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REVIEW TECHNICAL PROCEDURES

OF USDA’S ESTABLISHMENT OF

POSTED COUNTY PRICES

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

DECEMBER 14, 2005

Serial No. 109–24

(

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

Vice Chairman

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, opening statement ............................................................................ 3

WITNESSES

Fletcher, John, general manager, Central Missouri AGRIService Inc., Marshall, MO, on behalf of the National Grain and Feed Association .................. 25

Prepared statement .......................................................................................... 37

Gaibler, Floyd, Deputy Under Secretary, Farm and Foreign Agricultural Services, U.S. Department of Agriculture ................................................................. 4

Prepared statement .......................................................................................... 41

Answer to submitted question ......................................................................... 69

O’Conner, Michael, member, National Farmers Union, Alcester, SD ................. 26

Prepared statement .......................................................................................... 57

Reese, Sherman J., president, National Association of Wheat Growers, Echo,

OR .......................................................................................................................... 20

Prepared statement .......................................................................................... 54

Shelor, Greg, vice president, legislation, National Grain Sorghum Producers,

Minneola, KS ........................................................................................................ 22

Prepared statement .......................................................................................... 60

Sonnenberg, Dean, president, National Sunflower Association, Fleming, CO ... 23

Prepared statement .......................................................................................... 36

SUBMITTED MATERIAL

Hayes, Evan, statement .......................................................................................... 71

(1)

REVIEW TECHNICAL PROCEDURES OF USDA’S

ESTABLISHMENT OF POSTED COUNTY

PRICES

WEDNESDAY, DECEMBER 14, 2005

HOUSE OF REPRESENTATIVES,

COMMITTEE ON AGRICULTURE,

SUBCOMMITTEE ON GENERAL FARM COMMODITIES

AND RISK MANAGEMENT,

Washington, DC.

The subcommittee met, pursuant to call, at 10:00 a.m., in room

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

(chairman of the subcommittee) presiding.

Members present: Representatives Lucas, Jenkins, Johnson,

Bonner, Musgrave, Neugebauer, Conaway, Fortenberry, Goodlatte

[ex officio], Osborne, Etheridge, Salazar, Barrow, Pomeroy, and Peterson [ex officio].

Staff present: Tyler Wegmeyer, Callista Gingrich, clerk; Bryan

Dierlam, Lindsey Correa, Anne Simmons, and Clark Ogilvie.

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

Mr. MORAN. Good morning. The hearing of this Subcommittee on

General Farm Commodities and Risk Management will come to

order.

We are here today to get a better understanding of how Department of Agriculture determines posted county prices and how accuracy throughout the system can be improved. This is a very technical subject; however, I think we will all benefit from a refresher

course on how our loan program works and how posted county

prices play an integral role in the structure of our farm programs.

This will be especially important to our members as this subcommittee who will be instrumental in developing the next farm

bill. We will be better equipped to address the needs of our producers if we have an in-depth understanding of the various elements

of current farm law.

The 2002 farm bill provides our farmers with a three-part safety

net comprised of direct payments, counter-cyclical payments, and

marketing assistance loans. The marketing assistance loans provide farmers with short-term funds to meet expenses until their

commodities are marketed. Loan deficiency payments are available

if market prices dip below the loan rate or loan price, and producers can choose to forego the loan and opt for the LDP instead.

These LDP payments are based upon local PCPs. The Farm Service

2

Agency uses PCPs to determine county loan level rates and Marketing Assistance Loan Program benefits for 17 different commodities. USDA monitors and sets over 88,000 posted county prices

each day, 5 days a week.

The goal for the hearing today is to go beyond the superficial and

to get a better understanding of the process and all of the factors

involved in determining posted county prices. It has been brought

to my attention by Kansas farmers that in the last couple of

months, that in certain areas, PCP does not accurately reflect the

local cash market price. In the instances they have pointed out, the

PCP is considerably higher than the local price. At the same time,

I understand there are instances in which the PCP would be lower

than the local cash price. The question that probably should be addressed is not it is lower or higher, but whether or not the PCP

accurately reflects the local market.

I thank Secretary Gaibler and Mr. Yost and Mr. Farrish from

USDA for being responsive to the concerns that I have raised to

the circumstances that Kansans have faced this year. The job of

maintaining accuracy in the system is vitally important, not only

for the integrity of the program, but also for the real effect it has

on farmers’ bottom lines. This year, farmers are facing the effects

of higher input costs due to fuel and fertilizer cost inputs and various natural disasters, and I fear that any inaccuracy in PCP may

exacerbate the strain on our farmers’ pockets. Our Federal farm

policies do not currently account for input costs that our producers

are experiencing now, and I want to ensure that the programs we

have in place to help our farmers do not inadvertently cause loss

of revenue.

I look forward to hearing from our knowledgeable witnesses to

get a fuller understanding of the current situation and where there

may be opportunities for improvement, and I thank each of them

for their appearance here today, and what I know is a significant

effort to prepare for today’s hearing.

I now recognize the gentleman from North Carolina, distinguished ranking member, Mr. Etheridge, for any opening remarks

he may have.

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

CAROLINA

Mr. ETHERIDGE. Thank you, Mr. Chairman, and I appreciate

your particular interest in examining the methodology of the USDA

is using to established posted county prices as part of the commodity Marketing Loan Assistance Program. I have been fortunate that

I have not heard many complaints from my farmers about PCPs;

however, no region of the Nation is immune from the potential

problem of seeing PCPs fall dramatically out of line with local cash

prices.

This hearing not only allows us to fulfill our oversight responsibilities to ensure the farm programs we enact are being implemented as we intended, but it also serves as a warm up for the

farm bill hearings that we will be having later on, because I believe

the Marketing Loan Assistance Program will be a popular topic in

3

future farm bill hearings, and I think these oversights are vitally

important.

So I applaud your leadership in looking into this matter, and

hope and trust that we will see more oversight hearings in the year

to come. I served as chairman of the appropriations committee in

the general assembly, and I can tell you, the oversight years were

especially important to find out how things were working, whether

they worked the way we wanted them to, and it helped keep the

agencies in line with the legislative things we were doing.

And with your permission, Mr. Chairman, I would yield the balance of my time to the ranking member of the full committee, Mr.

Peterson.

Mr. MORAN. The gentleman from Minnesota is recognized.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA

Mr. PETERSON. Thank you, Mr. Chairman, and I thank the ranking member for yielding.

This is an interesting time to have this hearing, given everything

that is going on around us. Our trade negotiators are in Hong Kong

and have offered up some substantial reductions in our farm programs over there. I am not sure it is going any place, but it is out

there. We have those here in the country who want to dismantle

commodity programs as we know them, and they are continuing

their public relation campaigns here at home.

With that said, it will be at least two more crop years before producers could feel the impact of any major changes that may come

about because of the Doha trade agreement, further budget cuts for

the next farm bill. And this means that we will need to be sure

that our current programs are serving producers well until then.

I am interested to hear from the Farm Service Agency about

their day-to-day operation of the Marketing Loan Assistance Program, and particularly LDPs. I have counties in my district who

are wondering why their neighboring counties in Minnesota saw

their terminal changed, when they don’t feel that their grain flows

to the Pacific Northwest either. I also look forward to hearing from

the producers joining us here today about what can be done in the

short term to make sure that the program is working as well as

any long-term thinking they have been doing about the next farm

bill.

Mr. Chairman, I thank you for calling this hearing. I am looking

forward to hearing from the witnesses.

Mr. MORAN. Mr. Peterson, thank you for joining us today. The

chair now recognizes Mr. Floyd Gaibler, the Deputy Under Secretary for Farm and Foreign Agricultural Services at the U.S. Department of Agriculture. He is accompanied, no, I will let you introduce the folks you are accompanied by, Mr. Gaibler. Thank you

very much for joining us.

4

STATEMENT OF FLOYD GAIBLER, DEPUTY UNDER SECRETARY, FARM AND FOREIGN AGRICULTURAL SERVICES,

USDA, ACCOMPANIED BY MIKE YOST, ASSOCIATE ADMINISTRATOR FOR PROGRAMS, USDA, AND BERT FARRISH, DEPUTY ADMINISTRATOR FOR COMMODITY OPERATIONS, USDA

Mr. GAIBLER. Thank you, Mr. Chairman and members of the

subcommittee. I appreciate the opportunity come before you today

to discuss posted county prices. Joining me today is Mike Yost,

Farm Service Agency Associate Administrator for Programs, and

Bert Farrish, who is the Deputy Administrator for Commodity Operations.

This subcommittee has asked the Department to assess the technical procedures of USDA’s establishment of the PCP Program system, and explain the Department’s plan to continue to improve the

accuracy of this system.

The PCP is a proxy for the cash value of a commodity. It is determined by taking terminal prices, then subtracting a value reflecting historical relationships between local and terminal market

prices, and then adding or subtracting a value to minimize differences across State and county boundaries, and reflect localized,

current year market anomalies. When terminal markets and county prices vary significantly because of differing supply and demand

factors, the resulting demand can be a variance in PCPs and marketing assistance loan benefits between neighboring counties.

Concerns over USDA’s PCP system occur when program benefits

differ widely in adjacent or neighboring counties, or when PCPs exceed cash market prices, or when the cash, local cash price plus

LDP is below the loan rate. Counties that are adjacent to those different terminal markets, or counties where the two terminal markets used to calculate the PCPs are different, are more likely to reflect discernable differences.

Utilizing the loan provision is the only way for the producer to

guarantee receipt of the loan rate for the applicable crop. The national loan rate for each commodity is set by statute. Loan rates

for each county are determined once per year, and all county loan

rates for a particular commodity must balance back to the statutory national rate. Once a loan rate is set for a year, it does not

change. The loan rates are then updated each year to reflect PCPs,

production and adjustments to differentials.

The challenge is establishing PCPs reflective of local cash prices

while minimizing resulting discrepancies in marketing loan benefits. If PCPs in each county are reflective of local cash prices, differences in marketing loan benefits may naturally widen between

State and county boundaries, contrary to statutory provisions. Conversely, if PCPs are established to ensure that differences in marketing loan benefits are held to a minimum, PCPs will not reflect

local cash prices. When PCPs are adjusted accurately to reflect

local cash prices, but the adjustments are limited geographically,

then marketing loan benefit rift lines occur.

The emphasis on the statutory requirement to minimize marketing assistance loan benefits across State and county boundaries has

created equal benefits within specific geopolitical boundaries, such

as within a State. With a dynamic marketplace overlaying the static values, inaccuracies in the PCPs occur.

5

Another challenge occurs from using PCPs to determine county

loan rates for subsequent crop years. Loan rates are established for

each commodity and county on an annual basis; and conversely,

market prices fluctuate on a daily basis to reflect local market conditions. Adjustments to lower PCPs in order to gain marketing benefits will result in lowering the county loan rate in subsequent crop

years.

Unlike previous years, 2005 has affected PCPs with four separate key situations: one, some of the typical advantages of barge

rates over rail rates eroded late last summer because of low water

levels in the upper Mississippi River caused by the draught in Corn

Belt States; two, in the Mississippi and Texas Gulf regions, the 1–

2 punch of Hurricane Katrina followed by Rita affected both rail

and water transportation negatively; three, energy and fertilizer

prices soared in the past year along with crude oil prices and natural gas prices; and four, significantly higher 2005 crop years, coupled with carryovers from record 2004 crops, contributed to lower

export demands.

The FSA has initiated a review of the current policies and processes that compose the PCP system. This review will examine the

basic assumptions regarding equal marketing assistance loan benefits and LDPs within a specific geographic or geopolitical area, and

the commonly held belief that LDP plus the local cash price should

equal the county loan rate. Further emerging market dynamics like

ethanol, fuel costs, and rail and barge capacity must be reexamined. In both 2004 and 2005, as part of the county loan rate review,

all county differentials were adjusted to reflect ethanol plant locations and market influences. All aspects of price discovery, including collection and reporting processes, will be studied. And the FSA

intends to complete this review before the start of the 2006 marketing year.

In conclusion, we believe we are meeting the legislative objectives of the Marketing Assistance Loan Program. Are there efforts

without flaws? No. But flaws usually surface when outside influences affect farming, such as natural disasters and high energy

prices. The two most recently extraordinarily large crops have had

a significant impact in administering the PCP system. We are

aware of these risks and know how to make quick and successful

judgments, and we will continue to work to improve the process.

Thank you, Mr. Chairman.

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

Mr. MORAN. Thank you, Mr. Secretary. Mr. Secretary, I have a

number of questions, all of which I struggled to understand even

the question, let alone, I guess, your answer. But walk me through

if you would, please, tomorrow, Thursday in Kansas, in Republic

County, KS, there will be a posted county price at the local USDA

office. What happens at the USDA here in Washington, DC and

what happens in Republic County, KS to establish what those

numbers are this week in a county in Kansas?

Mr. GAIBLER. If I might, Mr. Chairman, I would defer to Mr.

Farrish, since his division handles that process.

Mr. MORAN. Thank you, Mr. Secretary. Mr. Farrish.

6

Mr. FARRISH. Thank you, Mr. Chairman. Each day, when the

markets close, we look at the market closes in each particular crop,

and then we have a formula or a process that we go through to establish the posted county price.

Mr. MORAN. We being somebody here at the USDA in Washington, DC?

Mr. FARRISH. Well, it is primarily our staff in Kansas City.

Mr. MORAN. OK.

Mr. FARRISH. We oversee that staff from here in Washington and

talk to them each during that process. But if you would like for me

to walk you through the formula, I can certainly do that.

Mr. MORAN. Please.

Mr. FARRISH. We have got the country divided up into a number

of terminal marketing areas, or terminal markets, if you will. We

establish what that price would be in that terminal market, whether that be the Gulf, whether it be Decatur, IL, and I am using corn

as an example today, Kansas City, Minnesota, Pacific Northwest,

which is an export market, we will establish what that terminal

market price is each day. And then we have a couple of adjustments we use to get down to the county price. One of those adjustments is the county differential that has been established over the

past year, and we review those differentials once a year. So we will

take the terminal market price, we either add or subtract that

county differential, and then we have a terminal adjustment that

we use, and we will either add or subtract that to get down to what

is our posted county price.

