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95–481—PDF 2004

S. HRG. 108–597

STRENGTHENING REGULATIONS AND OVERSIGHT

TO BETTER ENSURE AGRICULTURE FINANCING

INTEGRITY

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JUNE 16, 2004

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

DON NICKLES, Oklahoma

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

JOHN BREAUX, Louisiana

KENT CONRAD, North Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Lincoln, Hon. Blanche, a U.S. Senator from Arkansas ........................................ 3

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 9

AGENCY WITNESSES

Dyckman, Lawrence J., Director, Natural Resources and Environment, General Accounting Office, Washington, DC; accompanied by Thomas Cook,

Senior Agriculture Analyst, Natural Resources and Environment, General

Accounting Office, Washington, DC .................................................................... 6

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 9

Dyckman, Lawrence J.:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 21

Responses to questions from Senators Grassley and Conrad ....................... 38

GAO Report ....................................................................................................... 42

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Lincoln, Hon. Blanche:

Opening statement ........................................................................................... 3

Prepared statement .......................................................................................... 116

(III)

(1)

STRENGTHENING REGULATIONS AND OVERSIGHT TO BETTER ENSURE AGRICULTURE

FINANCING INTEGRITY

WEDNESDAY, JUNE 16, 2004

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 11:18 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Also present: Senators Baucus and Lincoln.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Thank you all very much for being patient. A lot

of times we come to these hearings late and do not have an excuse.

This time, there is a vote on on the floor of the Senate. I have not

missed a vote in 11 years, and I am not intent upon missing this

one.

So, I thank you all very much for being patient. For those of you

who are in the audience, thank you for coming as well. Most importantly, thank you, folks who have prepared testimony, for the hard

work that you have done.

This hearing is for the purpose of introducing and discussing a

report by the General Accounting Office that evaluated qualifications and oversight associated with farm entity financing.

So, I want to thank Larry Dyckman, Director of Natural Resources and Environment at the General Accounting Office, who

will testify, and then Ron Maxon, Tom Cook, Carol Herrnstadt

Schulman, and Cleofas Zapata. These are all from the General Accounting Office and all of these people made significant contributions to the material that is being presented today.

As everyone here knows, I have long been an advocate for reasonable, legitimate farm program payment limits. In fact, as a family farmer, I enjoyed some income from at least the AMT this year,

and a lot of years also from the loan deficiency payment, and sometimes if we get low prices, from the counter-cyclical payments. So,

I am a person who has benefitted from this as well.

But I think, though, that it is legitimate to have good payment

limits as well, so I have worked on that and have been successful

in the Senate, but not successful in the House to this point, and

I am not going to give up on that.

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But the American people do, in fact, recognize the importance of

the family farmer to our Nation and the need to provide an adequate safety net for family farms.

In recent years, however, assistance to farmers has come under

increasing scrutiny. Critics of farm program payments have argued

that the largest corporate farms reap most of the benefits of these

payments, something like a statistic of 60 percent of the payments

going to 10 percent of the Nation’s farmers, and that obviously

would be the largest farmers.

What is more, farm payments that were originally designed to

benefit small- and medium-sized family farmers have contributed

to their own demise. Unlimited farm payments have placed upward

pressure on land prices and have contributed to over-production

and lower commodity prices, driving many family farmers off the

farm.

The Senate agreed, by an overwhelming bipartisan vote during

the 2002 farm bill debate and two Senate Budget Committee markups that targeting Federal assistance to small- and medium-sized

family farmers is the right thing to do.

It has been my hope since the farm bill conference committee

dropped the payment limit amendment that Congress would establish legitimate, reasonably payments similar to S. 667, the payment limits bill that I introduced this session.

This hearing, though, is NOT about lowering payment limits to

reasonable levels for the 1.3 million individuals and entities receiving farm program payments. Program payments are a necessary

element in the ‘‘safety net’’ Congress established to assist family

farmers. Some folks forget that I have defended farm payments

throughout my career due to the inherent risk involved with agricultural production.

The ability of farm program payments to provide financing to

small- and medium-sized producers in times of need has proven to

be a crucial instrument for the survivability and sustainability of

the agricultural community.

But if Congress is expected to continue to support farm programs, we have to prove to the taxpayers that the programs are

tailored for their desired effect. Between 1999 and the year 2002,

farmers received approximately $60 billion in Federal farm payments from USDA to support production of ‘‘program crops,’’ which

include, but are not limited to, corn, cotton, barley, rice, and wheat.

Congress enacted the Agricultural Reconciliation Act of 1987,

commonly referred to as the Farm Program Payments Integrity

Act, to establish eligibility conditions for recipients and to ensure

that only entities ‘‘actively engaged in farming’’ received payments.

To be considered actively engaged in farming, the Farm Program

Payments Integrity Act requires an individual or entity to provide

a significant contribution of inputs, capital, land, and equipment,

as well as a significant contribution of services of personal labor or

active management to the family farming operation.

I wrote the General Accounting Office to request an analysis of

the implementation and current application of the Farm Program

Payments Integrity Act. The 1987 Act created the three entity rule

and was intended to tighten rules requiring farm program recipients to be actively engaged in farming.

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Congress intended to end abuses such as the widely publicized

‘‘Mississippi Christmas tree,’’ where one farm was subdivided into

many corporations, each receiving payments up to the established

limit.

However, press accounts over the past 2 years have called into

question how effective the 1987 Act is. For example, a story in the

press described a family owned property which reportedly received

$38 million between 1996 and 2001 on a 61,000 acre spread.

The farm was leased to a complex partnership involving 39 local

investors, who in turn had 66 separate corporations, which were

seemingly created to maximize government payments.

This arrangement, and others like it, raised questions about the

interpretation and enforcement of the 1987 Act, and that part of

the Act which required each partner to be actively engaged in

farming.

Specifically, what standards are being applied to determine

whether a significant contribution of active personal labor, active

personal management, or a combination of the two is being provided by the payment recipient?

I also asked the General Accounting Office to determine if these

standards reflect the intent of Congress in passing the 1987 Act,

and if not, what reform is necessary?

The General Accounting Office conducted its review from May of

2003 through March of 2004. The information the General Accounting Office will reveal today shows that just about anybody can get

a piece of the pie.

My constituents, who have dirt under their fingernails, have a

hard time understanding this. They know that Congress never intended the guy who makes a couple of calls a year to act like he

is in the farming process to get the biggest piece of the pie.

I think we can all learn something from this report. Hopefully,

this information will help us to get past regional disparities and establishing a new consensus position for the good of the agricultural

community.

Once again, I would like to thank the General Accounting Office

for their hard work and look forward to hearing your testimony.

Would you like to go ahead, Mr. Dyckman? Oh. Did you want to

be recognized?

Senator LINCOLN. I can wait if you want.

The CHAIRMAN. Well, do it right now.

