects such as ours are going to successfully maneuver through the critical period of planning and

start up. Whether it is beef or pork packing plants, soybean crushing, ethanol, wheat, aquaculture or one of the other value-added

concepts being discussed, oftentimes the difference between success

and failure is the amount of time and money spent doing the preliminary work. These ventures need assistance in hiring the best

firms to conduct the feasibility studies, legal representation, engineering, marketing, business plan development and so on.

We in the pork industry in America know how to raise pork better and more efficiently than anyone in the world, but we need a

little boost when it comes to becoming better business owners in a

broader sense when it comes to a project this size. That is why we

are so excited about Congressman Thune’s value-added agricultural

package. In fact, when I heard about it from Brad, I almost leaped

out of my chair because I testified a month ago, and two of the

things they suggested was a tax credit bill and block grants to

States. So this is common-sense legislation, and I hope we can

move it forward.

We feel that both 1093 and 1094 will address two major hurdles

that co-ops face as they develop from the initial vision stages all

the way to becoming profitable ventures for their members. With

1093, I can’t explain how many dead-end roads we went down, programs we found out that were available after the fact, just how

many ideas and support from people we could have got if there was

a State-run co-op development center in place. They need to be

State-run because they need to be relatively close. There is a couple

in Missouri, but, you know, we are all on shoestring budgets, and

sometimes you have got to visit these offices several times a month.

10

And if every State had one that was local, the producer could go

there. There are also a lot of rules and programs that are just different in each State.

So in May of this year, the Illinois Legislature passed a bill that

creates the first AgriFirst Program, and its ultimate goal is to become a DECA-like program that can help fund and do things for

agriculture. But up front it is just going to be a program where it

can be the incubator center for knowledge and business plan development and so forth. So this would tie in great with that. Illinois

could apply for one of these grants, and it would help them fund

their program at a much higher rate.

With regards to 1094, some say that the tax credits are always

a longshot. Sometimes I think that they don’t work hard enough

on them. But this puts incentives where they do the most good in

established projects that have come to fruition and will enable the

participating members to recover more quickly their initial capital

investments, which in turn make the co-op more profitable, which

in turn allows the members to reinvest their money back through

their communities, and this is why we are here today.

I really encourage Congress to push for these tax credits. I know

it has got to go through another Committee, Ways and Means, but

these are both excellent bills, and I think most of the commodity

groups, if not all of them, are going to be behind them.

I am running short on time. But from the Small Business Administration I think Terry pointed out a lot of things. The fees and the

application process makes a lot of these unavailable to ag projects

this size, a lot of $150,000 loans and such, and we are doing a $30

million project. So perhaps the Small Business Administration

could do a better job of cross-selling their programs. If we go in and

ask for what is available, maybe they could say, go to this one, or

go to that one. Sometimes I think they just say, well, this is what

we got, and that is it.

In closing, Mr. Chairman and members of the Committee, the

producers that are in our particular co-op have agreed to lay their

operations on the line and invest what little capital they have left

into this project. Two years of holding the membership together, a

project that hasn’t been built yet really says a lot about eight hogs.

They have hung in there, and they have hung in with the board

of directors. We should be finishing up financing this summer, and

hopefully we will start this fall. But the future of the independent

pork producers are hinging on our success. They are a key ingredient to the sustainability of the landscape. They eat corn, they eat

soybeans. And our industry is changing rapidly. And if we can

work with Congress collectively, maybe we can come up with ideas,

common-sense ways to preserve the livelihood of the pork producers throughout the Midwest.

Thank you, Mr. Chairman, and I would be happy to answer any

questions as well.

Chairman THUNE. Thank you, Mr. Reis.

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

Chairman THUNE. We will get to questions in just a moment, but

our final witness this morning is Mr. Jay Truitt, who is executive

director for legislative affairs for the National Cattlemen’s Beef Association.

11

Mr. Truitt, it is good to have you here this morning, and please

proceed.

STATEMENT OF JAY TRUITT, EXECUTIVE DIRECTOR FOR LEGISLATIVE AFFAIRS, NATIONAL CATTLEMEN’S BEEF ASSOCIATION

Mr. TRUITT. Thank you. And, again, Mr. Chairman and members

of the Committee, we thank you for the opportunity to be able to

speak to you today.

Again, I am here today on behalf of the National Cattlemen’s

Beef Association, which is the trade association that represents

America’s cattle farmers and ranchers and is also the marketing

organization for much of what takes place in the beef industry. We

are proud to be the leader in the Nation’s food and fiber system.

Beef is the largest segment of agriculture, and, again, we are proud

of that. It is something that we are pleased with.

We, too, have gone through dramatic changes. We feel that our

rule as an initial organization is to begin to lay the groundwork so

that the legislation, as it is before the Committee today and has

been before this Committee in the past, has an opportunity really

to work.

The beef industry, not unlike the pork industry, has seen a dramatic shift and a dramatic change in the respect that I would like

to talk about this morning. And what has been of key interest to

us was our constant and ever-present decline in market share that

had gone on for about 20 years. We realized that we were in trouble a number of years ago and began to do some strategic planning

and really get focused on where that was going to change and how

we could turn those numbers around. A little bit later I think I can

explain why we have turned those numbers around, and we are beginning to see beef demand increase and have continued to see that

increase for the last several months.