And then we also do telephone work each day. We make about

500 calls per day to all the grain production areas to double-check

prices, especially into areas where we may sense that we have a

problem or have a problem reported to us. We look at DTN information. We look at information on terminal prices from AMS, the

Agricultural Marketing Service, to compare those and see if we are

in line. But basically that is the process. It is a calculation process,

not a matter of calling a location and saying we are going to use

the price in this location as the posted county price today. These

differentials have been established over long periods of time, and

they represent historical trading and value relationships between

that county and the markets that service it.

Now, we do try to establish two terminal markets for each area,

and then we will take those, we will calculate them both, and we

will use the higher value as the posted county price, using the theory that the producer would always sell his grain the higher market and not the lower market.

Mr. MORAN. When you say two areas, how do you define an area?

Mr. FARRISH. Two terminal market areas. OK. For instance, we

may, in the State of Illinois, we will look at the Gulf and the Decatur market. In the State of Minnesota, we will look at the Pacific

Northwest and the Minnesota market, except in the southeastern

corner of Minnesota. Today, we are using the Gulf market and the

Minnesota market and comparing those two. In the State of Kansas, we would use the Gulf market and the Kansas City market to

compare and then choose the higher of the two to be the posted

county price.

7

Mr. MORAN. The explanation, then, for why there would be a difference from one county to an adjoining county, or across the State

line, well, I have chose Republic County, Kansas. It sits on the Nebraska border. I don’t know what the adjoining county is to the

north of Republic County in Nebraska. But as you know, often the

conversation that you get, that we get, is across the county line or

across the State line, it is a different posted county price. And the

explanation for that would be the county differential, based upon

this historic pattern? And also, I suppose, what market you are

looking at, based upon the geography.

Mr. FARRISH. That would be correct. More often the question is

why there is a difference in LDP values across State and county

lines, not necessarily posted county price. Or quite often the question is why is there a difference between cash values and posted

county price values. Those differences can occur for a number of

marketing reasons, weather reasons, transportation reasons, and it

is very difficult to adjust those down every day in every county, because we tend to look at long periods of time and not one day at

a time.

Mr. MORAN. What process do you have in place to correct errors?

Mr. FARRISH. We can review, if we see where we think there is

an error or a marketing anomaly, if you will, or a value anomaly

in an area, we can adjust, we can make temporary adjustments to

the county differentials. We have made State-only adjustments occasionally to reflect a change, maybe, in marketing patters or

transportation patterns within that State. And then, if that situation reverses itself, then we return to the original values that we

were using.

Mr. MORAN. Mr. Farrish, thank you. Let me recognize the gentleman from North Carolina, Mr. Etheridge.

Mr. ETHERIDGE. Thank you, Mr. Chairman.

I want to focus first on the USDA’s upcoming review of the PCP

process mentioned in your testimony. You all intend to complete it,

you said, before the start of the 2006 marketing year. My question

is, will they contain recommended changes and adjustments in the

process? And if so, will such changes be in place before the new

marketing year, or will there be any public review or a comment

period?

Mr. GAIBLER. Well, we certainly intend to have the changes in

place before the implementation of the marketing year. And I think

we would encourage input from commodity and farm groups and

this committee as we work through that process. We may even consider utilizing a third party to evaluate the process and provide us

some recommendations along those lines. We will certainly work

with the committee and the affected commodity groups as we proceed through this review.

Mr. ETHERIDGE. Let me follow that up, because you said you may

consider. Would you be willing to go a little bit farther and say you

will do it or you are going to do? Or is that going to pattern any

history, or how has it been done?

Mr. GAIBLER. We are always welcome to try and maintain a dialog with the industry. I continually have to do this with price discovery problems with the Peanut Program, for example. And so we

8

have always had a tradition of being open and having a dialog and

we will do that.

Mr. ETHERIDGE. I would encourage that because I think that is

healthy. I think, No. 1, it gives more credibility and less friction

later one with the people who are affected. The National Sorghum

Producers will testify in the next panel, and they are going to testify that their growers need small regions in determining LDPs. As

you will be aware of the testimony when it comes up, I will ask

you to respond to their request now, because certainly you may not

be here when they testify. And in the process, talk about how these

regions are established and the tradeoffs for having larger or smaller or fewer or more regions, because I think that is their concern.

Sometimes the smaller folks get caught in the gap when you look

at broader pieces. And if you would share that thinking with us,

I think that would be helpful to these producers.

Mr. YOST. Thank you, Mr. Chairman. Mr. Gaibler has asked me

to tackle that question for you.

There are benefits and maybe pluses and minuses to having larger areas and smaller areas. In 2001 the system was reviewed in

terminal marketing areas where a real——

Mr. ETHERIDGE. I don’t want to interrupt you, but are you going

to share with us what those pluses and minuses are?

Mr. YOST. Yes, I will get to that.

Mr. ETHERIDGE. OK, thank you.

Mr. YOST. In 2001, in all our crops, those terminal marketing

areas were looked at. The focus coming into 2001 had been to provide level LDP, or marketing loan gains in LDP benefits across

broad regions of the country. So in 2001 the number of terminal

marketing areas were reduced, specifically, I am not sure in sorghum and I don’t have that exact number with me, but in general,

all crops received a reduction in terminal marketing areas. Specifically, in corn, we went from 16 to 10. Some of those markets were

irrelevant as far as broad trading of corn, and the same thing in

sorghum and wheat and other crops, because of changing marketing patterns. So historically the focus had been on changing or providing level benefits across broad areas. Coming into this review

that we are talking about, certainly that will be one of the areas

that we look again; are these terminal market areas reflective of

the market today?

I understand their concern. One of the minuses may be, perhaps

to some folks, in going to more marketing areas. That draws up

more divisions in the country, which provides the opportunity or

the chance that there will be more differences across various lines

in the country, which has been opposed in the past by some groups

and some individuals involved in the process who continue to want

level benefits across broad areas.

While we have provided a level LDP across a broad area, in some

cases, it has thrown the PCP versus cash values off. Can that be

tackled with smaller areas? Perhaps. But again, the price of that

would be, or the result of that would be, would be bigger differences across those marketing lines to do that.

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

But it seems to me that this is one of those areas where the challenge is, and I think this is part of the reason we are here, and

9

I would encourage you to take a hard look at that. Thank you, Mr.

Chairman. I yield back.

Mr. MORAN. Thank you, Mr. Etheridge. The chair recognizes the

distinguished gentleman from Virginia, the chairman of the committee, for any opening statement or questions of the witnesses.

Welcome, Mr. Chairman.

The CHAIRMAN. Thank you, Mr. Chairman. I appreciate you very

much holding this hearing to discuss the USDA’s procedures for determining county, posted county prices for farm bill commodity programs.

I am here to learn about this subject. It seems to me that to administer the Marketing Loan Program, loan deficiency payments,

and marketing loan gains, the USDA must calculate nearly 88,000

posted county prices each day. This is obviously a large task, given

the resources with which the USDA has to work. And that task is

even more complicated, given that the markets for these commodities are dynamic and are changing all day, every day.

Administering daily fixed posted county prices within this dynamic market could lead to market distortions. So I want to understand the mechanics of how the USDA determines the posted county prices each day, the steps they take to minimize distortions

within the loan program, and the areas where the USDA could improve the process to further minimize future distortions. Congress

have given the USDA many parameters in which to operate the

loan program, and I want to ensure that the USDA is operating

within those parameters in a way that minimizes unintended consequences to the program.

I don’t have any questions at this time, but I do thank you for

recognizing me, and I look forwarded to hearing the answers to the

other Members’ questions.

Mr. MORAN. Thank you, Mr. Chairman, very much for joining us.

The gentleman from Colorado, Mr. Salazar.

Mr. SALAZAR. Thank you, Mr. Chairman.

Back in the early 1980’s when I was a young, struggling, beginning farmer, I worked for the USDA, back then known as the

ASCS office. I guess now it is known as the FSA office. And as we

struggled to figure out how we could help farmers in the area, one

of my biggest problems and one of my biggest concerns, of course,

was how USDA and their price setting or their actual loan setting

price was really affecting or was it really doing or affecting the

market in an artificial way? Because the market never did change

much from what the loan price was set at, up or down a few cents.

And could you comment a little bit about what your sense is of

when you set the price early on in the year, does it affect the market down a little bit later in the year, if you would, Mr. Under Secretary?

Mr. GAIBLER. The first response that I would give you is that

there has been a lot of change in the market dynamics since the

1980’s. We have seen a lot of shift in production and marketing

patterns. We have seen the emergence of ethanol into the industry,

and that has created more price and market volatility, and we anticipate that that market volatility will continue to grow and not

lessen in the future. With that in mind, it is imperative for us to

try and improve this program that we have as much as possible so

10

that we can reflect those changes in the marketing place, and then

try and do it in a way that won’t try and manipulate or have an

adverse impact on prices. This market loan program is simply trying to provide a market-clearing mechanism. And so what we need

to do is make sure we have as much timely and accurate information as possible so that that program can work efficiently. But it

is going to be more of a challenge, as I mentioned, because there

will be more volatility in the market than there was 20 years ago.

Mr. SALAZAR. One of the things that I guess still sticks in my

mind is, several years ago, someone mentioned here about the

drought that we suffered. It was a severe draught throughout the

entire western States that we know of, and the wheat prices and

the wheat stocks, the reserves were way down. Yet wheat prices

didn’t really move upward in any way, shape, or form, and they

hovered right around, I believe, the county loan rates, which were,

I believe, at that time $2.20 or $2.70 for wheat. I can’t remember

exactly. Well, $2.75 I think. And so with there being such a shortage in the United States, it seems like the market, of course, it is

about holding market volatility and keeping it to a constant point.

But I think it adversely affects many ag producers, and maybe I

do believe that it probably does establish some kind of a price setting for commodity marketers or traders. So that was my concern.

Mr. GAIBLER. Well again, the level of the loan rate is going to

establish a price floor, so that will always have some impact on

what prices will be. But ultimately the market is going to allocate

supply and demand. And so in the case of wheat, we have not seen

a lot of change and production yields have been very flat for the

most part, and it is not had a dynamic market as to, say, the soybean or the corn market.

Mr. SALAZAR. And, Mr. Farrish, can you expound a little bit

about how the county differential is actually set? For example, I

live in the valley, called the San Luis Valley, which is basically one

market region throughout the area, although I guess some areas

are considered to be in different terminal markets, and there are

six continuous counties, contiguous counties in the San Luis Valley.

But could you expound a little bit about how the county differential

is established?

Mr. FARRISH. Well, the county differentials have been around for

a very long time, and maybe we should go back in history a little

ways. Originally, this system began in about 1985 and it was a

posted elevator price back then to value PIK certificates, when we

have the PIK Program, to dispose of large inventories of CCC

grain. It has developed over time and came into use to develop, or

to value all CCC inventories, and it was continually refined to use

it as part of the LDP to determine posted county prices. As I have

said, the county differential is a part of that. That differential has

been maintained and adjusted over long periods of time to reflect

the value of that grain, whether it is wheat or corn or sorghum,

in that county, value it in traditional marketing patterns. We review those county differentials each year as a part of formulating

new loan rates each year. And we go back and look at prices and

history and where grain is being marketed, and make a determination as to whether that needs to be adjusted or not to accurately

reflect that value relationship in the marketplace for that county.

11

Mr. SALAZAR. Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Salazar. The chair recognizes the

gentlewoman from Colorado, Mrs. Musgrave.

Mrs. MUSGRAVE. Thank you, Mr. Chairman.

Lots of times we have constituents call us and they have called

the USDA and they have concerns. And I just wondered if there is

some assurances you can give us. I don’t like to call your office. I

don’t like to have my staff give you a call and pass those things

on. I like to be able to tell my constituents that you are addressing

it, and I believe that you are making efforts to do that. Could you

just give us some information on how you are addressing the concerns when you get these calls from people that are extremely frustrated?

Mr. GAIBLER. Well, in general, when we do get inquiries, either

directly from producers or through our State and local county offices, we immediately go out and look at the situation and try and

verify what the prices are and determine if they are out of line.

And if they are, we will make adjustments. We try to be proactive.

We can’t obviously spot all of these anomalies on our own.

Mrs. MUSGRAVE. Yes.

Mr. GAIBLER. But when they are brought before us, we will certainly address them and have addressed them. Sometimes they will

come directly to you as a member. I will respond as well. But we

would encourage producers, whenever they notice these concerns,

to come to us directly and we can respond as quickly then as possible.

Mrs. MUSGRAVE. Could you give me kind of a cheat sheet for my

agriculture legislative assistant, so when we get these calls, you

can say, when you see what you think is an anomaly, this is what

is going to happen? And like, do those people actually get a call

back after they have pointed something out that they think is glaring?

Mr. GAIBLER. I will let Bert. Mr. Farrish deals with this directly.

Mr. FARRISH. OK. Well, thank you, Congresswoman. We get

input from a lot of different sources. We get input from producers

directly from their commodity groups, from congressional offices,

and quite often from our own State and county offices, give us

input into problems that they foresee out there. I think it is very

important for us to remember that we have what is called a posted

county price, not the local price. And as you can see in our written

testimony, you can have areas or counties in the country with

widely different values within that county for the same crop. I

think we point out some instances where, in the same town, corn

and soybeans were valued 9 cents a bushel differently in two locations in the same town.

So the question becomes, what is the true county price? What is

the true price in the county? And that is a challenge as we go out

and verify these problems and try to examine what is causing it.

Because quite often we find situations where a company perhaps

is out of the market and not interested in buying grain and they

drop their price quite a ways, which causes us to be above it. The

expectation is that they will be back in the market in a few days

and that price could rise again. So it makes it a challenge, poses

a challenge for us to whether we make a change in the differentials

12

for an isolated situation like that. And then it has an impact on

the rest of the county and the counties around it. Because the first

question I am going to ask our staff is, what is the unintended consequence of doing this, because usually there can be one.

