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24–057 PDF 2005

REVIEW OF THE STATE OF THE FARM

ECONOMY AND THE IMPACT OF

FEDERAL POLICY ON AGRICULTURE

HEARING

BEFORE THE

SUBCOMMITTEE ON

GENERAL FARM COMMODITIES

AND RISK MANAGEMENT

OF THE

COMMITTEE ON AGRICULTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

SEPTEMBER 29, 2005

Serial No. 109–17

(

Printed for the use of the Committee on Agriculture

agriculture.house.gov

COMMITTEE ON AGRICULTURE

BOB GOODLATTE, Virginia, Chairman

JOHN A. BOEHNER, Ohio,

Vice Chairman

RICHARD W. POMBO, California

TERRY EVERETT, Alabama

FRANK D. LUCAS, Oklahoma

JERRY MORAN, Kansas

WILLIAM L. JENKINS, Tennessee

GIL GUTKNECHT, Minnesota

ROBIN HAYES, North Carolina

TIMOTHY V. JOHNSON, Illinois

TOM OSBORNE, Nebraska

MIKE PENCE, Indiana

SAM GRAVES, Missouri

JO BONNER, Alabama

MIKE ROGERS, Alabama

STEVE KING, Iowa

MARILYN N. MUSGRAVE, Colorado

RANDY NEUGEBAUER, Texas

CHARLES W. BOUSTANY, JR., Louisiana

JOHN J.H. ‘‘JOE’’ SCHWARZ, Michigan

JOHN R. ‘‘RANDY’’ KUHL, JR., New York

VIRGINIA FOXX, North Carolina

K. MICHAEL CONAWAY, Texas

JEFF FORTENBERRY, Nebraska

JEAN SCHMIDT, Ohio

COLLIN C. PETERSON, Minnesota,

Ranking Minority Member

TIM HOLDEN, Pennsylvania

MIKE MCINTYRE, North Carolina

BOB ETHERIDGE, North Carolina

JOE BACA, California

ED CASE, Hawaii

DENNIS A. CARDOZA, California

DAVID SCOTT, Georgia

JIM MARSHALL, Georgia

STEPHANIE HERSETH, South Dakota

G.K. BUTTERFIELD, North Carolina

HENRY CUELLAR, Texas

CHARLIE MELANCON, Louisiana

JIM COSTA, California

JOHN T. SALAZAR, Colorado

JOHN BARROW, Georgia

EARL POMEROY, North Dakota

LEONARD L. BOSWELL, Iowa

RICK LARSEN, Washington

LINCOLN DAVIS, Tennessee

BEN CHANDLER, Kentucky

PROFESSIONAL STAFF

WILLIAM E. O’CONNER, JR., Staff Director

KEVIN J. KRAMP, Chief Counsel

JOHN HAUGEN, Communications Director

ROBERT L. LAREW, Minority Staff Director

SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT

JERRY MORAN, Kansas, Chairman

JOHN A. BOEHNER, Ohio,

TERRY EVERETT, Alabama

FRANK D. LUCAS, Oklahoma

WILLIAM L. JENKINS, Tennessee

TIMOTHY V. JOHNSON, Illinois

MIKE PENCE, Indiana

SAM GRAVES, Missouri

JO BONNER, Alabama

STEVE KING, Iowa

MARILYN N. MUSGRAVE, Colorado

RANDY NEUGEBAUER, Texas

CHARLES W. BOUSTANY, JR., Louisiana

K. MICHAEL CONWAY, Texas

JEFF FORTENBERRY, Nebraska

BOB ETHERIDGE, North Carolina,

Ranking Minority Member

JOHN T. SALAZAR, Colorado

JIM MARSHALL, Georgia

STEPHANIE HERSETH, South Dakota

G.K. BUTTERFIELD, North Carolina

CHARLIE MELANCON, Louisiana

JOHN BARROW, Georgia

EARL POMEROY, North Dakota

LEONARD L. BOSWELL, Iowa

RICK LARSEN, Washington

BEN CHANDLER, Kentucky

DAVID SCOTT, Georgia

JIM COSTA, California

TYLER WEGMEYER, Subcommittee Staff Director

(II)

(III)

C O N T E N T S

Page

Etheridge, Hon. Bob, a Representative in Congress from the State of North

Carolina, opening statement ............................................................................... 2

Moran, Hon. Jerry, a Representative in Congress from the State of Kansas,

opening statement ................................................................................................ 1

Peterson, Hon. Collin C., a Representative in Congress from the State of

Minnesota, prepared statement .......................................................................... 3

WITNESSES

Collins, Keith, Chief Economist, U.S. Department of Agriculture, and Chairman, Federal Crop Insurance Corporation ........................................................ 5

Prepared statement .......................................................................................... 46

Funk, Sam, administrator, Kansas Farm Management Association, Kansas

State University, Manhattan, KS ....................................................................... 29

Prepared statement .......................................................................................... 62

Gruenspecht, Howard, Deputy Administrator, Energy Information Administration, U.S. Department of Energy ................................................................... 3

Prepared statement .......................................................................................... 72

Piggot, Nicholas, associate professor, North Carolina State University, Raleigh, NC ............................................................................................................... 33

Prepared statement .......................................................................................... 82

Ray, Daryll E., director, Agricultural Policy Analysis Center, University of

Tennessee, Knoxville, TN .................................................................................... 31

Prepared statement .......................................................................................... 102

Westhoff, Patrick, program director, Food and Agriculture Policy Research

Institute (FAPRI), University of Missouri, Columbia, MO ............................... 27

Prepared statement .......................................................................................... 120

SUBMITTED MATERIAL

Agriculture Energy Alliance, letter of September 9, 2005 to Speaker Hastert .. 125

The Alliance for Health Economic and Agricultural Development, statement .. 128

National Corn Growers Association, statement .................................................... 131

(1)

REVIEW THE STATE OF THE FARM ECONOMY

AND THE IMPACT OF FEDERAL POLICY ON

AGRICULTURE

THURSDAY, SEPTEMBER 29, 2005

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GENERAL FARM COMMODITIES

AND RISK MANAGEMENT,

COMMITTEE ON AGRICULTURE,

Washington, DC.

The subcommittee met, pursuant to call, at 10:04 a.m., in room

1300 of the Longworth House Office Building, Hon. Jerry Moran

(chairman of the subcommittee) presiding.

Members present: Representatives Johnson, Bonner,

Neugebauer, Fortenberry, Etheridge, Salazar, Marshall, Herseth,

Butterfield, Melancon, Barrow, Pomeroy, Larsen, Scott, and Peterson [ex officio].

Staff present: Tyler Wegmeyer, Craig Jagger, Bryan Dierlam,

Callista Gingrich, clerk; Lindsey Correa, Chip Conley, Clark

Ogilvie, John Riley, and Anne Simmons.

OPENING STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS

Mr. MORAN. The Subcommittee on General Farm Commodities

and Risk Management will come to order.

We are here today to review the general state of the farm economy and in light of several significant hurricanes and storm related

damages, plus ever increasing input costs, in light of the fact that

we have a farm bill in consideration to begin in the near future,

we thought it was appropriate for the subcommittee to begin their

review of just generally where we are in the economics of agricultural production today in the United States. We have a number of

witnesses, generally from academia and economists and we are

very interested in hearing what they have to say.

Farm income was up significantly in 2003 and 2004. It is estimated that farm income will be down in 2005, but any suggestion

that things are good in agriculture certainly doesn’t meet the reality test when at least, I am home among Kansas farmers. And

having just completed 69 town hall meetings, one in each of the

counties that I represent, clearly, farmers are concerned about the

cost of input. It is the concern about the cost of fuel and I think,

in our State, it is estimated that the average farmer’s fuel bill will

increase this year by $17,000. It is the cost of fertilizer and in portions of my district and State where irrigation is prevalent, it is the

2

cost of natural gas. So as we sometimes read the headlines or the

stories that indicate that farm income has improved, it also is important, I think, for us to consider the effects of the energy circumstances we face in this country upon farmers.

I relate to my constituents that I have the opportunity to change

my driving patterns. I can slow down, I can turn off the air conditioner, I can ride my bike. Slowing down, actually, is the most difficult thing to do. But my farmers have few options and therefore

those input costs have a dramatic effect upon their ability to not

only feed the world, but to feed their families. And so we have

gathered experts from across the country today to give us an overview of the farm economy, particularly in light of ever increasing

energy costs and I am particularly interested in where we see that

trend going and whether there is a consequence to that increasing

input cost in how we develop the 2007 farm bill. So we are delighted to have our witnesses with us. We are delighted to hear

what they have to say and hopefully help us make intelligent and

wise decisions as we determine agricultural policy now and in the

future. I now recognize the gentleman from North Carolina, Mr.

Etheridge.

OPENING STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH

CAROLINA

Mr. ETHERIDGE. Thank you, Mr. Chairman. Let me welcome our

witnesses and guests today and I think it is, as the chairman said,

very appropriate that we be holding the hearing now, not only to

talk about the current position of agricultural economy, but do a

little peering through a telescope to the future in light of the natural disasters we have just had and certainly, as he has said, in

light of the current conditions of energy in this country and the

cost of it and what impact it is going have, not only in agriculture,

but on the economy in general, which again, will reflect back on the

income of farmers. And not only allow us to get an assessment of

how we are handling the recent disaster, but hopefully help us prepare for the future hearings, as all of us know will be forthcoming

for the next farm bill.

So I look forward to hearing from both of our panelists and the

panelists yet to come. And Dr. Collins, I hope you will take a little

time, as you are giving us an update on the Department, to give

us some damage assessments as you have them, from the recent

hurricanes of Katrina, Rita, the drought in the Midwest, and if you

have the numbers, I hope you will feel free to give us a little prognostication on what impact the energy costs are having now on agriculture, but also in the overall economy, how that is going to reflect back on agricultural commodities over the next several

months and maybe even years, and our ability to market that in

a world economy. Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Etheridge.

Any statements for the record will be accepted at this time.

[The prepared statement of Mr. Peterson follows:]

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PREPARED STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF MINNESOTA

I want to thank Chairman Moran and Ranking Member Etheridge for holding todays hearing. There are tremendous needs in agriculture now. Recent disasters

show widespread crop and livestock losses. Energy prices are hitting farmers

through fuel, fertilizer and other costs, driving up input costs and decreasing already thin margins.These needs come at a time when our trade negotiators and the

President are making statements indicating that they are willing to bargain away

our domestic safety net, just as we are about to write a new farm bill.

We need to address the immediate needs of producers facing disaster situations;

however, we must also recognize what farmers already know—crop insurance and

ad hoc disaster packages are often inadequate and unpredictable. It is time to look

seriously at implementing a standing disaster program, so the guesswork is removed from our farm and nutrition programs in the event of a disaster.

Our current needs also set the stage for the debate on the next farm bill. Questions of whether farm policy should be focused on price or income; is the cost of production adequately addressed by farm policy; and how flexible should our farm programs be to respond to disaster, will need to be addressed as we move forward.

I look forward to todays testimony and hope that it begins to help us understand

the current state of American agriculture, so that we can answer some of the shortterm and long-term questions facing this committee.

Mr. MORAN.We do have our first panel and they are welcome to

the table. Dr. Howard Gruenspecht is the Deputy Administrator of

the Energy Information Administration, U.S. Department of Energy, as well as Dr. Keith Collins, one of our regular participants

in these hearings, who is the Chief Economist at the U.S. Department of Agriculture and also the Chairman of the Federal Crop Insurance Corporation. Dr. Gruenspecht, we will begin with you.

Thank you very much.

STATEMENT OF HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY

Mr. GRUENSPECHT. Thank you, Mr. Chairman and members of

the committee. I appreciate the opportunity to appear before you

today to discuss recent developments in energy markets and their

possible implications for the agricultural sector. The Energy Information Administration is the independent statistical and analytical

agency in the Department of Energy. We do not promote, formulate

or take positions on policy issues, but we do produce data, analyses

and forecasts that are meant to assist policy makers, help markets

to function efficiently and inform the public.

Hurricanes Katrina and Rita wrought incredible devastation on

the central Gulf Coast, most importantly in terms of human suffering, but also in terms of economic impacts that have spread well

beyond the stricken area. At its peak impact, Katrina shut down

over 25 percent of U.S. crude oil production, 20 percent of crude

imports, 10 percent of domestic refinery capacity and over 15 percent of U.S. natural gas production. Some of those impacts were

temporary, but others will continue to affect output for many

months to come.

Rita has compounded these effects. As of yesterday, the Minerals

Management Service reports that all oil production and over 78

percent of natural gas production in the Federal offshore Gulf of

Mexico is shut in. Moreover, while many Texas refineries have restarted or are returning to operation, 3.6 million barrels a day of

refining capacity, as of yesterday, is off line and roughly 2.5 million

4

barrels of refining capacity in Texas and Louisiana is expected to

remain inoperable for at least 2 weeks with some capacity possibly

remaining out for several months.

As you alluded to in your opening statements, the farm sector is

a significant consumer of energy, particularly diesel fuel, propane

and electricity. In addition to direct farm use of energy, agriculture

is indirectly affected by the energy requirements of the fertilizer industry, specifically in nitrogenous fertilizers. With this background

in mind, let me turn to recent energy market developments, starting with petroleum.

Even before Hurricane Katrina struck on August 29, crude oil

and petroleum prices were setting records. Oil prices worldwide

had been rising steadily since 2002, due in large part to growth in

global demand, which had used up much of the world’s surplus production capacity. Refining has also been running at increasingly

high levels of utilization in many parts of the world, including the

United States.

In the immediate aftermath of Katrina, with the extent of the actual damage still largely unknown, crude oil prices rose briefly over

$70 per barrel, but in less than a week had fallen below their prestorm levels. The more significant price impact, however, was on

finished petroleum products. Wholesale prices for gasoline rose

more than $1.40 per gallon east of the Rockies within 3 days and

wholesale diesel fuel prices rose 35 to 40 cents a gallon.

The seemingly disproportionate change in finished product prices

reflects the severity and expected persistence of the impacts of

Katrina and now Rita on refining operations in the Gulf. Wholesale

product prices, like those of crude oil, have fallen back somewhat

from their peak levels, but obviously, Rita, then following on after

Katrina, has moved things in the other direction.

The near-term outlook for oil markets depends on a number of

factors, but the most important is the rate at which refinery capacity can be brought back on line. The Energy Information Administration released our monthly Short-Term Outlook, I think, September 7. We do this every month. We will do another one in October.

And in that Outlook, we considered several cases based on the

speed of recovery of the energy system from the effects of Hurricane Katrina.

In our Medium Recovery Case, we expect that the price of diesel

fuel, at the wholesale level, would be up in September about 22

cents from its August level and that that price would slowly decline. However, the September price would be about 79 cents per

gallon higher than the same month a year ago, while in December,

after prices declined somewhat, the year-over-year increase would

be 73 cents per gallon. And again, this is prior to Rita.