Seventy percent of the total U.S. Beef volume that moves

through the marketplace is moved through the retail outlet. Over

the past several years that has been a pretty consistent number.

We are beginning to see some changes there, though, and how that

beef moves through those retail outlets has taken some dramatic

changes.

We look at beef consumption numbers in the United States, and

not to slight my friends from the pork industry, but we are still

number 1. We are proud of that. We like to point that out again,

as I said earlier. But at 66.2 pounds per person per year, we know

that there is a huge marketplace out there now, and, again, we

hope that that number will continue to increase.

We started laying the groundwork in the mid-1980s and really

got focused late in the 1990s at NCBA in trying to figure out ways

that we could make products more usable for consumption, and

also that we could begin to develop some of the technology and discover many, many technologies. That made it possible for anyone,

from producers that form together in a small marketing organization all the way up to the largest members of our industry, to be

able to move into the next generation of retail consumption, which

we believe is beginning to arrive.

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Just 3 years ago, heat-and-serve entrees were something that

probably no one really thought about a whole lot. Today it has become a huge business for us, and the convenience section in the

fresh meat case, which was zero again just a few years ago, is now

$117 million. That is something that we are very proud of, and it

has been a great success story.

When you look at some of those individual successes involved in

creating those products and developing those products, what we

find is that the incentives that were put in place, in some part because of NCBA’s use of check-off dollars, to run contests and promotions that help reward people that were creative and looked for

solutions in the retail outlet, but also producers that took the technology that we had found through our research and development

programs and were able to apply them at whatever scale was appropriate and really become extremely successful—and there are a

number of cases where we have seen heat-and-serve products now

that are in the marketplace that started in someone’s kitchen, and

we are as proud of that as we can possibly be, and we think it is

a huge part of the future of the beef industry. And, again, we see

our role in making sure that they have some the basic technical

and physical tools that are needed in some cases to make sure that

we can move in that direction.

New products, again, are those promotion programs, and those

research projects have been funded by our check-off dollars that

producers across this Nation contribute in. NCBA mentions those

dollars for the Cattlemen’s Beef Board, which is a hundred-plusmember board designated by the Secretary to administer that program, and we are very pleased with the effect that that has had

on our industry. We think that that is one of the key reasons why

now for eight quarters in a row beef demand has been increasing,

and in large part it is because of these new product areas that have

moved in and began to take up space in the retail counter in a positive way, from our perspective.

Category management tools and the mechanisms that will allow

us to actually move into the marketplace have become a key component in the way that we have redesigned the marketing of products that allow producers to find the space where they fit in the

retail outlet. We think that is essential.

Again, in closing, we would to say that—and I spent a great deal

of time working with Mr. Talent. I spent a lot of years in Missouri

and on the ground working with him on these programs.

I notice that all of you have been very focused on trying to address the needs of producers, and in some respect probably consumers as well, but rural communities around the country, and I

think we are on the right track. And I myself am a participant in

a couple of new-generation cooperatives. My family has been in the

cattle business for a couple of hundred years or more now, and we

see it as the way that we continue to remain engaged and maintain

some of the profitability.

I have a lot of respect for the gentleman to my right because I

realize after being one of the latecomers exactly how much work

goes into these projects, and any assistance that you can provide

to that process, whether it be in technical information, expertise or

just general aid, is obviously helpful.

13

On the tax and credit issue related to the legislation, obviously,

it is a huge investment, and from a producer’s standpoint, it is an

investment that probably means that there will have to be sacrifices made. Any way to lessen the pain of that investment is obviously a step in the right direction.

And again, we commend you, and, Mr. Chairman, thank you for

this opportunity to address the Subcommittee. We thank you very

much for all the hard work that you do, and I would be happy to

answer any questions as well. Thank you.

Chairman THUNE. Thank you, Mr. Truitt.

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

Chairman THUNE. And thank you to all the panelists for your excellent testimony, and just a couple of things that—one observation, and that is, Mr. Nelson, you refer in your testimony to something that I think is important in this, too, and that is that we

have seen this increasing level of concentration within the agribusiness sector, and, frankly, I think we need some—a new look at

antitrust legislation in that area, the bill that you referenced, the

bill that I introduced changing the level of scrutiny that we apply

to agriculture mergers and really forces us for the first time to

focus on the impact on prices paid to producers, which is something

it hasn’t been a part of.

And so I say that, realizing that that is probably a more difficult

thing to get done, but I also think that it is very important for this

Congress to begin to look with a higher level of intensity at what

is happening in the marketplace out there and the impact it is having as you see this increasing level of concentration. But that is

something that obviously we are going to have to build support for

out here, and changing antitrust law is no easy feat.

In the meantime, we do, I think, have to take as much control

of our destiny as we can in the industry of agriculture, looking at

ways that we can reach up the ag marketing chain and capture

more of the value of the products, the commodities that we grow

in rural areas. And, Mr. Reis, you had mentioned that we have got

to quit selling live hogs and start marketing pork, and that really

is—and, Mr. Truitt, you alluded to that as well, that those are all

things you have got to start thinking about, what your market is

out there, and how do we come up with ways of meeting those demands in that marketplace and processing and adding value to the

things that we grow in rural areas.

So it is a very timely subject, one which I think we, again, need

to look at as a Congress, as policymakers, as to what we can do

as policymakers to provide that kind of activity.