Mrs. MUSGRAVE. Yes.

Mr. FARRISH. But we do have a process and quite often they will

bring those problems all the way up to my level. And we conference

called here in Washington with our staff in Kansas City to try to

resolve the problem.

Mrs. MUSGRAVE. What is the time turnaround?

Mr. FARRISH. It is usually fairly fast. If we are made aware of

an issue, if we are made aware here in Washington of an issue

with a price in a county somewhere, we will immediately call our

folks in Kansas City and say, you need to get on the phone this

afternoon and take a look at this. Sometimes calls come in directly

into the Kansas City staff, and we may or may not find out about

it here in Washington, but we find out about most of them. A lot

of times they are resolved locally in Kansas City, but it is usually

a fairly fast turnaround to take a look at it. That doesn’t mean that

we are going to necessarily make a change, but we can explain it

and understand it.

Mrs. MUSGRAVE. I understand that. And what we need to be able

to tell our constituents is how you react, how quickly you react and

how serious you take their concerns.

Mr. FARRISH. Yes. OK, thank you. We take all their concerns

very seriously and we will react and turn it around within a day.

Mrs. MUSGRAVE. Thank you.

Mr. GAIBLER. We would be happy, Congresswoman, to provide

you sort of an outline of the process that we go through so that you

can understand the steps.

Mrs. MUSGRAVE. I would appreciate that. Thank you. Thank you,

Mr. Chairman.

Mr. MORAN. You are welcome. The gentleman from Minnesota,

Mr. Peterson.

Mr. PETERSON. Thank you, Mr. Chairman. And I hope I can get

through this in 5 minutes, but if you would indulge me, because

we have a situation here that if we can work through this, I think

it would be helpful to the committee to understand some of the

ramifications.

Mr. MORAN. We will see how it goes, Mr. Peterson.

Mr. PETERSON. Back in, I think, October 27, they reclassified 13

counties in the southeast part of Minnesota. They made the case

that they had a problem between the cash and the posted county

price because of the river being shut down. The farmers over further west, I think were basically in the same situation. But now

they are in the Pacific Northwest market and the other 13 counties

are in the Gulf market, and I don’t think there is much evidence

that the corn goes west, but that would be one question.

I have got some charts here that you made up. Prior to this, the price down in the southeast was a lot less. It was $1.22 versus

$1.49, $1.47. But I think there is other factors that could be involved here. It could be that there is more livestock, more ethanol

use up in that area that affects this. It could be that the farmers

store their grain in hope of making some money and got caught,

13

and the government’s bailing them out. There is a lot of other

issues that can get involved in all of this, and I am not sure. Well,

it is not transparent to me that all of that was taken into consideration.

And then, if you look at soybeans, you got the same kind of deal,

but nothing was done there, apparently, because they were, the

LDPs weren’t triggered, I guess, so you left that alone. But so, I

guess, number one, what evidence do you have that these counties

that were not in that area, that that grain is actually going west,

because they are telling me it doesn’t. Another question I have is,

aren’t you going to just have people that are LDP shopping going

into those 13 counties so they can get a better deal? And another

question is, as I understand it, that posted county prices are established, they are used to figure out the loan rates, and so could not

the effect of this be that a year from now or 2 years from now, that

area is going to actually end up with a lower loan rate because of

what you did? Or is this because it was temporary? It is just not

going to be the case. And last, how is the ethanol market factoring

into this thing, because we have a lot of ethanol plants in this area

that has these higher prices. I guess there are just a lot of questions out in my area about what happened here, and I am not sure

you didn’t cause more problems than you are solving in the long

term. I know that is a lot of questions.

Mr. GAIBLER. I will let Mr. Farrish, because he has been working

on this issue specifically.

Mr. FARRISH. Well, thank you for that opportunity.

Mr. PETERSON. Do you recognize your charts?

Mr. FARRISH. Yes, sir, I do.

Mr. PETERSON. OK.

Mr. FARRISH. And we produce those each day. You are correct.

We did make a temporary change in southeast Minnesota. I think,

as you know, I was asked by John Muncin, our state executive director, to come out to Minnesota in October and meet with producers and others in that area to discuss the situation in southeast

Minnesota. But let me, I guess, put in perspective of the type of

year that we had. We had an extremely difficult situation in

freight. Freight values along that section of the Mississippi River

were at historic highs. I find southeast Minnesota to be an area

that is a storage deficit area, meaning, there is not enough storage

to handle the crop and the normal movement. And because of the

size of the crop, it put a lot of pressure on the system there.

Mr. PETERSON. And that didn’t happen in those other counties?

Mr. FARRISH. Well, yes. No, I am not saying——

Mr. PETERSON. Because every town in the other areas got corn

out of the ground right now.

Mr. FARRISH. Yes. And I understand that. But southeast Minnesota is an area that the corn does not generally move to the

west. It moves to the Gulf along the river. That is the traditional

marketing pattern.

So I sat down with our State executive director in working with

the producers in that area. And I give a lot of credit to John

Muncin. He is the one, with our assistance, who worked out the 13

counties that he felt should be set aside and worked off the Gulf

market and not the PNW and the Minnesota market. So now we

14

use the Gulf and Minnesota market to value, as terminal marketing areas, to value corn in that region. We do find that corn, as you

move west, it moves more to the ethanol industry. It moves westward to the Pacific Northwest for export as opposed to moving east.

You are correct about chasing LDPs, if you will, because that is

one of the unintended consequences that we try hard to watch for

and not create. We could have made posted county prices right on

the money along the river in that area, but it would have created

huge LD fees and caused producers from all over to want to drive

to that area and market their corn in an area that had no transportation and no storage. So we don’t want to encourage movement

into an area that doesn’t want the product.

The ethanol factor, you asked about that. It is a big factor. We

have been taking that into account each year by adjusting differentials in those counties to try to more accurately reflect what ethanol values, or the value that ethanol is creating in those counties

for corn.

Mr. PETERSON. But just one clarification. What evidence do you

have that that grain is moving west for export?

Mr. FARRISH. Out of central Minnesota?

Mr. PETERSON. Yes. Well, like out of Big Stone County or Stevens County. They don’t think it is.

Mr. GAIBLER. We will let Mr. Yost, who is a resident of Minnesota.

Mr. FARRISH. He is a Minnesota farmer.

Mr. YOST. Well, Congressman, as you stated, there is a significant expansion of the ethanol industry out there. There is. There

are two train loaders in my home county, in Swift County, and

they are loading corn to go out to the west coast, periodically during harvests and periods of high movement in the summertime. So

part of the year they are. And of course it depends on the size of

the crop, coupled with the increase in demand for ethanol. We also

had a huge crop out there this year, as you well know, 200 bushels

of corn. So it is just that we are ratcheting things up. So I personally believe that we will always have a market for ethanol, or corn

for ethanol out there, very significant, and it will take precedent

some of time, and I also think the Pacific Northwest market will

also come into play because of the infrastructure already in place.

There are several hundred 10-car train loaders out there. So I believe there is some evidence, but you are correct in saying that it

is less than it used to be. You are very correct. So I think both

markets are legitimate.

Mr. PETERSON. And is this temporary thing going to affect their

loan rates or not?

Mr. FARRISH. Well, I want an opportunity to address that, too.

I forgot to when I was speaking previously. Yes, it can and that is

one of the things we were very clear to producers, and we are always very clear to producers when they come in and ask us to

lower their PCPs or change the county differential to give them a

lower PCP. We are very clear with them that this could have an

negative effect on your loan rate in the coming year, and we have

always had that discussion with them.

And just to follow up on what Mr. Yost had to say. One of the

things that I do on a daily basis is follow the vessel lineups around

15

the country, and I look at the Pacific Northwest every day to see

what products are being loaded out there for export. And there is

significant corn movement, has been significant corn movement out

of the Pacific Northwest all during harvest, and that continues

today. As well as soybeans. And all of that corn and soybeans has

to come from the western production belt, which means central

Minnesota and westward.

Mr. PETERSON. Thank you, Mr. Chairman.

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

Texas.

Mr. NEUGEBAUER. Thank you, Mr. Chairman.

One of the concerns, I have a lot of sorghum producers in my district, and one of their concerns is that the posted county prices

have not really been reflective of the county price to the cash price

in the area, and that the producers are concerned that the efforts

to kind of minimize these differences between the LDPs and the

marketing loan benefits across the county and State borders have

kind of led USDA to adjust the posted county prices to the point

where they are not reflective, that more of trying to manage the

loan deficiency process than really trying to make the posted county prices reflective of the county prices. I think, in the previous

farm program, I think the loan deficiency payments were more

county determined rather than regionally determined. And now,

moving to more of these regional pricings and regional determinations for loan deficiency prices, again are causing producers to

make decisions based on loan deficiency payments and not based

on what the cash price for those commodities are.

So that kind of leads me to three questions. And, Mr. Secretary,

you can kind of fan those out as you see fit. But one is, what are

you finding, for example, in grain sorghum, why there are quite a

bit of difference between the posted county prices and cash prices?

When you looked into that, what did you find? And second, is there

a better way to come up with a posted county price and local cash

prices in these loan deficiencies that is more reflective of those specific areas, and not having the producers looking at loan deficiency

prices or loan deficiency payments that in some cases would be less

beneficial to them than really what is going on in the cash market

in that particular area? And what kind of responses has USDA initiated when the grain sorghum folks have brought this to you?

Mr. GAIBLER. Well, we did have some occurrences here in October and November with grain sorghum producers. In October, there

was a concern about the inequity between the LDP rates for grain

sorghum and then the corn LDP rates. And so we did look into

that. And at the time, the research did disclose that the grain sorghum PCPs were, on average, reflective of the local cash prices.

But then, later on, there was the concern about where the PCPs

actually exceeded the local cash price. And there were some scattered counties in problem areas and there were some changes made

there. I think part of the problem is that equating the corn to the

grain sorghum is a difficult one. Those are two entirely different

markets. You have a very large corn market of 11 million bushels

being grown. It is much more geographically spread. There are

wider markets and market dynamics in play. And the grain sorghum is a more thinly traded, more locally regional type of comVerDate 11-SEP-98 11:02 Jan 24, 2006 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 F:\DOCS\109-24 HAGRI PsN: HAGRI
16

modity. And it may be there are ways that we need to look at grain

sorghum in particular, in terms of looking at it on a county versus

some sort of a regional basis. I know that Mike and Bert have already had conversations with the grain sorghum folks, and it is

something that we will continue to talk about with them.

Mr. NEUGEBAUER. And I would look forward to being a part of

those discussions, Mr. Secretary. Maybe we could bring some of the

sorghum people in and look at that, because I think, certainly, we

don’t want to have a policy in there that is shifting planning decisions based on our policy. It needs to be based on the market conditions. And I would look forward to entering into some dialog with

you about that. And hopefully, and I think this administration has

been receptive to sitting down with commodity groups when they

have specific issues, and I would hope that invitation would be

open to our friends in sorghum.

Mr. GAIBLER. Yes, we certainly will. We will be pleased to involve

you. And again, as I mentioned earlier, we think it is important to

have a dialog, and as we go through this review, it will be critical

to have their input and yours as well.

Mr. NEUGEBAUER. Thank you, Secretary.

Mr. MORAN. Thank you, Mr. Neugebauer. I would ask unanimous

consent of the committee that we allow the gentleman from Nebraska to join us at the dais, and that he be allowed to ask questions of the witnesses and make any statement he would like to

make. No objection. Mr. Osborne is recognized.

Mr. OSBORNE. I thank the chairman for his forbearance in letting

me appear in his committee. I appreciate it. And I would like to

pursue Mr. Neugebauer’s question a little further.

As you probably know, sorghum uses about 25 percent of the

amount of water that corn does; about 25 percent less input cost.

And the loan rates were equalized for corn and sorghum in the

2002 farm bill. And yet, as Mr. Neugebauer indicated, it does seem

that our policies do in many cases tend to shift planning from sorghum into corn. We have seen that steadily and yet, in the Midwest and particularly in Mr. Moran’s case and my case, we are

really seeing some problems with water issues. Sorghum is something that would be very, very helpful, to have more acres planted

in sorghum. So rather than having a large regional LDP system,

it would appear that maybe we need to break this up, whether it

be county or whatever, because right now there seems to be some

inequities.

And I know you have commented on this previously, but do you

have any thoughts? Because I believe the region right now includes

Kansas, Texas, Nebraska, Colorado, Oklahoma, Missouri, Illinois,

and South Dakota. And so what we are doing is we are adjusting

the posted county prices in every county to match the loan rate.

But that is a huge area, and I think maybe this is causing some

distortion and some problems. And you mentioned that you might

be looking at doing something different here. But could you flesh

that out a little bit as to whether you would want to break that

region up a little bit, or would you want to go to a county approach? Or how would you do this?

Mr. GAIBLER. Well, I will let either of these, because they have

already had some preliminary discussions about that.

17

Mr. YOST. Congressman, we have talked with the grain sorghum

folks about this. We recognize the problem. We recognize the need

to change. Sorghum is not unique. There is other commodities that

have similar circumstances. There is some overriding issues with

the grain sorghum industry that was beyond our control. The marketplace is different between corn and grain sorghum. There is different prices. Corn has had a lot of biotech advancements in it that

has enhanced production of it. We can’t affect that. But nonetheless, we talk to grain sorghum folks. We know they have some

valid concerns. They talked about new ethanol plants going up, a

20 to 30 million bushel increase in demand in a crop that is probably under 400 million bushels. Definitely it is going to affect the

marketplace and how we are going to establish posted county

prices. So we look forward to working with them in the future, and

your staff.

Mr. OSBORNE. OK. I have one further question and that is, right

now we have got a lot of grain on the ground. We have high ending

stocks at the of last year and another heavy production year. Does

USDA many provisions or if you have got anything in mind as to

how to provide more storage? Because it is really becoming worrisome, I think, for lots of people.