Natural gas. Like crude oil and petroleum products, natural gas

prices were also setting records even before Hurricane Katrina

struck. In August, the Henry Hub natural gas price averaged over

$9 per thousand cubic feet as hot weather in the East and Southwest increased natural gas-fired electricity generation for cooling

demand.

In our Medium Recovery case, again, we expect prices at the

Henry Hub to remain well high by historical levels. Depending on

the speed of recovery from supply losses in the Gulf of Mexico, the

5

average price across the three recovery cases for the fourth quarter

range from $11 to $13 per thousand cubic feet. We do expect the

natural gas market to stay tight for the next couple of months, particularly given the supply impacts of Katrina and Rita. Maybe a

brighter part of the picture, from the agricultural perspective, is

the impact of higher petroleum prices on ethanol’s competitiveness

as an energy source. EIA has recently done several studies in connection with the Energy Policy Act of 2005 and we found that the

penetration of ethanol was very sensitive to the oil price scenario

and I think that is discussed at greater length in my written testimony.

In terms of energy expenditures, for this winter, we expect heating costs to be significantly higher than last winter. It varies by

fuel and by region. In terms of farm costs, all I would say is that

every additional dime added to the price of diesel oil sustained over

a year at about $400 million annually to U.S. agricultural costs.

Every dollar added to the price per thousand cubic feet of natural

gas costs over $200 million and obviously affects the cost of fertilizer.

That concludes my statement and I would be happy to answer

any questions that you or the other members might have. Thank

you, Mr. Chairman.

[The prepared statement of Mr. Gruenspecht appears at the conclusion of the hearing.]

Mr. MORAN. Thank you, Doctor. Dr. Collins, welcome.

STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE AND CHAIRMAN, FEDERAL

CROP INSURANCE CORPORATION

Mr. COLLINS. Thank you very much. Mr. Chairman, Mr.

Etheridge, members of the subcommittee, including Mr. Peterson,

the full committee’s ranking member, thanks for the chance today

to discuss the state of the U.S. farm economy. As we all know, the

U.S. farm economy began a recovery in 2003 that has continued up

until this year. U.S. and global income growth and rising agricultural exports have helped push U.S. net cash farm income to a

record high in 2003, set another record in 2004 and cash income

this year is likely to be near last year’s record high level. Partly

reflecting these returns, U.S. farm land values increased 11 percent

in 2004. That was the highest increase since 1981 and we are forecasting a 7 to 8 percent increase in land values in 2005.

While aggregate cash income has remained healthy and farm equity is growing, as the chairman noted, there are several factors

that will cause uneven economic performance for many producers

and are raising uncertainty about next year.

First, sharply higher energy prices are cutting into net farm income and will likely continue to affect production input and marketing costs in 2006. Second, losses caused by drought in the Corn

Belt and Hurricanes Katrina and Rita, as well as other regional adverse weather, have reduced income prospects in those affected

areas. Third, rising interest rates are increasing farm production

costs, and with higher energy prices, raising uncertainty about the

future rate of economic growth.

6

Large world production and record U.S. crops last year have

caused prices of major crops to pull back this year. The price decline has been reinforced by large crops expected to be harvested

this fall. In fact, despite the weather problems, we are forecasting

the second largest corn crop, the second largest cotton and rice

crops ever and the third largest soybean crop ever this fall. Congestion on the Mississippi River, due to the hurricanes, has also exacerbated the price declines, although the river traffic appears to be

rapidly resuming. The sharp increase in loan deficiency payment

rates and counter-cyclical payments, will offset some of this market

price decline. But this will, of course, add to farm program spending, which was already up. Farm program spending, which dropped

to $10.6 billion in fiscal 2004, was expected to be $19.5 billion in

2005 and $22 billion in 2006, even prior to Hurricanes Katrina and

Rita.

World economic growth and rising U.S. agricultural exports will

continue to underpin the health of many farm commodity markets.

USDA’s late August forecast placed U.S. agricultural exports at

$63.5 billion for 2006, up roughly $13 billion from the year 2000.

This would be record-high exports, even though Asian markets remain closed to our beef. Beef and veal exports this year are forecast

to be only $800 million and that compares with over $3 billion in

2003, the last year of normal beef trade. Despite the closed beef

markets and increasing meat and milk production this year, livestock and poultry producers have again seen good financial returns.

Even though meat production and poultry production are expected

together to be up 2.5 percent, after little change in 2004, consumer

demand for meat and dairy products has been strong and the livestock and livestock product prices set records in 2004 and are at

or near those levels in 2005. Lower feed costs are also boosting returns.

For the 2006–07 crop markets, we must closely watch global demand and U.S. input markets. For example, ammonia prices after

Katrina struck were being quoted at nearly 40 percent above a

year ago. That plus higher diesel costs could pressure returns for

producers of energy-intensive crops.

For livestock next year we expect the prices of the past 2 years,

which have been good, and the turning of the cattle cycle, which

is finally increasing, to result in a near 3 percent expansion in total

meat and poultry production and that is going to mean softer

prices for livestock and livestock products. Despite uncertainties,

weather shocks and the prospect of declining future returns, there

are many positive forces supporting U.S. agriculture. Global economic growth at this point appears sound, export prospects remain

good, global grain stocks as a percent of use remain low by historical standards. Meat demand remains firm. Farm programs are offsetting much of the price declines for program crop producers and

participation in crop insurance is high.

In addition, crop prices could move higher over coming months

after the harvest passes and the logistical snags caused by Hurricanes Katrina and Rita are fixed. That completes my statement,

Mr. Chairman.

[The prepared statement of Mr. Collins appears at the conclusion

of the hearing.]

7

Mr. MORAN. Thank you, Dr. Collins. The increasing input costs

of fuel fertilizer and natural gas that farmers in the United States

are facing, is that creating a competitive disadvantage in comparison to the producers, farmers in other parts of the world or are all

farmers experiencing the same kind of increase in input cost?

Mr. COLLINS. Well, not all farmers are experiencing exactly the

same, but generally, of course, crude oil is priced in dollars on

world markets and depending upon exchange rates and local conditions, it can differ from country to country. In addition, a big difference between us and other countries is natural gas prices, where

we have extremely high natural gas prices because it is not an

internationally traded commodity. I guess our liquefied natural gas

imports account for a very small percentage of our total use and

so we have high natural gas prices which has fed into higher fertilizer prices, nitrogen prices, whereas other countries of the world

may not face such higher nitrogen prices.

So I think there is going to be a difference in energy costs between U.S. agricultural producers and those in other countries. I

am not sure it has put us at a competitive disadvantage at this

point because we have had very large crops, we also have very

large crops in storage and we price competitively on world markets,

and what it means to be able to price competitively and maintain

our market share in those commodities is that producers may have

to take a lower price and that gives them less income to pay those

higher energy costs. Over time, if energy prices stay high and farm

prices stay where they are now, then I think we could be at more

of a competitive disadvantage, but I don’t see us at this point.

Mr. MORAN. Is there any evidence, any way to predict the number of U.S. farmers, due to increasing input costs who will no

longer remain as farmers?

Mr. COLLINS. No, I cannot predict that. I am sorry.

Mr. MORAN. Dr. Collins, it is the anecdotal conversation at, kind

of, in every community is with these prices, commodity prices

where they are and fuel and fertilizer prices where they are will

not be in business next year. Is there truth to that?

Mr. COLLINS. I don’t think for most producers there is truth to

that. I heard that in 2000 and 2001 and we got by that. I think

you have to put what is going now in a little bit of perspective. Agricultural markets are cyclical. We have been, the last couple of

years, at the top of a cycle. You might say we were at the bottom

in 1998 and 1999. Not only are we at the top, we are way beyond

what most people expected the top to be. Farm income, in 2004,

was 20 percent above the all-time previous record. Now, I point

that out to say that people in cyclical businesses have to understand that that is the nature of their business and so they have

to prepare for that.

They have to save, in the good years, to cover the bad years because the bad years come in agriculture, as everybody knows who

has been the business for a long period of time. So I am hoping

that there are a lot of producers who stored some of that high income from 2003–04 and the first part of 2005 in their rainy day

fund to help cover next year. Is every producer going to be in that

position? No. There are surely going to be producers that are going

8

to be squeezed by this situation, but at this point, I couldn’t tell

you how many people are going to be in that position.

Mr. MORAN. Dr. Gruenspecht, the hurricane, as I understand it,

has reduced natural gas production in the Gulf of Mexico and according to the EIA website, the working gas in storage has increased 3.4 percent above the 5-year average. If our working gas

supply has increased above the 5-year average, how do we explain

the cost of natural gas? Do we have less storage capacity? I am

reading this question, although it is one that Kansans talk to me

about all the time. I am trying to get the words correct so that I

can ask the question appropriately, but there is a real sense out

there that we have increased our natural gas supplies and yet the

price keeps going up. Response?

Mr. GRUENSPECHT. Well, I think storage is one important factor

that affects the price. I would say that earlier this year we running

not only above the 5-year average, but we were running above last

year’s storage and that is no longer the case. We are now below

last year’s storage level. But the other thing that I think the markets look at are the prospects for production. If you are looking at

a, say, production shortfall of let us say 3.4 billion cubic feet a day,

which was where we were 3 weeks after Katrina, but before Rita

hit. If that persists for a month, 3.4 billion cubic feet times 30 days

becomes 100 billion cubic feet. So very quickly, if you have production reduced, there is a concern about the future market balance.

Mr. MORAN. Was the production reduced before the hurricanes?

Mr. GRUENSPECHT. Actually, they were still in effect, I believe,

of Hurricane Ivan that persisted for quite a long time and it is also

the case that production in the Gulf of Mexico has tended to decline

somewhat over time. That is an old production area and production

had been falling off as a function of time, as well as due to Hurricanes Ivan, Katrina and Rita, so natural gas is a real challenge

balancing supply and demand, and over time we see LNG coming

in more, we see perhaps a pipeline from Alaska eventually being

built, but that will take 10 years to build, so some of the unconventional gas will come in, as well, from the Rockies.

Mr. MORAN. Let me make sure I understand your answer because this one I have to explain at home.

Mr. GRUENSPECHT. Right.

Mr. MORAN. There is greater gas in storage and that is one factor

in determining the market price for natural gas, but what you are

telling me is another factor is the potential to replace the gas in

storage, i.e. production.

Mr. GRUENSPECHT. Right.

Mr. MORAN. And that we have seen as being reduced over a period of time even prior to Katrina and Rita. Is that accurate?

Mr. GRUENSPECHT. That is a fair description, sir.

Mr. MORAN. And the future, in that regard?

Mr. GRUENSPECHT. Rita, the impacts have not really been evaluated. Right now, the outages are about 7.8 billion cubic feet a day,

which is significantly more than 3.4. The question is how quickly

will that come back? In part, it has to do with the production infrastructure, itself. In part, it has to do with the subsurface pipelines

that bring that to shore and there is another aspect of it, which is

a natural gas processing plant. Some natural gas goes directly from

9

the well into the transmission and distribution system, but other

gas is processed and some of those plants, you don’t hear as much

about them as you do about refineries, but some of those plants

along the Gulf suffered significant damage and their availability is

a very important question.

Mr. MORAN. Thank you very much. The gentleman from North

Carolina, Mr. Etheridge.

Mr. ETHERIDGE. Let me just follow that up with one point and

if you can answer with a yes or no, because it is hard to explain

to the people we deal with that all this stuff in storage, the price

goes up dramatically. The cost of that has already been paid. There

is a windfall on what you now have in storage.

Mr. GRUENSPECHT. There is certainly a capital gain, I will give

you that.

Mr. ETHERIDGE. They called it another thing and I tend to agree

with them. Dr. Collins, in your testimony, you project an agricultural trade surplus for fiscal year 2005 at $4.5. billion. That is a

sharp decline from last year’s surplus of $9.7 billion. The Department’s export/import projection for the fiscal year 2006 when they

had an agricultural surplus of $2.5 billion.

The farmers I talk with are starting to see a steady decline in

the agricultural trade surplus and are growing more and more concerned as these declines appear to be caused by a surge in foreign

imports. Since 2002 agricultural imports have risen by an average

of $5.5 billion a year, compared to the previous 3 years when they

rose by an average of $1.2 billion. What is the source of this increase in imports? Is it the trade agreements we have enacted over

the past 3 years or are there other economic reasons behind it?

Second, what agricultural products are we bringing in that represents this potential increase and finally, are they displacing products grown here or are they products not produced in the United

States?

Mr. COLLINS. Mr. Etheridge, I think the trade agreements are

probably a minor factor in this. I think the major factor is the rising affluence of Americans, the diversity of our population; more

Hispanics, more Asians; the desire for more horticultural products,

fresh fruit and vegetables year round. Half of our imports are horticultural products, so there are seasonal imports that come in,

there are fruits that are produced in other countries and ethnic

foods that come in, so I think the primary drivers have been a rise

in income and affluence and our desire for horticulture products.

In addition to that, many of the imports that are coming in are

things like wine and beer, essential oils, snack foods and processed

foods, so it is quite an array of things, some of which we produce,

much of which we don’t produce, so I think it is something we are

probably going to continue to see. Another factor I should mention

is the diet and health consciousness of Americans that again causes

them to want more fruits and vegetables, and fruits and vegetables

happen to be something that is very labor intensive. For our fruits

and vegetables production in the United States, about 40 percent

of the production costs are labor.

Mr. ETHERIDGE. Do you see this trend continuing?

Mr. COLLINS. I see the trend continuing, yes, sir, I do.

10

Mr. ETHERIDGE. OK. Your testimony speaks of fiscal year trade

surplus projections, though I know the Department also makes calendar year projections. Can you tell us the Department’s projection

for the agriculture trade surplus or deficit for the calendar year

2005–06? Many of the other statistics you sought are in calendar

year. Is there a particular reason why trade projections are made

using fiscal years?

Mr. COLLINS. That is a good question. For a long time, we used

to do both calendar and fiscal years and then we stopped doing calendar and went to fiscal years because it was just too much work

to do both. I really can’t tell you why we chose fiscal over a calendar year.

Mr. ETHERIDGE. But testimony still carries both that.

Mr. COLLINS. I don’t. In fact, my office clears and puts out the

official projections for exports and we only do fiscal years. What

you will see sometimes is other projections put out by other parts

of the Government, but for us, we just do fiscal year. Unfortunately, we put out lots of projections. We put them out on a calendar year basis, like farm income. We put them out on a crop year

basis, like corn prices. We put things out on a fiscal year basis, like

farm program costs and exports.

Mr. ETHERIDGE. OK, final question of you is your testimony mentioned export projections for 2005 for the cotton crop. If Congress

immediately eliminates the Step 2 Cotton Competitiveness Program as demanded by the Secretary in order to comply with the

WTA ruling on the Brazilian case against the U.S. cotton program.

What will be the impact on cotton prices and exports for this year

and beyond?