OPENING STATEMENT OF HON. BLANCHE LINCOLN, A U.S.

SENATOR FROM ARKANSAS

Senator LINCOLN. Thank you, Mr. Chairman. Thank you for

holding this hearing today.

As one who represents a leading farm State in the U.S. Senate,

I care very deeply about maintaining the integrity of U.S. farm policy, in part because my Arkansas farm families, as do the Chairman’s, care deeply about many, many issues here.

While I have not seen the full report that GAO is presenting here

today, I remain confident that 99.9 percent of all of our farm families are hardworking and honest people. That said, there may be

a few bad actors that can unfortunately undermine the very important safety net that we have created in the farm bill.

4

My Arkansas farm families are hardworking people who do

something pretty incredible every day, and I am enormously proud

of it. They provide us with the safest, most abundant, and most affordable food supply and fiber supply in the world. I know the

Chairman is equally as proud of those great farm families in his

State.

In fact, they not only feed a hungry world, but with your strong

leadership in this committee, Mr. Chairman, they are increasingly

fueling a Nation with biodiesel and ethanol, which the Chairman

and I both have worked diligently on.

Today, Americans pay less than 11 percent of their income for

this bounty, and the farm policy that makes it all possible accounts

for only about one-half of one percent of the entire Federal budget.

In any other sector of government, this would be considered a huge

success here in Washington.

President Kennedy once said that our farmers deserved praise,

not condemnation, and their efficiencies should be cause for gratitude, not something for which they are penalized. Food for thought,

I think, for the critics out there who we read about all the time in

the big-city papers who fail to realize what hardworking farm families do each and every day.

Mr. Chairman, when I learned that we were going to be getting

this report here in the Finance Committee, I started to think really

about a lot of the parallels that we talk about in this committee

and some of the issues that we traditionally work on here together

in the Finance Committee.

As you know, we do use the Tax Code to provide incentives and

to provide help to all kinds of activities. In fact, we have been

working, I think, to repeal the entire extraterritorial income regime

because it was struck down as a tax subsidy.

That is the context, I think, in which we must consider U.S. farm

policy here in the Finance Committee today, and I hope that we

will. It is no different, really, than the JOBS bill, which I strongly

support, and which would not have been possible without the incredible leadership of the Chairman and the leadership of Senator

Baucus.

The JOBS bill recognizes that the world marketplace is not free

and fair, and so we have a responsibility to U.S. employers who

provide millions of American jobs to help level that playing field.

That bill is not about welfare. That bill is not about means testing.

It is about protecting American jobs, American working families.

Well, the farm bill is really no different. It is not about welfare

and should not be about eligibility testing. It is about an industry

that, today, creates 25 million American jobs, produces $3.5 trillion

in economic activity here at home, and accounts for 15 percent of

our Nation’s GDP, and 25 percent of my home State’s economy.

The farm bill helps support all of this in a very distorted world

marketplace, just like the JOBS bill does. So from my perspective,

I do not believe that further payment limitations are appropriate,

in the first place, any more than they would be appropriate in the

JOBS bill that we have just recently taken up here in the Senate

and hope to conclude in the conference in the Congress.

Now, I do think that we ought to enforce the law strictly and vigorously, absolutely, I do. I appreciate the Chairman’s effort in this

5

regard. He is a strong supporter and a friend of American agriculture, and I know that he wants to do the right thing for American agriculture and for the American taxpayer.

I have worked closely with him and feel confident in that regard.

We are very fortunate to have a friend of farmers, and a farmer

himself, as a Chairman of this committee in the U.S. Senate.

But we also have oversight and enforcement problems in other

agencies other than the Farm Service Administration. We also

know that we have a massive gap between the amount of taxes

owed and paid in this country, and I believe we are going to be

having a hearing on that in the committee as well in the coming

months, we hope.

I have here, I think, a document put together by the Budget

Committee which lists the so-called tax expenditures that we have

in the Code. According to the document, tax expenditures are defined as ‘‘revenue losses resulting from Federal tax provisions that

grant special tax relief designed to encourage certain kinds of behavior by taxpayers, or to aid taxpayers in special circumstances.’’

So, as you can see by definition, these tax expenditure provisions

are somewhat similar to the assistance that we make to agricultural producers. They are just passed through in tax cut form.

So, in fact, the document goes to say, these provisions may, in

effect, be viewed as spending programs channeled through the tax

system. They are, in fact, ‘‘classified in the same functional category as in the U.S. budget.’’

So I would like to encourage the Chairman and others on the

committee to work with me in commissioning GAO to study some

of the same issues that we will bring up here today, or that will

be brought up here today.

I would like to know if there are abuses involved with the 128

Federal spending programs, if they need to be limited to firms, or

businesses, or taxpayers of certain sizes or incomes, and if they are

currently limited in such a way, and if they need to be further restricted.

So as we look at the points that will be brought out in this GAO

study and we hear from this panel that will discuss that, my hope

is that we will also look at, under this committee’s jurisdiction, the

others that we can bring up and also take a look at.

Mr. Chairman, I would hope that we will have the support of the

committee in requesting that GAO study on those 128 Federal

spending programs.

We have, as I said, before us a report concerning farm payment

programs that, by law and under our international trade commitments, cannot spend out more than $19.1 billion in payments each

year.

And while they could add up to almost $100 billion over the next

5 years, I believe that we should expand the GAO study to include

the $4.4 trillion in tax subsidies that will be passed out over the

same time, and certainly look forward to working with the Chairman and others on the committee interested in hopes of expediting

this request to GAO.

So, Mr. Chairman, I am hoping that you will join us, and will

be helpful as we submit a request to GAO for that further information, and we can expedite that request.

6

The CHAIRMAN. The only thing I would ask you to consider,

would be two. Number one, maybe wait until after we have our

hearing that you have already referred to. Senator Baucus and I

nailed down a series of hearings we are going to have between now

and the end of the session, and one of the hearings touches on

what you said.

The other one would be, and I should be able to answer this

question for myself but I cannot, to the extent to which some of the

work that you might want to ask the General Accounting Office to

do, that maybe the Joint Committee on Taxation would be the

more appropriate one to do that. That would not be exclusively one

or the other, but that there might be some division of labor there

that would be more appropriate.

Senator LINCOLN. Well, we will be more than happy to look at

where the appropriate place is. But I just found that today, as we

are going to GAO for a study on this subsidy, that perhaps GAO

would be the appropriate place to go for the other 128 subsidies

that we see within the Tax Code.

The CHAIRMAN. Yes. And also I think I should give you an explanation of the fact that originally we were working with the Committee on Governmental Affairs.

In fact, the Committee on Governmental Affairs originally asked

if they could hold a hearing on this General Accounting Office report, and I very much agreed to that. In fact, I wanted them to

hold it. We even did a lot of planning on the committee.