Mr. YOST. Well, as we noted in our testimony, that is a concern

of ours. We provided the chart for you that showed the commercial

storage in the United States has not grown dramatically. And at

the same time, our production has grown dramatically. We have

come of 2 back-to-back years of record and near record corn production. And recognizing that problem, earlier this year, we did make

some changes in our loan program, and we have allowed the producers to have the opportunity to store their grain on the ground

and on the farm if they are having, rather than having to go to a

commercial warehouse. We also, I think, would probably like to see

more activity in our Farm Facility Loan Storage Program. That

program has been around for some time now, where we provide financing to build on-farm storage. I think that that is something

that probably needs to be availed of more by producers. But it is

a challenge that we have, and I think it is going to be a continual

one here if we continue to have good crops here in the future.

Mr. OSBORNE. Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Osborne. Mr. Gaibler, Secretary

Gaibler, the grain sorghum folks seem to be getting a lot of attention today, and I am going to add to that myself. I very much recall

the efforts in the last farm bill, in the 2002 farm bill, to equalize

the corn and sorghum rates, and again encourage USDA to,

through a more adequate fashion, reach that goal. And perhaps it

goes back to the comments made by the gentleman from Nebraska,

Mr. Osborne, concerning the national versus localized or regionalized rates. One of the examples that the sorghum growers provide

in their testimony, they provide an example about the disparity between the corn rate and the sorghum rate.

But another one is about uniformity. I suppose my initial reaction is that uniformity is a good thing, and sometimes it is and

sometimes it is not, which I guess is what you all go through in

establishing these prices. But their testimony, this is their chart on

page 5 of their testimony. October 20, the LDP was 30 cents per

18

bushel uniformly across 11 towns in Kansas, Texas, and Oklahoma.

Our subcommittee staff yesterday checked to see if that was still

the case, and it is. Ten of those communities are still at 60 cents

and one of them is at 59 cents. So 7 weeks later, the concern that

was raised by the sorghum growers about the same LDP being the

same in all 11 communities is still true 7 weeks later. Is there an

explanation for why that is, that you have not already given us?

Perhaps you are going to restate what you have already told us,

but that one stands out to me as an example of a number of things,

Ms. Musgrave’s question about, do we respond quickly to concerns

about the county posted price, LDP rates? And then, I guess, just

generally, this concern again about, how do we treat grain sorghum

as far as a local market?

Mr. FARRISH. Thank you, Mr. Chairman. Secretary Gaibler has

asked me to address your question. You are correct, the LDP is still

the same. I would point out on the table that these are individual

locations, and the prices, cash prices do not represent the posted

county price. So in a way, not to cast any negativity on the research on the table, but it doesn’t represent exactly how we administer the system, since it is using cash prices versus loan rate and

not PCP versus loan rate.

And I guess, at the risk at restating our previous testimony,

much of the focus in the past has been to provide level LDP benefits across broad areas, or across all areas and minimize, there is

a provision in the statute to minimize differences across State and

county lines. And that is a real challenge of the system, is to try

to comply with that provision in the statute and yet, at the same

time attempt to reflect actual values in those counties.

And I would say, too, that in sorghum in particular, production

of sorghum has fallen a fair amount in the last 10 years or so. I

think we are around 400 million bushels now. Five or 10 years ago,

the U.S. was producing around 800 to 900 million bushels. And as

Mr. Yost pointed out earlier, that does make it a challenge to establish values in crops that have lower production levels and are

more thinly traded. We experience the same problem in barley and

some other crops as well. But that is an additional challenge to the

system that we face. It is particular to sorghum and not to corn.

Mr. MORAN. Does it seem odd to you about those 11 cities, 7

weeks apart? Does that strike you in any particular way?

Mr. FARRISH. Well, it strikes me that the market hasn’t changed

much in the last 7 weeks, initially. Again, we review those every

day, on average in those States. We look at State averages, and on

average within those States, our PCP is on average within a cent

or two of cash prices across the State. That leads us back into a

discussion, do we look at the State or do we look at smaller areas,

and that is one of the things that we will be examining as we go

forward this spring in examining the whole system.

Mr. MORAN. Well, I understand the kind of, perhaps, anomaly of

the question, because often we are asking you to uniform, make

more uniform from one county to the next. This one does strike me

as an example of why there needs to be more localized information

in regard to the county posted, posted county price in regard to

grain sorghum.

19

Mr. Peterson, anything additional? Mr. Goodlatte? Ms.

Musgrave? Mr. Neugebauer? Mr. Fortenberry?

Thank you all very much for joining us this morning. Thank you

for your preparation and your testimony today. Thank you, Mr.

Secretary.

Mr. GAIBLER. Thank you.

Mr. MORAN. The chair now would ask to come to the table our

second panel of witnesses, Mr. Sherman J. Reese, who is President

of the National Association of Wheat Growers; Mr. Greg Shelor, the

Vice President for Legislation of the National Grain Sorghum Producers; Mr. Dean Sonnenberg, President of the National Sunflower

Association; Mr. John Fletcher, General Manager of Central Missouri AGRIService, Inc.; and Mr. Michael O’Connor, a member of

the National Farmers Union. And I would recognize the gentlewoman from Colorado for introduction from her of Mr. Sonnenberg.

Ms. MUSGRAVE. Thank you, Mr. Chairman. Before I introduce

Mr. Sonnenberg, I would just like to acknowledge your work behalf

of the region. And the coach was here, and very often Nebraska,

Kansas, and Colorado face similar issues such as the severe

draught. We also work together for funding for ag research, and I

just appreciate your efforts very much. You are a rock star, and if

you want to have a field hearing out my way, you would be very

popular.

Mr. MORAN. The gentlewoman from Colorado will be regularly

recognized.

Ms. MUSGRAVE. OK.

Mr. MORAN. Thank you very much.

Ms. MUSGRAVE. You are welcome.

Mr. Sonnenberg and I met several years ago and got to know

each other very well when he would come to the State legislature.

He has been on the farm that he grew up farming since about

1975, and I believe corn, wheat, millet and sunflowers, which you

have grown probably for about 20 years now, but have been very

active in promoting things that were good for agriculture, and have

been a good source of information. And it has been a pleasure to

work with him through all these years. And of course he is very

involved now with the Colorado Sunflower’s Administrative Committee. He has done a lot of work with the Logan County Farm Bureau. I think, probably, Dean, you have held every office and have

been very active in the Farm Bureau for many, many years. I know

that you are engaged in a lot of forums, promoting the production

and the marketing of sunflowers. I note the tie you have on today;

always promoting sunflowers. And right now, Mr. Chairman, he is

president of the National Sunflower Association and he had been

appointed 5 years ago. So I am proud to introduce Dean as someone who has worked very hard on behalf of agriculture and have

done a good job of it now for many, many years. Thank you, Mr.

Chairman.

Mr. MORAN. Thank you, Ms. Musgrave. As a person who represents the Sunflower State, I appreciate the remarks you make

about Mr. Sonnenberg and his leadership. We welcome all of you,

Mr. Sonnenberg and others, to our subcommittee hearing today,

and I would recognize Mr. Reese to begin his testimony. Thank you

very much.

20

STATEMENT OF SHERMAN J. REESE, PRESIDENT, NATIONAL

ASSOCIATION OF WHEAT GROWERS

Mr. REESE. Thank you, Mr. Chairman. Mr. Chairman and members of this committee, my name is Sherman Reese. I am currently

serving as the President of the National Association of Wheat

Growers, and I am an active wheat farmer from Echo, Oregon.

Thank you for this opportunity to be here today. I look forward to

sharing our thoughts about the loan program as it is currently

structured, and some unintended impacts that it is creating.

Wheat growers as a whole have not been able to make use of the

loan program as established under the 2002 farm bill. Part of this

is a result of persistent draughts in wheat States, and with no crop

to sell, there is no loan program benefit. And part of it is a perception by producers that other crops have a more attractive safety net

or are otherwise more competitive. We believe that there are several issues that need to be addressed if the loan program is to be

retained in the next farm bill, but I would like to spend my time

today discussing discrepancies in posted county prices and their effects on loan deficiency payments, and touching on a particular

issue in a class differential.

The methods used by USDA to calculate posted county prices

have an arbitrary and unpredictable effect on loan deficiency payment rates. Posted county prices are calculated by subtracting the

county differential from the appropriate U.S. terminal market

price. The county differential reflects the cost of moving the commodity from that county to the terminal market, plus additional

factors such as local demand and local markets. These additional

factors appear to be subjective values with no established formula,

giving rise to discrepancies between posted county price and the actual cash price. These discrepancies are exhibited through posted

county price values both far above and far below actual cash price

for a county.

Recent swings in these values range from 19 cents under cash

price to 18 cents above during the period of May 17 to August 11,

2005 for winter wheat in Choteau County, Montana. Spring wheat

posted county price ranged from 16 cents under to 72 cents over

during that same time. These discrepancies are unacceptable, not

only because of the inconsistency, but for the possible failure of a

safety net for farmers who rely on loan deficiency payments when

markets fail to provide a price that covers the cost of production.

A possible remedy is for USDA Farm Service Agency to periodically

canvas county grain elevators to determine an average local cash

price in order to adjust the differential so the posted county price

would more closely reflect the actual cash price.

I should also point out that a few years ago, USDA had some

large differentials between adjacent counties for loan rates. In my

area there were two adjacent counties, and that would be Umatilla

County in Oregon and Walla Walla County in Washington, with 12

cents difference in county loan rates. The USDA has been responsive to our requests to smooth these out, and while there may still

be some issues out there, they have been largely resolved and we

thank the Department for doing so.

Let me touch on some results for USDA’s decision to separate

loan rates by class of wheat. We were not aware of this proposal

21

during negotiations for the 2002 legislation, so the administration’s

decision to separate them by class came as a bit of a surprise for

NAWG and its member States. Everyone knew there would be adjustments, and some of these have had different regional impacts.

This distribution of impacts is very difficult for a national organization with members in all regions and classes to address.

NAWG supports the principle established by the 21st Century

Commission which was chartered in the 2002 law; that the purpose

of Federal agricultural policy is to ‘‘provide a safety net under farm

income with minimal market distortion.’’ This principle guides our

preparation of proposals for the 2007 farm bill, and it guides our

response to the question of regional loan rates. If administration

decisions are causing growers to shift from one class of wheat to

another, when the market is sending different signals, then Federal policies need to be changed. If, however, class loan rates are

following true market signals that are accurately conveyed and not

distorted through arbitrary or subjective adjustment factors, then

the program is working as advertised and is consistent with the

21st Century Commission principle.

We have received complaints from some soft white wheat producers about the differential on loan rates between hard red and soft

white wheat in the Pacific Northwest. They contend that USDA decisions and adjustment factors result in a lower loan rate from soft

white than would otherwise result, and then in response, farmers

are shifting from soft white to hard red. Our response to those

States has been consistent with what I just said: if the market is

driving those differences, free from subjective interference, then the

program is working properly. If there are subjective or arbitrary

adjustment factors or policy decisions that are driving planning decisions, it is not working properly and NAWG will support getting

it fixed.

Therefore, we suggest that the subcommittee conduct a thorough

review, confidential if necessary, of the exact formula and methodologies for determining adjustment factors by USDA to satisfy

the question of whether subjective adjustments were made. You

should ascertain whether the loan rates for those classes of wheat

are truly following market signals or whether there is interference

in those signals. NAWG would be very happy to participate in that

review. Once that information is known, we will all have a better

idea of appropriate remedies, should they be necessary.

In conclusion, I would like to reiterate our belief that the loan

program has not worked efficiently for wheat producers and has

caused wheat producers to miss out on a major part of the farm

safety net. NAWG members understand that due to our commitments within the World Trade Organization and tight budget situations in the Federal Government, we need to start looking towards

more green box programs for the next farm bill. We should keep

the 21st Century Commission’s principle in mind and provide support through less market-distorting mechanisms. NAWG members

have already begun putting together potential proposals for the

2007 farm bill that will allow wheat producers to use more of the

farm safety net while keeping planning flexibility and keeping our

WTO commitments. I look forward to sharing these proposals with

the committee in working with you as you begin drafting legislaVerDate 11-SEP-98 11:02 Jan 24, 2006 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 F:\DOCS\109-24 HAGRI PsN: HAGRI
22

tion for the 2007 farm bill. I am ready to answer my questions

about my testimony today. Thank you.

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

of the hearing.]

Mr. MORAN. Thank you, Mr. Reese. Mr. Shelor, welcome.

STATEMENT OF GREG SHELOR, VICE PRESIDENT,

LEGISLATION, NATIONAL SORGHUM PRODUCERS

Mr. SHELOR. Thank you. Mr. Chairman and members of the committee, my name is Greg Shelor and I produce grain sorghum,

wheat, corn, and soybeans near Minneola, Kansas, which is in the

southwest part of the State. I serve as Vice President for Legislation of the National Sorghum Producers, and appreciate my first

opportunity to represent this organization before the House Agriculture Committee. I would like to thank you for the interest in

sorghum, and the review of the technical procedures of USDA’s establishment of posted county prices. I would also like to thank

USDA for implementing the eLDP Program, which has sped up the

process of farmers receiving their loan deficiency payments in a

timely manner. However, I would like to see USDA change the

publication of loan rates and the LDPs to a bushel basis. This

would help clarify numbers for our producers.

USDA implementation of the LDP Program, where LDPs are determined by posted county price, is of utmost importance to our

members. And this issue has generated more inquiries to our office

than any other issue this year. Our members are saying they are

frustrated because they don’t understand how USDA determines

the LDPs, and it seems arbitrary to them. They are especially frustrated when they see large changes in the LDP when the market

did not change. This is due primarily to the switch from the county

LDP system to a regional LDP system, which has taken the regional size to an extreme.

On October 20, the LDP was the same, with the exception of an

area in south Texas, for the top eight sorghum producing States,

Kansas, Texas, Nebraska, Colorado, Oklahoma, Missouri, Illinois,

and South Dakota. These States produce 95 percent of the grain

sorghum in 2004, and NSP feels this area is too large for one single

LDP to be set by USDA.