Mr. COLLINS. Mr. Etheridge, when the administration sent their

recommendation to Congress to repeal the Step 2 program back in

the middle of the summer, we did do an analysis of the repeal of

Step 2. At that time, looking out into the future, we had been projecting a Step 2 payment rate to exporters and to domestic mills

of about 2 to 3 cents a pound. If that 2 to 3 cents a pound were

removed, what that would mean is a little bit lower domestic farm

price and a little bit higher price paid by foreign customers of U.S.

cotton because we believe that 2 to 3 cent subsidy payment is split,

with about 75 percent of it getting reflected in higher U.S. prices

and about 25 percent of it getting reflected in lower export selling

prices by our exporters.

So if you pull that 2 to 3 cents out, you get a little bit higher

price in the world market for U.S. cotton, a little bit lower farm

price. What it does to exports and domestic use are fairly modest.

We don’t think domestic textile mills respond very much to price

changes. We estimated at the time maybe a 25,000 bale reduction

in domestic use by cotton textile mills and we estimated that we

would lose, in the first year, about 250,000 bales of cotton exports

and over time, that that loss would diminish because markets

would adjust to that.

However, I might tell you that today, as we sit here today, the

Step 2 payment rate is running about 4 to 5 cents a pound, which

is substantially higher than what we used when we looked at this

a couple of months ago. So if I were to redo that analysis today,

I would probably show a little bit bigger impact on the decline in

11

domestic textile use and a little bit bigger loss of exports in the

first year. But again, I would have that loss dissipating over time

as markets adjust.

Mr. ETHERIDGE. Mr. Chairman, I see my time has expired, but

sometimes we use old projections to make decisions when we are

in the current environment and the cost is going to be increasing

in the future. And I think your last number of 4 to 5 cents is probably more accurate and could be higher if the energy prices continue and we would be put on a competitive disadvantage. I am not

an economist, but I can figure. Thank you, sir.

Mr. MORAN. The gentleman from Alabama, Mr. Bonner.

Mr. BONNER. Thank you, Mr. Chairman. Dr. Collins, I am from

Mobile, Alabama. My district was severely impacted by Hurricane

Katrina. Last Thursday a group of farmers from my district, as

well as some from Mississippi, came together to discuss the crop

insurance programs that our country has and that the world looks

upon, in many cases, with envy. And yet they were left wondering

well, what about them? What happens to the nursery growers, for

instance, or the Christmas tree farmers who are excluded from the

current insurance programs that we have and it begs the question

that since we have got a program that is a model, that many countries look upon with envy, after storms we seemingly continue to

have to come up with disaster assistance to help compensate producers for their loss due to Mother Nature. And I guess my first

question would be how do we make the crop insurance program

that we have better, stronger and more available to people who

currently are outside of that box?

Mr. COLLINS. Yes, sir. I would say that has been a major task

of the Congress and the U.S. Department of Agriculture for the last

decade. If you go back to the mid–1990’s, we probably had 20 to

30 percent of insurable acres insured. As we sit here today, we

have about 80 percent of insurable acres insured. If you go back

to around year 2000, about 8 percent of our policies were what we

call buy-up, that is producers were buying up 65 percent or higher

coverage. Today it is over 50 percent buy-up, so I would like to celebrate crop insurance as somewhat of a success in terms of coverage over the last 4 or 5 years. We do have a nursery policy. Nursery is not excluded. It is a crop that is insurable.

For crops that are excluded, we have a complimentary program

called the Non-Insured Assistance Program. Admittedly, it is like

catastrophic coverage insurance. It only covers losses is excess of

50 percent. But any commodity produced in the United States for

which insurance is not available, there is that safety net Non-Insured Assistance Program. So having said all that, we can still do

a better job. We know, that as we look across the Nation, our rates

that we charge producers are not necessarily always actuarially

where they should be, so that some areas of the country might be

paying more than they should be paying, and that will discourage

producers from participating in the program.

We look at areas of the country and we know that in certain regions producers are buying just catastrophic coverage, and catastrophic coverage is 50 percent, it only covers 50 percent of the production at 55 percent of the value, so 0.5 times 0.55 is 27.5 percent.

So you are only covered up to 27.5 percent of the total value of your

12

crop. That is not very satisfying if you have a loss, to get a check

for 27.5 cents on a dollar. So we need to go across these commodities and we where we see that catastrophic coverage is the predominant coverage, we have to figure out what is wrong and why

the program can’t be made more attractive. And that is a balance

that we do in crop insurance.

We are always looking at new products, like we are trying to increasingly get into livestock coverage and range, pasture and forest

coverage, so we are always looking at new products, but we can’t

put all our resources just in new products. We have to look at the

existing products where participation is insufficient and see what

we can do to remedy that condition. It is just an ongoing process

that we have to stay on top of.

Mr. BONNER. Well, I guess the follow-up is, is that when I go to

meet with these farmers, these growers, this weekend and next

week, and I give them the assurance that the Department is going

to be aggressively working to come up with new ways to expand

the current program and to make certain that they are not going

to be forgotten in this. They are not looking for the Federal Government to come in and to create a welfare situation for them, but

they are—you take a nursery, one lost $2 million of uninsured

crops, that is a pretty heavy hit for a small business. And they are

looking to me as they are looking to our colleagues from Louisiana

and Georgia and South Dakota and Texas to try to make sure that

we are not going to let them fall through the cracks of the programs that we have in place to try to protect them.

Mr. COLLINS. I think you can have our commitment and I say

that as someone who works on crop insurance and has some role

in what we do there. Nursery is probably our most complicated insurance product that we have. When a producer wants to buy nursery insurance, we have to send him a CD of the price elections. We

have hundreds of thousands of price elections, because we quote

prices for every single nursery crop by size of pot, from 1-inch pots

to 10-inch pots for every variety of plant. It is a very complicated

policy. It takes a lot of work on the part of the nursery growers to

determine their insurable value. We have been working on trying

to simplify that policy and make it more appropriate.

In fact, we just put out a nursery policy this year. In 2005 we

amended the nursery policy and put out a whole new set of parameters and specifications on nursery, which we hope will make it

more attractive and more usable in 2006 for producers. But I think

you can tell your producers that the Department of Agriculture is

deeply concerned with making crop insurance work. We are not

particularly delighted about having crop insurance and disaster assistance programs. We have disaster assistance programs every

year. We would prefer to have things based on crop insurance, actuarially sound crop insurance which is consistent with market

principles, and that is the best way to get the most efficient production agriculture. So we are going to work on that.

Mr. BONNER. Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Bonner. As I indicated to Mr.

Bonner yesterday, members of our subcommittee, we anticipate

sometime in the future having a hearing in the South, perhaps in

Alabama, on this issue of crop insurance and how it works and

13

doesn’t work in regard to the landscape business, the greenhouse

industry, kind of the specialty crops, and take a look at specifically

the hurricane issues and crop insurance, so we are trying to figure

out when Congress might adjourn or recess so that we have the opportunity to take a further look. The chair now recognizes the

ranking member. We are pleased to have you with us, Mr. Peterson.

Mr. PETERSON. Thank you, Mr. Chairman. I want to follow up.

Is the administration, in the aftermath of this situation where the

President has said we are going to do whatever it takes and talking

about $200 billion, is the administration supporting an ad hoc disaster program as part of that?

Mr. COLLINS. I have had no intelligence on that, Mr. Peterson.

The administration is still considering its position on disaster assistance.

Mr. PETERSON. So that is not part of the deal?

Mr. COLLINS. I can’t say whether it is or whether it isn’t. That

is something more appropriate for the White House to say.

Mr. PETERSON. You don’t take a position on that, you are just,

you are not, the Department’s not advocating that we do this?

Mr. COLLINS. I am not going to take a position on that today, Mr.

Peterson.

Mr. PETERSON. Well, I didn’t say you, but——

Mr. COLLINS. Or the Department.

Mr. PETERSON. I hope the administration gets on board because

if we are going to spend the kind of money and, I went through

a disaster. I had three towns under water and I support helping

folks, but we have got to also, if we are going to do that, we have

got to take care of the agricultural producers because they have

been hard hit, not only there, but other parts of the country.

Mr. COLLINS. I would say that the Secretary has told us and said

publicly that, while not taking a position one way or the other, if

there is a disaster assistance bill for agriculture, he would like to

work with Congress on that and ensure that it is something that

is crafted in a most effective way.

Mr. PETERSON. Yes. And do I understand, so 80 percent of the

people are insured now?

Mr. COLLINS. Eighty percent of insurable acres are insured.

Mr. PETERSON. Right. And half of that is CAT coverage?

Mr. COLLINS. I should know off the top of my head, but I can’t

remember what percentage is CAT.

Mr. PETERSON. Something like that, isn’t that what you said?

Mr. COLLINS. No, no. I think CAT coverage is much, much lower.

I think CAT coverage is like 15 or 20 percent. It is not half. It is

well below that.

Mr. PETERSON. That is not actuarially sound. Even at 27.5 percent, those people aren’t paying anywhere near what that costs.

Mr. COLLINS. Correct. It is a grant.

Mr. PETERSON. Yes. So I think we need to get honest about this.

I looked at this crop insurance thing. We have got an ad hoc disaster every year for what, the last 7, 8 years. We are probably going

to do it again this year. I think we are kidding ourselves.

The one thing that we are missing in this whole deal is to have

a permanent disaster program as part of the farm bill and quit kidVerDate 11-SEP-98 13:03 Oct 25, 2005 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 F:\DOCS\109-17 HAGRI PsN: HAGRI
14

ding ourselves that we are ever going to fix crop insurance to make

this thing work and if we could ever get out of a year where we

don’t have a disaster where we could pass this, giving the Secretary the authority to do this in a disaster county, we could put

the requirement in there that unless you have buy-up coverage,

you don’t get that disaster payment and then we can finally get to

the bottom of this thing.

But it is just every year after year after year we are doing this

and I think we are kidding ourselves, so I have introduced a bill

on this regard. I hope that you folks will look at it, because I think

this is something that is missing in the farm bill and that we need

to look at as we do the next farm bill.

Mr. COLLINS. Disaster is not an easy concept if you are going to

wrap it around and actually sell a crop insurance policy. I worry

about just adding that to what we have now.

Mr. PETERSON. Well, no, but what I am saying is that you

wouldn’t get the disaster payment unless you bought up and get rid

of CAT coverage because we are kidding ourselves. We put the CAT

coverage in because we passed disaster bills that said that you

couldn’t get a disaster payment unless you had crop insurance and

so we let people buy crop insurance for $50 so they qualify, that

is what that was all about.

Mr. COLLINS. Right.

Mr. PETERSON. We are just kidding ourselves.

Mr. COLLINS. Right. You have read the actions of Congress year

in, year out on passing ad hoc disaster to say we are always going

to have it. I would rather stick with crop insurance. I would rather

have crop insurance than a grant program. I would rather have

crop insurance delivered by the private sector than crop insurance

delivered by the Government.

Mr. PETERSON. I don’t think some of these areas are ever going

to buy it and I have one more question and then I am out of time.

We can discuss this later. On this income in 2003 and 2004 and

2005 that were the highest ever, how much of that is livestock, specifically cattle? Isn’t one of the reasons that the income is up so

much is we have had high cattle prices? Do you know what percentage of that is cattle prices?

Mr. COLLINS. I have it here in my notes somewhere, but I can’t—

I would be happy to give it to you. It is pretty close to 50–50. We

have had 2 or 3 consecutive years of both crops and livestock receipts over $100 billion. We have never had that before in history,

so there has been a big increase in livestock receipts over the last

couple years.

Mr. PETERSON. I would guess the biggest percentage of this increase is in the cattle.

Mr. COLLINS. I would agree with that. Milk, too.

Mr. PETERSON. Yes, we had the high prices.

Mr. COLLINS. Right.

Mr. PETERSON. Yes. Thank you. Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Peterson. The gentleman from

Texas, Mr. Neugebauer.

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Thank you for

holding this very important hearing because I think one of the

things that I think most members of the committee are hearing is

15

that the energy prices are having a tremendous on the profitability

of agriculture at just about every level. Dr. Gruenspecht, what are

some of the things from a policy standpoint that could be considered to help give some near-term relief to producers on these high

energy costs?

Mr. GRUENSPECHT. It is hard for Energy Information Administration to talk about policy. I can talk about some of the things that

have been done, which are broadly targeted, I would say. There

have been loans of oil out of the Strategic Petroleum Reserve to

folks who could not get oil, crude oil, through their regular channel.

There have been sales from the Strategic Petroleum Reserve. There

have been coordinated releases of products with the other international energy agency countries to help bring product in, which is

particularly important to the refining situation that we have.

There have been waivers of the Jones Act, which is to allow ships

that would not normally be allowed to carry product in trade between U.S. ports to do that, which makes it easier to bring products in. There is certainly an effort to prioritize some of the restoration of electricity in ways that will help the energy industry

come back into production. In some cases, some of the refining capacity, the issue is not damage to the facility, itself, but the lack

of availability of electric power, so there is a lot of effort going on

there, as well. There has been some relaxation of environmental

fuel specifications to help fuel move around more easily. Those are

just a few of the things that have been done.

Mr. NEUGEBAUER. One of the ideas that I think has been floating

around a little bit would be to relax the fuel tax that, as you know,

on production side of fuel consumption, that fuel is exempt from

certain taxes. And one of the things that is being talked about is

that to extend that to the delivery and to the production and to the

shipping of some of those agricultural products, at least on an interim basis. What would be your, Dr. Collins, both of you, what

would be your reaction to that?

Mr. GRUENSPECHT. I guess I would defer to Dr. Collins on that

point.

Mr. COLLINS. I would defer to the Treasury on that point. People

who are interested in deferring taxes are worried about the impact

that the higher costs are going to have on them. There are others

who are suggesting that we ought to even raise taxes to make oil

and gas a more pricier commodity to encourage conservation and

development of alternative sources of energy. So I don’t have any

particular thoughts on this except to say that from an economist’s

point of view, what happens is, when you have a cutback in supply

of a commodity, the way the market works is prices go up, the

prices encourage conservation.

They also encourage increased supply over time and so the markets adjust. If you start waiving taxes or subsidizing energy, what

you do is you dampen that response on the consumer side, so you

are going to get less of a cutback in consumption, less of an incentive to find alternatives and efficient uses and you are going to

probably slow down the adjustment process to the energy cutback

in the first place.

Mr. NEUGEBAUER. Well, I agree with you, but the problem with

agriculture is the fact that other areas of the economy you can add

16

a fuel surcharge on, but when farmers and ranchers and producers

in our country don’t have the luxury of saying oh, by the way, to

the packers, we are going to put a fuel surcharge on our cattle that

we are shipping, or we are going to put a fuel surcharge on the cotton that we are shipping, one of the things we have to look at in

certainly long term is implementing a comprehensive energy strategy that brings some stability to the markets.

I want to go back to the crop insurance issue here. My time is

about to expire. Mr. Chairman, I have introduced a crop insurance

bill that would actually give better coverage and would put the

GRP coverage on top of some of the revenue policies and really,

what would be going on right now, instead of having the discussion

about a disaster program, we would be taking claims on these

areas that were impacted by these two hurricanes and so I want

to continue to encourage the chairman to have some, and I am glad

to hear that we are going to have some crop insurance hearings,

but I guarantee you that the scoring of my bill opposed to ad hoc

disaster programs is a great deal and it is, you know, Dr. Collins,

you and I have had some discussions about that.

