Testimony of
Leland H. Swenson
President National Farmers Union
to the
Senate Agriculture, Nutrition and Forestry Committee
Hearing on Price and Income Volatility in Agricultural Commodities
July 29, 1997
Introduction
On behalf of the family farmers, ranchers and rural Americans who are the
National Farmers Union (NFU), it is my honor this morning to address this
esteemed committee. My name is Leland Swenson, and I am president of National
Farmers Union. Representing some 300,000 agriculture families, NFU is very
interested in the subject of today's proceedings on price and income volatility.
I commend Chairman Lugar and the rest of this committee for holding this timely hearing, for there is indeed a deep concern with agricultural market price volatility. It concerns our producers, their families and their communities. It also concerns their bankers, suppliers and other creditors. I also intend to explain why price volatility also concerns our consumers and customers, both here and abroad.
Overview Of The Problem
Speaking from the producers' standpoint, we have indeed experienced extreme
volatility in our agricultural markets over the past year. July wheat prices,
as reported by the Dodge City, Kansas, Cooperative Exchange, have plummeted
more than $2 per bushel when compared to July 1996 prices. Feed grain prices
reported from the same source have been slashed in half over the past 12
months. The basic formula price (BFP) for milk which averaged $14.75 per
cwt in 1996, fell to $10.70 last month. And in the soybean futures markets,
we experienced a 50-cent-per-bushel plunge in less than two days, based
on the high-profile announcement of a multinational grain trading corporation's
intent to import soybeans from Brazil.
Historic weather-related losses over the past winter and spring have further exacerbated the problems of volatile markets, especially for the production livestock sector. These examples are in addition to price volatility in other economic sectors which have stricken production agriculture such as last winter's propane prices and this spring's fertilizer prices.
Extreme price volatility experienced now will negatively affect the future of production agriculture as it enters the 21st century. To capitalize on the opportunities presented in a growing domestic and international market, U.S. farmers and ranchers will need the latest in technology to retain their competitive edge. According to Dr. Daryll E. Ray, professor and Blasingame Chair of Excellence at the University of Tennessee and director of the Agricultural Policy Analysis Center (APAC), "Increased price and income risks arising from the policy environment may reduce farmers' ability and willingness to invest in new technologies--ditto for the willingness of farmers bankers to finance such investments."
Historical Background Which Has Led To The Problem
Before we explain NFU's recommendations to correct some of these problems,
we should examine a few of the causes. Although the Federal Agriculture
Improvement and Reform Act (FAIR) of 1996 can be credited for some of the
problem, we must go back further in time to identify changes in federal
law which have led to these extreme swings in income and prices.
For almost three decades, the federal government has been less inclined to manage the supply-demand mechanisms of production agriculture. The pursuit of expanding trade led to the abandonment of supply management in the 1970s. Farm legislation adopted in the 1980s replaced many commodity support mechanisms with direct government payments. In 1990, due to new farm legislation, but more importantly due to huge reductions in federal spending, our country moved toward a policy of no government stocks of major storable commodities. In 1993, and again in 1994, the Congress ratified major trade agreements which will allow and, in some instances, require, importation of many of the country's major commodities. In the fall of 1994, there was legislation which even removed the word "stabilization" from the name of the Agricultural Stabilization and Conservation Agency (ASCS) by reorganizing the agency into the Farm Service Agency (FSA).
The FAIR Act of 1996 can be credited for almost completing our government's trend towards the elimination of any safety net for our nation's farmers, ranchers and consumers during volatile market periods. The act decoupled program benefits from any requirement to produce a crop, capped commodity loan rates at 1995 levels, suspended the Farmer Owned Reserve, failed to authorize replenishment of the Food Security Commodity Reserve and capped it at only 4 million metric tons, and phases out the dairy program.
The Recent Soybean Episode
The most recent episode involving the announcement by Cargill to import
Brazilian soybeans has heightened our concerns. Although we do not deem
it necessary to import the beans, it is certainly that $46-billion-per-year
corporation's right to do so. Our overriding concern is that given the
price volatility in our commodity markets, and the continued erosion of
any checks and balances to stabilize that volatility, could a major market
trader manipulate the market by publicizing actions such as a major buy
of imported stocks? Why did Cargill feel it necessary to publicize its
intentions, and what was that company's position in the futures market?