Then later in the process, the Governmental Affairs Committee

realized that it had a logistical problem scheduling a hearing on

the issue in a timely fashion, and proposed a potential date in August in conjunction with a hearing that they were holding on crop

insurance.

I had already then asked the General Accounting Office to hold

distribution of the report for 30 days, and at that point did not feel

that I could wait until August. So, I decided to invite the General

Accounting Office before this committee, and that is why we are

here today.

Would you proceed, Mr. Dyckman?

STATEMENT OF LAWRENCE J. DYCKMAN, DIRECTOR, NATURAL RESOURCES AND ENVIRONMENT, GENERAL ACCOUNTING OFFICE, WASHINGTON, DC; ACCOMPANIED BY THOMAS

COOK, SENIOR AGRICULTURE ANALYST, NATURAL RESOURCES AND ENVIRONMENT, GENERAL ACCOUNTING OFFICE, WASHINGTON, DC

Mr. DYCKMAN. Thank you, Mr. Chairman and Senator Lincoln.

I do want to introduce Tom Cook, sitting to my right, who is the

lead analyst on this assignment. I also want to mention, Amy

Webbink from our General Counsel’s Office is with us today, too.

I am pleased to be here today to discuss the results of our review

of USDA’s implementation of the Farm Program Payments Integrity Act of 1987, which we conducted at your request. The report

was released this morning.

As you mentioned, farmers received a significant share of the

Federal budget in absolute terms. Between 1999 and 2002, USDA

paid farmers an average of $15 billion annually to help support

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major commodities. As you indicated, these payments went to 1.3

million farmers. These are individuals, as well as entities such as

corporations or partnerships.

The Act, in part, is a response to concerns that farm payments

were going to individuals not involved in farming. Therefore, it

sought to ensure that these payments went only to farmers who

are ‘‘actively engaged in farming.’’ The Act also established, as you

indicated, payment limits for these recipients.

Now, my testimony today focuses on two primary issues, and

they are discussed in our blue book report. First, how well has

USDA’s regulations for active engagement in farming helped limit

farm program payments? And I do not mean limit in terms of legitimate payments, but limit those that should not be eligible. And,

second, how effectively has USDA overseen that payments only go

to farmers who meet the Act’s requirements?

Now, in summary, Mr. Chairman, I have got to tell you that individuals may circumvent the farm payment limits because of what

we see as weaknesses in USDA’s regulations.

Specifically, I refer to the regulation’s definition of ‘‘active engagement in farming’’ and the way the regulations deal with

schemes and devices. We also found that USDA can more effectively oversee farm payment limit requirements.

Now, let me turn to the first weakness that I referred to. Under

the Act, to be actively engaged in farming an individual recipient

must significantly contribute to, among other things, personal labor

or active personal management.

However, the regulations do not provide a measurable standard

for what constitutes a ‘‘significant contribution of active personal

management.’’ This allows individuals, we believe, who may have

limited involvement with the farming operation to qualify for payments.

Now, we do not know how large this problem is, and, quite frankly, USDA does not either. But we do know that a survey that we

did of USDA field offices showed that about 99 percent of recipients, practically everyone, asserted that they were eligible for payments completely or in part because of their active personal management.

The department broadly defines ‘‘active personal management’’

specifically as activities that are critical to the profitability of the

farming operation, taking into consideration the individuals or entities’ commensurate share in the farming operation.

In contrast, for example, USDA provides quantitative standards

for what constitutes a significant contribution of active personal

labor, 1,000 hours of work annually, for example. But, again, most

farmers do not use this requirement.

Several farming operations we examined illustrate this problem.

For example, one 12,000 acre operation was managed by a general

partnership of 11 partners. The partners asserted that they qualified for about $1 million in payments in 2001 because they contributed capital and active personal management.

There were five management meetings in 2001. Three were not

in the same State as the farm. Only 7 of the 11 partners participated in all meetings, and none of the partners lived in the State

where the farm was located.

8

But, finally, based on our review of the minutes documenting

these meetings, it is unclear whether some of the partners contributed significant active personal management.

Now, we also did a survey of 535 USDA field offices, and it

showed that USDA’s employees agree that the department can, and

should, strengthen the management contribution standard.

Also, as you probably know, in 2003 the USDA Commission on

Farm Payment Limits concluded that the lack of clear criteria on

what constitutes a significant contribution of active personal management likely makes it easier for farming operations to add recipients to avoid payment limits.

I would like, now, to turn to the second weakness in the USDA

regulations. That is, the regulations are unclear about whether certain transactions and farming operation structures could be considered schemes or devices to evade payment limits.

Under the Act, such schemes or devices disqualify a person from

payments for 2 years. According to USDA regulations, a scheme or

device can include, among other things, creating fictitious entities

for the purpose of concealing a person’s interest in a farming operation.

We found several large farming operations that were structured

as one or more partnerships, each consisting of multiple corporations that increased farm payments in a questionable manner.

Depending on how USDA interprets its regulations, these operations might be considered to evade, or have the effect of evading,

payment limits, and, hence, constitute a scheme or device.

For example, one family had two general partnerships encompassing multiple entities with family and non-family members. The

family-owned affiliated non-farming entities that conducted businesses with the farming entities.

Now, our testimony board to our left and to your right illustrates

the legal structure of this farming operation and the flow of payments to the non-farming entities. It is also on page 8 of my full

statement.

I might add that this was actually a simpler organizational

chart. We had more complex ones, but we could not fit them on the

chart.

In 2001, the two partnerships collected more than $800,000 in

farm payments on 6,000 acres. However, both farming partnerships

incurred a small net loss. The loss was incurred, in part, because

we believe the farming operation first paid above-market prices for

goods and services, and, second, received a net return from the sale

of the crop to the non-farming entities that appeared to be lower

than market prices because of the apparent excessive charges related to purchasing and processing the crop; basically, not arm’s

length transactions.

Now, with these types of transactions, the farm payments were

channeled to the family-held non-farming entities. However, when

we spoke to USDA officials about this, they agreed in principle

with us, but they said that they are reluctant to question these

types of operations because they do not believe USDA’s regulations

provide a sufficient basis for action. We have referred the two examples in our report to the Inspector General’s office, at USDA.

9

Now, let me turn to USDA’s oversight. We found that USDA is

not effectively overseeing farmers’ eligibility for farm program payments, for several reasons.

First, USDA does not review a valid sample of farm operation

plans to determine compliance, and thus does not ensure that only

eligible recipients receive payments.

Second, USDA does not complete its compliance reviews in a

timely fashion. Third, for about half of the 2,000 farming operations we reviewed, USDA officials did not use available tools to

verify that persons were actively engaged in farming. By ‘‘available

tools,’’ I am talking about direct interviews or examining key financial information at the farm.

In conclusion, Mr. Chairman and Senator Lincoln, we believe

that USDA could better ensure that recipients of farm program

payments do not circumvent the payment limitations.