Mr. COLLINS. If I could comment on it, even though the time is

up. Mr. Neugebauer, I testified here a couple of months ago and

you raised this issue with me and I was concerned about your proposal, in effect, talking about double indemnities. I have had a

chance to look at your proposal in more detail since then and I find

it very intriguing, actually. One of the things I was concerned

about was the high coverage levels, that would result from two

policies, on moral hazard. But there is no moral hazard with an

area policy. I think that there is something that could be done

there and I think that as we think about standing disaster, that

proposal should be contrasted with standing disaster, because I

think it is certainly a feasible and could be an efficient alternative.

Mr. NEUGEBAUER. Thank you.

Mr. MORAN. It sounds like unqualified support, Mr. Neugebauer.

Mr. COLLINS. Well, as much as I can give.

Mr. MORAN. We are encouraged to hear it. Congresswoman from

South Dakota, Ms. Herseth.

Ms. HERSETH. Thank you, Mr. Chairman and Mr. Etheridge. I

think this is a very important hearing, certainly timely. I want to

thank the panelists today for their testimony and overview of the

state of our farm economy in the United States in particular because of the challenges we face following Hurricane Katrina and

now Hurricane Rita, other disasters around the country, trade

anxieties and since you have addressed a number of the questions

that I had in your written testimony and your summaries, as particularly with commodity prices, particularly with the impact of energy costs. Let me just articulate some of my concerns based on our

discussion here and just pose one question.

The impact on producers of any size, but particularly smaller

mid-sized family-run farms, when you look at the input costs, not

just with energy now, but even before that, when you look at some

of what I think is some uncertainty based on some questions that

have been posed today by Mr. Etheridge about market competitiveness in the global economy given these energy prices. When we also

combine that with what is happening to average consumers, not

17

just those that are involved in agriculture, but I don’t know if you

saw, the American Banking Association just came out with a study

showing that we have had a record high number of individuals who

are late on their credit card payments and that was from April

through June and the primary reason in their study was energy

costs and we know that for farmers, in getting their financing for

next season, are treated differently than the average consumers,

who pay a higher interest rate and a late fee on that credit card

statement.

I want to just go to a point that you made, Dr. Collins, about people need to understand they are in a cyclical business here and I

think that at least the producers that I represent clearly understand that and the Federal Government is in a far better position,

in my opinion, to have a rainy day fund, which we haven’t had,

than some of the producers that I represent because they have

been hit with multiple-year disasters, mostly drought, but some

flooding, other issues where there has been some prevent plan payments that come through for them. And they know that the crop

insurance isn’t designed to make them whole, but to at least make

it to the next year.

The impact of some trade has had a negative impact in South

Dakota. And then you have the higher input costs, the environmental standards, so any savings that I think they have been able

to hold onto have gone into the higher input costs and now going

to the higher energy costs. They have gone to supplement whatever

disaster payments or crop insurance they have been able to get to

survive to the next year.

And so I agree with what I think Chairman Moran was getting

at in terms of any projections about those farmers that just may

not make it through at this point despite the fact that they have

tried to save and how that may influence the Congress’ decisions

in budget reconciliation and our trade representatives’ decisions in

WTO and so the question is, can USDA come up with any kind of

projections or estimates on the impact of the confluence of factors

here, not just in the last few weeks, but in the last few years, for

small and mid-size family operations that may not make it, because I think those are important numbers to have for us and our

decisions, for the administration and the trade representative in

some of what is coming up within the next few weeks and months.

Mr. COLLINS. That is certainly a fair question and I guess I

would say that we have a very detailed financial analysis program

at USDA that produces a vast array of income and solvency measures of agriculture. We produce farm income estimates three times

a year, February, August and November, and not only do we

produce the aggregate, we also produce by type of farm, whether

it is a grain farm or a cotton farm. We also produce by size of farm

estimates of income and insolvency, so we have a lot of stuff that

we just published as of August 31, which could give you some insights on these things and in fact, they do show that for some types

of farmers in some regions of the country, some very sharp declines

in net farm income for 2005.

To go from that to how many farms are going to go under, that

is another matter. That is very difficult to do. That depends upon

the financial resources of the farm and its access to credit and

18

many other things that we really can’t estimate on an individual

basis, but we can certainly give you an array of information, distributional information, about farms and their financial condition

in the United States. Now, unfortunately, as I say this, that was

August 31. That was done based off of our August objective yield

survey and that was pre-Katrina, pre-Rita and we know there have

been some charges.

I will give you one example. Fuel costs and fertilizer costs for

farmers between 2004 and 2005. In that farm income number we

released at the end of August, we had a $3.3 billion increase in fuel

and fertilizer costs for agriculture. Post-Katrina, we have taken another look at it. This is not an official estimate, but using our models, it now looks like it would be about a $4.8 billion increase. So

based on the Department of Energy’s medium recovery scenario

from the hurricanes, we would probably add about $1.5 billion to

this year’s energy costs for farmers alone, so that is significant.

That is a factor and that is going to come out of incomes particularly the energy intensive crop producers. Now, that is an aggregate number. But we have also some of these distributional numbers that we can provide you, as well.

Ms. HERSETH. I appreciate it, Dr. Collins. Thank you, Mr. Chairman.

Mr. MORAN. The gentleman from North Dakota, Mr. Pomeroy.

Mr. POMEROY. I thank the chairman. Dr. Collins, in your testimony, you had strong global income growth and rising U.S. agriculture exports helped U.S. net cash farm income reach record high

in 2003. It eclipsed that record by 20 percent in 2004 and it remained on track to approach that 2004 record again in 2005. It

seems certainly an important part of the picture, although it

doesn’t reference at all the role of domestic cattle prices in terms

of establishing that net farm income. Don’t you think that you have

only presented part of the picture?

Mr. COLLINS. That is why my testimony is 16 pages long. That

was in the first page. I did present a lot more details as we went

on and your point is well taken and Mr. Peterson made the same

point. I think, in fact, I have been able to recover the cattle and

crop data and just to give you an example, in 2002, when we were

sort of at a low point in the cycle——

Mr. POMEROY. Well, actually, I find that interesting.

Mr. COLLINS. OK.

Mr. POMEROY. If you want to put it in writing, I would love to

read it, but I have got 5 minutes.

Mr. COLLINS. OK.

Mr. POMEROY. I have got further issues to cover. In light of the

administration’s decision to reopen the Canadian cattle imports,

what will be the effect on cattle prices?

Mr. COLLINS. Well, the analysis we did at the time we made that

decision, we were talking about a $2 to $3 per hundredweight decline in fed cattle prices.

Mr. POMEROY. Yesterday the U.S. Department of Agriculture in

the Ways and Means Committee expressed concern about the ongoing refusal of Japan to allow our exports in. Would exports into

Japan help cattle prices?

19

Mr. COLLINS. Well, I think it would more than offset any projected decline we would have from Canadian cattle coming in.

Mr. POMEROY. I found it interesting that the testimony from

USDA said that the time for action is now. That was a quote from

the testimony presented. But the action taken by USDA, the only

action that one can really see was the decision in August to allow

Japanese beef to come into our country, so at a time when we can’t

get our exports into their country and believe they are unfairly

keeping us out, we say OK, by golly, we sure will happily take your

beef here. And to me, that is just part of the failed exports strategy

that in the end, as you also referenced earlier, has us net importing

or just about in terms of total agriculture from a trade standpoint.

Now, why in the world would we let Japan sell beef to us when

we can’t sell to them?

Mr. COLLINS. I think the answer to that is that we are trying to

develop our import disciplines, our import regimes based on science

and the science, tells us that we ought to be importing beef from

countries where the beef is safe, regardless of what that country

does.

Mr. POMEROY. It seems to me, Dr. Collins, that that is part of

a long-term trade strategy advanced by this administration that

has us at the deepest trade deficit in the history of the country.

Both parties expressed strong objection to this approach in the

Ways and Means hearing yesterday and I hope the administration

is listening. Republicans and Democrats alike have had a belly full

of this. In fact, the chairman of this subcommittee testified yesterday. Man, I cannot explain to the people I represent, the ranchers

I represent, that the best way to get into Japan, when they have

absolutely refused to let us in there, was to take their exports here.

To me, that absolutely stands logic on its head. It is a strategy, I

believe, of unilateral disarmament. We are going to play by one

fancy science set of rules while everybody else plays by a different

set of rules and is keeping our exports out. And the message I

would like you to take back to the U.S. Department of Agriculture

is we don’t think the way to get into Japan, after being unfairly

held out for years now, is to let them sell to us in the meantime.

We ought to have a little quid pro quo here at the bargaining table

and to give that right up front is literally, unilateral disarmament.

Mr. COLLINS. It is not much of a quid pro quo. We only import

about a million dollars’ worth of their beef and what we are talking

about is the loss of $2.5 billion worth of exports, so I don’t know

how much of a lever that actually be.

Mr. POMEROY. Well, I will tell you what, and I think the ranchers I represent think this, too.

Mr. COLLINS. Well, I understand——

Mr. POMEROY. Symbolism sometimes means a lot and we are

saying you are illegally keeping our product out, but by golly, we

would sure like to have some of that Kobe beef in our steakhouses.

To me, it is a bad strategic move. I would like you to revisit that

one. Thank you. I yield back.

Mr. MORAN. If you had something to yield back, once again, Mr.

Pomeroy. Your time had expired. Let me look at my list. The gentleman from North Carolina, Mr. Butterfield.

20

Mr. BUTTERFIELD. Thank you, Mr. Chairman. Let me join my colleagues in thanking each one of you for coming forward today with

your testimonies. I will certainly be brief, but I want to go back to

the crop insurance discussion. Most of the discussion today has

talked about the prospective condition of crop insurance and what

we are going to do for the farmers in the future. I guess my concern is more in the present tense. What is the general health of the

crop insurance industry right now? Is it healthy?

Mr. COLLINS. You are talking about the crop insurance providers,

the reinsured companies?

Mr. BUTTERFIELD. Yes. What are you hearing from the industry?

Are they solvent? Are they concerned?

Mr. COLLINS. Rather than what I am hearing from them, I will

tell you from the data, I think the health is extremely sound right

now. We have been on a run of several years of the crop insurance

companies having substantial underwriting gains running $200 to

$300 million a year. For the 2004 crop year, their underwriting

gains were over $700 million, by far and away, an all-time record

high. On top of that, of course, we reimbursed their administrative

and operating expenses to the tune of something in the order of

$800 million or more. So the crop insurance companies are making

good rates of return and that is reflected in the fact that we have

new entrants coming into the crop insurance business.

We have approved three new companies in the past year and we

have a couple of more companies that, in fact, are now talking with

us about becoming approved crop insurance providers. So after a

big decline in the number of companies for many years, we have

now seen a turnaround and we are seeing new entrants in the

business. So those financial data combined with the new entrants

suggest to me that the rates of return are pretty good in crop insurance right now.

Mr. BUTTERFIELD. Do the crop insurance carriers furnish to you

their balance sheets? Do you monitor their finances and the bottom

line of their companies?

Mr. COLLINS. We do monitor their finances, the National Association of Insurance Commissioners provides the collection and the review in the financial performance of the companies, as a whole, and

then we take that data and we focus on their crop insurance lines

of business. So the answer is yes, we do monitor those financial

performance indicators.

Mr. BUTTERFIELD. All right. Is any of this solvency due to the

fact that they have denied so many claims to many of the claimants? From what I can gather, there is a high rate of claim denial

for claims that are being presented to them. First of all, let me explore the predicate of my question. Is that true? Is there a large

rate of claim denials?

Mr. COLLINS. I can’t answer that. I haven’t looked at the claim

denial data. Of course, there is an appeal process that producers

can go through and I haven’t got the sense that our appeal process

has been burdened by a lot of appeals. But I don’t know the answer

to that. The best I can do is tell you I can try to get back to you

on claim denial. I just don’t know the answer to that.

21

Mr. BUTTERFIELD. I would like to know the percentage of claims

that are actually approved versus those that are denied, yes.

Thank you, Mr. Chairman. I yield back the balance of my time.

Mr. MORAN. Thank you. The gentleman from Louisiana.

Mr. MELANCON. Thank you, Mr. Chairman and Dr. Collins. I appreciate you all coming today. As you are probably aware, I am

from Louisiana’s third district, which took Katrina on one end of

the district a month ago and took Rita on the other end of the district, picked up everything that Katrina didn’t hit. I guess the

thing that is foremost in my mind in your response to Representative Bonner was that the Department does care. After the hurricanes in Florida, I saw immediate response from the Department

of Agriculture and not wanting to play politics, but realize it was

a presidential election year and other factors, but the Department

of Agriculture hasn’t shown up yet. And administratively, you did

quite a bit, from my understanding, to help agriculture in Florida

after those storms. What is the difference between Louisiana and

Florida?

Mr. COLLINS. Well, I disagree with your premise. To state that

we haven’t shown up is just not a fact. We have taken all the prepositioned food for this year’s School Lunch Program and sent hundreds of truckloads of food to your area. We right now have 5,000

USDA employees on detail down there to help clean up the mess.

Mr. MELANCON. I am talking about the farmers. I am not talking

about food programs. I am talking about the farmers and the disaster that is there. They showed up to help the citrus farmers, they

showed up to help the cattle farmers. They have not shown up, the

Department hasn’t.

Mr. COLLINS. We have our Natural Resources Conservation Service cleaning debris, disposing of dead animals. We have our Farm

Service Agency doing the same thing through the Emergency Conservation Program. We have available $152 million for emergency

loans. I could go on and on. We have a lot of activities going on

in the mid-South and I think it is unfair to characterize us as not

showing up. If you are specifically talking about whether we are

writing checks for crop disaster assistance, that is something that

is going to be decided by the Congress. That is going to be something that is going to take a political decision while working

through the process. People haven’t lost the crop until the crop is

to be harvested, which in some cases is about now and so this crop

disaster payment issue is going to be worked out, but I do think

it is unfair to characterize the Department as being absent, because I think we have many, many activities going on to provide

assistance to the people of Louisiana.

Mr. MELANCON. Well, the Department did payment programs out

of section 32 before the Congress acted on crop disaster in Florida.

It has not done that in Louisiana.

Mr. COLLINS. Right, that is a true statement. I agree with that.

If that is the standard you are raising, then that is something that

can be discussed with the Secretary of Agriculture.

Mr. MELANCON. Thank you.

Mr. MORAN. The gentleman from Georgia.

Mr. MARSHALL. Thank you, Mr. Chairman. Last week I was visited by some farmers from middle Georgia who are pretty worried

22

about whether or not they are going to have enough diesel to get

their crops in. I can’t say they were complaining, but they did observe that and since we are here talking about the impact of Federal policy on agriculture, they did observe that the decision to permit truckers, over the road truckers to use off-road fuel severely

impacted them and their fuel supplies. Cost prices go up, diminish

the reserves that they had and frankly, with Rita coming in, they

were quite concerned that they weren’t even going to be able to get

their crops out of the field. I have a couple questions.

