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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

  

                    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

                    U.S. GOVERNMENT PRINTING OFFICE
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                      COMMITTEE ON SMALL BUSINESS

                  DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
ROSCOE G. BARTLETT, Maryland             California
FRANK A. LoBIONDO, New Jersey        DANNY K. DAVIS, Illinois
SUE W. KELLY, New York               WILLIAM PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               DONNA M. CHRISTIAN-CHRISTENSEN, 
PATRICK J. TOOMEY, Pennsylvania          Virgin Islands
JIM DeMINT, South Carolina           ROBERT A. BRADY, Pennsylvania
JOHN THUNE, South Dakota             TOM UDALL, New Mexico
MIKE PENCE, Indiana                  STEPHANIE TUBBS JONES, Ohio
MIKE FERGUSON, New Jersey            CHARLES A. GONZALEZ, Texas
DARRELL E. ISSA, California          DAVID D. PHELPS, Illinois
SAM GRAVES, Missouri                 GRACE F. NAPOLITANO, California
EDWARD L. SCHROCK, Virginia          BRIAN BAIRD, Washington
FELIX J. GRUCCI, Jr., New York       MARK UDALL, Colorado
W. TODD AKIN, Missouri               JAMES R. LANGEVIN, Rhode Island
SHELLEY MOORE CAPITO, West Virginia  MIKE ROSS, Arkansas
BILL SHUSTER, Pennsylvania           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            TOM UDALL, New Mexico
FELIX GRUCCI, New York               DONNA M. CHRISTIAN-CHRISTENSEN, 
MIKE PENCE, Indiana                      Virgin Islands
BILL SHUSTER, Pennsylvania           DAVID D. PHELPS, Illinois
                                     BRAD CARSON, Oklahoma
                     Brad Close, Professional Staff

                            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

 
        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 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 producer-owned 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 we believe is a vital part of long-term strategies 
for the success of rural America, how to spark the development 
of successful value-added 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 
thefourth 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 value-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.
    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 ruraldevelopment 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 together 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 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 ofthe Illinois Pork Producers 
Association. Mr. Reis farms and lives in Willow Hill, Illinois. Mr. 
Reis.

    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 ownership 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.
    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 2\1/2\ 
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. 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 
moreprofitable, 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.
    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.
    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-plus-member 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.
    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 smaller-type operations and types of 
projects. And so there is--I mean, there are kind of 
conflicting points of view about how the SBA programs 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 higher-risk 
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 farmers 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 million-dollar 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 higher-margin 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.
    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 value-added 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 
value-added 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 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 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-to-serve 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 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 banktries 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.
    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 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 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 orfor 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 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 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 goingto 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 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 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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