We are not talking about lowering the limits or raising the limits. We are just simply talking about compliance with the regulations that are on the books, compliance with the law, or better defining the regulations and making them more clear so they can be

enforced.

To this end, we made eight recommendations to USDA to address the weaknesses we identified in the regulations and in their

oversight.

That concludes my short statement. I would be happy to answer

any questions.

[The prepared statement of Mr. Dyckman appears in the appendix.]

The CHAIRMAN. Senator Baucus, would you like to make a comment?

Senator BAUCUS. Briefly, Mr. Chairman. Thank you very, very

much.

The CHAIRMAN. Then I will ask questions.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA

Senator BAUCUS. Thank you for the opportunity to offer my

thoughts on this.

You might say that during consideration of the 2002 farm bill,

I and many other Senators, especially those on the Agriculture

Committee, worked very hard with my colleagues, including my

very good friend, Chairman Grassley, to craft a sound, effective

farm policy.

The foundation of the farm bill, as everyone will recall, is built

on two principles. First, we wanted a strong safety net that would

cushion producers in hard times. Second, we wanted to make the

United States’ agriculture sector more competitive, especially in

this era when global markets exert such incredible influence on domestic markets.

Today’s GAO report appears to raise questions about the integrity of one element of the United States’ farm policy. The report

does not offer an opinion on the level of payment limitations, but

instead suggests that USDA could do a better job of enforcing rules

regarding who is eligible to receive a payment.

10

No one supports circumvention of the law. If our system is to be

effective, we must ensure its integrity. Nevertheless, I suspect that

the report’s findings also probably reveal, though perhaps not intentionally, a more fundamental structural problem in our farm

policy.

Payment limitations disproportionately affect certain commodities in certain regions of the country. In this sense, they can be

unfair. This weakness ought to be a concern for anyone who cares

about the future of the United States farm policy.

Worse, in my opinion, payment limits actually inhibit competitiveness with the United States’ farm economy. A competitive industry requires efficiency, and efficiency is often best achieved

through economies of scale.

In capital intensive crops such as wheat or rice, payment limitations inhibit a farmer’s ability to achieve economies of scale that

he or she needs to maximize efficiencies. In a time when our farmers face an increasingly global market, efficiency is more than a

luxury, it is an imperative.

This is an important debate and one that we should have. The

current farm bill expires at the end of the 2007 crop. Until then,

we should rigorously examine all aspects of farm policy, especially

those that concern the integrity of the system with an eye towards

crafting an even better farm bill.

The GAO report requested by Chairman Grassley offers us a look

at a very important part of this system, and for that I thank him.

I look forward to working with him and others on this committee

as we undertake that effort.

The CHAIRMAN. We will have 10-minute rounds of questions.

Mr. Dyckman, could you please expand on the nature and significance of the problem associated with individuals claiming a significant contribution of active personal management to qualify for

farm program payments?

Mr. DYCKMAN. Well, as I indicated, Mr. Chairman, in my statement, the key problem is that there is no measurable standard. I

think it is a basic rule of management that if you cannot measure

it, you cannot manage it.

If you cannot measure a compliance requirement, it is very difficult for those that are charged with responsibility for making sure

that there is compliance, basically the USDA, to determine whether

there is compliance. The standard is very vague. It is not clear.

As I indicated, the vast majority, almost 99 percent of farmers

or recipients of farm payments do claim personal management as

opposed to labor. Therefore, it is quite important from our perspective, from the Congress’ perspective, and from the taxpayers’ perspective, to, we think, have a clear, measurable standard so you

can make a determination, so there is no vagueness around it.

I might add that we did query FSA county directors and asked

their opinion of the standard. The majority of them told us that it

would be very helpful to clarify the definition of what constitutes

active personal management, and 50 percent supported a quantifiable criteria.

Senator LINCOLN. What was that number?

Mr. DYCKMAN. Fifty percent of those we queried would support

a quantifiable criteria.

11

Senator LINCOLN. Were these farmers?

Mr. DYCKMAN. No, these were FSA officials.

The CHAIRMAN. Based on your audit work, could you comment on

the prevalence and financial impact to the government of these

types of cases?

In your opinion, what percentage of joint operations, general

partnerships, and joint ventures that received payments in 2001 included members claiming active personal management but were

not really actively engaged in farming?

Mr. DYCKMAN. Well, because of our sampling approach and because of USDA’s sampling approach, we were not able to do a complete projectable sample. But of the 86 completed compliance reviews that we looked at that USDA had completed, in 30 percent

of those 86 cases, or 26 cases, it appeared to us that some recipients had little involvement in the farming operation.

I think what we are talking about is potentially millions of dollars of payments being made to people of questionable eligibility.

But we do not know the magnitude of the problem and, unfortunately, USDA does not. Its data systems do not allow it to understand the problem much better than we do from our review, and

I think that is part of the problem.

The CHAIRMAN. Skipping on, the report alluded to the proposed

regulations of the 1987 defining a significant contribution of active

personal management with a quantitative figure. That idea was

scrapped by the U.S. Department of Agriculture before the final

regulation was published.

After reviewing the end result, do you believe the IRS standard

for material participation in a business or enterprise, which would

be $500, would provide the necessary quantitative measure to limit

the problems that you found?

Mr. DYCKMAN. Well, that is an interesting question, Mr. Chairman. I am not a tax expert, but we did speak with a former IRS

attorney to get a better understanding of that requirement of the

IRS Code. I believe it is 469 of the IRS Code.

As I understand the rationale behind that, it was introduced as

part of the 1986 Tax Reform Act, and I think the regulation might

have gone into effect about 1988, so it was really almost the same

time frame as the farm requirements for eligibility that we are

talking about today.

The problem that the Congress saw when it imposed that requirement, is that there were tax shelters that attorneys, doctors,

and professionals were buying into to offset and to take passive

losses and offset them against active income. The IRS need some

quantifiable standard to determine whether or not an individual

was actively engaged in a business or it was purely a tax scheme

that was bought into.

So, one of the tests to determine that was the 500 hours a year.

According to this official, it has worked exceedingly well. It has basically shut down many of these tax shelters because doctors and

lawyers would quickly see that there is no way that they could devote 500 hours to this endeavor as an investment tool.

Now, will it work in farming? That is something I think has to

be looked at in a regulatory process in terms of USDA again proposing possibly regulations to get input from the farming commuVerDate 11-MAY-2000 10:29 Sep 15, 2004 Jkt 092535 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 95481.000 SFINANC2 PsN: SFINANC2
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nity, and others. Obviously, it is a much more quantifiable standard and one that can be measured much more easily than the existing standard.