Are you in a position, you might have an estimate right now, but

if you don’t, then later, to give an estimate of the cost to farmers

of this Federal decision to permit off-road fuel to be consumed by

over the road truckers and others in response to the disaster. And

we are not questioning the policy, I am just kind of curious of the

economic impact to farmers of that. And then, do you know of

shortages, or do you anticipate shortages that are significant

enough that farmers should be concerned about whether or not

they are going to be able to get their crops out of the field? Cotton

farmers in Georgia were really worried about that last week.

Mr. COLLINS. I have no estimate of the effect on diesel prices of

the relaxation of the off-road requirement. I would need something

like that to be able to estimate the impact on farmers’ costs and

I have to estimate how long that price differential would obtain to

be able to estimate that, so it is just information that I do not have

and we have not attempted to estimate. Perhaps Dr. Gruenspecht

could talk about the issue of diesel fuel availability for harvest.

Mr. GRUENSPECHT. First of all, as your question indicates, I

think it was sort of a disaster response kind of issue in meeting——

Mr. MARSHALL. I guess my follow-up is going to be to the extent

that costs are incurred by agriculture as a result of the disaster response, is there some plan to compensate agriculture for those costs

that were incurred? We need to know what the costs are. Believe

me, they are there. The question is can we calculate them and is

it going to grow worse as a result of the fact that people can’t even

get their crops out of the field?

Mr. GRUENSPECHT. I think it sounds like a question that may require some coordination between respective agencies.

Mr. COLLINS. Yes, yes. My first thought is that I don’t envision

there being a shortage of diesel fuel to cause people not to be able

to get crops out of the field. I don’t think there is any indication

of that at this point. I think what I have been watching, in fact,

more intensively is the spike in natural gas prices and the consequence of that for fertilizer production. If we look back historically in periods where we had spikes in diesel prices and we have

had some scarcity of supply, agriculture has done all right on the

diesel side and been able to get their supplies.

We had the natural gas spike in the winter of 2000–01 and we

saw a substantial amount of fertilizer production capacity shut

down because of that spike. There is sort of a cap on nitrogen

prices because we import 50 percent of what we use and that limits

the price increase in nitrogen and when natural gas prices go up

in the United States and they don’t in other countries, that causes

a terrible price squeeze for fertilizer producers and they shut down.

23

So I have been worried about that more than I have been worried

about diesel fuel, I must say.

Regarding the compensation issue, that is caught up in a bigger

issue. People in all sectors of our society are paying costs they

hadn’t anticipated because of these hurricanes. Corn farmers in

central Iowa are paying costs because of wider bases, difference between interior prices and river prices because of the backup on the

Mississippi. So it is a huge question of——

Mr. MARSHALL. Is it your expectation that if, in fact, some farmers are unable to get the fuel they need to get their crops out of

the field, that that would qualify for disaster benefits, at least? I

guess these are questions that you can’t answer right now and they

are hypothetical in the sense that we don’t know that this is actually going to happen. Let me make one observation, if I could.

I find quite well-founded your observation that both with regard

to fertilizer and diesel fuel expense, costs, those things generally,

these kinds of disasters lead to spikes that are very difficult to deal

with where agriculture is concerned. Part of the problem here is

that we have a ‘‘just-in-time’’ delivery model, business-wise in our

economy. Energy, generally, we regulate pretty carefully.

Electricity, for example, we have got redundancy in the system,

and I wonder whether or not, where you all are concerned, you are

thinking about the kind of redundancy that might need to be introduced into our gas and diesel fuel supply system so that if we incur

these kinds of problems again in the future, we don’t have these

spikes that lead to the problems that you are worried about right

now and just testified to. My time is up. I don’t know whether or

not it calls for a response, but——

Mr. GRUENSPECHT. I could try. Electricity is very interesting because there is no way to hold the inventories of electricity, so demand and supply have to be equated on a second-by-second basis.

Mr. MARSHALL. That is true as far as consumption is concerned

by respectively, we hold inventory, we hold reserve margins.

Mr. GRUENSPECHT. So with electricity, there is a longstanding

concept of reliability having to do with resource adequacy and security and some of the physics, like the transmission system. With

other commodities, you don’t have to balance production and demand on a second-by-second or minute-by-minute basis because

you have the possibility of holding inventories. That said, the country does have a strategic petroleum reserve which is meant to deal

with certain types of energy security problems. There is a Northeast heating oil reserve that is quite small. Generally, the country

has not had large scale petroleum product reserves federally controlled or natural gas reserves federally controlled.

Mr. MARSHALL. Right, and I agree with that and the question is

whether or not where our Federal policies are concerned, we need

to think about gas and oil more like we think about electricity,

where we do require redundancy, we do require excess capacity.

One other observation, where refining capacity is concerned, everybody says that we are right at the limit of the ability of the existing

refining capacity to meet demand in the United States. You take

out a little bit of that capacity, you have the problem that you all

are worried about right now where agriculture is concerned.

24

Business isn’t interested in carrying excess capacity. That is

quite understandable. It means carrying excess cost. So we haven’t

seen the development of excess capacity where refining is concerned in the United States, in part, for that reason, I would simply suggest that we, as a country, need to start thinking about,

from an agriculture perspective, from all kinds of other perspectives, whether or not we are going to insist upon excess capacity

where refining is concerned, redundancy where delivery is concerned and then perhaps additional reserves. And I will stop there

because I am well beyond my time.

Mr. GRUENSPECHT. And I will just say I think that is a very good

way to think about the issue. Of course, you pay for the redundancy and the excess capacity, although you save in situations

where the spikes otherwise occur, so it is a balancing that has to

be done, but it is a very legitimate way to think about the question,

how you balance those costs and benefits.

Mr. MORAN. Mr. Marshall, I was patient in your 5 minutes until

Mr. Scott arrived and I now call on the gentleman, Mr. Scott.

Mr. SCOTT. Thank you, Mr. Chairman. I, of course, want to

thank you for having this hearing to discuss the health of the Nation’s farm economy. 2004 seems to have been a banner year with

substantially healthy increases in farm income and production

borne by increased cash receipts for the major commodities and

2005, as we know, did not get started off on the right foot with ever

increasing fuel costs and interest rates ended trending upward.

While these conditions seem to have had, at least, a modest effect

on the farm economy, other conditions such as strong global economy and a weakened dollar have allowed agriculture to remain

strong. I have two concerns resulting from the current state of agriculture.

First, trade. As trade and monetary policies have geared to

produce a rebound in the value of the dollar globally and because

energy prices do not show many signs of coming down, I am concerned that we may not be able to sustain this growth and certainly would like to hear from you in terms of your evaluation of

whether you think we can sustain the growth.

And second, I am concerned about how the administration will

treat the relative health of agriculture as it prepares for the budget

cycle. After two major natural disasters, Katrina and Rita, have seriously disrupted grain and other agriculture transport, we are not

even yet through hurricane season. A discussion about the health

of our national farm economy and the impact of Federal farm policy

has on us is vitally important. So Mr. Chairman, I thank you again

for putting together this forum discussion. I look forward to hearing from you.

There has also been a great deal of discussion in Congress regarding the need for ad hoc agricultural disaster assistance. While

the administration insists, as it has in the past, that ad hoc agriculture disaster assistance or maybe even a part of it, must be offset with cuts in other programs and also what are some of the

things we can do to encourage the health and competitiveness of

smaller farms in the face of rising energy prices and interest rates.

And there are two other issues that are somewhat smaller, but I

25

do have a concern with, as well, and I do think we need to begin

to address.

We are losing generation after generation of younger people interested in going into farming, agribusiness and other areas. I

think it would be smart of us to kind of begin to look at that, see

what incentives we can put into the formula to encourage young

people to go into the agribusiness area, into agriculture, into farming.

And of course, I have another little pet peeve and that is that

I would like to see us continue to produce more of our products

here. We are depending more and more on foreign sources for our

major consumption items in agriculture and food products. For example, I understand about 80 percent of the tomatoes that we consume in this country are produced elsewhere and that is a trend

that I think we certainly need to—so but those are just a few questions. Perhaps we can get some response to my comments.

Mr. COLLINS. Yes, sir, Mr. Scott. I can offer a couple of thoughts.

You opened with a question of whether the prosperity, the economic growth in agriculture that we have seen over the last couple

of years will continue and, based on some comments I have made

here today, I think the point I would make is that we have been,

the last couple of years, at the zenith of an agricultural cycle and

we are not going to stay there. We are going to pull back in aggregate measures of performance of the economy. We are seeing that

now in crop markets with lower prices, with production coming

down from where it was in 2004.

That is going to mean the net value of crop production is going

to decline. We are going to run down some of our crop inventories.

The fact that we are selling these large inventories is keeping cash

flows high, but as production comes down and we reduce some of

those inventories, then cash flows are going to come down, as well,

in the future.

Then on the livestock side, where we have enjoyed enormous

prosperity the last couple of years, that prosperity, as it always

does in any commodity market, because of leading to more production and more production is going to lead to lower prices, so I

think, in 2006 we are going to see some declines in livestock and

livestock product prices. Then couple that with these increases in

energy costs and in interest costs for farmers and I think that we

are going to start to come down in our aggregate measures of performance. I still think those measures of performance will be better

than what we saw in the late 1990’s, but they are not going to be

at the peak levels that we saw in 2004 and 2003.

Regarding your point about what is going to be done about the

higher energy costs and assistance to producers, that is something

that we have talked about here today and I think that is going to

simply depend on the actions of Congress. We, of course, have some

built-in protections in the farm bill, some price-based payment

mechanisms which are being triggered and more payments are

being made. We do have crop insurance and some crop insurance

indemnities will be made. Although, I might say that our early estimates of crop insurance indemnities for the 2005 crops show a

loss ratio of less than one, so this is going to be, despite the disasVerDate 11-SEP-98 13:03 Oct 25, 2005 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 F:\DOCS\109-17 HAGRI PsN: HAGRI
26

ters, from the national perspective, a year of not excessive crop insurance payouts.

Regarding your point about the next generation of farmers, I

would just say that, as you may know, Secretary Johanns has been

conducting farm bill listening sessions around the country. He just

finished his nineteenth and he said to us many time that one of

things he hears most about in those listening sessions is the issue

you just raised about the next generation of farmers. We all know

that from surveys that the average age of a farmer is roughly 54

or 55 years old. I always like to point out that that is the average

age of the principal operator of the farm.

And it is only recently that we started asking the ages of the second most important operator and the third most important operator and it turns out that the second most important operator has

an average of about 45 and the third most important operator has

an average age of about 35. And so there is some mentoring and

some progression going on out there for a lot of farms, yet for others, it is not true. We have farmers retiring and I have talked to

farmers who tell me that they don’t know what they are going to

do with their farm because their children don’t want to be farmers,

so this is something that I think we will pay attention to over the

coming year. It may be an issue for the farm bill. I don’t know.

Mr. MORAN. Thank you. Mr. Scott.

Mr. SCOTT. I just have one more point on the farm bill that I

would like to just make sure, given what we know about the state

of agriculture, how much impact would the administration’s proposal for changing the farm bill, many of us are very wary of

changing the farm bill. But I think the administration is making

some changes, such as including payment limitations, a 5 percent

assessment on total farm payments and limits on marketing loan

gains. What was the net farm income in 2005, what impact would

that have on the net farm impact of 2005, have those changes been

in place for this crop year?

Mr. MORAN. Dr. Collins, if you can answer that in a sentence or

two, fine. If not, can you answer that in writing?

Mr. COLLINS. I will. I won’t give you a quantitative estimate. I

would only say that those are not the administration’s proposals for

the 2007 farm bill, those were proposals for budget reconciliation

and we have made a distinction and said that those are not farm

bill proposals. We did estimate that the 5-year savings on farm program outlays would be about $5 billion from those proposals. That

is $5 billion over 5 years.

Mr. SCOTT. The administration is recommending some changes in

the farm bill, is that right?

Mr. COLLINS. No, we are not. At this point, all we are doing is

listening and the Secretary has committed that in some point in

the future he will offer some thoughts on the farm bill.

Mr. SCOTT. Thank you. Glad I got that cleared up.

Mr. MORAN. Thank you, Dr. Collins. Dr. Gruenspecht, I am going

to take the priority of asking one more question, because we have

you here today and we will have Dr. Collins before us again. Is

there evidence that the price elasticity is working in the fuel market? Are we consuming less fuel today with higher prices than we

were at lower prices?

27

Mr. GRUENSPECHT. For quite a while, as you know, because

prices had been rising well before Rita and Katrina, prices had

risen substantially and demand had also tended up. There is a

price elasticity, but there is also an income elasticity, and the economy has been growing very well recently, so there has been increased demand for trucking and increased personal income, which

has led to increased driving and the like.

In the last few weeks, it does appear that fuel consumption has

fallen off more than past seasonal patterns would suggest. There

is usually a fall-off of gasoline consumption after Labor Day, for instance. So there is more, there does appear to be in the short-run

more of a fall-off. Now, what happens going forward I think will

be very, very important, but you do have the price elasticity that

you mentioned, and you also have this income elasticity that has

been working the other way until recently.

Mr. MORAN. Thank you both very much for your testimony today.

Mr. Etheridge and I had anticipated having a second round of this

panel, but as the Members began to return, we changed our minds.

So we will—those Members who would like to ask additional questions, I am sure both Dr. Gruenspecht and Dr. Collins would be

glad to respond. We thank you for your time and testimony.

Mr. MARSHALL. Mr. Chairman?

Mr. MORAN. Mr. Marshall.

Mr. MARSHALL. I do note that there was only one Member who

returned.

Mr. MORAN. We now welcome and invite to the table the second

panel. Dr. Patrick Westhoff is program director, Food and Agricultural Policy Research Institute, FAPRI, at the University of Missouri, Columbia. And Mr. Sam Funk, who comes from my home

State of Kansas, he is with the Kansas Farm Management Association at Kansas State University, Manhattan, Kansas. And Dr.

Daryll E. Ray, welcome back to the Director of the Agricultural Policy Analysis Center at the University of Tennessee in Knoxville.

And I recognize the gentleman from North Carolina to recognize

and to introduce one of his constituents.

Mr. ETHERIDGE. Thank you, Mr. Chairman. And Dr. Nicholas

Piggott is associate professor of the Department of Agricultural and

Research Economics at N.C. State University in Raleigh, North

Carolina, and we welcome him. He is a specialist in the area of demand analysis, agricultural markets, applied economics, agricultural biotechnology, and risk management. We welcome you. I believe this is his first time testifying before the U.S. Congress.

Mr. MORAN. Welcome, Doctor. And we will start with Dr.

Westhoff. Good morning.