Just a couple of questions. One—I guess I think you mentioned

in your testimony—a couple of you did make reference to the SBA

loan programs. And I guess my question would be how beneficial

are the SBA loan programs to rural America? If they are not, how

can they be improved? And I think, Mr. Reis, you had noted in your

testimony that in some cases SBA loan programs aren’t designed

for projects as large as yours, and yet, Ms. Jorde, you had mentioned that some of these programs need to be targeted to smallertype operations and types of projects. And so there is—I mean,

there are kind of conflicting points of view about how the SBA proVerDate 11-MAY-2000 10:54 Sep 20, 2001 Jkt 074835 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HR\OC\B835.XXX pfrm01 PsN: B835
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grams are currently designed, how they work, and so if any of you

would care to comment on that, I would appreciate hearing that.

Mr. REIS. I think the program is designed for situations that she

gave examples of. If I want to market my meat, and there is a particular individual doing this in Illinois, he would qualify for loans

such as that. So I think that the language or the rules that are in

the administration do work for that. But when we come in and say,

okay, we have got a $30 million project, and we have got 6, 8, 10

million of it is investment capital from the producer, and we want

to get a loan guarantee or we want to get money for the rest of it,

the Small Business Administration just—it doesn’t handle programs as large as that, projects.

Chairman THUNE. Ms. Jorde, would you care to comment?

Ms. JORDE. Yes, I would agree. And I understand the importance

of what he is talking about. My comments were probably more related to some of the real development needs that we have. In some

cases we have been able to use small business loans or Small Business Administration guaranteed loans for value-added projects. In

the case that I alluded to with the one individual, that certainly

worked. We are working on a financing package with another cooperative that also is a pasta plant where the dollar amounts aren’t

30 million. They are closer to a million or 2 million, and we are

looking at the SBA 504 program for that program.

So I think SBA does have a lot of use still in rural America, but

over the last several years we have seen increasing fees not only

up front, but also on an ongoing basis. We pay a half a percent to

the SBA on every loan that we have every month, so that increases

the cost of providing the credit to the borrower. It increases their

fees up front, and ultimately what happens is that the borrower

that is able to get financed elsewhere without SBA will go there,

and so you end up with an SBA loan portfolio that has the higherrisk loans in it, which defeats the purpose of the strong SBA program. It is one of those things where if we can make it up in volume and lower the fees, but have more participants, I believe we

would have a stronger program.

Chairman THUNE. You mentioned, too—how does the USDA B&I

Program, Business and Industry Program, how has that been beneficial in targeting rural areas? I mean, is that something that,

again, could be—is there room for improvement there?

Ms. JORDE. Well, I think there is. I think it is a beneficial program. I think sometimes the USDA program isn’t as efficiently administered, at least in my neck of the woods, as SBA is. I have

heard that from other bankers. But also it appears to be targeted

more toward the large businesses; quite a bit more paperwork, a

longer processing time, and then generally it runs short of money.

As I indicated, I think there were several hundred projects that

weren’t able to be funded last year because it ran short of funding.

But I definitely feel that it is a very valuable program that needs

to be enhanced.

Chairman THUNE. Are these—go ahead, Wayne. I am sorry.

Mr. NELSON. No. Quickly. I think that these ag innovation centers in the States could act as a clearinghouse so, as was said earlier, they could understand many of these programs, the SBA, the

B&I, and possibly some other ones that aren’t even known to farmVerDate 11-MAY-2000 10:54 Sep 20, 2001 Jkt 074835 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\B835.XXX pfrm01 PsN: B835
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ers and to people starting these co-ops or joint ventures. The ag innovation centers would help very much if the State—— Chairman THUNE. Does—and I should know the answer to this,

but does SBA—can you, with their guaranteed loan program, make

loans to cooperative-type ventures?

Ms. JORDE. Yes. I don’t think there is any reason you can’t. The

dollar limit is the problem you run into. I believe a million dollar

guarantee is the maximum on a 2 million dollar loan. A milliondollar guarantee is the maximum level.

Chairman THUNE. Okay. Let me just ask a little bit of a different

question, too, and this might—if you look more to value-added ventures that are designed primarily for the U.S. Market, how important are overseas markets, and how important is the whole trade

issue in trying to pursue additional types of value-added opportunities? I mean, a lot of things that we are talking about are sort of

designed for the domestic market. But how important is it that we

have a—you know, a free trade policy that enables us to reach

some of those arguments? Would anybody care to comment on that?

Mr. Truitt.

Mr. TRUITT. I would comment from the perspective that, number

1, the beef carcass just doesn’t flow through the system in the way

that maybe that we would like for it to, and there are certain

pieces of that product that hit the retail channels that don’t find

their way into the U.S. Market very easily. Again, that—the reason

for a lot of the innovation that we have done has been to take the

chuck and the round part of our product and really find creative

ways to move it into the marketplace. But in that light, as you well

know, Mr. Chairman, we have continued to increase the total dollars in exports that we have of beef out of this country for some

time, and that means that we send some of the higher-priced and

higher-quality and, frankly, in some cases, probably the highermargin pieces into other marketplaces that this market just won’t

bear. And it allows us to do some of the innovation that we do.

It—for us it is essential, and the fact that we have to be able to

move certain products out of this marketplace to keep from almost

drowning in them here inside this country. If we have had a primary drag on our overall profitability over the 20–year decline that

I discussed earlier in our demand, it was the fact that people

around the country on Saturdays and Sundays quit having pot

roast. They just forgot how to cook them. And my wife is great at

accomplishing that task, but I realize that she is in the vast minority, and my daughter probably is in the generation that will not

cook them at all unless they come in a real easy-to-use container.