As we have contacted USDA with our concerns regarding this

program, they have been receptive to work with producers in correcting the LDP Program’s problems in the Sorghum Bill. Last

week, national staff met with the FSA staff, asking that the regional LDP system be revisited, and that the regions used to determine the LDP be changed to smaller regions. We look forward to

working with USDA to help them better understand the dynamic

changes occurring in the sorghum market.

On October 20, the cash price for sorghum in Dodge City and

Russell, Kansas was the same at $1.52 per bushel. The LDP was

also the same at 30 cents per bushel. However, the loan rate in

Russell is 15 cents per bushel less than the loan rate in Dodge

City. This means there was a 15 cents per bushel discrepancy in

LDP. Dodge City was 11 cents per bushel low and Russell was 4

cents to the high. The Russell market is influenced by a local ethanol plant, and this is reflected in the cash price. As currently imVerDate 11-SEP-98 11:02 Jan 24, 2006 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 F:\DOCS\109-24 HAGRI PsN: HAGRI
23

plemented, a regional LDP system cannot accommodate such variations in local markets, and weakens farmers’ confidence in the

system.

Some may ask why producers don’t place the grain under loan

in such instances. Farmers are caught in a cash flow squeeze with

low commodity prices and high energy prices. From a cash flow

standpoint, the cash price plus LDP is better than putting grain

under loan and prepaying at 27 cents per bushel storage. With little on-farm storage as compared to the Corn Belt, sorghum farmers

are limited in using loan programs as cash flow, and instead use

LDP as a cash flow tool. With cash flow being an issue this year,

the errors in the LDP rates add up to a large cash flow issue for

farmers. Just recently as the day before yesterday, my cash price

plus LDP was 71⁄2 cents per bushel less with the regional system.

Doing some quick math, this 71⁄2 cents per bushel discrepancy on

the 187 million bushel Kansas sorghum crop equates to $14 million

not going into Kansas producers.

National Sorghum Producers is committed to working with the

committee, its staff, and USDA to ensure proper implementation of

the Farm Security and Rural Investment Act of 2002. Sorghum is

a vital part of many producers’ operations and must receive equal

treatment by USDA. USDA implementation of the LDP Program,

which is determined by the posted county price, must not interfere

with farmers’ cropping decisions. Thank you.

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

of the hearing.]

Mr. MORAN. Mr. Sonnenberg.

STATEMENT OF DEAN SONNENBERG, PRESIDENT, NATIONAL

SUNFLOWER ASSOCIATION

Mr. SONNENBERG. Mr. Chairman and members of the committee,

thank you for your invitation to testify today about the procedures

the USDA’s Farm Service Agency uses to establish posted county

prices for commodities. I am the President of the National Sunflower Association, and I am testifying today on behalf of the association. I am a producer from Fleming, Colorado, where we raise

sunflowers, corn, wheat, and millet on our farm.

The safety net provided for sunflowers by the 2002 farm bill, as

with other oil seeds, relies primarily on the Marketing Loan Program. The direct payment rate for sunflowers is nominal and the

counter-cyclical rate is virtually nonexistent. We are happy to report that until this fall, oil sunflower prices, the basis upon which

both confection and oil sunflower LDPs are determined, had been

above the loan. And so virtually no LDP activity has taken place

from 2002 through 2004. And this did contribute significantly to

the savings that have been posted by the 2002 farm bill, relative

to the original CBO score.

Because of higher prices, NSA did not have a reason until this

year to review the effectiveness of either the terminal market locations or the freight differentials to each county that is used to determine sunflower PCP. However, this past harvest, record yields,

coupled with significant increases in acreage and high delivery volumes at harvest, did cause oil sunflower cash prices to decline significantly from those seen in 2004. Conversely, the high diesel fuel

24

prices that we saw this fall caused freight rates to rise significantly. The combination of those two factors has driven the price

of oil sunflowers below loan level in many markets.

The sunflower PCPs did not originally track those declines, and

producers notified the NSA about the growing spread between

PCPs in their local market. The NSA contacted the FSA about the

divergence, and I would really like to thank them for the speed at

which they were able to respond and bring those back into sync.

About 14 days transpired, for the congresswoman’s question of earlier. I was impressed to see that anything in the bureaucracy could

move that fast. I understand and it may be clarified today that the

freight differential at the local markets was suggested by removing

a single dominant market and was replaced with a combination of

two or three regional market points in order to refine the calculation that determines the local PCPs.

The NSA believes that higher and more volatile diesel fuel prices

seen this fall played a major role in causing that divergence. We

also believe that this climate of volatile prices will unfortunately

stay with us for a time to come. As a result, the railroads have already devised a baseline energy index formula to reflect moving

fuel costs that are then added as a surcharge and hopefully as a

discount when warranted to a base freight rate. For instance, reports of surcharges topping $500 per railcar over and above the

posted freight rate were not uncommon during this harvest. Although sunflowers are primarily moved by truck, the higher rail

rates dictate all freight rates. With the dynamics of today’s energy

market, perhaps the PCPs need to include a similar formula to reflect moving fuel costs. And since surcharges vary by region, such

a system would need to be implemented regionally.

Another factor magnifying the effect is the changing dynamics of

the sunflower market itself. There are fewer and fewer delivery

points for sunflowers. In the case of Colorado, there are 107 terminal elevators, or warehouses, and only 30 of them purchased sunflower at all in the last 3 years, and fewer than 10 of them are in

the market on a daily basis. The railroad increasingly wants unit

trains of 52 or 110 cars, so there are fewer and fewer places deliver. So far more farmers are contracting directly, and the distances to the markets have grown significantly.

In listening to the previous testimony, it seems important to ask

the question about what is a terminal market. In the oil sunflower

complex, 25 percent of the production moves into the bird seed.

And in Texas, Oklahoma, Kansas, Colorado, and Nebraska and Wyoming, that figure is 50 percent. And in the cases of areas like Missouri and Illinois, it may well be a hundred percent. While ignoring

that effect may maximize payments to our producers, it probably

penalizes us later as our loan prices may fall. In today’s ag money

market, the value of my insurance coverage is directly proportional

to my ability to borrow operating capital.

In closing, I want to thank the subcommittee for the opportunity

to testify on this issue, and I would be glad to offer the services

of the National Sunflower Association if you need further information. I would be glad to answer your questions. Thank you.

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

25

Mr. MORAN. Thank you. Mr. Fletcher.

STATEMENT OF JOHN FLETCHER, GENERAL MANAGER,

CENTRAL MISSOURI AGRISERVICE, INC.

Mr. FLETCHER. Good morning, Mr. Chairman. Chairman Moran

and members of the subcommittee, my name is John Fletcher. I am

General Manager of Central Missouri AGRIService, LLC in Marshall, Missouri. Our company is a joint venture between a familyowned company and two cooperatives. CMAS operates our country

elevator, farm supply, and feed manufacturing business in westcentral Missouri. And I am testifying today on behalf of the National Grain and Feed Association.

On a national basis, our sense is that USDA generally did a good

job this year of monitoring and adjusting PCPs to keep them

roughly in line with cash market prices in local areas during what

was a difficult harvest situation, complicated by large crops, hurricane disruptions, and rapidly escalating freight rates. Unlike some

previous years, the NGFA’s office generally received a lower volume of calls and complaints about PCP anomalies than we have

had in previous years; however, there have been some exceptions.

Mid-October, several NGFA member elevators began reporting that

sorghum PCPs were not reflecting the local cash prices in several

areas of Kansas.

In my home State of Missouri, the gap between PCPs and local

elevator prices were significantly wider this year during the peak

of harvest compared to the previous years. For instance, in some

areas of Missouri, the PCP was 20 to 30 cents higher than the local

prices, resulting in lower net prices to the farmer. While in others,

the PCP was 10 cents lower, resulting in local prices, the total

price being 10 cents higher than the loan rate. However, it appears

that most of that differential disappeared during the post-harvest

period, which leads us to believe that the spike in harvest transportation cost is attributable to extremely tight transportation capacity constraints, and the disruption caused by Hurricanes Katrina

and Rita played a direct role.

To improve the existing system would require a substantial increase in the market price sampling points that USDA contacts

daily to include more localized markets. One of the real challenges

in this regard is a trend in markets away from terminal marketbased pricing, as many grain movements occur directly between the

originating elevator to the customer, such as a feed mill or an ethanol plant, bypassing traditional terminal points in the process. This

makes local market prices much less predictable, unless individual

local markets are monitored daily.

In addition, USDA would need to devise a system that more adequately incorporates changes in transportation costs to reflect the

actual freight rates for barge, rail, truck, or actual freight costs to

specific market destinations, because freight rates can fluctuate

dramatically, particularly given the impact of the carrier-imposed

fuel surcharges. The bottom line is that the current system used

by USDA, given the human and financial resources allocated to it,

is doing about as well as can be expected. Currently, USDA relies

on producers, grain elevator operators, and market observes to provide assistance in alerting the Department if PCPs are out of line

26

with local cash markets in certain geographic areas. At times, the

NGFA itself has been alerted to such PCP anomalies by members

and has notified the USDA headquarters. Generally, our experience

has been that these reports are investigated quickly and efficiently

by USDA; however, there is always a however, we have received

reports from some member companies expressing frustration with

the Kansas City Commodity Office’s responsiveness after reporting

PCP anomalies.

To rectify this, NGFA suggests that the USDA establish a more

transparent, systematic, and better defined method, perhaps a webbased system of some sort for reporting instances in the future,

when LDP payments plus local cash price is out of line with the

loan rate. We also believe that USDA could be more transparent

in explaining the general parameters it uses for investigating the

PCP anomalies and the factors it uses to determine whether adjustments are warranted.

NGFA would also encourage the USDA to revisit another component of the Marketing Assistance Loan Program that has been

problematic in restricting the ability of producers to utilize modern

risk management tools when contracting to sell grains and oil

seeds. I am referring to the beneficial interest, that is, title control,

risk of loss, and the commodity to be eligible to receive loan deficiency payments or the Marketing Loan Program gain. The problem is that the concept of beneficial interests is out of kilter with

various kinds of new generation cash grain contracts that offer producers opportunities to maximize market returns. USDA has ruled

that certain types of advanced sales contracts, contracts to sell,

price later contracts, and contracts for future delivery of grain violate the beneficial interests rules, because these contracts give the

buyer an interest in the commodity at the time specified in the contract or a time implied by law.

We think that there is something amiss when a government farm

program that is designed to divert forfeitures, encourage stocks and

inter-market channels, and maximize farm income, has the unintended and perverse effect of limiting the marketing options available to producers. The NGFA believes that USDA has the legal authority under the current statutory language to revisit the beneficial interest issue to bring it more into line with the current market environment. If USDA’s analysis reveals that it does not believe that statutory authority is sufficient to modify the current interpretation of the beneficial interest rules, Congress may wish to

revisit the statute as part of the 2007 farm bill.

Mr. Chairman, that concludes my statement. I would be pleased

to submit to questions. Thank you very much.

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

Mr. MORAN. Thank you, Mr. Fletcher. Mr. O’Connor.

STATEMENT OF MICHAEL O’CONNOR, MEMBER, NATIONAL

FARMERS UNION

Mr. O’CONNOR. Thank you, Chairman Moran and the rest of the

subcommittee for holding this hearing, and providing me the opportunity to share with you some of my concerns with the posted county prices. I am Mike O’Connor. I am a member of the South Dakota

27

Farmers Union and testifying on behalf of the National Farmers

Union. I am an independent family farmer, raising corn, soybeans,

and some cattle. I served as the State executive director of the FSA

for 10 years, or 8 years under President Clinton, and I also served

as the Jerauld County FSA director for 2 years.

If there is one thing that the independent minded farmers can

agree upon, it is the confusion and the complexity of setting the

posted county price. The process is something very few can clearly

explain or comprehend. A familiarity amongst producers is a system that is inconsistent and unreliable. As a producer and a former

FSA State director, I have had the unique opportunity to witness

the complexities of the posted county prices from both sides. Producers get very frustrated because they try to figure out how the

system works, and by the time they think they have it figured out,

it does the direct opposite.

My home county of Union County, South Dakota bases its posted

county price off of the higher of the two terminal markets, one in

Minnesota and one in Portland, Oregon. With the added differentials and discounts such as transportation, more than often the

posted county price is out of touch with the local market. One out

of every three rows in South Dakota is processed into ethanol. Because the loan rates are set a distance from the market and the

value-added market, such as the ethanol market, have not been

taken into consideration to the account that I think they need to

be.

Just to give you an example, a week ago, in a grain elevator in

Beresford, South Dakota, corn was selling for $1.60, but the ethanol plant less than 8 miles away was $1.80. That is a 20-cent difference right there. The price of corn for the Board of Trade usually

sets the local markets, including the ethanol plant. Most producers

understand the Board of Trade and how it works, and they think

the posted county price should follow the Board of Trade, but it

doesn’t always do that. There is occasions when the Board of Trade

closes higher or lower, and the PCP does the direct opposite. This

is very frustrating for many producers who want to understand the

PCP process and to be better marketers of that commodity.

One of the biggest problems producers see is the PCP is consistent with the differentials. The transportation differential this year

was undoubtedly compounded by skyrocketing energy prices. Energy surcharge tacked on by transportation entities, whether it is

rail, ground, or barge, are paid directly out of the producers’ pockets, but also impact the degree of the differentials used to establish

that posted county price.

Evidently, differentials can be altered to fit the situation, thus

being reactionary in nature. And this really happened to a great

extent in 2004, where the posted county price was actually higher

than the local market at the end of the summer in 2004. USDA did

not want all this forfeited and was able to make some type of adjustments to add to the differentials and the PCP. This resulted in

many of the loans being bought back, but also caused significant

differences between across State lines and county lines. There

seems to be black hole when that is done with other deductions

that nobody can explain.

28

The increasing transparency in establishing differentials would

go a long way in understanding how PCPs are set. At the time a

PCP between counties is different with no explanation, the PCP between two neighboring States are often off, too. Let me give you an

example, the corn buyback in four counties in my area, two in

South Dakota and two in Iowa. From July 1, 2005 through September 30, 2005, South Dakota had a higher buyback rate, 29 of those

days, averaging 31⁄2 cents higher. Iowa had a higher buyback, 16

of those days, averaging 2 cents higher than South Dakota.