STATEMENT OF PATRICK WESTHOFF, PROGRAM DIRECTOR,

FOOD AND AGRICULTURE POLICY RESEARCH INSTITUTE,

UNIVERSITY OF MISSOURI

Mr. WESTHOFF. Thank you, Mr. Chairman, for the opportunity to

appear before the subcommittee this morning. My name is Pat

Westhoff and I am an economist with the Food and Agricultural

Policy Research Institute at the University of Missouri.

FAPRI receives funding from annual USDA special research

grants to provide information to members of Congress and their

28

staff. Each year, we prepare baseline projections for the farm economy to provide a snapshot of what agricultural markets might look

like under a continuation of current farm policies. Then we try to

estimate how those projections might be affected if there were a

change in U.S. policy, a change in world trading rules, or even a

change in the weather.

What one thinks about the current farm economy depends on

one’s point of reference. If the point of comparison is 2004, one can

say a lot of negative things about the farm economy in 2005. In

contrast to the record yields of 2004, drought has sharply reduced

crop yields in parts of the Midwest, including my home State of

Missouri, and Hurricane Katrina has damaged crops and disrupted

shipments of agricultural products. Higher energy prices, as we

have heard about this morning, have increased farm-level expenditures on fuel and fertilizer. Based on mid-September information,

it appears that prices for corn, soybeans, and wheat are all likely

to be lower for the crop harvested this year than for last year’s

crop. Average milk and hog prices are lower this year. USDA estimates, and we would agree, that farm income is likely to be several

billion dollars lower this year than it was in 2004.

However, the outlook is much more positive if one does not use

2004 as the point of reference. National averages yields for most

major field crops this year are generally near or even above longterm trends, in spite of the serious regional yield problems I have

mentioned. Consumer demand for meat and dairy products has remained strong in 2005, and the annual average prices for cattle,

poultry, and milk are all higher than expected earlier this year. At

least in nominal terms, net farm income is still on track to be the

second highest ever in 2005.

Looking beyond 2005, one can again cite reasons for optimism,

pessimism, and uncertainty. Provisions of the energy bill should

contribute to increased production of ethanol and biodiesel and increased demand for corn and other crops. China is already a major

market for U.S. soybeans and could become a major market for

grain in the years ahead, although there is much uncertainty about

projections of Chinese markets. Brazil and Argentina have demonstrated their ability to expand crop production, but the pace of

future expansion in South America remains very uncertain. USDA

and FAPRI both expect lower 2006 prices for cattle, hogs, and milk,

in part because of supply response to recent strong prices and returns. The agricultural economy will continue to be sensitive to

movements in energy prices and interest rates.

In turning to the policy front, all sectors of U.S. agriculture are

affected by Federal policy, but the largest and most direct effects

are felt by the sectors receiving the bulk of Government farm program payments, grains, oilseeds, and cotton, and the sectors benefiting from prices support programs, dairy and sugar. While these

commodities account for most of the harvested acreage in the country, they only account for about 40 percent of cash receipts.

To illustrate how markets and polices interact, I am going to

take one particular example, the corn sector under the 2002 farm

bill. In 2004, corn yields reached record levels, and as a result corn

prices fell sharply. Multiplying price times yield, the national averVerDate 11-SEP-98 13:03 Oct 25, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 F:\DOCS\109-17 HAGRI PsN: HAGRI
29

age gross returns per acre fell by about $14 per acre between 2003

and 2004.

Federal marketing loan and counter-cyclical programs are based

on prices, not on revenues. Thus the large drop in 2004 prices triggered a large increase in payments under those two programs.

Total payments per base acre planted to corn increased by more

than $65 between 2003 and 2004, so corn producers had an unusually good income year, in spite of lower prices.

For the 2005 crop, both prices and yields are expected to be lower

than they were in 2004. That translates into a large reduction in

gross receipts for market sales, which is aggravated by a significant increase in production costs because of high fuel and fertilizer

prices. However, net returns are expected to be much lower in 2005

than they were in 2004, and some lower than in 2003.

Finally, however, note that 2005 net returns with payments are

still expected to exceed those of 2002. Prices were substantially

higher in 2002 than they are expected to be this year, and production costs were much lower in 2002. The difference in the overall

net returns is entirely explained by differences in Government payments. Prices were high enough in 2002 that there were no

counter-cyclical payments and limited marketing loan benefits.

The lesson is that current farm program provisions are, by design, focused primarily on cushioning producers from the effects of

lower prices. They were not designed to deal with net revenues

losses caused by low yields or increased production costs. Certain

crop insurance products do protect producers against significant reductions in yields or gross revenues, but they generally do not provide support when there is only a relatively modest reduction in

yields. Federal programs do not protect producers from the risk of

increased production costs.

FAPRI does not propose policy options, nor do we support or oppose particular options. But as you consider farm policy options,

Mr. Chairman, I would encourage you and your staff to continue

to use FAPRI as a resource. Thank you for the opportunity to

speak with you here today.

[The prepared statement of Mr. Westhoff appears at the conclusion of the hearing.]

Mr. MORAN. Thank you very much, Doctor. Mr. Funk, welcome.

STATEMENT OF SAMUEL FUNK, ADMINISTRATOR, KANSAS

FARM MANAGEMENT ASSOCIATION, KANSAS STATE UNIVERSITY

Mr. FUNK. Thank you, Mr. Chairman and members of the committee. I appreciate the opportunity to be here today. My name is

Sam Funk and I am the administrator of the Kansas Farm Management Association Program and a faculty member in the Department of Agricultural Economics at Kansas State University. We are

pleased to be able to provide the information we have here today,

but it does give somewhat of a face of the difficulties being faced

by producers out there today.

The general farm economy for farm incomes across Kansas must

take into account the substantial increase in fuel and fertilizer

prices directly used on farms, as well as the higher costs of other

inputs and services due to petroleum-based products. In light of the

30

damage caused by Hurricanes Katrina and Rita in the Gulf Coast

States and other off-shore locations, there likely will be additional

stress on farms due to the increase in input prices as well as other

contributing factors such as mobility of export products through existing channels and the higher level of costs due to the tremendous

strain placed on the U.S. economy as a whole. While the final impacts of these two massive storms is yet to be known, it is our intention to provide you with further information as it becomes available.

The tables and charts and written testimony that were submitted

by my colleagues and myself show expenses for three major crop

inputs for Kansas farmers: fuel and oil, irrigation energy, and fertilizer. With the possible exception of irrigation energy, these costs

are important for most producers in the United States, especially

those located in the High Plains and across the Corn Belt regions.

Costs are reported for the previous 5 years, from 2000–2004, as

well as forecasts for 2005 and 2006. Forecasts for diesel prices and

natural gas are based on an average of Kansas State University

models and Energy Information Administration models. Fertilizer

price forecasts are based on KSU models alone. The KSU models

are based on New York Mercantile Exchange closing futures prices

for crude oil and natural gas as of September 22, 2005. The reason

for using an average forecast from several sources is that research

has shown that composite forecasts generally are more accurate

than individual forecasts.

Forecasts for whole-farm expenses for 2005 and 2006 are based

on changes in input prices, implicitly assuming that producers do

not change their production practices significantly in response to

the higher prices. For individual farms, this assumption may not

hold, however, historical evidence suggests that the aggregate level

producers generally do not make major changes in response to

price. Furthermore, research examining optimal input price, for example, fertilizer and irrigation water, shows that input levels are

reduced only marginally when prices increase. That is, producers

will still use similar amounts of the input for optimal economic production, but their economic returns will decrease due to higher energy prices.

With the 2005 information that is in, and for all of the three inputs considered, costs are expected to increase significantly in 2005

relative to the previous 5-year average. Percentage increases in

prices range from a low of 39.7 percent for fertilizer and a high of

94.8 percent for natural gas. Furthermore, prices in 2006 are forecasted to be above the historically high levels of 2005. This is especially true for fertilizer prices, which are forecasted to increase significantly in the fall of 2005 and spring of 2006.

Using the Kansas Farm Management Association Summary’s

dryland and irrigated farm types, the expense categories of gasfuel-oil, fertilizer, and irrigation energy were assigned to an energy

expense complex. Across all farms and on a per acre basis, the impact of higher fuel and oil, irrigation energy, and fertilizer prices

will increase costs in 2005 approximately $8 to $10 per acre for

farms in Kansas compared to the previous 5-year average. An increase of this magnitude is also expected for 2006 relative to 2005.

The cost per irrigated acre in the KFMA Summary due to the inVerDate 11-SEP-98 13:03 Oct 25, 2005 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 F:\DOCS\109-17 HAGRI PsN: HAGRI
31

crease in the energy expense complex is expected to rise $32.89 in

2005 and another $15.60 in 2006. The cost per dryland acre in the

KFMA Summary is expected to increase $5.72 from 2004 to 2005,

with an additional $8.44 projected for 2006. Assuming that producers do not make major production changes, land rents would need

to decrease by $14.16 per acre for dryland acres and $48.49 for irrigated acres from 2004 to 2006.

Based on an average from 2000–04, the percentage of total operating expense for these farms represented by the energy expense

complex is 22.8 percent for dryland and 29.9 percent for irrigated.

Holding other expenses constant while using projected future expenses for the energy complex, that would suggest that the figures

would rise 33 percent and 41.4 percent for dryland and irrigated

crops, respectively.

Significant increases, indeed, on energy costs would result in

looking at a summary for dryland producers—energy increase complex that would result in a negative impact on net farm income by

$22,227 per farm from 2004 to 2006. A number for the irrigated

farms would be $51,832. These figures would represent a decline

in net farm income respectively of 39.8 percent and 93.6 percent

from 2004 levels.

Given the number of other factors that would be affected by the

energy prices as well, we would expect even more costs to be increased for farms. Revenues are expected to decline in 2005 as

yields for the primary fall crops in Kansas are expected to decline

from the historically high levels of 2004.

Factoring in historically high yields for major crops across Kansas in 2004 and downward pressure on farm-level agriculture commodity prices with higher fuel prices and limited export flows, a

sustained level of revenues for Kansas farm families in 2005 is not

expected. Reduced revenues and increased expenses result in a

more pessimistic outlook for overall net farm incomes. Thank you.

[The prepared statement of Mr. Funk appears at the conclusion

of the hearing.]

Mr. MORAN. Dr. Ray, welcome back.

STATEMENT OF DARYLL E. RAY, DIRECTOR, AGRICULTURAL

POLICY ANALYSIS CENTER, UNIVERSITY OF TENNESSEE

Mr. RAY. Thank you very much. I appreciate the opportunity to

interact with you and talk with you about agriculture and what I

view are some of the influences that policy has had on agriculture.

In the time that I have I would like to focus on two premises or

issues that I think have significantly influenced the direction of

policy in the last couple go-arounds, and probably is going to be influencing it in the future as well.

As you recall, when we were debating the 1996 farm bill, prices

were high and there was a tremendous amount of optimism about

what agriculture was going to be like. And I think, as a result of

that, there were a couple of lines of thought that developed. One

was that this additional, or this optimism about exports would continue and exports would be the driving force to a market prosperity

for agriculture; and the other was that agriculture is in a better position to adjust now, and agriculture really didn’t need programs

anymore to upright it should it get into trouble with prices or inVerDate 11-SEP-98 13:03 Oct 25, 2005 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 F:\DOCS\109-17 HAGRI PsN: HAGRI
32

comes, because it was able to do a better job of making the corrections on its own. Well, I guess I would submit that this last decade

has suggested that those premises don’t necessarily hold, and I

think that that new era kind of thinking is no more correct now

than it was and has been for the last three-quarters of a century.

And I want to talk about each of those. The first is exports. We

have been promised an expanding export market for some time for

crop agriculture and it really hasn’t materialized. Now these promises are an audience pleaser and they were an audience pleaser in

the mid–1990’s, they were an audience pleaser now and they have

been since about 1985, but the odds are against it, it seems to me.

U.S. farmers have enjoyed an export-driven prosperity three

times in the last century, World War I, World War II, and the mid

to late 1970’s. Now that doesn’t mean that there haven’t been years

in which exports have been an important component of demand

and has raised prices, but in terms of an extended period of time,

there really have not been that many extended portions of the last

century.

I think that most countries view their domestic food production

in the same way that U.S. residents view the military; it is a matter of national security. So if you think of it that way, it is unrealistic to think that importing countries who embrace opportunities

to reduce production of staples, especially, in their countries, because they can buy staples a number of cents per bushel or less

than the U.S. I think it is also unrealistic to expect U.S. export

competitors, some of which are using agriculture as a development

vehicle, to unequivocally hand over export markets to the United

States.

The other one I want to dwell on a little bit in the time that I

have is the idea that food and agriculture is different. I think that

there are a number of things about the nature of agriculture, and

most of them are as true today as they have been for over a century, that make agriculture different from other industries. In

other sectors, low prices stimulate two responses: consumers consume more, producers consume less. In the case of agriculture, low

food prices do not stimulate consumers to eat five meals a day, for

example. They will switch from one type of diet to another, but

they won’t necessarily eat more food. They may eat a little bit

more, at least the first days, but it doesn’t continue.

In the case of supply, we have folks in the other sectors that will

reduce the number of shifts or reduce the number of hours work.

They will do something to adjust the output level to the way their

demand is going and affect their demand. Agriculture can’t do that,

it isn’t in their best interest to do it, and they don’t. They farm all

of their acreage all the time and they don’t reduce their yield-determining inputs significantly, either. And even in the long run, if

they go out of business, chances are somebody will come along and

put that back into production, maybe at a higher level than they

were before.

So I really think that price responsiveness is a basic issue. And

when we consider a shift in a policy, if the lack of price responsiveness of aggregate agriculture is not identified as a fundamental

problem, the policy is liable to give you unexpected results. Now at

the minute there isn’t a tremendous amount of price responsiveVerDate 11-SEP-98 13:03 Oct 25, 2005 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 F:\DOCS\109-17 HAGRI PsN: HAGRI
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ness from one crop to the other. If a farmer has the ability to go

from soybeans to corn to wheat or to cotton, he will do it in a heartbeat, but that doesn’t necessarily mean that he is going to reduce

his total acreage or production on his farm with regard to the sum

of all crops.

OK. I think that we are in a situation now where farmers are

more dependent upon the Government for a significant share of

their income than they had been in decades. In a number of States,

where major crop dominates the agriculture, Government payments exceeded net farm income in several years, and many of

those were very important agricultural States. Internationally, we

have been accused of dumping crops on the market at below the

cost of production. I say we are equal opportunity dumpers. We

dump the domestically as well as internationally. We provide crops

and ingredients, food ingredients, and food ingredients to those

that process and use feed at below the cost of production, and we

also provide an opportunity for input suppliers to be selling extra

inputs that are beyond the general outputs that are beyond what

can fetch an economically viable price.

I think that the shape of the 2007 farm bill will be greatly affected by two concerns. One is the Federal deficit and the other is

the WTO pressure to eliminate agriculture subsidies. And I am

sure there will be others, but those are a couple of the important

ones. I think that these issues have one cause, and that is low

prices. Both of them are causing that, one domestic, one international.