So we have changed some of those dynamics, but it is essential

for us to have a marketplace that can take the products either that

we don’t use or that have a higher profit margin somewhere else

in order to keep our footing stable.

Mr. NELSON. Mr. Chairman, two things, I think. First of all is

that American producers are terribly productive, I mean just enormously productive, and as much as we want value-added success

in the future, it is not going to be our total answer to take care

of all our production in the U.S. So trade is essentially important

with bulk commodities that are going to have to continue to be exported.

16

Secondly, I think there are some very keen export markets in the

case of pork. I will give an example. Denmark has a slaughter facility that only is for the Japanese market. They have a different

slaughter facility that is for the English market. So they actually

have different cuts of pork in different facilities to go to the different export markets, and I think that is something, just as an example, that we have a great deal of opportunity in America to be

able to use that with exports with value-added products.

Ms. JORDE. Mr. Chairman, I think there are challenges on the

import side of the equation, too. One of the most successful valueadded cooperatives in North Dakota started about 6, 7 years ago,

Dakota Growers Pasta Company, and it is a farmer-owned cooperative. Many of the farmers in my area invested in this cooperative.

The general manager is actually on the board of my local community bank as is—another board member on my bank board. They

started out very strong, and they made a promise to their farmer

owners that they would only use their durum, durum produced in

North Dakota preferably, or in the United States. But they found

themselves at a competitive disadvantage with other competitors in

the U.S. because their competitors were purchasing durum from

outside the country, from Canada, at lower costs than what our

producers were able to sell it for, and that created some very big

challenges for them.

So when you look at our markets, it is worldwide. Trade is extremely important, and it still does come down to being able to be

competitive with the cost of that raw commodity as well. Through

a very controversial decision at their stockholders’ meeting—they

are now allowing Canadian farmer investors to purchase shares in

their cooperative in order to try to be competitive with other pasta

producers in the country.

Chairman THUNE. Well, as much as I appreciate all the valueadded products, I do yearn for the days of pot roast and apple pie,

too.

Mr. Udall.

Mr. UDALL [presiding]. Thank you very much. Chairman Thune,

I also yearn for those days.

Let me just say at the outset that I think these two pieces of legislation that we are having a hearing on here, the Value-Added Development Act for American Agriculture, H.R. 1093, and the Farmers Value-Added Agriculture Incentive Tax Credit Act, H.R. 1094,

I think are very good pieces of legislation, and I would note that

I have signed on, and I believe very much in trying to do everything we can to move these along.

Ms. Jorde, you mentioned about the role of the SBA in terms of

possibly assisting—the administration has—and I sit on the Small

Business Committee—has proposed that we have a 43 percent cut

in the SBA and then adding fees on top of many of those programs.

Could you or any of the other panelists comment on the impact it

might have in this area?

Ms. JORDE. Well, I think it would devastate the program. I think

that if you look at the numbers that the volume of SBA-guaranteed

loans declined when the fees were increased in the last few years.

And so I think increasing fees will just contribute to a smaller SBA

portfolio, and a higher-risk SBA portfolio, because only those loans

17

that can be funded with a guarantee, those that are desperate for

the loan and will pay whatever it takes, will come into the program, and the other loans will go elsewhere.

There is a very competitive banking market out there right now,

and, you know, I think we are better off, like I said earlier, to have

a larger SBA portfolio of guaranteed loans with good, strong credits

than limited to a few number that are willing or can only get in

the program with higher fees.

Mr. UDALL. Any other comments from any of the other panelists

on that?

Mr. NELSON. There is a real lot of rural small business people

that use SBA loans that might not even be valued added, and we

see the same comments there. Especially concerning some of the

smaller loans in some of our smaller rural communities, the fees

can be very much detrimental and not allow them to receive the

funds.

Ms. JORDE. If I could just follow up, too, I had a conversation a

year or so ago with a woman who heads up our regional area. I

guess she is out of South Dakota, and I don’t recall her name, but

she is with SBA, and at that time they were looking into lowering

some of the fees, which they did do recently. She said that their

evidence shows that the loss ratio in rural areas is much lower

than it is in the more urban areas and that there is a very good

case to be presented for lowering fees for rural areas. So we think

that this would be an excellent pilot project to look at, to see if by

lowering fees, if we don’t increase the volume in the portfolio, make

it a stronger program while enhancing rural development.

Mr. UDALL. Mr. Truitt, you are nodding your head, so I want to

give you a chance to say something.

Mr. TRUITT. I would be remiss if I didn’t say we thought that

lowering fees was a very good idea, especially in rural areas. And

obviously there is a very real challenge for producers to manage

the different investment strategies that it takes to stay in business

today, with slim margins and, again, trying to make additional investments elsewhere. It gets pretty complicated. I would say that

there are a number of State-based programs in a number of States

that are pretty creative, and there probably are some good solutions out there to help us address some of those needs. But, again,

I guess I was nodding my head to the fact we can reduce the fees

associated with the loan. I know my members support that.