There is no quick and easy solution that would be perceived as

fair to all producers. Determining the responsible party for this discrepancy would be a step in the right direction, whether it is the

USDA or the grain merchandisers. I would also encourage this

greater transparency into the process of setting posted county price

with the better utilization and reflection of the local markets. I

thank you, Chairman Moran, and the rest of the committee, for

this opportunity, and I will try and answer questions.

[The prepared statement of Mr. O’Connor appears at the conclusion of the hearing.]

Mr. MORAN. Mr. O’Connor, thank you, and let me start by asking

you a question. Your time as a State FSA director catches my attention. Are things different today than they were then? Are we

making progress? Are things about the same? Are we making or

having a more difficult time in establishing the right posted county

price today than we did 10 years ago?

Mr. O’CONNOR. Chairman Moran, things are not different. The

only time that they are different today would be when the market

price is above the loan rate, and that takes care of all the problems, otherwise the problems existed 10 years ago. And that was

a problem that I had to address between neighboring States, where

South Dakota wasn’t receiving anything and our neighboring State,

Iowa, was 6 or 8 cents.

Mr. MORAN. In regard to that question, and for all members of

the panel, it does seem to me that there is this desire to have more

uniformity across county lines, but at the same time, that uniformity can in itself be a problem, that we want things more localized.

So which direction is it that USDA needs to go? Do we need more

localized input, market information, in establishing the posted

county price? Are we looking for more uniformity so that from one

county to the next or across adjoining State lines, the posted price,

and ultimately the LDP, is the same or similar? What would we

tell USDA they should do? It is either a great question or a poor

one.

Mr. O’CONNOR. I will take a shot at that. I think a little of both.

I think that local input is really important. And the second thing

is again, I think they have to review these differentials and these

loan rates to see if they are actually reflecting the difference in

such a short or a small area in southeastern South Dakota and

northwest Iowa and Nebraska, Minnesota. There isn’t a whole lot

of difference in the marketing areas, especially with the new ethanol plants coming up. So I think you have to take a little of both,

but local input certainly should. But the biggest key, whatever they

do, they need to make it so that the average producer can take a

look at it and see what they have done.

29

Mr. MORAN. Mr. Reese?

Mr. REESE. With regard to wheat, the problem we have, of

course, is having the 6 market classes identified. And if you have

more than one market class in a county, it becomes really problematical, because you have, for instance, a $3.20 loan rate for hard

red winter wheat versus maybe a $2.70 loan rate for soft white

winter wheat in my area. So for us, we need to find out a way internally within our crop to find a way to make that discrepancy go

away, because that is having unintended consequences in terms of

planning decisions, which may or may not follow historical trends

for those particular areas.

I think, with regard to USDA and what they have done, Mr.

Farrish is a friend of mine and has always been very accurate and

timely in responding to our questions. But the perception, and I

think you have heard that from this panel, the perception out there

is that there is a lot voodoo economics, and I am not sure what the

correct answer is. We just don’t have, any of us as farmers, we

don’t really have a good idea. We know that there is production,

we know that there is price, and we know that there is bases. So

those three items are involved in how they determine these PCPs,

but nobody on my side of the street understands it well enough to

fully comprehend what is going on.

Mr. MORAN. Mr. Sonnenberg?

Mr. SONNENBERG. In the case of sunflowers this year, uniformity

was what we needed. We have oil processing capability in North

Dakota and in Kansas. If the market is moving to Mexico, Kansas

has a price advantage. If the market is primarily domestic oil, the

Dakotas have an advantage. So as we came into harvest, we were

a dollar lower on the price in Colorado and Kansas, and that

wasn’t being reflected in the LDP. And it was very beneficial to the

growth of the industry in the future to realize that we in the south

that participate in the market, even though the price reward was

for growing in the north. So uniformity was important to us.

Mr. MORAN. Mr. Sonnenberg, in that regard, it wasn’t too long

ago in which there was concern raised about the LDP rate between

confectionary and oil seed within sunflowers and the effect it was

having upon planted acres. Has that issue been resolved?

Mr. SONNENBERG. We really went to a single class to a large extent, as far as the loan was concerned, so as not to create an artificial differential between them, and allow the marketplace to buy

what it needed irregardless of what happens with the loan rate. So

I think that that is taken care of.

Mr. MORAN. That is a change that has occurred within the last

several years?

Mr. SONNENBERG. Yes. For a short time they were separated,

and it seemed more divisive than having it unified.

Mr. MORAN. So there is one loan rate today across the spectrum

for confectionary versus oils.

Mr. SONNENBERG. That is correct.

Mr. MORAN. OK. Anyone else? Mr. Fletcher?

Mr. FLETCHER. Sure. I would like to add, the current system for

determining PCPs is 20 years old. We tweak it here, we tweak it

there. But this fall, typically, I am in west-central Missouri. Typically, St. Louis markets will be 15 to 20 cents higher on corn that

30

we are. This year, we were 20 cents higher than they were on corn.

Well, you get an anomaly like what Hurricane Katrina caused and

things are going to get messed up. And then USDA steps in and

tries to fix that and it causes a ripple effect, the rift that they

spoke of.

I think part of the problem is, the loan rates vary from county

to county, so you could have one PCP across a State, but if the loan

rates vary, then the LDPs are going vary from county to county.

If the loan rates were more uniform, if there wasn’t a 10-cent higher loan rate in Jackson County, Missouri than there was in Lafayette County, Missouri, then you wouldn’t need to have a different

posted county price in order for LDPs to be the same. I do think,

and I don’t know the entire national system. In our county, it

would be a 3-minute process for the local county office to determine

what the posted elevator prices are on a given day and enter that

into some database that could be monitored in Kansas City to look

for things being out of sync. It would be a monumental task for

somebody in Kansas City to check every elevator or every market

in the country. But I think if you delegated that out and entered

it electronically into some kind of web-based system, it will be really easy to do. I think it would be a lot easier to monitor.

Mr. MORAN. Elevator operators across the country would have

that capacity, have that ability?

Mr. FLETCHER. No, I am saying the local county office would.

Mr. MORAN. The local county office. I wanted to make sure you

weren’t volunteering.

Mr. FLETCHER. No, no, absolutely not. Well I think there needs

to be some accountability on it, and I think that the local county

office could better determine what the companies that were buying

grain in their markets were paying for grain.

Mr. MORAN. Thank you, Mr. Fletcher. Mr. Peterson?

Mr. PETERSON. Thank you, Mr. Chairman. And, Mr. O’Connor,

Congresswoman Herseth sends her regards.

Mr. O’CONNOR. Thank you.

Mr. PETERSON. She wanted you to know that she thinks highly

of your leadership, and she is down at the White House at a briefing right now or she would have been here. So I wanted to convey

that message.

Mr. O’CONNOR. Thank you.

Mr. PETERSON. And I guess, for you, is it fair to say that farmers

knew that there was going to be a backup in the corn market, even

before Katrina hit?

Mr. O’CONNOR. Yes, very much so. I think that, at that time,

Congressman Peterson, I think the terminals were full and I think

there was a lot of loans maturing and were moving into the marketplace. And I think it all started about July 3 or 4, right in there,

when the market turned around and headed in the other direction.

It headed down.

Mr. PETERSON. And don’t you think a lot of this pressure, that

we have got such a terrible pricing situation going on here, that

that is a lot of what is causing some of the concern out there, that

it is not working? We are not getting the kind of prices out of the

marketplace?

31

Mr. O’CONNOR. Absolutely. If the marketplace would establish a

decent price, we would not have these type of problems with the

disparity in the PCPs and loan rates. And that would be the answer to most of the problems, a fair price.

Mr. PETERSON. Thank you. I guess to any of you, most of the

complaints that we hear about the operation of the program, and

a lot of the complaints are about farmers shopping around for the

highest LDP, what is your reaction or experience with farmers

chasing LDPs? Is that a common thing as opposed to them trying

to find the highest cash price?

Mr. FLETCHER. One thing that we have commented on, I have

been in the industry for 25 years, and it used to be that the farmer

was always wanting the price to go up. In the fall of the year, we

find the farmer wanting the price to go down so he capture a higher LDP. It is almost unnatural.

Mr. PETERSON. Any of the others have a comment?

Mr. O’CONNOR. Congressman Peterson, I don’t see that as much,

and didn’t as the State director, of chasing the higher LDP. Again,

if they would have to use commercial storage, sometimes the producers would haul it to that particular terminal where the loan

rate was higher so they could get a higher loan rate, and eventually that may turn into a higher or a better price in the form of

an LDP, or the buyback when they bought it back, but I didn’t see

that as so much chasing it in the years that I served there.

Mr. SHELOR. In our area in southwest Kansas, we don’t have

that many options for markets. It is quite a ways to the next elevator. So with the price of fuel and stuff, you can’t afford to go too

far looking for a better price. So you are pretty well limited on

that. So there is not much of that in our area.

Mr. PETERSON. Are you from Minneola, Kansas?

Mr. SHELOR. Yes.

Mr. PETERSON. I think I landed there about 3 or 4 weeks ago.

I think that is where I was. There is a little airport there and there

is a stockyard right southeast of it.

Mr. SHELOR. Well, there is not——

Mr. PETERSON. That doesn’t narrow it down much, does it, Mr.

Shelor?

Mr. SHELOR. No.

Mr. PETERSON. Maybe I was mistaken. But what I was concerned

about, I was flying down and there was this big head wind, so I

had to land in this little town to get gas in my plane, and there

was nobody around on a Sunday morning, but they had the pump

on. And so I filled it up and left a check. I was just hoping that

the town fathers got the money.

Mr. SHELOR. Well, we don’t have a local——

Mr. PETERSON. I am not sure where I was, but I was someplace

in Kansas. And every time I fly over Kansas, Mr. Chairman, if the

wind is blowing 40 miles an hour, I don’t know why you don’t have

a lot of windmills out there.

Mr. MORAN. A rare day in Kansas when the wind isn’t blowing,

Mr. Peterson.

Mr. REESE. I guess I would like to take a stab at what the congressman asked. In regard to wheat, I think we have to be careful.

One of the things that we wanted to have was a loan rate low

32

enough to keep us from building stocks again. And yet, because of

these class differentials that we are experiencing in wheat, then

you start seeing people wanting to see a higher loan rate, relative

to another class so that they can sell that class that they are growing and collect the LDP accordingly. And so it is real tightrope for

us to find someplace where we can have an LDP collected for wheat

without having a loan rate so high or that we end up with a lot

forfeitures and a lot of price-depressing, farmer-owned or government-owned reserves.

Mr. PETERSON. I have heard that concern, too, but I have to tell

you, in my part of the world right now, they are telling me that

they are not going to plant wheat next year because they can’t

make it work. So I am not sure that is going to be a problem, from

what I am hearing. Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Peterson. Chairman Goodlatte? Mr.

Neugebauer?

Mr. NEUGEBAUER. Thank you, Mr. Chairman.

Mr. Shelor, you heard me talk to the secretary a while ago, and

about that he has been working with the sorghum group. Have you

found the administration receptive as you all have brought these

issues in front of them?

Mr. SHELOR. Yes, I believe they have, with our staff and their

staff. They correct the problem, but then it doesn’t seem—back in

October it was corrected and now it is off again, so it doesn’t seem

to stay corrected. But yes, they have been real receptive and get

right on it. And I have noticed locally, it will be readjusted within

the next day back in line. But then, as time goes on, then it gets

back out of line.

Mr. NEUGEBAUER. Have you all sat down with some specific

changes to the program that you think might be beneficial and

cause less tweaking or the need to call and say hey, things are out

of kilter? Have you all brought some thoughts and ideas to the

table?

Mr. SHELOR. I am not sure what team has done on that, but I

believe their recommendation is to get into smaller regions, because right now it is seven or eight States, which is just way too

large. And even getting down to some mass reporting districts or

something to get them districts, because even our own States, we

have a lot of different markets, whether it is an ethanol plant or

whether it is cattle feeding or something, we have got specialized

markets and that affects each one of the regions differently. So it

needs to be a smaller reporting district on that.

Mr. NEUGEBAUER. And it has been represented that there was a

concern that because of these differences, we were going to see a

major shift from some of the folks that were planting sorghum to

possibly moving to corn or to other grains. In Kansas, for example,

or in the region, have you seen a shift towards producers moving

from sorghum to corn because of the differences?

Mr. SHELOR. Yes, we keep seeing the reduction every year because the price is that much less. And then you have that discrepancy of 10 to 15 cents, then, at harvest time. So yes, we do see reduction in acres.

Mr. NEUGEBAUER. And I think the gentleman from Nebraska

made the point that the amount of water required for grain sorVerDate 11-SEP-98 11:02 Jan 24, 2006 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 F:\DOCS\109-24 HAGRI PsN: HAGRI
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ghum is substantially less than for corn. At what point in that

process does the input cost, and particularly with these high energy

cost and the cost of irrigation and so forth, what would be a tipping

point between a producer looking at these differences between corn

and the sorghum, and the input cost in moving to, say, corn or another commodity?

Mr. SHELOR. Well, they just kind of have to set it down at their

own farm, because every area is different on what their production

is, so you have to sit down and run a cash flow on that to see, like

to say, a fourth less water and input costs in the way of fertilizer

and stuff. So I presume it would be close to a 25 percent difference

in that. It is where they would look at planting sorghum over corn.

Mr. NEUGEBAUER. So you would say a 25 percent difference in

cost in the input, probably, between corn and sorghum?

Mr. SHELOR. Yes. I haven’t sat down and put the figures on my

own farm to that, and it could even be more, because a lot of our

inputs or our seed costs and stuff are a lot less, so it could even

be greater than that.

Mr. NEUGEBAUER. Any other of the panel want to respond to how

you felt like the administration is responding to this issue? And do

you have some other specific suggestions that maybe we haven’t

asked about this morning? Thank you, Chairman.

Mr. MORAN. Thank you, Mr. Neugebauer.