So, in theory, I do support that. But, of course, you have to proceed slowly. You have to make sure that it is something that the

farmers could actually work with, but I think it is a reasonable approach, something that we could build on. They originally had

1,000 hours, as you indicated, and maybe that was excessive. But

surely we can come up with some quantifiable measure.

The CHAIRMAN. Yes.

In Appendix 4 of our report, I note in the responses to your survey of FSA county directors that a majority thought commodity certificate gains should be counted towards the $75,000 payment limitation that currently only applies to loan deficiency payments and

marketing loan gains. Could you comment on their responses?

Mr. DYCKMAN. Yes. I will have Mr. Cook respond.

The CHAIRMAN. All right. Mr. Cook?

Mr. COOK. Yes. In that appendix, we found that, based on our

survey of county FSA officials, that 54 percent of county FSA officials believed that commodity certificate gains should be counted

against the $75,000 payment limitation. Thirty-three percent

thought that they should not be counted towards the payment limitation.

I might add that most of these county officials that we surveyed

were located in areas of the country that currently receive commodity certificate gains, cotton and rice growing areas of the country. So, the majority of county FSA officials did believe that they

should be counted against the payment limit of $75,000.

The CHAIRMAN. All right.

How do the General Accounting Office’s findings compare to

some of the findings of the Payment Limitation Commission?

Mr. DYCKMAN. Well, the Payment Limitation Commission, obviously, was a fairly thick report and addressed a lot of different

issues pertaining to payment limitations. But on the key issue in

our report, or one of two key issues in terms of the need for a quantifiable standard, I think we are in unison.

I think we are singing off the same song sheet. They indicate it

is a problem. They indicate there is a need to do a look-see and to

come up with a more quantifiable standard. They do not offer a

specific solution, which is fine, because I think it is up to USDA

to map out the specific solution to the issue.

But they do see that as a problem, and they pointed out that

many farms organize just to get additional direct payments. Surely

that is not the intent of the farm bill.

On the issue of schemes and devices, they did not, apparently,

look into that issue because it is not covered in their report.

The CHAIRMAN. I have got some time left on my 10 minutes. Let

me go back to a point I skipped that I would like to bring up again.

That would be, beyond what you have identified in the report, do

you have other examples of individuals receiving payments that

have not demonstrated a significant contribution of active personal

management?

Mr. DYCKMAN. Yes, we do. As I indicated, we looked at 86 compliance reviews that were completed by FSA, and about 30 percent,

13

or in 26 cases, some of the recipients, appeared questionable to us

as to whether or not there was active personal management.

So, while our report only talks about two cases, there are other

cases. As I indicated, we do not know the full extent of the problem, but unfortunately neither does USDA.

The CHAIRMAN. All right.

Another question. This will probably have to be my last one.

Could you expand on the problem and significance of your finding

that some farming operations may be engaging in schemes or devices to increase their farm program payments? Do you have any

idea how many other farming operations may be organized in that

manner, and then what would be the overall potential financial impact?

Mr. DYCKMAN. Well, again, the essence of the problem that we

found was that you have these organizations created that are farming entities and non-farming entities which may be legally created,

but the problem is, there are not arm’s length transactions between

the two.

You can qualify for direct payments and potentially other payments with each of the partnerships created. However, if the farming operations have a net loss, the way the farming payments actually get channeled down to, I will use the term ‘‘kingpin,’’ is by having these seemingly non-arm’s length transactions where you are

selling things to the farmers at excessive costs and you are buying

their goods at below the fair market price. So, that is the essence

of the problem.

We did see additional cases of these. We know that others exist,

but we do not know the magnitude of the problem. We think this

is also a multi-million dollar problem and something that USDA

should look into.

Now, it is very labor intensive, I have to concede, to try to trace

these types of organizational structures and to prove that there are

not arm’s length transactions. I might add that there might be Internal Revenue Code issues involved with these as well.

As I indicated, the two cases in our report, we did turn over to

the Inspector General’s office, and we trust that they will look into

them.

The CHAIRMAN. Thank you.

Now it is time for you, Senator Lincoln.

Senator LINCOLN. Thank you, Mr. Chairman.

I did not get to finish m y statement, so I would like to ask unanimous consent to include my entire statement into the record.

The CHAIRMAN. I hope I did not cut you off.

Senator LINCOLN. You did not. You are fine. No, sir. I would just

make sure it is all in there, and it will save us time for questions.

The CHAIRMAN. Yes, I will be glad to. Without objection, it will

be included.

Senator LINCOLN. Great.

[The prepared statement of Senator Lincoln appears in the appendix.]

Senator LINCOLN. I would also like to have any of my questions

I cannot get included in the record to be answered by GAO. I apologize, I am not as prepared, and I have not read the whole study.

14

The CHAIRMAN. Is your request that you would have questions to

submit in writing beyond the ones you are going to ask orally?

Senator LINCOLN. Yes, sir.

The CHAIRMAN. Oh, yes. And you may get questions, too, from

other members. You are familiar with that.

Mr. DYCKMAN. Yes, that is fine.

Senator LINCOLN. I do not know. I know that the press and some

others on the committee got their report last night, but I did not

get mine until this morning, and I know that was an oversight, Mr.

Chairman. So, I may have additional questions that I would like

to have answered as I get through the entire report.

Gentlemen, you all make some good points. I think that the

Chairman and I agree that the bad actors are something that we

do want to eliminate in any system, whether it is the Tax Code,

doctors and lawyers, passive and active questions, whether it is agriculture, or what have you.

But making sure that the farm policy that we have in this country actually is geared to make sure that all farmers from across

this country can have access not only to a program and a safety

net that will provide them the ability to provide for their families,

but also to be able to be able to be competitive in the global marketplace.

A couple of questions that I have for you all. You talk about

USDA’s standard of personal management decisions that are critical to the profitability of the farming operation are not measurable. You are talking about measuring who and what participates

in this operation.

It seems to me that whether you are the one that makes the decision to take out a loan to buy crop insurance, to plant one crop

instead of another, when to market your crop or how much of it to

market, whether to buy equipment, whether to lease land, for example, all of these are very critical decisions that may not take a

lot of time, but can make or break the operation.

There is no doubt, these are critical decisions. If there is one

thing that the Chairman and I know as farmers, it is that there

are many things that happen to a farmer that are way beyond

their control.

Making those decisions whether to spend a lot of money and resources on fuel, labor, seed, fertilizer and what have you in February when it is a beautiful day and you are anxious to get your

crop started, is a critical decision.

It may not be a lot of one, but if the monsoons come in March,

you have got a problem. So in terms of measuring the critical nature of the decision making in this farming operation, I think, it

is not as easy as it may seem.

You have indicated some of that, and I appreciate that. But I just

hope that we will take a greater look at that in terms of furthering

production agriculture in the United States.

What he or she plows, plants, or harvests, and the like, I mean,

we have a hard time quantifying that and I think it is important

for us to take note that it is not an easy question to answer.