Mr. UDALL. Thank you. Chairman Thune mentioned the concentration of the markets in the areas that you work in, and I

know in my home State of New Mexico, whenever I talk to farmers

or producers, they talk about the concentrated markets—and they

don’t say it quite like that—but the pressures on their prices and

the fact that the producers aren’t getting the prices that they think

they deserve. And he mentioned antitrust as one way of dealing

with that, and possibly better enforcement of antitrust laws and

changing antitrust laws.

Can you think of any other ways to deal with this issue of concentration of the markets and trying to get producers to get a fairer

share of the whole pie in terms of production?

Mr. TRUITT. Yes, sir. I would comment from the perspective of

the beef industry, I mean, I think we have already begun to answer

18

some of those questions. And Mr. Thune had mentioned that we

have four processors in the United States that control the vast majority of the livestock that go into the marketing system. But the

fact is that that number four processor, their primary business is

doing business with producer-owned cooperatives and cooperative

marketing agreements that move through that plant or through

their facilities. And at some point in the future, I would expect that

the producers will wholly own that entity, and I think that is something we can look forward to seeing more and more that will happen in the future. When we look at the real growth that has taken

place in our industry—and, again, I don’t mean to sideline the concentration aspects of your question. But the real growth that is

taking place and tremendous growth that is taking place is from

some smaller and mid-range processors that have figured out how

to move into shelf-ready or case-ready or fully-cooked, ready-toserve products, or found niches within some of the other entities

or niches in our marketplace. And the growth in those segments is

tremendous.

I do believe that we should continually keep a close watch on

what happens with our industry and make sure that the right

things are happening to the right people and that everybody is

playing with as many of their cards above the table as we possibly

can. But we are seeing some changes take place in the beef industry that I don’t think any of us could have predicted 3 or 4 years

ago. Maybe high prices are helping us make those decisions, but we

are in a bright spot right now and are proud of what we have accomplished.

Mr. UDALL. Mr. Reis.

Mr. REIS. With respect to the consolidation and the whole industry, and you, too, have a big thing here to deal with, you know; how

do you regulate success? You look at catsup, you look at chewing

gum, the market share that the two big companies have—and we

are nowhere near that—but it is frustrating to farmers because of

regional concentration. I can’t haul my grain to Nebraska or South

Dakota. The trucking costs prohibit me from going more than 90

miles.

So you have to look at who is commanding the most market in

these areas, and when you really break it down like that, there is

even more consolidation; so that is one thing. And you have to look

at consolidation, because we haven’t made money for so long, or the

profits and margins have been dwindling, the concentration in the

equipment—the water, the building equipment, the equipment to

put out the crops. I mean, there are less and less choices there. So

the farmers give up because the dealerships are closing and things

like that.

So you have got a big thing here, and one of the things that

sparked us to do what we did and has kept our group together is

that we know that fighting concentrations is a slow process and we

want to go in there and find a niche.

You mentioned the international markets. While we are not

going to go after those right away, we feel that the strict European

standards are going to come to America, and we want our plant to

be there. We are not going to go up against ConAgra or IBP or

19

Smithfield. We want to find a niche that they aren’t filling and try

to fill that up.

The last thing with concentration, what drives it is regulations— the HACCP requirements on these plants. A lot of these small

plants are closing up. They have got HACCP requirements for the

killing of the animal and they have got HACCP requirements for

processing of the animal. They are saying we are no longer going

to kill this animal. We want to buy boxed bones and combo’d meats

so we can further process it. American Premium Foods, will you

kill our animals for us?

So I mean, the undue regulations put on the packing industry,

and I am sure other industries can talk about that, is driving the

consolidation as well.

Mr. UDALL. Mr. Nelson.

Mr. NELSON. Thank you. I think that looking at the Department

of Justice, we have already made some inroads in that we have a

higher visibility now over the last 2 or 3 years in the Department;

but, as Chairman Thune said, it is very difficult to enact legislation

because the legislation on antitrust affects not just agriculture but

everything, and so it becomes more difficult. But within the departments, within USDA and the Department of Justice, I think we can

continue to try to raise the bar of understanding to show them

what is happening and how important it is to recognize that they

might have ways already on the books to be able to help us in the

concentration.

Secondly, the point that farmers need to share in this vertical integration I think is so important, and what Jay and David have

said, is that in the beef and pork industry they are doing that

through cooperatives or joint ventures. And the way they are doing

that is by being able to have a product that the American people

or the whole-world consumer wants, having that niche to where

they have the product designed to what they want. And I think

that is something that has happened in the past and it is continuing to happen in the future, and not just in meat but also in

grains, and I think that will help a great deal with the concentration problem.

Mr. UDALL. Terry.

Ms. JORDE. Concentration is an important issue and very difficult to legislate. The Independent Community Bankers Association was formed to help—not prevent concentration, but allow community banks to stay independent and provide resources so they

could do that. I think with anything like this, though, we have to

be very careful on how we legislate. For example, there is legislation in place that determines whether banks can merge. There is

a formula called the Herfindahl-Hirschman index that is used to

determine concentration ratios before and after a merger of two

banks, and in some cases what this has resulted in is in a community, say, of maybe 500 people where there are two community

banks, when the one bank tries to buy the other bank because the

town can no longer support two banks, it fails the concentration

test of this index, and therefore the merger is not allowed; yet a

large out-of-State holding bank can come in and buy up that bank

and, you know, ultimately they end up losing the community ownership of that bank in that town.

20

So, with anything, I think we have to be careful on how we legislate and look to all the ramifications that can come as a result of

legislation.

