Statement of

The Honorable Dan Glickman, Secretary

United States Department of Agriculture

Before the

Committee on Agriculture, Nutrition, and Forestry

United States Senate

August 3, 1999

INTRODUCTION

Mr. Chairman and Members of the Committee, the U.S. farm economy is now under severe financial stress. USDA's most recent supply-demand estimates project commodity prices to remain low and the farm economy soft through the end of next year. Most of you soon will be returning to your home states, and I think you will see and hear that much of U.S. agriculture continues to face either weather-related problems or slumping market prospects or both.

One year ago, we faced a similar situation. Weak global economic growth and successive years of large global farm production drove farm prices down, while at the same time, drought devastated the South and Southwest. This led the Administration and Congress to take a series of actions that provided an important measure of help to farmers and ranchers. At USDA, we made full use of our export credit and food aid authorities to move additional product overseas. We also expanded our domestic food assistance program purchases, stretched the crop insurance program, and distributed an unprecedented volume of loan deficiency payments. Congressional action authorized us to distribute nearly $6 billion in supplemental income and crop loss payments and to provide over $1.1 billion in additional credit to family farmers.

There is no doubt that the emergency assistance we provided this past year boosted farm incomes and helped many family farmers and ranchers continue to farm. Because of these efforts, the situation today is not as bad as it could be. But, these actions have only helped farmers adapt to a bad situation, they have not changed the underlying causes of today's farm misery-another year of large global production, weak foreign economic growth and regional weather disasters.

I believe additional assistance is needed to help our nation's farmers during this period of crisis, and in my comments today, I would like to tell you why assistance is needed and in what forms.

FARM INCOME PROJECTED TO BE DOWN AGAIN IN 1999

Critical sectors of the farm economy are in the second year of the most severe financial stress of the decade. Due to low commodity prices, farm cash receipts are expected to fall to $191 billion in 1999 from almost $208 billion in 1997. Net cash farm income for FY1999 is forecast at $53.7 billion, the lowest level since 1995 and $4.8 billion less than in 1997, and about $2 billion below the 1993-1997 average.

As sobering as these numbers are, they don't reveal the full extent of the problem. Because they reflect the financial performance of the agricultural sector as a whole, the aggregate numbers mask regional and commodity specific problems. Prices for some commodities have hit their lowest levels in more than two decades and stock levels are building. The projected 1999-crop corn price is the lowest since 1986, 30 percent under the average of 1993-1997. Soybean prices are expected to be the lowest since 1971, and are also 34 percent under the five year average. Hog prices also were at their lowest since 1972, 33 percent below the five year average. Wheat, cotton, and rice prices are expected to be 29 percent, 26 percent, and 31 percent, respectively, under their 5-year averages.

The aggregate numbers also mask problems in regions of the country where weather disasters have affected production. Producers in some regions of the country are faced with the seemingly improbable combination of low yields and low prices. Yesterday, I had a first-hand look at the problems that Mother Nature is causing. I visited farms in the Mid-Atlantic region, one of the nation's hardest hit areas. In many regions in the east, precipitation during the past 12 months has been the lowest since the 1960's, and in northern Virginia, West Virginia, and Central New York, precipitation has been the lowest since the 1930's. In Maryland, for example, rainfall since May 1 has been about 50 percent of the normal level, and losses will be significant. Other regions of the country are also suffering weather-induced crop losses: long-term drought continues to stress crops in the interior regions of the Pacific Northwest and from the easternmost Corn Belt into New England. There is also a significant area of northern North Dakota that was flooded this year preventing crops from being planted.

Government payments have been a crucial counterbalancing force to low prices, increasing from $7.5 billion in 1997, to over $12 billion last year, to a projected $16.6 billion this year. But as we stand here this summer looking ahead, farmers are worrying about their incomes from this Fall's harvest which are not fully reflected in the aggregate income data for 1998 and 1999.

LOW PRICES LIKELY TO CONTINUE IN 2000

Looking ahead, prices for hogs, cattle, and field crops likely will remain low for the rest of 1999 and much of 2000, placing additional financial pressures on producers who specialize in the production of these commodities and are already highly leveraged.

Crops: For principal crops, net income could fall further. For the next crop year, our current projections place cotton and soybean market prices at the lowest levels since the early 1970's, feed grain prices at the lowest levels since the mid 1980's and food grain prices at the lowest levels since the early 1990's.

For the crops to be harvested in 1999, net income from wheat, feed grain, soybean, upland cotton, and rice production could drop to $17 billion, compared with over $19 billion in the 1998 crop year and the average of $23.4 billion for1993 to 1997. A more detailed look at commodity market prospects illustrates the economic problems farmers will face.