So if that is an issue for you all, I hope in terms of what you

are suggesting we use to quantify that, you might be a little bit

more explicit on.

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But when you talk about, the two-thirds of payments go to the

top 10 percent of farmers, is it not correct that your definition

would lump any farmer who really receives $12,000 or more in direct payments into that 10 percent?

And I really hope that farm families across the country are lis- tening to that figure, because $12,000 in direct payments makes

you a big farmer when you use your GAO statistics, or USDA’s statistics in terms of the bigger ones.

But is there not a better model that we could use that would reflect only those who are actually making all, or nearly all, of their

income off of the farm? That is what these programs are geared towards, right? They are geared to help.

Mr. DYCKMAN. Right. But many, as you know probably better

than I, most farmers earn income off the farm, outside of the farm.

Senator LINCOLN. Some of them have to in order to stay afloat.

Mr. DYCKMAN. Right. Some of them have to, and some of these

farms are investments. So, I am not sure of the question.

Senator LINCOLN. I mean, I think what you are trying to say is

that 10 percent of the farmers are producing 90 percent of the food

and fiber.

Mr. DYCKMAN. Those are USDA statistics as well. Right. So I do

not believe we are disagreeing.

Senator LINCOLN. But you are saying, of those, that they are getting the majority of their income off the farm if they are producing

that much of the food and fiber?

Mr. DYCKMAN. No, that is not our intent.

Mr. COOK. No. Our calculation in our report where we provide

the information that 10 percent of the recipients receive about twothirds of payments, that includes more than direct payments. That

includes all. That includes the production flexibility contract payments, loan deficiency payments.

Senator LINCOLN. All the programs.

Mr. COOK. Yes. All of them. Correct. So it is not limited to direct

payments.

Senator LINCOLN. But you are still saying that in that category,

that those people are getting a sizeable amount of their income off

the farm?

Mr. COOK. No. No, we are not saying that.

Mr. DYCKMAN. That was not the intent of our implication.

Senator LINCOLN. I would disagree with that, I think, just in

looking at the farms that we have.

The CHAIRMAN. I am not saying this to be argumentative, but

your report really does not deal with the issue of payment limitations. It deals with what the definition is of ‘‘actively involved in

farming,’’ right?

Mr. COOK. That is correct. And it does not get involved in the

issue of the other incomes that these persons are earning.

The CHAIRMAN. I will not take time away from you. You will

have your full time. But I think in my opening statement, maybe

I would have misled you, Senator Lincoln, because I made this

point about 10 percent getting 60 percent of the benefit.

But I was explaining, that was in regard to attempts that I had

made in the past about payment limitations, which is still an issue

I am working on. But that is not the issue here. The issue here is,

16

the enforcement of the words in the 1987 Act ‘‘actively engaged in

farming,’’ or whatever the exact words are.

Mr. COOK. Program Payment Integrity Act.

The CHAIRMAN. Yes. In the 1987 Act.

So, you proceed.

Senator LINCOLN. All right. Thank you, Mr. Chairman.

Some of what you mentioned, you reflect on the personnel at

USDA through the FSA and whether they are adequately supported or prepared to kind of do the work that they need to do in

those FSA offices. Well, I can quantitatively say to you they are

not. They are continually being asked to use part-time, temporary

employees.

We have been begging up here for more resources through FSA

to be able to provide these offices the ability to work more handson with their agricultural producers to be able to look more closely

at the programs that they are there to implement, but they clearly

do not have the time or the personnel to implement the programs

that exist.

So, your point there is well taken. I do not think you are going

to get any argument from me that they do not have the ability, the

time, or the resources, or any of that. I think that is a key point

of what we could do to make sure that things were being done

properly.

Mr. DYCKMAN. Let me just add, though, of course I agree with

you fully on that, and we indicate that training is a problem also.

But I think that if the regulations were clearer, it would be easier

for FSA to ‘‘enforce’’ the Act.

That is our point. Every agency has limited responsibilities, and

the Farm Act proposed a large amount of responsibilities on FSA,

and they have carried it out fairly well. Farmers are receiving their

payments on time, basically.

Senator LINCOLN. Have you visited those FSA offices?

Mr. DYCKMAN. We have visited FSA offices.

Senator LINCOLN. And have they been in certain regions of the

country?

Mr. COOK. Yes.

Senator LINCOLN. Where?

Mr. COOK. As our report indicates, we visited field offices in California, Arkansas, Louisiana, Mississippi, Nebraska, and Texas.

Senator LINCOLN. I would say that, of all those States you have

mentioned, those are obviously the ones you are going to find

where people are going to hit their limits because they are farming

capital-intensive crops, unlike the other offices where you would go

where they are farming crops that are not going to hit their limits.

Mr. COOK. Right. As we mentioned in the report, we drew our

sample from the FSA sample, which targets larger payments. So,

just by the nature of doing compliance reviews of large farming operations, it automatically takes you to those areas of the country.

Senator LINCOLN. Sure. Well, I would just point to the comment

that Senator Baucus made, which is the economy of scale. If you

are paying $400,000 to $800,000 for a piece of equipment and you

are going to hit your limit on farming 200 acres of rice, or you are

going to hit your limit at cotton at a higher number, but certainly

lower than what you can provide a return on, you have got to look

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at the possibility of how you can partner yourself in order to make

sure that you can, in an economy of scale, provided the marketplace that we have in the global economy, an ability to keep yourself afloat.

I guess you indicate that 45.2 percent of payments to entities go

to general partnerships. Now, I do not know if that is supposed to

send a shiver up my spine as being intrinsically evil or something.

What percentage of these general partnerships are made up of

dads and moms on a farm with their three sons? Maybe there are

two brothers. Maybe there is an uncle and a nephew. Maybe there

is a group of four cousins trying to keep a farm together. I do not

know what that point is. If it is that big business is taking over

agriculture, I just do not see that. I have got to say, I come from

a part of the country where meeting that economy of scale is virtually impossible unless you do partner with family members in

order to make sure that you can farm in that economy of scale that

is going to allow you to get not only the kind of equipment you

need, but to deal with the kind of resources and capital investments you have to make, whether it is paying an electric bill to

pump water on rice, whether it is the pesticide and insecticide

chemical application that is required, and the amount of acreage

and the value of that land, and the kind of compromising situation

that puts you in, to have to have that much land to farm whether

you own it or rent it. I think, in fact, USDA studies have shown

us that number of corporate-owned farms are down.

After holding, I guess, somewhat steady for years, they are in the

low single digits as a percentage of overall farms in terms of corporate headings. But, again, this general partnership issue of

bringing people together to make sure that you can be competitive

in a global marketplace, I do not know. I mean, if that is your intent, is to——

Mr. DYCKMAN. Our intent was simply to provide the information

that we were requested. One of the pieces of information was to

show the breakdown of the types of entities that are receiving farm

payments.