Mr. UDALL. Thank you for your testimony.

Chairman THUNE. Thank you, Mr. Udall. Mr. Shuster.

Mr. SHUSTER. Thank you, Mr. Chairman. As the Chairman said,

I am from Pennsylvania. Most people who think of Pennsylvania,

they think of Pittsburgh and Philadelphia. Well, I am from the center of the State, which is very rural, and I have over 7,000 farmers

in my district, most of them small; so I have a keen interest in

these two pieces of legislation because I think they assist and encourage small farmers to go out into the marketplace and be able

to be more profitable.

And I want to thank all the panelists here today for their testimony. We have talked about a couple of these ventures. How many

of them are out there? I know in Pennsylvania, I am familiar with

the dairy co-ops, but for the most part they deal with shipping and

distributing the milk, not taking it to the end user. So how many

of these ventures are out there? Are there many or few? I don’t

have a sense of that.

Mr. REIS. I don’t have a real sense of it either, but the USDA

program that I told you we got a $500,000 grant for had 210 applications for that $10 million, and a very, very short application period. They gave us like 30 days to put this together. So I am sure

there are a lot more of them out there that didn’t apply.

Mr. SHUSTER. Go ahead.

Mr. NELSON. Regionally, there has been a lot happening over the

last 10 years. Like North Dakota has been one of the leading

States in developing these sorts of enterprises. I think they probably have, for sure, the most per capita, and probably have 30 or

40 different enterprises in the State of North Dakota with only

650,000 people. So that is really significant.

In South Dakota we are gaining, and in Minnesota. In Minnesota, for instance, there are 14 ethanol plants and 12 of them are

operated by farmer-owned entities. So I would say nationwide there

are getting to be quite a few.

Mr. SHUSTER. Where would I go to find out what is happening

in Pennsylvania? The Farm Bureau, would they be the best source

for me? Would they be tuned into this type of thing?

Mr. NELSON. They could be, but through the USDA and the Economic Research Service, in fact, if you go on the Web, you could

find out very quickly how many value-added operations would be

in Pennsylvania by going to their Web site.

Mr. SHUSTER. In South Dakota, how successful have these—you

said about 30 or 40 ventures. How successful are they, on balance?

Mr. NELSON. In North Dakota. In South Dakota, ours have been

very successful. We haven’t done as much as they have in North

Dakota and in Minnesota, but we are hopeful to catch up with

them very soon. But we have been cautious in developing programs, and so far we have been fairly fortunate in having operations that have been very successful.

The fact that these are high risk has to always be at the forefront. There is no question that there is some risk involved, and because there is this risk, there are going to be some failures; but

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that shouldn’t be reason not to do it, just because there have been

failures in the past or will be some in the future. It is very important, we think, to move forward with these operations. If everyone

was successful, then we probably aren’t going fast enough or far

enough.

Ms. JORDE. First of all, I was born in Bellfont, Pennsylvania; but

commenting on North Dakota, like you said, there have been a

number of them. Not all of them have been successful. I would say,

though, when they say only one out of every ten new business

start-ups makes it ultimately, I think the batting average is much

higher for value-added cooperatives. There is a real commitment of

leadership and a real drive to succeed. The farmers are very much

driven to make this thing work, so they put in a tremendous

amount of not only financial resources, but time, into the boards

in developing the plan and attending meetings and getting out

there and talking to farmers. So the motivation is tremendous.

Mr. SHUSTER. You said, Mr. Reis, there were 210 people that applied. Do you find that across the board in the other States that

these——

Mr. REIS. That was nationwide.

Mr. SHUSTER. What, are you talking about the application——

Mr. REIS. For the USDA grant. I think a lot of them applied for

the full 500,000, so you are talking $50-some million was applied

for and only 10 was funded.

Mr. SHUSTER. And 210 nationwide doesn’t seem to me to be a

large number. Are there interests in the farming community nationwide? Again, 210 doesn’t seem like a whole lot of farmers.

Mr. REIS. That is not farmers. That is co-ops.

Mr. SHUSTER. So it could be thousands.

Mr. REIS. It could be thousands. And if you look at Illinois, our

co-op represents the whole State. That is one pork-producing plant

in the State, and a couple of ethanols. Wheat is not as big a commodity as it is out West, but if you get 500 or 750, that is a lot

of cooperatives.

Mr. SHUSTER. Are these ventures, are they—I know you talked

about your hog-processing plant. That is from the barnyard to the

shelf. Are most of them doing that kind of vertical integration, or

are they just a portion of the integration?

Ms. JORDE. Well, I think our experience has been that, you know,

whether it is sugar beets that come out of the field and go directly

into the crystal bag sugar packages out the front door, or pasta

that comes in the back door as durum wheat—it is milled in semolina and processed into all kinds of, you know, lasagnas and raviolis and everything else out the front door—we have seen total

vertical integration.

Mr. REIS. Some of them take it a step further and make processed pizza dough. There is one in Oklahoma that just got started,

and we are looking at the leasing company that leased their equipment to them. But they are taking the wheat from the farm all the

way to the pizza dough, so all you have got to do is throw it in the

oven.

Mr. SHUSTER. Are those cases limited where you are going to go

from cradle to grave, so to speak? It seems to me that would make

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sense in the dairy industry. The dairy farmers aren’t getting the

profits in the store when the consumer buys it, so—— Mr. NELSON. The market is changing so much in the case of

dairy. What used to be a throwaway byproduct, now in a powdered

form used as a food additive, and other food additives as well, are

actually worth more than the fluid milk in some cases. So it is a

growth process, I think, of finding new ways, like Jay said in beef

and Dave with pork, finding new ways to prepare it and market

it.