Mr. Shelor, we thought we had success in the 2002 farm bill in

equalizing the loan rate on corn and sorghum. How close are we?

What has happened since then?

Mr. SHELOR. First, the loan rate in my county is $1.93 on sor- ghum and it is $2.10 on corn, which sounds high on corn, but we

have extremely good basis there on our corn because of the cattle

feeding and stuff. So they are willing to bring that up there. So

that would be 17 cents difference on the loan rate.

Mr. MORAN. And, Mr. Fletcher, you talked about something that

really did catch my attention. We may need to have a hearing on

beneficial interest. That is another topic that gets our phones to

ring. But you specifically talked in your testimony about the new

beneficial interest form that came out in August. It has an unintended effect of limiting the marketing options available to producers. Would you explain that? Maybe you didn’t say that.

Mr. FLETCHER. The form that came out in August basically was

a no foul, no harm, no foul deal. If a guy delivered his corn against

a contract, it got applied against the contract before he claimed his

LDP, then he would assume to have asked for the LDP that he lost

beneficial interest. I think that helped keep someone from accidentally not getting an LDP on a certain portion of their bushels, but

what has happened with this farm law is, you have gotten into a

situation where someone who is aggressively marketing his crops

will forward sell his crop and then assume that he is going to get

a LDP that adds to the price that he got for his crop. And if something happens in the meantime, he doesn’t pull that LDP trigger

at the time he intended to.

Mr. MORAN. In trying to correct a common mistake, a common

problem in not having beneficial interest——

Mr. FLETCHER. I don’t think the new form created, and I will ask

my staff people behind me if I am misunderstanding this, but I

34

don’t think the new form created a new problem. It was a partial

correction to an existing problem, and the existing problem was

that we have——

Mr. MORAN. Unintentionally lost beneficial interest.

Mr. FLETCHER. Yes.

Mr. MORAN. And the form is helpful or harmful?

Mr. FLETCHER. It is helpful to the point that if someone unintentionally loses beneficial interest, he gets the LDP on the day that

he would have lost beneficial interest. He may anticipate that he

is going to take a 30-cent LDP, and instead he happened to lose

beneficial interest on the day when it was 7 cents.

Mr. MORAN. OK.

Mr. FLETCHER. But the unintended consequence of the whole

beneficial interest deal is that it makes more difficult for a guy to

use the marketing tools that are available to him. And I would

point out that I have customers who won’t forward contract grain.

We talked about getting a decent price for the crop. We bought a

lot of corn this year for $2.30, $2.40 back in the spring when they

could forward contract. December corn was $2.60, $2.65. But a lot

of guys just simply won’t pull the trigger because there is risk of

not being able to deliver that grain when he knows he has got the

loan rate to back him up. And the simple fact is, and I am not encouraging this in any way, shape, or form, but if the loan rate

wasn’t there, he would be more aggressive in forward selling his

crop.

Mr. MORAN. I don’t know how to address that.

Mr. FLETCHER. I don’t know either. If you figure it out, I would

like to know.

Mr. MORAN. In many ways, that is the purpose of the program.

But what you are telling me is, it may cause some folks to take less

prudent or less business oriented decisions.

Mr. FLETCHER. That is correct.

Mr. MORAN. Mr. Sonnenberg, you talked about the changing dynamics of the sunflower market. What is going on just generally in

sunflowers that you are talking about?

Mr. SONNENBERG. Two years ago there were 4 large oil processors that were active in the sunflower. Today, the one at Red

Wing, Minnesota no longer accepts oil sunflowers at all. And the

two at Fargo and Enderlin are only 20 miles apart. They control

80 percent of the crop. I think that they are more less considered

a single point, just because they are so close geographically. And

so the remaining large processor is only 20 percent of the crop and

is located in Kansas. So we have lost markets and spread in the

markets, and we have changed the market in the last few years

from being primarily an export market to being primarily a domestic market. And that emphasis has shifted the pricing burden primarily to the north as opposed to being divided between the Kansas market and the North Dakota market.

Mr. MORAN. Thank you. Let me see if Mr. Peterson has anything

further before—thank you, Mr. Peterson. Just a couple of kind of

concluding comments. Was there anything that you wished, while

you were sitting out there, that we would have asked USDA that

we did not? We will be glad to follow up with them with additional

questions if there is something that stood out to you.

35

Mr. O’CONNOR. Mr. Chairman, the only comment that I would

make on that, again, I guess the question I would ask him is, why

can’t they expose what they are using and make it more transparent to me as a producer and everyone else involved in this?

Mr. MORAN. Thank you.

Mr. FLETCHER. We would like to know if they think they have

the statutory authority to deal with the beneficial interest question.

Mr. MORAN. OK. And then, finally, does this discussion lend

itself to any thoughts that you all have about the 2007 or thereafter farm bill, something that we ought to be aware of, particularly in relationship to this issue? Mr. Sonnenberg?

Mr. SONNENBERG. I am particularly concerned about that amber

box designation, where this is the principal mechanism of support

for the oil seed complex. It lends itself well to the marketplace, and

the rest of the world, if you will, has redefined the process for their

best interest, and I am afraid that we are rather a pond in the middle at this point, and I express that concern.

Mr. MORAN. Mr. Reese?

Mr. REESE. With regard to wheat, again, as I pointed out in my

testimony, we considered the WTO implications as well as the

budget implications in looking at the 2007 farm bill, and I think

that while the marketing loan may be still around, its effect as far

as wheat is concerned will probably be much diminished, and we

are looking more at direct payments and how those could be more

of a green box item rather than something like this. It is amber

box and it is going to be severely constrictive, if the tea leaves and

the prognosticators are correct about what is going to come out of

WTO.

Mr. MORAN. Does wheat feel that it is isolated on that issue with

other commodities?

Mr. REESE. I think so. When you look at the past history in

terms of where we have been able to gain any kind of substance

in terms of market support through the marketing loan, at least

the 2002 bill, we have been pretty much, as I said earlier, left out

in the cold. And part of that was our own doing. We wanted to

make sure that that loan price was low enough that we wouldn’t

have a huge amount of forfeitures as we had before in the previous

farm bill. So to the extent that that has happened, I think it has

been helpful, but none of us could foresee, I think, a loan price that

would be, and over time, substantially out of whack with the cash

price that we couldn’t possibly gain anything from it. So that is

part of our reason for looking at a direct payment that would be

substantially larger, and perhaps a more known quantity for the

budgeters and the appropriators than a loan program that can be

very expensive at times, and it has been in the past. We are hopeful that our colleagues in the other crops can see our position on

that point.

Mr. MORAN. Thank you. Mr. O’Connor?

Mr. O’CONNOR. Thank you, Mr. Chairman, for asking that question. First off it is, yes, I would like to see something very similar

to what we have with the counter-cyclical payments, and for the

extension of an existing farm program. Where they could improve

it, I think with this, we need a national energy green reserve with

our new energy bill, and I think this would be a great opportunity.

36

And it also would help with the problem we have right now, when

this year, especially in corn, and I am talking when the local market was actually lower than the PCP, that grain, if you could have

given the producers an opportunity to forfeit or put it into reserve,

one of the two, I think it would go a long way in helping us in our

future down the road, and it would be a great addition to the

present farm bill. So an extension with a few corrections. Thank

you.

Mr. MORAN. Gentlemen, thank you very much for your time and

testimony. The subcommittee is very grateful your help in educating us in regard to the posted county price and its effect upon

farmers’ income and farm policy.

Without objection, the record of today’s hearing will remain open

for 10 days to receive additional supplementary written responses

from witnesses to any question posed by a member of the panel.

But at the moment, the hearing on the Subcommittee on General

Farm Commodities is now adjourned.

[Whereupon, at 12:05 p.m., the subcommittee was adjourned.]

[Material submitted for inclusion in the record follows:]

STATEMENT OF DEAN SONNENBERG

Mr. Chairman and Members of the Subcommittee, thank you for the invitation

to testify today about the procedures the USDA’s Farm Service Agency (FSA) uses

to establish Posted County Prices (PCPs) for commodities. I am President of the National Sunflower Association (NSA) and am testifying today on behalf of the Association. I am a producer from Fleming, Colorado, where we grow sunflowers, corn,

wheat and millet on our farm.

The safety-net provided for sunflowers by the 2002 farm bill, as with the other

oilseeds, relies primarily on the Marketing Loan Program. The Direct Payment rate

for sunflowers is nominal, and the Counter-Cyclical Payment rate is virtually nonexistent. The NSA is happy to report that until this fall, oil sunflower prices—the

basis upon which both confection and oil sunflower Loan Deficiency Payments

(LDPs) are determined—had been above the loan level. Virtually no sunflower LDP

activity took place from 2002 through 2004, and this did contribute to the savings

that have been posted by the 2002 farm bill relative to the original Congressional

Budget Office score when Congress passed the legislation. Because of these higher

prices, NSA did not have reason—until this year—to review the effectiveness of either the terminal market locations or the freight differentials to each county that

is used to determine the sunflower PCPs.

However, this past harvest, record yields coupled with a significant increase in

sunflower acreage did cause oil sunflower cash prices to decline significantly from

those seen in 2004. Conversely, the extremely high diesel fuel prices that we saw

this fall caused freight rates to skyrocket. Combined, these two factors did drive the

price of oil sunflowers below loan levels in many local markets.

The sunflower PCPs did not initially track the market decline and producers notified the NSA about the growing spread between the PCPs and their local markets.

NSA contacted the FSA about the divergence. I would like to take this opportunity

to personally thank the FSA for acting swiftly to bring the sunflower PCPs and local

market prices back into synch. It’s not very often that a government agency moves

at such speed and I must say that I was impressed. I understand, and this may

be clarified today, that the freight differential to local markets was adjusted by removing a single dominant market that was replaced with a combination of two or

three regional market points in order to refine the calculation that determines the

local PCPs.

The NSA believes that the higher and more volatile diesel fuel prices seen this

fall played a major role in causing the divergence of the sunflower PCPs and the

local market price. We also believe that this climate of high energy prices will unfortunately stay with us for some time to come. As a result, the railroads have already

devised a baseline energy index formula to reflect moving fuel costs that are then

added as a surcharge (and hopefully a discount when warranted) to a base freight

rate. For instance, reports of surcharges topping $500 per rail car over and above

the posted freight rate were not uncommon during this past harvest.

37

Although sunflowers are moved primarily by truck, the higher rail rates dictate

all freight rates. With the dynamics of today’s energy markets, perhaps the PCPs

need to include a similar formula to reflect moving fuel costs. And since surcharges

vary by region, such a system would likely be needed to be implemented regionally.

Another factor magnifying the effect rapidly fluctuating freight rates have on the

difficulty of establishing accurate PCPs is the changing dynamics of the sunflower

market itself. Fewer country deliver points for sunflowers and other specialty crops

due to the establishment of 110-car Shuttle train loading points have caused producers to become more involved with direct contracting. And with fewer delivery points

today versus 4 years ago, the distance to market has grown considerably, making

the freight component of marketing more important than in previous years.

In closing, I want to again thank the Subcommittee for the opportunity to testify

on the PCP issue. I would also offer the services of the National Sunflower Association should you need further information on this issue. I will be happy to address

any questions you may have.

STATEMENT OF JOHN FLETCHER

Chairman Moran and members of the Subcommittee, I am John Fletcher, general

manager of Central Missouri AGRIService Inc., in Marshall, Mo. Our company is

a joint venture between a family owned company and two cooperatives. CMAS operates our country elevator, farm supply and feed manufacturing business in west central Missouri. We were established in our present form in 1999. We currently operate six country elevators and two feed mills. I am testifying today on behalf of the

National Grain and Feed Association, on whose Country Elevator Committee and

Board of Directors I serve.

The NGFA is comprised of 900 grain, feed, processing, exporting and other grainrelated companies that operate about 6,000 facilities that handle more than 70 percent of all U.S. grains and oilseeds. The NGFA’s membership encompasses all sectors of the industry, including country, terminal and export elevators; feed manufacturers; cash grain and feed merchants; end users of grain and grain products, including processors, flour millers, and livestock and poultry integrators; commodity

futures brokers and commission merchants; and allied industries. The NGFA also

consists of 35 affiliated state and regional grain and feed associations, as well as

two international affiliated associations. The NGFA has strategic alliances with the

Pet Food Institute and the Grain Elevator and Processing Society, and has a joint

operating and services agreement with the North American Export Grain Association (NAEGA).

The NGFA appreciates the opportunity to testify today to provide our perspective

on the U.S. Department of Agriculture’s procedures for establishing posted county

prices (PCPs) under the marketing assistance loan program. In addition, we want

to offer some thoughts in preparation for the 2007 farm bill about what we believe

is a need for USDA to update its beneficial interest procedures to be more accommodating of the types of cash grain contracts currently being offered to optimize the

potential for producers to earn more income from the marketplace.

POSTED COUNTY PRICES

At the outset, we believe it is important to note that the PCP system was developed by USDA in 1983 in conjunction with the 1983 payment-in-kind program as

a method for establishing baseline values for Commodity Credit Corporation-owned

inventory and price support loan collateral. Prior to that, USDA had utilized posted

elevator prices as a mechanism for establishing values for CCC-owned inventory.

During these early years of the PCP system, USDA’s goal was to price CCC-owned

inventory as close to the market as possible so that it did not undersell or oversell.

As a method of approximating grain price values in specific geographic areas, the

PCP system performed remarkably well—enabling USDA starting in 1985 to liquidate in an efficient and orderly manner CCC’s extensive grain inventory with

minimal market disruption.

But during subsequent farm bills—particularly the Federal Agriculture Improvement and Reform Act of 1996—Congress gave USDA different marching orders by

adopting a marketing loan program for wheat, feedgrains, soybeans, minor oilseeds,

cotton and rice. The laudable goal was to support farm income while allowing grain

to be priced at market-clearing levels to avoid another buildup of government-owned

stocks that overhang the market and depress farmgate prices. Specifically, the 1996

farm law directed CCC ‘‘to the extent possible ’’to determine and announce an alternative repayment rate, based upon the previous day’s market price at appropriate

38

U.S. terminal markets as determined by CCC, adjusted to reflect quality and location for each commodity. It was this statutory language that USDA used as the rationale for shifting its PCP system to a new, expanded and much more complex

role—using it to determine commodity price values as close as possible to the local

cash market price in any given area as a key component of an income-transfer

mechanism.