This is not to suggest that there is anything wrong with that, but

as the report indicates, where we did find problems for those farms

that apparently are not either complying with the regulations, or

it is questionable whether they are.

Senator LINCOLN. Well, again, through the work of the FSA offices—and I visit them regularly. Some of them are working overtime. Many of those employees are part-time employees. They get

no benefit from working overtime. They get no health benefits from

the kind of diligent workers they are, and putting 2, 3, and 4 years

into a job where they know they have no security.

I mean, there is an inherent problem there, too, if you are going

to administer something. I understand your proposal, which is that

it should be better defined.

But are we going to just always have to go to a better definition

because all we are going to use is part-time employees, not people

who can really represent the intent of the law that Congress is

passing because we want full-time professional Federal employees

that can administer the programs and the intent of the law that

we passed?

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Just in closing, Mr. Chairman, I did not have the opportunity to

review the report, but I also was curious if you gentlemen, in preparing the report, had the opportunity to explore the global competitiveness implications of really messing around with further

changes in payment limitations.

We have lost about 3 million jobs. That is what the JOBS bill

has been all about and what we have looked at, stemming the tide,

helping to stop offshoring. The farm bill that we produced is agriculture’s global competitive legislation.

If we tell farmers that they should not enter into general partnerships, they should not get bigger than what Washington tells

them to, and so on, and so forth in terms of defining how they are

going to be, are we not really putting our farming families in a

straightjacket in terms of their competitive nature in the global

marketplace?

I feel like we, as government, should be creating an environment

where our farmers are able to make the business decisions that

they need within the law that allows them to compete in the world,

notwithstanding there are bad actors. We know that they exist.

But making sure that there is a law created in order that farm

families all across this country are able to be a part of that competitive nature of the global marketplace. And again, in the part

of the country I come from, it is very different.

Being able to make that capital investment and be able to get

the return that you need is a critical part, and what you have

looked at are really those offices where we are going to hit those

limits very quickly because of that.

Mr. DYCKMAN. Well, we did not look into the global issues. We

simply looked, as I indicated, as to whether or not, for those farmers that are applying and that are receiving payments, what controls are there? What are the internal controls to determine that

they are receiving payments that the Congress has decided they

should be eligible for?

Senator LINCOLN. So there is no competitive comparison.

Mr. DYCKMAN. No. And as I indicated earlier, we have nothing

against corporations, partnerships, and joint ventures. Obviously

farmers have to structure for a variety of reasons in certain ways,

and the larger farms may have to structure differently. But our

concern is protecting the taxpayers’ investments and making sure

that the law is being complied with. That is your concern, too, I

know.

Senator LINCOLN. That is, absolutely. That is why I am hoping

and encouraging that the Chairman will allow us to send you another request to look at the other possibilities of the 128 subsidies

that come through this committee.

Thank you, Mr. Chairman.

The CHAIRMAN. Yes. Thank you very much.

In closing, I think I would emphasize where the Senator from Arkansas left off, that what I asked in the report was the General Accounting Office to study only the enforcement of the regulations of

‘‘actively engaged in farming.’’ We did not ask you to look into anything about payment limitations. We did not ask you to look into

anything about structure.

19

Just look at individuals that received payments, and did anybody

receive payments who was not meeting the definition of ‘‘actively

engaged in farming,’’ and what was the reason if it was not being

enforced, being followed, and what might have been the result of

that, like money going to people that should not be getting it, all

because Congress was concerned about people maybe not being in

farming should not be getting any farm program payments. That

is all we asked you to do, and you have done it well and I want

to thank you. I have thanked you, now, twice.

But in the process of thanking you, I think I need to extend to

all of the General Accounting Office, I am probably one of the

major requesters of studies by the General Accounting Office, but

very little in agriculture, more on health issues and more on Defense Department issues.

But I think you do a very great service, and I hope you will extend my thanks to other people who work down there, beyond just

the work that you have done for this committee.

Thank you very much. The hearing is adjourned.

[Whereupon, at 12:17 p.m., the hearing was concluded.]

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PREPARED STATEMENT OF HON. BLANCHE L. LINCOLN

Mr. Chairman, thank you for holding this hearing. As one who represents a leading farm state in the U.S. Senate, I care deeply about maintaining the integrity of

U.S. farm policy in part because my Arkansas farm families care deeply about this

issue. While 99.9 percent of all our farm families are hard working and honest people, one bad actor can undermine this very important safety net.

My Arkansas farm families are hard working people who do something pretty incredible every day: they provide us with the safest, most abundant, most affordable

food and fiber supply in the world. In fact, they not only feed a hungry world but,

with your strong leadership on this committee Mr. Chairman, they are increasingly

fueling a nation with biodiesel and ethanol.

Today, Americans pay less than 11% of their income for this bounty and the farm

policy that makes it all possible accounts for only about one-half of one percent of

the entire federal budget. In any other sector of government, this would be considered a great success. You know, President Kennedy once said, ‘‘Our farmers deserve

praise, not condemnation; and their efficiency should be cause for gratitude, not

something for which they are penalized.’’ Food for thought for the critics out there

who we read about all the time in the big city papers.

Now, I know that everyone is entitled to their own facts, but I would be remiss

if I did not remind those critics of the 2002 Farm Bill of what they predicted when

this bill passed and what actually happened. First, they said that it would bust the

budget, never mind that it was fully contemplated within the budget. But, in fact,

from FY 03 to FY 05, the Farm Bill has come in $17.3 billion cheaper—about 33

percent less—than originally expected. They said that it would lead to overproduction but according to USDA, production remains steady. They said it would lead to

depressed farm prices but today the ‘‘across commodity index’’ for crop prices is at

a record high. They said it would interfere with trade but today our exports are at

an all time record high. And, they said it would lead to fewer and larger farms but

USDA’s statistics do not bear this out at all. Both are steady. Maybe this is why

the 2002 Farm Bill enjoys broad support in farm country from folks across the political spectrum.

The critics also said that agriculture no longer matters to the American economy.

Well, take a look at a Wall Street Journal article from December 17 of last year

which, in fact, proclaims the exact opposite. Let me quote a little from that article.

‘‘The present boom is proving that agriculture still matters in the U.S. Rising farm

incomes are helping ease the blow of the loss of manufacturing jobs in Midwest

states.’’ And the Wells Fargo Chief Economist was quoted in the story as saying,

‘‘The farm sector is a significant source of strength in the U.S. economy.’’

So, the critics were wrong about U.S. farm policy. And, Mr. Chairman, clearly,

as important as they are to me and my state, a lot more is riding on U.S. farm policy than just our farm families. Mainstreet USA and even our largest cities have

a stake in this important legislation. To doubters, I’d point to the 1980’s farm financial crisis when we saw stores boarded up throughout rural America and when even

cities like Chicago suffered, as noted in an Economist magazine article. One has to

wonder what would have happened in farm country, to Mainstreet, and even our

larger U.S. cities had we not responded with ad hoc assistance from 1998 to 2002

when prices reached record lows and we had the lowest real net cash income on the

farm since the Great Depression. The 1980’s for those who remember probably give

us a glimpse.