I think in some of the existing value-added enterprises like the

soybean plant in South Dakota, right now they aren’t processing

soybean oil to go right on the shelf, but they are looking at adding

certain identity preserve-types of soybeans that could be used for

the Japanese market or for some other European market, that then

they would be able to do the processing and have that special product for the end user. But first they start out as kind of a bulk processing facility and then they will grow into that as time goes on.

So some started out but are getting into it over a period of a few

years.

Ms. JORDE. But I think the point we have to remember, and really the point of the hearing also, is that investing in value-added cooperatives is risky and it can take, many times, a number of years

before the farmer really starts to get a return on his investment.

And one farmer might have an investment in two or three or four

different cooperatives, maybe smaller amounts. One or two of those

may not work either, so they end up losing all their investments.

So we have really been asking our farmers to put up all the seed

money and take all the risk in order to help rural development in

our communities, and obviously their goal is that they want to be

able to share in some of the profit from producing the product into

the finished product. But it is still very risky, and farmers are

tapped out, and they don’t have risk money left. They are the ones

that have been providing the equity capital to these projects, and

there isn’t a lot left.

Mr. SHUSTER. Mr. Reis, your hog venture, did you say 240 farmers?

Mr. REIS. That’s how I—— Mr. SHUSTER. What was the average investment?

Mr. REIS. We sell on shackle spaces, which allows a producer to

have one animal per week killed. That is how we set up the shares.

Anywhere from 20 to 75 to 80 is the average purchase amount of

shares. If they sell one semi-load a week, that is 180 shackles, and

if they sell two loads a week, you know, you are getting up there

to 360.

Mr. SHUSTER. What is the cost of a shackle?

Mr. REIS. We are going through the financing right now, but anywhere from $500 to $1,000.

Mr. SHUSTER. You are not in operation at this point?

Mr. REIS. No.

Mr. SHUSTER. One final question to Mr. Truitt. What markets

are important to the beef industry internationally; or the most important, I should say?

Mr. TRUITT. Obviously, we would like to make sure that the

Asian market continues to be recovering. I guess it has long been

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our number one and most important high-dollar or high-end export

market. Mexico and Canada. Mexico specifically is a very important market for the United States as well, though. Japan is number one. But when we look into some of the products that we really

don’t use at all in this country or that fit easier into someone else’s

marketplace, Mexico is an important place for us.

The European Union as a market still has promise, but they

have forgotten to keep all the agreements that the WTO required;

so until we get that worked out that continues to be a tough spot

for us.

Mr. SHUSTER. Have we been able to sell any into China? I am

not familiar with what—— Mr. TRUITT. No, sir. Really, we have just begun to do some development in the marketplace there, but China obviously is a beef-deficit country from its own production standards. So we see it as one

of those places over the horizon that we would like to be—I would

say in response to your earlier question about the investments, I

mean my investments range from $55 to $75 per head, so some of

them are pretty modest into those cooperative agreements. And all

of those investments have been returned back to me now, so I feel

pretty good about them. I am glad to not be on the other end of

that scenario.

Mr. SHUSTER. All right. Thank you very much.

Chairman THUNE. Thank you, Mr. Shuster. We have some folks

in the room today from my State of South Dakota where cooperatives have been very successful; rural electric cooperatives in the

room today. And that model is one that I think that makes a lot

of sense when it comes to value added.

And you all have referenced the fact that there is a shortage of

capital and equity and everything else, which is something that the

tax credit bill that I introduced would attempt to at least provide

some incentives for people. If it is a question of sending your

money to Uncle Sam or putting it into something that might actually get you a return, I think that would be fairly straightforward

for most farmers.

The good news, and there is a hearing going on right now in the

Ag Committee—which I hope to make it over to—about the new

farm bill. And in that new farm bill there is over the next 10 years

$370 million set aside for value-added type opportunities, and I am

hoping before it is all said and done to get a portion of that carved

out for my bill, House bill 1093 that creates the Ag Innovation Centers. And really a lot of things you have talked about today, that

you have testified to, are technical barriers as well, and these are

complex things.

And Wayne, you had mentioned, and I think this is really true,

that if we are not experiencing a certain number of failures, we are

probably not being aggressive enough, because I think we are going

to have to assume a certain amount of risk and accept a certain

amount of failure when it comes to these types of ventures. But we

cannot afford not to be investing; we just have to for the future of

the rural economy.

Just a couple of questions and then we will wrap up pretty quick.

Mr. Nelson, you had commented that your company, Communicating for Agriculture and the Self-Employed, it would seem to

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me to tie into sort of this question; and that is, how do we do a

better job of getting the message out and educating people about

the benefits and value of value-added agriculture? We have, I

think, this mentality that is over a period of time in production agriculture, but how do we get more people in the country to buy into

the whole importance of investing in these types of activities?

Mr. NELSON. Well, I think the first thing we have to do is to convince ourselves, convince farmers, and sometimes, you know, it

seems like it should be a slam dunk, but it isn’t always all that

easy—as Dave, I am sure, will say in trying to get his project off

the ground. There is a feeling that maybe farmers don’t have

enough confidence in their own ability, I guess would be the best

way to say it. And I think that as David has proven, and countless

other operations that have started and are successful have proven,

that farmers do have the ability to get together with the proper

guidance to do these projects. But there is a little bit of mistrust

from the farm communities and from people in the rural communities thinking that are you really able to do this?

