Opening Statement for Senator Richard Lugar Farm Price Volatility Hearing

Good morning. Today s hearing focuses on farm price volatility, the propensity for change in commodity prices. We all know that agricultural markets are volatile by nature with the possibility of large price movements in both directions. Farmers have been particularly concerned about volatility in recent months because the price trend for many commodities has been down. Farm prices for grains and milk have dropped sharply this year. Recent declines have been from last year s high prices. Some say the new farm bill has increased the potential for price volatility. My own view is different. The FAIR Act s planting flexibility provisions allow farmers to be more responsive to changing market conditions than was the case in the past. If anything, this will probably reduce the potential for large swings in prices.

Producers are more concerned about the volatility of farm incomes than simply prices. Many have said the new farm bill will make incomes more variable, but we need to recall that under the old policy, both gross and net incomes could vary widely depending on how many acres the government allowed farmers to plant -- a swing factor that has now been abolished. Dr. Keith Collins, USDA s Chief Economist, is here today to help us better understand the subject.

Some say that the government must protect farmers and others from excessive volatility. A traditional idea is to stabilize farm prices with a government operated grain reserve, which accumulates stocks during periods of surplus and releases them during periods of shortage. Unfortunately, the concept rarely works this way in practice. Historically, reserves have been managed so as to withhold stocks from the market. In the 1980s, such decisions created billions of bushels of unintended government grain stocks, which severely limited upside price movement for years.

Economics tells us that volatile markets tend to provide greater returns over time than less volatile ones because participants must be compensated for a willingness to bear risk. If this is true, reestablishing a large grain reserve would be counterproductive for our farmers as well as expensive for taxpayers.

On the other hand, it is reasonable for government to help facilitate the development of private sector tools that farmers and others involved in agriculture can use to manage price and income volatility. Forward contracting arrangements, futures, options, crop or revenue insurance, are examples of such tools. Clearly, the government should also work to maintain the integrity of our markets so that all participants have confidence that traded prices truly reflect supply and demand. Finally, the government can help improve risk management education because these tools need to be fully understood to be used properly. The second panel today will provide a variety of viewpoints on volatility in the grain markets and the government s proper role. I look forward to the discussion. I am particularly pleased that we have an Indiana producer on this panel, Ken Rulon, from Cicero.

The milk market situation deserves special mention for two reasons. First, dairy farmers are under more financial pressure than most others at this particular time due to low prices. Second, unlike others, dairy farmers do not have many risk management tools at their disposal to protect themselves from price volatility. However, there are fledgling futures contracts for both fluid milk and milk products that are trading on the exchanges in both Chicago and New York. These contracts have the potential to become the basis for new tools that can help meet dairy farmers risk management needs. USDA s Agricultural Marketing Service is considering a variety of changes to federal milk marketing orders pursuant to last year s farm bill. The Department should ensure that such reforms are designed to help, not hinder, the development of private sector risk management tools for dairy producers.

Today s third panel will address these and other dairy issues. I look forward to the discussion. I would yield to the able ranking member, Senator Harkin.