These are questions NFU has asked this committee as well as the U.S. Department
of Agriculture (USDA) and the Commodity Futures Trading Commission (CFTC).
Brooksley Born, chairperson of the CFTC, has communicated her organization's intent to examine closely recent actions by Cargill as they may relate to the futures markets. In a letter to NFU, dated June 25, 1997, Born admitted that "News reports about imports of soybeans for U.S. processing -- were associated with a significant, negative impact on prices. For that reason, our Chicago surveillance staff initiated a review of the matter." (Text of the letter is attached)
Recommendations
To address some of the problems of market volatility, NFU offers the following
suggestions.
Safety Net NFU supports any and all attempts to restore and strengthen the safety net for family farmers and ranchers. On April 4, 1996, as he signed the FAIR act into law, President Clinton pledged to work with Congress to improve the safety net for family farmers. Senate Minority Leader Tom Daschle, D-S.D., committed to help the president in that endeavor when he introduced the Agriculture Safety Net Act of 1997 (S.26) on Tuesday, Jan. 21, 1997. The legislative initiative, if passed, would amend current farm law, the FAIR act, to: remove the cap on Commodity Credit Corporation (CCC) commodity support rates; allow the secretary of agriculture to extend the term of CCC commodity loans by six months; expand the Crop Revenue Coverage (CRC) Program; and give "high priority" to projects that encourage farmer-owned, value-added processing facilities.
The Agricultural Marketing Transition Act, which is Title I of the FAIR Act, set a new precedent by capping CCC commodity support rates at the 1995 levels. Support (loan) rates are calculated at 85 percent of the five-year olympic average (meaning that the high and low years are not used in the calculation) of the market price. The FAIR Act continued that calculating process with one change--it capped the support at the 1995 level. Therefore, the relatively stronger market prices experienced by producers in 1994 and 1995 will not help in moving the support rate upward. The difference of 1997 loan rates would be an increase of $.54 per bushel for wheat, $.22 per bushel for corn and $.047 per pound for upland cotton. (See attached chart)
Extending the length of CCC loans will allow producers more flexibility in marketing their crops and allow them the ability to avoid selling their crops when volatility drives market prices low. The CRC program allows producers to insure income at set rates per production unit. The CRC has been a popular pilot program on a limited number of crops in a limited number of counties. Expansion of the program to all program crops in all traditional growing areas would allow producers more options in the area of risk management. Secretary Glickman has moved forward with expansion of the CRC in some areas. We commend his actions and call on this committee to support his efforts.
Proper prioritization of federal programs to assist in the area of farmer-owned, value-added cooperatives would allow producers and their communities to retain more of the value of their products within their local economy. As producers climb the rungs of the ladder in the processing sector of agribusiness, they will be better able to survive the volatility of today's economic environment.
Commodity Reserves Government-held grain reserves have been maintained at least as far back as ancient Egypt. As explained in biblical history, it was good government policy to store grain during 7 fat years in order to survive 7 lean years. It was good policy then, and even better policy today, with so many more mouths to feed on this planet.
Many times, producers have mixed attitudes toward government-owned stocks. There are those who consider them as tools to hold over the market and depress prices. That is a legitimate concern if government stock programs are not legislated and administered properly. This past year, however, we have noticed a profound reversal of those attitudes, especially in areas hard hit by weather disasters. Better grain stocks would have been very helpful for many producers in the northern Plains this past winter. Stocks will be indispensable if we have another short crop this year followed by another record-breaking winter.
Government-held stocks are also important to consumers. According to an analysis by the Food and Agriculture Policy Research Institute (FAPRI), had a program of tighter stocks been in place going into the 1988 drought, the federal government could have saved $15 billion over the 5-year period of the 1985 farm bill, but very likely saved consumers downstream $40 billion in increased food expenditures. A $15-billion investment that yields a $40-billion return is always a good deal.