In any case, the Chairman knows very well as do my other colleagues the challenges America’s farm families face in a world market place that is not free or fair.

When U.S. farmers survey the world, they see an average bound tariff of 62%

against their products. Now, compare this to the 12 percent that our foreign competition sees when they want to send something here. And when U.S. farmers look

at the world, they see subsidies in Europe for example sitting at around $400 per

acre while our help to our own farmers is around $40. I know the Chairman is

working very hard to lead us to better days in this regard—but today that is the

reality. America has said to the world, ‘‘we are ready to level the playing field for

everyone’’ but the response we’ve gotten back from many quarters is, ‘‘you bring

down your help to U.S. farmers and we’ll hang onto ours, thank you very much.’’

Hope springs eternal and I have great hope that we can make progress in the Doha

Round but we are not there yet.

Mr. Chairman, when I learned we were going to be getting this report here in

the Finance Committee I started to think about the parallels to some of the issues

that we traditionally work on together here. As you know, we use the tax code to

provide incentives and help to all kinds of activities. In fact we have been working

117

to repeal the entire Extraterritorial Income Regime because it was struck down as

a tax subsidy.

That is the context in which we must consider U.S. farm policy here in the Finance Committee. It’s no different than the JOBS bill which I strongly support and

which would not have been possible without your leadership Mr. Chairman and the

leadership of Senator Baucus. The JOBS bill recognizes that the world market place

is not free and fair and so we have a responsibility to U.S. employers who provide

millions of American jobs to help level the playing field. That bill is not about welfare. That bill is not about means testing. It is about protecting American jobs.

Well, the Farm Bill is no different. It is not about welfare. It should not be about

means testing. It is about an industry that today creates 25 million American jobs,

produces $3.5 trillion in economic activity here at home, and accounts for 15 percent

of our nation’s GDP and 25% of my state’s economy. The Farm Bill helps support

all this in a distorted world market place just like the JOBS bill does. So from this

Senator’s perspective, I don’t believe that further payment limitations are appropriate in the first place anymore than they would be appropriate in the JOBS bill.

Now, do I think that we ought to enforce the law strictly and vigorously? Absolutely I do and I appreciate the Chairman’s efforts in this regard. He is a strong

supporter and friend of American agriculture and I know that he wants to do the

right thing for American agriculture and the American taxpayer. We are very fortunate to have a friend of the farmer, a farmer himself, as Chairman of the Finance

Committee of the United States Senate.

But we also have oversight and enforcement problems in other agencies other

than the Farm Services Administration. We also know that we have a massive gap

between the amount of taxes owed and paid in this country and I believe we are

going to be having a hearing on that in this Committee as well.

I have here the Document put together by the Budget Committee which lists the

so called ‘‘tax expenditures’’ that we have in the code. According to the document,

‘‘Tax Expenditures’’ are defined as ‘‘revenue losses resulting from Federal tax provisions that grant special tax relief designed to encourage certain kinds of behavior

by taxpayers or to aid taxpayers in special circumstances.’’ So as you can see by definition these tax expenditure provisions are somewhat similar to the assistance that

we make to agricultural producers, they are just passed through in tax cut form.

In fact, the document goes on to say, ‘‘These provisions may, in effect, be viewed

as spending programs channeled through the tax system. They are, in fact, classified in the same functional categories as in the U.S. Budget.’’

I intend to commission a GAO study with some of our colleagues, Mr. Chairman,

studying the same issues you have brought up today. I would like to know if there

are abuses involved with these 128 Federal spending programs, if they need to limited to firms, businesses or taxpayers of certain sizes or incomes, and if they are

currently limited in such a way, if they need to be further restricted.

We have here before us a report concerning a farm program payments that by

law and in our international trade commitments cannot send out more than $19.1

billion in payments each year. And while that could add up to almost $100 billion

over the next five years, I believe we should expand the GAOs study to include the

$4.4 trillion in tax subsidies that will be passed out over the same time and I look

forward to working with the Chairman and others interested in the hopes of expediting this request. Would the Chairman be willing to work with me to submit and

expedite this request?

Finally, before closing Mr. Chairman, let me just comment a little on the tone and

tenor the critics of farm policy have taken in regard to the whole Farm Bill but payment limitations in particular. I have been very disappointed on a number of levels

by what I see as a divide and conquer strategy being pursued by those who really

oppose U.S. farm policy altogether but who have failed to kill it using their real objections. I’m also very disappointed by the personal attacks against anyone who does

not share their view, including Members of Congress, and frankly the misrepresentation of facts.

First, this business that farm policy is geared to big agribusiness. Supreme Court

Potter Stuart once said about a particular topic that he ‘‘could not define it, but he

knows it when he sees it’’ and that is true about people helped under this legislation. They are real farm families. The statistics that critics use are couched in

USDA’s definition of a farmer which is anyone who produces $1,000 of product or

more on the farm in a given year—the equivalent of a 4-acre corn farm. With this

very broad definition in mind, it is important to note that while 38 percent of farm

families receive 87 percent of the benefits, these farm families also produce 92 percent of America’s food and fiber, make most if not all of their living off the land,

and operate the equivalent of a 372 acre corn farm or larger. You know, I always

read about the Riceland Foods, Incorporated example where my Arkansas co-op is

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supposedly getting hundreds of millions of dollars as if that’s old man Riceland ripping off Uncle Sam. But, as some know, Riceland is a co-op of about 9,000 farm families who share these benefits. And, if split evenly among them all, payments are

about $14,000 per farmer. That’s just a little taste of the misrepresentation going

on out there.

The bottom line is that payment limitations have the real potential to put Arkansas farm families in a terrible spot. At once the federal government says, ‘‘go out

and do what you need to do to be competitive in the world’’ and then at the same

time, we say, ‘‘but, hey, don’t get bigger than the romanticized size we visualize here

in Washington or we’ll punish you.’’ But, the fact is we have payment limitations

in farm policy and I accept them as part of the compromise we struck in the 2002

Farm Bill. The 2002 Farm Bill was debated for over 2 years and a contract was

made with America’s farm families, a contract that my Arkansas farmers, their

lenders, and others they do business with all the way up and down Mainstreet are

relying on and have made business decisions on. That was the main point of the

bipartisan Commission on Payment Limitations made up of Senate, House, and Executive appointees for and against pay limits, Democrat and Republican: Don’t

change the rules midstream. I think we should take their report to heart.

With that, I thank the Chairman again for his strong leadership on behalf of

America’s farm families and for holding this hearing.

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