Favorable growing conditions in the main producing areas and continued weak foreign demand continue to pressure crop prices for the 1999-2000 crop year. Wheat producers reacted to the drop in wheat prices by planting the lowest wheat acreage since 1973. However, higher yields and weaker demand than previously anticipated mean that wheat prices will likely average only slighter higher in 1999-2000 than last year's average price of $2.65 per bushel.

While we will be releasing our first objective yield survey for key crops on August 12, yield prospects in early July suggested corn prices will likely drop below last year's season-average price of $1.95 per bushel, despite improving exports. Record high soybean acreage, combined with favorable growing conditions, have also weakened the price outlook for soybeans and suggest an enormous increase in carryover stocks next year. Soybean prices for 1999-2000 are currently projected at $4.30 per bushel, the lowest since the early 1970's.

Cotton production will rebound significantly from last year's weather problems, pushing carryover stocks to 6 million bales, nearly 37 percent of total use, and the largest since 1985-1986. The 1999 rice crop will likely be the largest on record, at 211 million hundred weight (cwt). Large supplies, coupled with flat export prospects, are projected to cause the average farm rice price for the 1999 crop to decline over 30 percent from the 1998 crop price and, if realized, be the lowest since 1992-1993.

Livestock: Livestock prices continue under pressure as total meat and poultry production is expected to reach another record high in 1999 and exports remain flat. Hog prices will likely continue to remain below break-even levels for most producers for much of 1999, and cattle prices, which have been low for quite some time, may still not be strong enough to return a profit for some producers.

The hog market continues to be the most troubling area in the livestock and poultry complex. After dropping to $10 per cwt. last December, hog prices have rebounded to $30-35 per cwt., which is still below breakeven for many producers. The prospects for further recovery during the remainder of 1999 are limited, as large numbers of animals will be marketed again this fall. USDA's most recent survey data showed that in the face of low prices producers are not cutting back production as much as initially expected. Consequently, pork production in 1999 is expected to rise 1.4 percent, after rising 10 percent last year. It now appears that cutbacks in pork production needed to boost prices may not occur until well into the next year. Hog producer revenues in 1999 could fall by over $2 billion from the 1993 to 1997 average.

Although cattle prices are up a little in 1999, they remain low as the steady liquidation of the nation's cattle herd continues since its inception late in 1995. The July 1 inventory of cattle and calves on farms of 107 million head is down from 113 million on July 1, 1995. Unfortunately, this liquidation has translated into increased near-term beef production and weak prices. Fed cattle prices for 1999 are expected to average about $64 per cwt., nearly the same as the average of the past 5 years, but considerably lower than the early 1990's. Eventually, fewer calves being born and more heifers held back to rebuild herds will strengthen prices but probably not until late in 1999 and into 2000.

Broiler and milk returns have fared a little better than other areas in the livestock sector. Broiler prices are down this year, but reduced feed costs are keeping returns in the black and production is likely to expand over 6 percent in 1999. Currently, strong cheese prices and reduced feed costs are pulling up milk prices and helping to strengthen returns, despite increasing milk production. Many Mid-Atlantic and Northeast producers affected by drought could see production fall and feed costs go up. For 1999, the average all-milk price is forecast at $14.25 per cwt., compared with the previous 5-year average price of $13.85.

FARM REAL ESTATE VALUES BEGINNING TO SOFTEN IN SOME REGIONS

The debt-to-asset ratio for farm operators remained stable at about 15 percent in 1998, compared with over 20 percent during the farm financial crisis of the mid-1980s. However, we are now closely watching developments in the balance sheet for agriculture. The strong increases in farm real estate values in the 1990's slowed sharply in 1998 and began declining in a few states. Thus far, the data show the drop in farmland values to have been fairly modest in most areas of the country. Nevertheless, recent Federal Reserve Bank data show that for certain parts of the country, such as the central portions of Iowa, Illinois, and Indiana, the collapse in commodity prices appears to have affected land prices more adversely than in other areas of the country, with farm land prices falling by 8-11 percent between April 1, 1998 and April 1, 1999. This likely reflects the reliance of this area of the country on corn and soybean production. Given the current price and income prospects for major crops and livestock, we can expect further pressure on land prices in the months ahead, particularly in the Corn Belt, Plains states, and mid-south.

IS THE 1996 ACT TO BLAME FOR THIS CRISIS?

Why is the farm economy in crisis? Can you lay all the blame on the Federal Agriculture Improvement Act of 1996? No. In large part, the crisis is being fueled by four consecutive years of record global grain production and weak export demand-both of which are beyond the scope of the 1996 Act. U.S. agricultural exports are projected to be only $49 billion this fiscal year after reaching a record high of nearly $60 billion in fiscal year 1996. Large global production, the Asian and Russian economic crises, and a strengthening dollar, have all contributed to a weakening in our exports.

The more appropriate question is: Is the 1996 Act doing what farm policy should to help deal with the problem and help with the recovery? Clearly the answer to that question is no.