So I think, first of all, proving that you are able is the place to

start. And the second thing is just to have a public hearing like

this and do as much as possible to show that the results of this

value added can be very, very important not only to the farmers

themselves, which, of course, is of utmost importance, but also to

these rural communities. And I don’t think the impact on rural

communities has been stressed enough. And I think that if we continue to say, look, this can be of help to Cando, North Dakota or

to Murdo, South Dakota, to all of these smaller communities, they

could be helped by value-added enterprises, and I think that is

what we strive to do.

Chairman THUNE. I just think from the standpoint of economic

development in rural areas, technology is a part of that, and I

think, as was referenced, investment in broadband so that we have

access to high-speed Internet service out in those areas of the country is really important, too. But if you look at what we have and

do well, it is production agriculture. It is always going to be the

number one industry in South Dakota, at least in the foreseeable

future. So how can we take that and build upon it and make it

something that can be profitable for producers? I think that is the

big question.

Ms. Jorde, I think the story that you talk about up there is a fascinating one, and I love a town with a name of Cando. Incidentally,

where did that come from?

Ms. JORDE. Well, my understanding is that there was a contest

back when the town was named and the slogan ‘‘You can do better

in Cando’’ was the winner.

Chairman THUNE. And you have done, I guess, when it comes to

the pastaplant there. But walk us through, and obviously we don’t

have a lot of time to do this, but sort of the loan and financing

process that your bank did in making that operation go.

Ms. JORDE. Well, this was over 20 years ago, in 1978, and at that

time and still to this day, that particular plant is still privately

owned by an individual that came out of the Twin Cities. His wife

was from Bisbee, North Dakota, which is about 15 miles from

Cando, and the owner had the dream of building the first pasta

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plant where the raw product, durum came in through the back

door, was milled, into semolina, processed into pasta and shipped

out the front door in his own brand name called Noodles by

Leonardo. We worked with the owner, the two local community

banks in the community, along with the Bank of North Dakota,

which is our State-owned bank, somewhat similar to a bankers

bank but actually the only State-owned bank in the country, and

we put together a financing package along with a CDBG grant.

And we were able to build the plant, and it has been operating now

since 1978. And I really think from that plant, that was where

some of the ideas started to continue the success that that plant

realized, and farmers decided at that point that they could be involved with it, too. So other pasta plants in the area were built,

and we have had great success in those areas, too.

Since then, the Federal and State and local programs have

changed, but we have always found that there is never just one

loan program or that just one bank can finance it. It has normally

taken five or six or seven or eight different programs to bring a

project to fruition, and that is why it is so important to bring in

different players. And like you said, our electric cooperative in our

community is a very important part of the financial packages that

we put together, because of access that they have to some of the

programs. So we try to work with as many local experts as we can.

Chairman THUNE. With farm income declining, have you seen

like a drop-off in application rates for loans? How has that impacted your—— Ms. JORDE. Well, as far as individual loans, we still have farmers

that need financing, in fact, more than ever. But we have fewer

farmers. With our county losing 21 percent of its population in the

last 10 years, obviously it is because we have had a loss of farmers

and they have left the county in search of jobs in other areas. So

our loan growth in the agricultural area has not increased substantially.

I think that the farm loans that we have on the books now are

stronger than they have been in the past; but, you know, again, a

lot of that is because of the government programs and disaster programs that have helped keep the farmers afloat. But there is no

vision right now for the future, other than in value-added agriculture, and that is what has been so disappointing and disillusioning to a lot of farmers. That is why we don’t have new farmers

coming into the area, because they can’t predict success very far

into the future.

Chairman THUNE. Well, there is a quality of life in rural areas

that is worth fighting to preserve, and I just happen to think that

we have got to be at this level, the State level, the local level, private industry, working together as much as we can with this type

of solution.

Obviously, as I said earlier, I have got some grave concerns about

what we are seeing in terms of concentration in the agricultural

marketplace and what that means to competitive markets and everything else, but until that changes, we really have to do what we

can to take control of our own destiny.

So I appreciate your testimony. There are a number of barriers

which you have indicated that we are aware of: capital, equity, the

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technical barriers some of you have alluded to. What we want to

do is tear those barriers down as much as we can and provide incentives for our producers to form cooperatives to invest in these

types of operations for their future.

So, Mr. Shuster, any other questions or comments?

I would welcome, as we continue in this dialogue and debate and

discussion, your input as to things that we can do better. You are

all out there in the real world dealing with these issues on a daily

basis, and I am just very committed and dedicated to the whole notion of value-added agriculture and the difference that it can make

in trying to at least preserve and save our rural economies. I think

the family farming structure and everything that is associated with

it is so important, not only from an economic standpoint but also

from a social and cultural standpoint and what it means to this

country and its future. So we definitely need to be coming up with

ways and solutions that make sense and that will further the

cause, I believe, of value-added agriculture in America.

So thank you all for your testimony. It has been very helpful,

and, as I said earlier, we welcome your ongoing input in this process. With that, this hearing is adjourned.

[Whereupon, at 11:44 a.m., the Subcommittee was adjourned.]

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