I think farmers should receive a bulk of their income from the

marketplace and not the Government. Agricultural policy needs to

be geared to a clear understanding of the unique characteristics of

the marketplace rather than ideology. Those supply and demand

curves are extremely elastic for aggregate agriculture. And if we

don’t take that into account, again, we are going to be surprised.

U.S. farm policy should not contribute to the dumping of agricultural products internationally or domestically, I would argue, and

of course it be a policy that is affordable. I thank you very much.

[The prepared statement of Mr. Ray appears at the conclusion of

the hearing.]

Mr. MORAN. Thank you, Dr. Ray. Dr. Piggott, welcome.

STATEMENT OF NICHOLAS PIGGOTT, ASSOCIATE PROFESSOR

AND EXTENSION SPECIALIST, DEPARTMENT OF AGRICULTURE AND RESOURCE ECONOMICS, NORTH CAROLINA

STATE UNIVERSITY

Mr. PIGGOTT. Good morning, Chairman Moran and Ranking

Member Etheridge and committee members. I would like to thank

you for inviting me to testify before the committee today. My name

is Nick Piggott from the agriculture department at North Carolina

State University. I am pleased to be here and to give you my views

on U.S. farm policy and the state of the farm economy.

Let me begin by stating that farm policy should include insuring

adequate, safe, and high-quality agricultural production with consideration given toward the potential environmental impacts of

practices used, without being burdensome on taxpayers and also

keeping the WTO agreements. These goals are ambitious and can

34

present a significant challenge to the policymakers under the realworld constraints of limited budgets, political pressure, and the

heterogeneity of the farm sector.

Before I give you my thoughts on farm policy, let me give you

a brief overview of the state of the farm economy today. While

there are regions of the country that are experiencing weather-related farm losses and—getting products to market because of the

disruptions to important ports, the Nation’s farmers as a whole experienced record incomes last year, with this year expected to be

the second best on record.

The value of crop production is forecast to be 5 percent higher,

and livestock production, 70 percent higher in 2005 than the previous 4 years. Projected net farm income is $71.8 billion, benefiting

from a significant increases in direct Government payments; account for about 30 percent of this total. If current projections are

realized, then this year promises to be prosperous for U.S. agricultural producers. More details about individual commodities can be

found in my written statement.

Let me now briefly address three critical elements of U.S. farm

policy, starting with the importance of the safety net. Current farm

policy has displayed an inability to adapt to the prospering times,

exhibiting the characteristic of downward stickiness rather being a

safety net. Downward stickiness of Government payments is where

payments are resistant to change when market forces indicate that

they should decline. Some stickiness and inability to adapt is a reflection of a predominance of policy instruments that are not marketplace and are therefore distorting.

Examination of farm income data—which is spelled out in my

written statement, reveals substantial heterogeneity in the farm

sector and several key factors in relation to farm incomes which

have implications for farm policy. Policy stickiness and heterogeneity of the farm sector call for a restructuring of the safety net,

based on marketplace-targeted policies rather than a one-size-fitsall approach.

Policies that provide financial assistance to large farms’ on-farm

income when an unexpected disaster strikes, preferably through

unsubsidized crop insurance, makes sense from the standpoint of

ensuring adequate supply of agricultural products, since these

farms produce the majority of the products. Providing an economic

safety net for small farms through targeted rural development policies that create opportunities to improve or maintain levels of

smaller farms’ on-farm income will allow these producers to continue to farm, if they choose, and to pursue the rural lifestyle, that

much of farm policy is intended to do, makes the most sense. Targeting rural development policies that enhance economic activity

also benefit large producers, but importantly, do not further distort

price signals in markets from which they derive the majority of

their income. They also benefit non-farm household incomes in

rural areas, many of which are poor.

The second critical element of farm policy is state-of-the-art production. The goal of producing safe and high-quality agricultural

output requires creating an environment for agriculture producers

to be the best they can be and to strive for continued improvement.

Agriculture policies should facilitate and reward the adoption of

35

new technologies that result in more efficient, safer, higher quality

food, and more environmentally friendly production practices. Patent laws that provide incentives for innovation are important. And

the U.S. university land grant system has evolved a role to play

here, also.

The third critical element on farm policy is the mitigation of the

reliance of some agricultural producers on farm payments. Producers of some agricultural commodities have become reliant on Government payments. Not only is this reliance burdensome on the

taxpayer and troublesome in relation to international agreements

such as the WTO, it changes producers’ behavior and expectations.

There is no real evidence to suggest that incomes of farmers who

produce commodities that receive significant Government payments

is any higher than those who receive little or no Government payments.

There is also reasonable evidence to suggest that Government

payments become capitalized in land values, land rents, and specialized assets. When this occurs, the Government payments are

not really doing what they are intended to do, namely, to support

farm incomes, since the higher land values and land rents means

that these increased costs offset the benefits of Government payments. Less reliance on Government payments and a movement toward market-based, non-distorting policies such as unsubsidized

actuarially fair crop insurance holds the promise of an efficient and

prosperous agricultural economy. The challenge is how to limit the

expectation of all Government support in order to encourage participation in crop insurance and to simultaneously reform and further develop the crop insurance portfolio to carry this burden. Part

of this challenge is to significantly reduce the current levels of premium subsidies in the crop insurance program, but at the same

time maintain participation rates.

This concludes my prepared remarks and I look forward to your

questions.

[The prepared statement of Mr. Piggott appears at the conclusion

of the hearing.]

Mr. MORAN. I thank you very much. There will be a pause before

those questions begin. We have one 15-minute vote followed by two

5-minute votes, so I guess we will be back here in probably little

more than a half-hour. It may be an opportunity for you all to have

a brief lunch, and the committee will stand in recess until the call

of the chair.

[Recess.]

Mr. MORAN. The Subcommittee on General Farm Commodities

and Risk Management will resume its hearing. I apologize for the

interruption. I think it might be useful, at least for me, if maybe

you all would want to give me one sentence or two sentences or

less a summary, what it is you would like for us to learn from your

testimony? What point would you like for Congress to glean from

what you have to tell us today? Dr. Westhoff?

Mr. WESTHOFF. Sure. Let me say, first of all, 2005 is not a good

year relative to those before, but it isn’t as bad as some other years

have been in the past. The second point would be that, given the

nature of current farm programs, we do a very good job of protecting against downside risk due to prices. We don’t by construction

36

do much to a downside risk doing the fields and dealing with production costs.

Mr. MORAN. Mr. Funk?

Mr. FUNK. I think the major point here is that, obviously, there

are some challenges that are facing us. It is not just something

that has come up here real recently just with Hurricane Katrina

and Rita, but I think the point is that there is a lot of challenges

that do face us, and we need to be very cautious with our restructure or wherever we go from here.

Mr. MORAN. Dr. Ray?

Mr. RAY. I think we need to always go back to the basics of why

it is that agriculture is having price and income problems. And before we move to far away in any direction, we need to be sure that

there has been a change in those reasons, and that by going in this

different direction, you will get the results that you expect.

Mr. MORAN. Dr. Piggott?

Mr. PIGGOTT. I think the major point I wanted to make is that

farm policy—include an economic safety net that better recognizes

potential—in the farm sector, specifically target policy—to larger

farms’ on-farm income—policies, creating opportunity to improve or

maintain the current levels of small farms’ on-farm income.

Mr. MORAN. I thank you all very much. Do you all utilize USDA’s

economic analysis in reaching the conclusions that you reach, particularly as we talk about farm income being up for 2003 and 2004?

I assume those are numbers that you used in your analysis. And

we ran out of time. One of the things I continue to think that we

ought to explore is the definition of farm income or farm, and this

$1,000 income, I think, clearly distorts the true picture of what is

going on in agriculture, and I wondered if anyone agrees with that,

or is there any consensus within the agricultural economic world

that we ought to be taking a look at that definition?

Mr. FUNK. I don’t know that anybody really would disagree with

the fact that when you start to take those definitions as having expectations for at least a thousand dollars and the farm fails, that

that really skews a lot of things. With the Kansas Farm Management Association, our average, comparing 2002 levels with 2002

census, shows that we tend to have the larger size of farms out

through there, but yet, at the same time, we don’t have the very

largest farms and we do have some very small farms in the mix.

Mr. MORAN. What does it take to have $1,000 farm income?

Mr. FUNK. A 4-inch lamb.

Mr. MORAN. I am sorry, I didn’t hear you.

Mr. FUNK. A 4-inch lamb or a 4-inch steer.

Mr. MORAN. I understand what you are saying now.

Mr. FUNK. Not much.

Mr. MORAN. Do you know, Dr. Ray?

Mr. RAY. I agree, too, that $1,000 is probably a very small

threshold, but I think that it also would be a good idea for USDA

to think about generating net farm income by a group of enterprises. We know that the policy that we deal with in this committee, has been major commodities. But yet, the net farm income

numbers include horticulture, they include income from, they include livestock, some of which are not really the kind of family

farm size that we might be used to thinking about when we are

37

developing policy. So if we had an increase in net farm income in

2004 of the level that has been discussed, what part of that income

actually came from the kind of major crop farmers that we like to

discuss in this committee?

Mr. MORAN. Dr. Westhoff, you in particular, I think, raised this

topic of farm policy and its relationship to commodity prices, and

indicated that we, in a direct way, don’t take into account costs of

input. Anyone want to address that? To me, one of the things I

mentioned at home is that, as we look at a new farm bill, clearly,

even if we had a farm bill very similar to the one we have, in which

prices matter and trigger certain assistance based upon the price

of the commodity, perhaps those triggers need to be adjusted based

upon ever-increasing input costs. That would be one way not to

have a wholesale change in the way that we deliver farm assistance, but there ought to be a more direct way. Is there something

that should be, is there a way to take into account input costs?

Mr. WESTHOFF. Sure. What I would like is an easy solution to

this problem, but I do think that we do find that, yes, a lot of the

viability in farm income has—production costs, I should say. And

I think if you were going to try to design something, you need to

think in terms of whether you are trying to protect aggregate-level

income, or you are trying to protect income at the farm level, or

trying to do things at the farm level than trying to deal with the

accounting practices of individuals can be very difficult. Is there

something that one could design that would take into account variations in things like fuel and fertilizer prices at the national level,

and have some sort of an offset available for those types of

changes.

Mr. MORAN. Dr. Ray?

Mr. RAY. One thing that I would say is we have insurance products that look at gross revenue or other kinds of measures of whole

farm, and these will work very well under some circumstances. But

I think that when we talk about products like that, or if it is not

a product, if it is a policy in place of target prices and loan rates,

what we are really saying is, is that there is going to be roughly

an equal rate of growth in both supply and demand; it is just that,

on average, there is going to be problems, but on the average they

average out. OK. But now if it is true that demand grows at a half

a percent less on average over the next decade, than the supply capacity, both in this country and around the world, all that means

is, is that over the next 10 years, that kind of program becomes increasingly more expensive, because it doesn’t get at the use of more

supply than can be demanded. So it has that disadvantage.

Mr. MORAN. Mr. Funk?

Mr. FUNK. Well, I think, long-term, going back to some of the discussions we had before the 2002 farm bill, we heard Dr. Collins

this morning mention, we hope they saved up for a rainy day. I

think, at the same time, we start talking about some of the farm

savings accounts that we have discussed in the past, those are

things that we definitely have to look at in a broad-based framework, along with tax policy and everything else, for what apparent

mechanisms do farmers have in order to save up during those good

years to be able to prepare for the lean years.

38

Another aspect, obviously, that came out, the Commission on

21st Century Production Agriculture, before the 2002 farm bill,

talked about a revenue-based type of trigger rather than simply a

price-based trigger. And I think, especially for your district, Mr.

Chairman, when you talk about, can we make a crop, that is the

first question, and I think that is one of the imperative things. It

is not just price, it is also about what kind of a crop do we have

to be able to sell that year.

Mr. MORAN. You and Dr. Collins, I am a supporter of the socalled farm accounts, the idea that we save for the future when

years are good. I am waiting for the good years in which my farmers could do that. So it appeals to me in theory, but in reality it

seems to me to be a very difficult proposition, and in part, maybe

it is the district that I represent. With 4 or 5 years of drought, it

is the conditions that have not been desirable. But do you see that,

Mr. Funk, you really have real statistics, every day, live farmers.

Do you see that? When Dr. Collins tells that in 2003 and 2004, that

we had increasing farm income, do you see any evidence that our

farmers were saving for 2006?

Mr. FUNK. I think, generally, there was an increase in savings,

but I think, long-term, in 2003, obviously, the wheat crop was OK

out in western Kansas for the broad scale. It would have been nice

if we had some sort of mechanism. Instead of encouraging them to

have to invest directly into a brand new combiner, something like

that that was a capital investment, we would have loved to actually

save those dollars so that in time of lean term, they could turn

around and be able to have those dollars to be able to cover family

living expenses.

Mr. MORAN. That is something, a much more realistic occurrence,

is that if there is any money to be had, you put it back into, you

might buy another quarter-section of ground, you might buy a new

combine, but it just seems unlikely to me that someone who is

earning their living farming puts that money back into a savings

account.

Mr. FUNK. And that is exactly what I am saying, it has got to

be a real broad-based type of a look. What really can we do? I like

the fact that I can invest in my university-sponsored account to be

able to invest for my retirement, and if something happens, I can

draw the money out in the case of emergency, but at the same

time, what do the producers have? And we have got all sorts of

mechanisms that are out there. If there is something that is really

good, though, we need to be able to put that in a play for them.

Mr. MORAN. Thank you very much. Let me turn to Mr.

Etheridge.

Mr. ETHERIDGE. Thank you, Mr. Chairman.

Dr. Westhoff, in your analysis of Federal policy, you noted that

current policy is designed to cushion producers from declining

prices rather than revenue losses or increased production costs,

similar to what we talked about a minute ago. And we have talked

about averaging and I would just say as emphatically that the river

may only average 6 inches deep, in some places it may be 12, and

that is sort of where find farmers in a lot of cases, and that is why

it is so difficult making policy across this country. What would be

the fate of farm programs that were designed to cushion falling

39

farm revenues, my farm support programs based on revenues rather than prices, be a way to address both deficit reduction requirements and future WTO trade agreements?

Mr. WESTHOFF. We can look at a revenue-based policy, if there

is interest to do so. Based on some past analysis that we have gotten, we can find quickly that you can support a higher level of revenue nationwide through a revenue-based type of system than you

can with a price-based system. The trick, as you said, is that revenues at the farm level can be very different than at the national

level. An individual may have a crop loss, where his neighbor does

not, and the crop loss may have decreased revenues. Are you going

to protect revenue at the farm level or at the sector level? For a

certain number of dollars you are going to be able to spend, you

can protect a higher level of national revenue, if your can focus this

protecting national revenue. If you are trying to protect revenue at

the farm level, it can be very expensive.

Mr. ETHERIDGE. It seems to me, also, a challenge is that some

of our farms are becoming more and more integrated, but still classified as farm operations, but they are integrated almost to the grocery shelf, which puts the small farmers at a very big disadvantage

because they can’t take advantage of those variations in prices or

distortions.