In early 1999, the NGFA provided a series of comprehensive recommendations to

USDA on ways to improve its system for determining PCPs. Among other things,

we recommended that USDA reevaluate the terminal markets it was using, as well

as the differentials, to enable PCPs to more accurately reflect local market prices.

The NGFA also recommended that USDA revise and update county loan rates for

wheat and feed grains to reflect the most recent 12-month average of market prices,

and to establish wheat loan rates by class. Further, we recommended that USDA

base the LDP loan rate on the county where the commodity is produced, not where

delivered or stored, and to permit a 30-day grace period for producers to select their

LDP payment to provide additional flexibility and to accommodate logistical concerns. We commend the Bush administration for utilizing the authority provided in the

2002 farm law to act on several of these recommendations. Most significantly,

USDA used congressional intent expressed in report language accompanying the

2002 farm law to update county loan rates and established wheat loan rates by

class—the first such adjustments since the 1995 crop, which were based on 1993-

and 1994-crop posted county prices that were themselves deemed to be in need of

substantial revision to better reflect local market prices.

It was in 2002 that USDA also implemented loan deficiency payment rates on a

statewide basis, in response to the 2002 farm law’s provision that required USDA

when setting loan repayment rates under both the marketing loan and loan deficiency payment program to ‘‘minimize discrepancies in marketing loan benefits

across state and county boundaries.’’

So, where do we stand today?

On a national basis, our sense is that USDA generally did a good job this year

of monitoring and adjusting its PCPs to keep them roughly in line with cash market

prices in local areas during a very difficult harvest situation complicated by large

crops, hurricane disruptions and rapidly escalating freight rates. Unlike some previous years, the NGFA’s office generally received a lower volume of calls and complaints about PCP anomalies than we had in some previous years.

However, there certainly were some exceptions:

• In mid-October, several NGFA-member country elevators began reporting that

sorghum PCPs were no longer reflecting local cash market prices in several areas

in Kansas. • In my home state of Missouri, the gap between PCPs and local elevator cash

prices were significantly wider this year during the peak of harvest compared to

previous years. For instance, in some areas of Missouri, there was a 20- to 30-cent

price differential between county PCP prices and local elevator prices on corn, although local soybean cash prices generally remained above PCPs. However, it appears that much of the differential disappeared in the post-harvest period, which

leads us to believe that the spike in harvest transportation costs attributable to extremely tight transportation capacity constraints and the disruption caused by Hurricanes Katrina and Rita played a direct role.

• In the Pacific Northwest, producers and elevators in all counties producing

white wheat are facing a problem more attributable to loan rates than PCPs. One

of our country elevator members in Washington state reports that the current loan

rates for the different wheat classes range from $2.74 per bushel for soft white

wheat to $3.24 per bushel for hard red winter and $3.40 per bushel for dark northern spring. But the countercyclical payment rates are based on a compilation of all

wheat classes, not individual classes. Recent market prices at that country elevator

location have been $2.96 per bushel for soft white, $4.05 per bushel for hard red

winter and $4.69 per bushel for dark northern spring, so countercyclical payments

are not expected to come into play this year. But the loan rate differentials between

these wheat classes are encouraging producers to plant hard red winter to maximize

both price support and market benefits, even though the region is not conducive to

producing good-quality wheat of that class. Loan rates that are inconsistent with

current cash market values cause longer-term market distortions, including misguided planting decisions and impacts on local land values.

How could the current PCP system be improved to more accurately reflect local

markets on a consistent basis?

For starters, we believe that dramatically improving the current system would require a substantial increase in the market-price sampling points that USDA conVerDate 11-SEP-98 11:02 Jan 24, 2006 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 F:\DOCS\109-24 HAGRI PsN: HAGRI
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tacts daily, to include more localized markets. One of the real challenges in this regard is the trend in markets away from terminal market-based pricing, as many

grain movements occur directly from the origin elevator to the customer, bypassing

traditional terminal points in the process. This makes local market prices much less

predictable unless individual local markets are monitored daily, which would be a

huge undertaking. The proliferation of such destination markets as ethanol and biodiesel plants has further complicated USDA’s PCP price-monitoring process.

In addition, USDA would need to devise a system that more adequately incorporates changes in transportation costs to reflect actual freight rates for rail, barge

and truck or actual freight costs to specific market destinations. It is our view that

USDA’s terminal market ‘‘differentials ’’relied upon to determine PCPs in local areas

are not truly reflecting the freight value changes we are seeing regularly in the

market. But these freight rates can fluctuate dramatically, particularly given the

impact of carrier-imposed fuel surcharges, which can vary monthly.

The bottom line is that the current system used by USDA—given the human and

financial resources allocated to it—is doing about as well as can be expected. As

noted previously, to do more to proactively address PCP anomalies that can emerge

or occur or when seasonal distortions come into play would require that USDA invest a much higher level of both human and financial resources to monitor local

cash prices—a degree of monitoring that we’re not sure either the administration

or Congress would be willing to undertake.

Currently, USDA relies on producers, grain elevator operators and market observers to provide assistance in alerting the department if PCPs are out-of-line with

local cash markets in certain geographic areas. At times, the NGFA itself has been

alerted to such PCP anomalies by its members, and has notified USDA headquarters. Generally, our experience has been that these reports are investigated

quickly and efficiently by USDA, and that the department is responsive to addressing and correcting significant anomalies that, based upon followup investigation, are

shown to warrant adjustment. However, we also have received reports from some

NGFA-member companies expressing frustration with the USDA Kansas City Commodity Office’s responsiveness after reporting PCP anomalies. To rectify this, the

NGFA suggests that USDA establish a more transparent, systematic and better-defined method—perhaps a web-based program—for reporting instances in the future

when the LDP payment plus the local cash price is out-of-line with the loan rate.

We also believe USDA could be more transparent in explaining the general parameters it uses to investigate PCP anomalies and the factors it uses to determine

whether adjustments are warranted. USDA also could improve its follow-up with

those who report such anomalies to explain the results of USDA’s investigation and

the reasons for any adjustments—or lack thereof—that subsequently are made.

However, the NGFA does believe that USDA is in the best position to resolve these

anomalies in a prudent and expeditious manner.

BENEFICIAL INTEREST

The NGFA also wishes to take this opportunity to encourage USDA to revisit one

other component of the marketing assistance loan program that has been problematic in restricting the ability of producers to utilize modern risk-management tools

when contracting to sell grains and oilseeds.

I am referring to the requirement that producers retain beneficial interest—that

is, title, control and risk of loss—in the commodity to be eligible to receive a loan

deficiency payment (LDP) or marketing loan gain.

We commend USDA for earlier this year making several improvements to certain

procedural aspects of its beneficial interest rules. In April, USDA’s Farm Service

Agency issued a notice that clarified that beneficial interest in a commodity is retained until such time as the producer makes a marketing decision with respect to

the commodity or relinquishes beneficial interest under the terms and conditions of

an applicable written or verbal contract. This helped clarify that producers placing

grain in ‘‘open storage ’’at grain elevators did not lose beneficial interest because

they still retained the ability to market their crops.

Then in August, USDA developed a new, simplified form that producers can use

to indicate their intent to receive an LDP before losing beneficial interest. This new

CCC–633 EZ form enables producers to indicate once each crop year of their intention to receive an LDP. This form then allows the producer to subsequently submit

a request for the LDP at any time during the marketing assistance loan or LDP

availability period for the given commodity. The LDP rate for the affected commodity is based on the earlier of: (1) the date the producer requests the payment; or

(2) the date beneficial interest is or was lost.

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While both of these steps have improved the ‘‘mechanics’’ of the marketing assistance loan process with respect to beneficial interest, they have not resolved the

major underlying problem. And that problem is that the concept of beneficial interest is out-of-kilter with various kinds of new-generation cash grain contracts that

offer producers opportunities to maximize market returns. Specifically, USDA has

ruled that certain types of advance sales contracts, contracts-to-sell, price-later contracts and contracts for future delivery of grain violate the ‘‘beneficial interest ’’rules

because these contracts give the buyer an interest in the commodity at the time

specified in the contract or at a time implied by law.

For example, USDA has stated that: ‘‘If the producer has or will receive a payment in return for a sales contract, ‘‘beneficial interest’’ is lost when the payment

is made or when the producer loses control, risk of loss, or title to the commodity.’’

In a credit-sale contract, such as a delayed-price or deferred-payment contract, legal

title and physical possession of the commodity have transferred. Thus, the producer

has lost ‘‘beneficial interest’’ for the quantity sold under such contracts. ’’ [NGFA

Government and Grain, September 30, 2004.]

The NGFA respectfully submits that there is something amiss when a government

farm program that is designed to avert forfeitures, encourage stocks to enter market

channels, and maximize farm income has the unintended and perverse effect of limiting the marketing options available to producers.

The NGFA believes USDA has the legal authority under current statutory language to revisit the beneficial interest issue to bring it more into line with the current market environment and the type of producer marketing contracts currently

being offered, while still preserving proper safeguards to prevent fraud, abuse or

‘‘price speculation ’’by producers attempting to maximize LDP benefits. Allowing

producers to enter into a full array of cash grain contracts earlier in the crop year

could improve their ability to generate additional revenue from the market and further strengthen the producer safety net.

If USDA’s analysis reveals that it does not believe it has sufficient statutory authority to modify its current interpretation of the beneficial interest rules, the

NGFA may seek Congress’ help in revising the statute as part of the 2007 farm bill.

Mr. Chairman, that concludes my statement. I would be pleased to respond to any

questions you or other members of the subcommittee may have.

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STATEMENT OF EVAN HAYES

Mr. Chairman and Members of the Subcommittee, barley producers greatly appreciate this hearing to shed light on USDA’s procedures for establishing posted county

prices, which are used to calculate our daily loan deficiency payments (LDPs).

As you are aware, LDPs have become an important part of the three-legged domestic farm support program provided to producers of program crops under the

2002 farm bill. In times of low commodity prices, like in 2005, producers actively

use the marketing loan and LDPs in their crop marketing strategies, as the statute

intended. However without transparent procedures, many of our producers believe

USDA manipulates posted county prices through arbitrary differentials in order to

minimize their outlays under loan deficiency payments and marketing loan gains.

This concern was evident in numerous counties across the county this year where

posted county prices for barley failed to reflect prevailing marketing conditions.

Two examples will illustrate the contradictions in USDA’s current implementation

of posted county prices and LDP calculations. In some markets, the PCP was considerably lower than prevailing market prices and in others the PCP was higher than

local market prices, causing distortions in the daily LDPs.

Example One: Idaho barley has two terminal markets for barley: PNW (Portland

export market) and West Coast Domestic (WCD). At peak August 2005 harvest, barley terminal prices were $2.52 per bushel for PNW and $2.76 per bushel for WCD.

The differentials for Caribou County, Idaho were - $0.48 per bushel for PNW (+ adjustment factor of -$0.19) and -$0.73 per bushel for WCD (+ adjustment factor of

-$0.18).

This resulted in a posted county price for barley in Caribou County, Idaho on Au- gust 24 (after new differentials were announced) of $1.85 per bushel (higher of the

two terminal markets minus their respective differentials).

PNW - $2.52 - $0.67 (0.48 + 0.19) = $1.85 per bushel

WCD - $2.76 - $0.91 (0.73 + 0.18) = $1.85 per bushel

LDP calculation: $2.03/bu loan rate - $1.85/bu PCP = $0.18 per bushel

The actual local market price on August 24 was $1.80 per bushel.Example two.

North Dakota barley has two terminal markets for barley: Minneapolis and PNW.

For the 2005 crop, barley terminal prices were $1.83 per bushel for Minneapolis and

$2.46 per bushel for PNW. The differentials for Cass County, North Dakota were

-$0.46 per bushel for Minneapolis (+ adjustment factor of -$0.02) and -$1.00 per

bushel for PNW (+ adjustment factor of -$0.19).

This resulted in a posted county price for barley in Cass County, North Dakota of $1.35 per bushel (higher of the two terminal markets minus their respective differentials).

Minneapolis - $1.83 - $0.48 (0.46 + 0.02) = $1.35 per bushel

PNW - $2.46 - $1.19 (1.00 + 0.19) = $1.27 per bushel

LDP calculation: $1.63/bu loan rate - $1.53/bu PCP = $0.28 per bushel.

The local market price for feed barley in Cass County ranged from $1.50 to $1.80

per bushel (depending on DON levels).

We request the following concerns be addressed:

1. Nontransparent process to establish differentials that are used to derive Posted

County Prices. There should be a transparent process used by USDA to establish

differentials. These differentials should accurately reflect transportation distances

and costs between the terminal markets and specific counties. We believe differentials should be updated more frequently than once a year to reflect changing market

conditions. Certainly, the rising fuel transportation costs in 2005 should have warranted more timely adjustments in the differential.

USDA made two adjustments in barley differentials this year: in August and

again in early December. These adjustments caused LDPs to increase in some areas

of the country and to fall sharply in others. Again, because of a lack of transparency

in the procedures for calculating differentials, producers were left wondering what

would happen next and uncertain when to market their crops and claim their LDPs.

For a large majority of barley producers this year, the adjustments came too late

for any financial benefit as they had lost beneficial interest in their crops.

2. Manipulating PCPs to achieve equal LDPs across counties. We understand the

logic for equalizing LDPs across neighboring counties to prevent producers from

shopping their commodity around to achieve the highest LDP. However, this manipulation in both county loan rates and differentials has produced anomalous conditions in several counties where the PCP has diverged widely from actual market

prices. Given the high cost of transportation fuel, it is highly unlikely that producers

will transport their bulk commodities any appreciable distance to take advantage

of different LDPs.

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Again, we appreciate the subcommittee conducting a serious inquiry into how

posted county prices are established for program crops.

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