In today's global economy, government-held reserves should be an indispensable part of U.S. agricultural trade policy. In another statement by Dr. Ray, he explains, "As a result (of no government-owned stocks) we are arguably not a dependable supplier of grain and cotton exports--U.S. exportable supplies are subject to the vagaries of weather-determined yields with no contingency plan to satisfy the needs of our export customers." Dr. Ray continues by explaining, "If a tight domestic-demand situation occurs and export customers even perceive a U.S. export embargo to be plausible, their food self-sufficiency goals would be intensified and would encourage export customers to arrange formal grain-delivery commitments with U.S. competitors."
NFU calls for the reauthorization of the FOR, with revisions to keep it insulated from the market. We also call for expansion and full funding of the Food Security Commodity Reserve. Additionally, we request an examination of an international grain reserve in cooperation with other developed nations to insure against a worldwide food shortage.
Market Oversight
Our futures and options markets should be used to reduce price volatility,
not escalate it. The 1997 policy statement of the National Farmers Union
calls on the CFTC to: Guard against insider trading by individuals or firms
which possess foreknowledge of significant price changes due to large market
transactions; Ensure that there exists an adequate number of delivery points
for hedging participants; Work in cooperation with state securities enforcement
agencies to crack down on "boiler room" operations and other
violators of the Commodities Exchange Act; Monitor with special vigilance
any market movements which indicate a deliberate accumulation of excessive
speculative positions, and to exercise, when necessary, those emergency
powers granted by Congress; and Monitor and guard against proposals by
the commodity futures exchanges impacting trading rules and trading limits
that would increase market volatility to the detriment of agricultural
producers.
NFU further urges that there be increased farm owner-operator representation on exchange boards, specifically on those committees responsible for rulemaking of new agricultural commodity contracts.
We reaffirm our call for an investigation into the soybean incident related previously in this statement. We call for oversight and investigations in any suspected market manipulations.
NFU urges this committee to move cautiously in reauthorizing the Commodity Exchange Act (CEA). We are very concerned with proposals regarding the professional trader exemption that allow regulated markets in agricultural products to trade side-by-side with unregulated markets on the same exchange. This could jeopardize CFTC's ability to effectively regulate agricultural markets. It is difficult to maintain the integrity of the regulated market if those trades are cleared with a large volume of unregulated trades.
NFU also calls for regulations to prohibit those who are involved in crop forecasting from owning or trading commodity futures contracts. The exclusion should apply to individuals, associations, partnerships, corporations, and trusts, that publish crop information or give general circulation of letters, circulars, telegrams, reports and especially electronic media transmission which concern crop information that affects or tends to affect the price of any commodity.
Dairy NFU is calling for emergency action to improve and then stabilize producer prices. Action could be accomplished either through restoring the support price or by setting a floor under the basic formula price. Although the average basic formula price (BFP) for 1996 was $14.75 per cwt., the current BFP is only $10.74 per cwt, up $.04 per cwt from the price announced in June.
In a recent letter to Chairman Lugar, Secretary Glickman discusses the volatility of dairy prices caused by the phaseout of the dairy price support program and the limited risk management tools available to dairy producers. His letter outlines four possible actions: USDA is authorized to implement an Options Pilot Program (OPP) which would assist producers in risk management needs. USDA could use the formal rulemaking process to establish a floor under the federal milk marketing orders. Congress could establish a modified price support program. Congress could provide authority for USDA to implement a processor recourse loan program.
The secretary also cites some challenges to using these options: the first option would be difficult to implement since it is supposed to be budget-neutral; the second option would take at least six months and is contrary to the intent of Congress as expressed in the 1996 farm law which phases out the support price. Under current law, the fourth option will be available to the secretary in the year 2000.
In the last couple of weeks, the price of cheese has crept upward. However, even with this modest progress, producers are still seeing a price which is much too low to cover production costs. Failure to take action will result in the continued accelerated loss of dairy producers.
Therefore, we call on Congress to move forward now with a price support program or alternatively, to set a floor on the basic formula price.
Conclusion
Price volatility is a serious concern for everyone who raises, buys, processes,
distributes, sells and consumes the agricultural bounty of the great country.
We contend that this country's government is, likewise, great enough to
insure it is managed in a way to protect all of these stakeholders. I again
commend the vision and leadership of this committee for initiating this
discussion this morning. NFU stands ready to assist you in moving forward,
past the discussion phase, and into the solution phase. Thank you.