OK, let me move to one other question before I run of time here.

Dr. Piggott, in your argument against additional subsidies or tax

relief for alternative uses of farm commodities, such as excise tax

exemptions on ethanol and those kind of things, let me be the devil’s advocate in this one. Does your argument apply to the view of

subsidies and tax relief for domestic oil productions, such as depletion allowances as used in agriculture and other things? Or for corporate R & D that winds up in our universities for research for new

products? Because a lot of it has some of the same similarities.

How do you differentiate in that?

Mr. PIGGOTT. What my point was, is, at a time here now, where

gasoline prices have risen to a level where, I think it was mentioned earlier this morning, that ethanol and biodiesel and products like that may become more of an opportunity or a possibility

where they may pencil out, if you will. What all is encouraging is,

for it to be a long-term structural shift to agricultural commodities

being a benefit, you need to make sure that it is science-based in

the sense that these alternative fuel options can compete on a

science-based perspective. That could be through innovations in

crop yields that are specialized towards, or crop production that is

specialized towards that production, and/or in production technology. That is what I had in mind. So we have a product that can

compete with petroleum-based products on an economic level. That

is what I had in mind.

Mr. ETHERIDGE. I think the reason I raise the question, though,

is, it is more of a fundamental question as well as a practical question, because if you are going to provide it for depletion or a depletion allowance for petroleum production, and the other things we

do, because it is so important to our economy, where we provide,

in effect, our military to make sure—any kind of—and we don’t

provide it for our farmers. And I am not arguing either way, I am

just raising the issue here. It seems to me we would be trying to

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produce and provide for 100 percent, because if we do an alternative fuel, 100 percent of those dollars, R&D or otherwise, is spent

in the United States of America. None of it moves outside. It seems

to me it makes it very difficult for us to be able to compete against

the very thing we want to find an alternative to replace. Does that

make sense? Someone else may want to comment on that. I only

raise that as an issue, because I think we need to have the input

on it.

Mr. RAY. I guess the only comment I make is that I think it is

very clear that what we pay at the pump is just part of our cost

of gasoline, if you think of the Middle East and all. So I think that

it is a matter of awareness and getting people to understand that

you are paying either, you either pay it one way or you pay it another.

Mr. ETHERIDGE. Good point. Thank you Thank you, Mr. Chairman, I yield back.

Mr. MORAN. On that similar topic, the price elasticity that I

asked the previous panel, isn’t there something different about

fuel, that it is slow to respond to increasing prices? I guess the

elasticity is what it is, as a result of what we consider is a necessity. Is there something unique about fuel?

Mr. RAY. Is there something unique about energy or food?

Mr. MORAN. Energy. I am sorry.

Mr. RAY. Energy. I think, in the short-run, it is very, very elastic.

All we have to do is look at how we as individuals react. We don’t

change much in the short-run, but the next time that we need a

car, it is going to have an impact. And as there are opportunities

to develop additional output in the energy sector, it is going to have

impact. So I think it is one of those cases where the short-run, it

is very inelastic, but over the long-run, it turns out to have a quite

bit of elasticity.

Mr. MORAN. That makes sense to me, just as a practical experience in my life. I have concluded that maybe I ought to get a different car, but it doesn’t make sense to trade my car in yet.

Mr. RAY. Yes.

Mr. MORAN. But when I go shopping, if gasoline prices are what

they are today, I will be looking for something smaller.

Mr. RAY. Yes.

Mr. MORAN. Farmers, is it true when I say, what I at least expressed earlier, that they have little ability to modify their expenditures of fuel, fertilizer, and natural gas? Are farmers generally

fuel-efficient, energy-efficient?

Mr. FUNK. Well, they try to be, obviously. You find that they try

to basically use the most advanced technology that they can to try

to increase their bottom line, and I think that is the thing, is that

if they treat it like a business, they are trying to be as efficient in

the utilization of the resources that they have, because they know

it impacts the bottom line for that farm. In that respect, though,

once they have the equipment line already established, and if they

want to be able to have a crop, they are going to have to use some

sort of level of energy input into that production process in order

to make a crop so they have got returns for that year. They can’t

simply shut it down to the result that they would lose their crop

and not be able to have sales for that year.

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Mr. MORAN. Is their restriction their banker?

Mr. FUNK. In some cases, in the last couple years, even before

I got to Kansas, excuse me for spending 5 years in Illinois prior,

we did see, if Representative Johnson were here, I think he would

get a kick out of that. When we were sitting over there, we saw

some bankers who told them, switch to soybeans. Lower input costs

are through there, especially if you can hit with a no-till drill instead of having to go back in with conventional tillage. So there are

several options that are available to them and especially switching

to crops like soybeans with no-till, but at the same time they have

got to make the most opportune use of the resources available.

Mr. MORAN. With the arrival of Mr. Pomeroy, let me turn to him

for any questions he might have.

Mr. POMEROY. Thank you, Mr. Chairman. I want to thank you

for holding this hearing. There is a lot of wonderful thinking out

there on how all this fits together, and often we are focused on the

piece of the legislative action in front of us. We don’t get this

chance very often. I have enjoyed it very much and I have enjoyed

the panel as well as the preceding panel in that regard.

Let me begin with FAPRI. And being in your region, a lot of research that you do is of great value to us in North Dakota. We appreciate it. I note that you indicate in your testimony that certain

crop insurance products do protect producers against significant reductions in yields or gross revenues, but generally do not provide

support when there is only modest reduction in yields. Would you

go further and say that crop insurance also does not generally respond to whether it is diminished economic return to the farm or

due to quality discount?

Mr. WESTHOFF. Yes, quality has been a problem. There are some

attempts being made by the crop insurance program, I understand,

to do some quality adjustments, but it has not be satisfactory to

many producers.

Mr. POMEROY. Yes, we directed them to, actually, in the legislation, but it has been pretty slow in coming. On the other hand,

they indicate they don’t want to ensure the grain trade, and I do

believe, I learn about a new disease every crop year. It is always

something. It is falling numbers and now we are back to vomatoxin

and who knows what it will be next year. It is always something

and it takes away the economic return to the farmer and it is uninsured. So I think, as we consider a response, a disaster response,

in light of what we have experienced in 2005, this is something

that we ought to consider. Now we have responded relative to quality loss in the disaster bills of the last 2 years. Have you measured

whether that has been helpful to farmers?

Mr. WESTHOFF. We have not looked at that particular question,

Mr. Pomeroy.

Mr. POMEROY. Anecdotally, I have heard it has been. But on to

the gentleman from Kansas. I can’t think of your last name. I am

sorry. I found your testimony to be thoroughly depressing about the

impact of these fuel costs on the profitability of farming now and

really into the future. Well, we talked about, over the midterm,

people might seek a smaller automobile. You are not going to go

and swap out a combine for a more fuel-efficient combine any time

soon. They are pretty well stuck with fuel-intensive, it is a fuel-inVerDate 11-SEP-98 13:03 Oct 25, 2005 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 F:\DOCS\109-17 HAGRI PsN: HAGRI
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tensive business, no getting around it. It is a capital-intensive business and it is a fuel-intensive business. Is that your perspective?

Mr. FUNK. Yes, sir. Yes. And you talked about switching out the

combine. Obviously, when you look at that, if you go for a larger

one that might be able to harvest more with a more efficient kind

of an operation, you still run into the circumstance where maybe

that larger combine won’t fit in the field they have got to be able

to get into. You don’t necessarily want to go to a smaller one, because the number of acres you have got to cover may not be as efficient as a larger one. So there is a catch-22 to that.

Mr. POMEROY. I have had farmers in North Dakota tell me, basically, that they lost profit this year through the higher fuel costs.

Unfortunately, looking at your testimony, I don’t see a lot of good

news around the corner for them as it involves profitability likely

next year.

Mr. FUNK. We just don’t see the energy turnaround into 2006.

And obviously, where we are at, including in your State of North

Dakota, it is a matter of, can we have that crop produced? And that

is a big question for us as well. We just don’t simply know what

yields will be in 2006 and we are still waiting now for 2005.

Mr. POMEROY. Interesting. One final question, Mr. Chairman,

and this would be of Dr. Ray. Do you believe that the present, I

thought your comments relative to the 1996 farm bill were very interesting. Do you believe that the farm bill that we are operating

under is more successful at achieving its ends of taking some of the

volatility out of the economics of family farm and agriculture and

freedom to farm?

Mr. RAY. To the extent that we have counter-cyclicals now so

that we don’t need emergency legislation to fill in the gaps, yes, but

I would point out that it has same fallacies, really, as the 1996

farm bill. All of the discussion that we have been talking about,

how farmers react to energy prices, is the same way they react to

crop prices; they will change the mix and they will change how

they put things together. But that doesn’t necessarily mean that

they are going to reduce total output all that much, if you add it

all up. So we don’t have anything in the 1996 farm bill or the 2002

farm bill that addresses that.

Mr. POMEROY. Well, what about the conservation title? Do you

think, as we explore the potential of getting income to farmers for

land stewardship practices, totally disconnected to production, that

that might provide some means to begin this, to implement it, to

incorporate more vigorously into the farm bill the kind of change

you are suggesting?

Mr. RAY. It definitely would. To the extent that the activities

that were involved took out of production some of the major crops,

it definitely would. And in your area of the country, I am sure it

would be a very important one, but in areas like Illinois and Indiana, it probably wouldn’t take much land out of production and

would essentially just change the name of the direct payment and

it would change the recipients as well.

Mr. POMEROY. A very interesting comment. Thank you very

much. Thank you, Mr. Chairman.

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Mr. MORAN. I thank you, Mr. Pomeroy. In that regard, Dr. Ray

or anyone else, does the 2002 farm bill create a significant incentive for production?

Mr. RAY. That is what people tell us, right? We have folks that

are telling us that in WTO. We have folks that are telling us that

in Brazil. All around the world they are saying that if we just did

away with subsidies, our production would decline and prices

would go up and everything would be great. Now, I think that is

very important to understand that our discussion about energy is

exactly the way it works for other crops, too; for changes in price,

too. And in the case of cotton, I am sure that there would be a reduction in the acreage of cotton, because it is a high-priced product

or it maybe has a little bit more subsidy than some. But that

means that soybean production and corn production would probably go up. That land wouldn’t lie idle.

So I think that it is, if you look aggregate agriculture, and I

argue that as we oftentimes get bogged down in one commodity

and then we think that we can use that as a pattern for all commodities, and that doesn’t work. So I think that most people that

have done work in this, and others can speak for it, the reduction

in total output is not as great as we would expect, if you look at

all of agriculture.

Mr. MORAN. The laws of economics suggest, in fact, require that

any kind of subsidy increases production. I think that is a given.

My question is more specific. Are there specific things in the farm

bill that encourage production beyond other farm policies? Are

there policies in place in the 2002 farm bill that are encouraging

production in way that distorts the market even more than some

other policy? I think any subsidy is going to have distortion. The

question is, are we doing it in the right way?

Mr. RAY. Well, my argument would be that whether you did total

decoupled payments or whether you have the current system, you

are going to have about the same amount of total production no

matter what.

Mr. MORAN. Just different production.

Mr. RAY. Yes.

Mr. MORAN. Potentially. Dr. Piggott, you indicated, and perhaps

I may be reading more into your testimony than was there, but I

think you suggested that the further we can go in the direction to

free market the better we will be, and that one of the ways to assist agriculture is through crop insurance. Are we any place close

in this world market that we operate in that we can significantly

reduce or eliminate direct assistance to agriculture and replace

that with assistance through crop insurance, through risk management tools?

Mr. PIGGOTT. Let me answer that question by saying what Dr.

Collins, I think, was trying to also say this morning, is, we have

made a great deal of headway there, with about 80 percent of all

acres insured now. There is still a lot of work to do in that area,

but what I was advocating in my testimony is that there is a vehicle in place which does produce the most efficient market outcomes

through crop insurance. And the challenge there is to reduce more

hazardous and adverse selection problems. So that can be the vehicle where we can provide assistance in times when it is needed.

44

And part of the challenge there is to take away some of the other

things, like the ad hoc payments, which do change farmers’ expectations if they continue to incur year in, year out, and that was my

point.

Mr. MORAN. What role do any of you see ethanol playing in the

agriculture economy? Is it a significant opportunity for agriculture

or is this oversold? Dr. Westhoff?

Mr. WESTHOFF. Well, I think, clearly, with the energy bill in

place, we have seen large increases in ethanol production already

and in front of us much more to come. In our own projections we

just put out in August, we actually have ethanol’s use of corn exceeding the exports by 2009. So it has become a very major point

of the agricultural economy and we don’t see a reason that is going

to change.

Mr. MORAN. Let me make sure I understand that. Corn will be

more used to produce ethanol than to be exported in 2009?

Mr. WESTHOFF. That is our current projection, that is right.

Mr. MORAN. Anyone else?

Mr. FUNK. I think, obviously, when you start speaking about

biofuels in general, not only ethanol but including biodiesel, and

now, as we read it from the energy bill, agro-biodiesel, I believe,

I think it is an important factor to be able to consider it and it

gives producers an opportunity to expand their horizons in looking

at investing in other opportunities that may come around to capture some value from the farm gate. At the same time, I think we

have to be very cautious in how we feel about looking at ethanol

and other crops, and we need to have a lot more integrated educational programs, shall we say, to help them to understand the

marketing of the byproducts and the co-products that come along

from those. And I think there is a big challenge with a lot of people

that start these operations and they think, well, I am just going to

produce ethanol, and there is a lot of marketing behind that and

a lot of business savvy that is required, as well, that isn’t in the

traditional area of agricultural production.

Mr. MORAN. Do you see evidence, this may be you, Mr. Funk, or

Dr. Westhoff, in regard to increasing, we have seen commodity

prices fall and yet we are producing more ethanol, more soy diesel

all the time. What is the correlation between the production of ethanol, soy diesel, bio-based fuels and price, commodity price?

Mr. WESTHOFF. Sure. More demand is going to mean a higher

price. If we didn’t have the level of ethanol demand we have today,

corn prices would be even lower than they are. In our estimates we

did of the effects of the energy bill, we estimated that the bill

would increase the average corn prices by about 12 or 13 cents a

bushel in the long-run.

Mr. MORAN. Gentlemen, anything you would like to add to today’s record before we close this hearing?

I appreciate your testimony. Thank you for joining us. This will

be ongoing discussion about farm policy. And as a number of you

indicated, it seems like we have had this discussion before, and you

have been trying to find the right answers for a long period of time

and we appreciate your help.

Without objection, the record of today’s hearing will remain open

for 10 days to receive additional material and supplementary writVerDate 11-SEP-98 13:03 Oct 25, 2005 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 F:\DOCS\109-17 HAGRI PsN: HAGRI
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ten responses from witnesses to any question posed by a member

of the panel. This hearing on the Subcommittee on General Farm

Commodities and Risk Management is adjourned.

[Whereupon, at 1:07 p.m., the subcommittee was adjourned.]

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