First, the most striking feature of this Act, the one that sets it apart from past farm policy, is that fixed income support payments-the so-called AMTA payments-are declining rapidly, just at the time when farmers need the help the most, especially compared to the payments the Act made when commodity prices hit record highs.

Second, the fixed payments are just that, fixed; they cannot and do not respond to low prices the way counter-cyclical payments did prior to 1996. In addition, the 1996 Act capped the loan rates, so they could not respond to the higher market prices of a few years ago. When President Clinton signed the 1996 Act, he expressed reservations because it was not clear that the Act would provide adequate assistance to producers when prices fall. Now it is clear that the 1996 Act does not provide adequate support; his reservations have proven to be well-founded.

Third, in our collective zeal to provide farmers freedom to farm-and one aspect of that, planting flexibility, is a desirable change-we enacted law that ended or suspended many of the authorities previous Secretaries of Agriculture had to manage just the kind of problems the farm sector is now experiencing. For example, I no longer have the authority to extend the term of commodity loans, meaning farmers have little choice but to dump their grain into an already dropping market; I have no mechanism to provide longer term storage, again, causing the just-cited problem; and of course, with few exceptions, our government no longer supports prices or controls production.

It is clear to me that only action by Congress will provide the degree of support that will be needed to prevent many farmers and ranchers from going under this year and next.

FINANCIAL ASSISTANCE IS NEEDED FOR FARMERS

To be sure, the immediate need is to provide cash assistance to mitigate low prices, falling income, and, in all likelihood, falling land values. Additional financial support needs to be provided soon to alleviate income losses and financial distress resulting from low prices.

While the current marketing assistance loans are providing some assistance as prices decline, the capped loan rates limit what can be provided. And without added assistance, such as that provided by the emergency appropriation action last fall, total Commodity Credit Corporation (CCC) assistance for the coming year will decline, despite the fact we project we will spend $7.75 billion on marketing assistance loan outlays and loan deficiency payments on the 1999 crop versus $3.75 billion on the 1998 crop. We estimate that the income for producers of corn, cotton, dairy, rice, soybeans and wheat will once again fall well below the average of 1993-1997. In addition to these major field crops, several other commodities are also suffering unusual financial difficulty and merit assistance, including hogs and a number of fruits and vegetables such as apples.

Congress should enact a new program or a program that utilizes existing mechanisms to target assistance to producers suffering from low prices. First, I do believe AMTA payments should continue to be advanced; however, I do not believe that supplemental AMTA payments provide the targeted relief that is needed. Only those with existing production flexibility contracts are entitled to receive an AMTA payment and many of the payments benefit absentee landlords rather than producers. Supplemental AMTA payments would provide no payments to producers of soybeans or hogs, for instance, even though they face great financial hardship. Unlike last year's emergency Act, payments should be better targeted to smaller and medium sized farmers and a separate payment limitation should be used to cap emergency assistance payments.

Farm credit funding needs also should be addressed, such as was done earlier this fiscal year, to meet rising demands from producers. USDA has already exhausted the emergency loan funds provided by the last emergency act. Applications for over $200 million in loans are pending and USDA is just now entering what is traditionally its peak lending season for emergency loans. Funds are or soon will be exhausted for other low interest loan programs as well. For FY 2000, additional loan funds will be needed to provide credit to producers who are unable to obtain credit without our assistance. Many of these funds will be needed for guaranteed farm operating and farm ownership loans. Weakening farm financial conditions have caused many lenders to seek FSA guarantees as a condition of providing further credit to farmers.

SUPPLY/DEMAND FACTORS SHOULD BE ADDRESSED

As important as it is to provide immediate financial assistance for farmers, unless this year's emergency bill includes steps to hasten the recovery of the farm economy, we will face the same problems again next year.

MARKETING FLEXIBILITY: Marketing opportunities for farmers could be enhanced through extending the term for marketing assistance loans as I proposed in the past. There are other things we can do to provide additional marketing flexibility and keep grain in producers hands until prices recover. For instance, Congress should provide the required credit subsidy in order to assist financing for the construction of on-farm grain storage facilities. While U.S. grain production has increased, grain storage capacity has dropped slightly. As a result, many grain elevators have insufficient capacity to allow farmers to store their grain off the farm at harvest when prices are usually at their lowest, causing them to sell instead. We already are running at 95 percent-plus utilization for storage in many parts of the country, even before taking in another record soybean crop and another large corn crop. Storage facility loans could help alleviate local storage problems while affording farmers additional flexibility in marketing their grain. In addition, you should consider whether a farmer-owned grain reserve is feasible at a reasonable cost.

CONSERVATION: Incentives to support some additional land retirement over the intermediate term may be a cost effective means of addressing the supply situation. Allowing farmers to enroll more acres beyond the authorized 36.4 million acres into the expanded Conservation Reserve Program, and a modest shorter term conservation program could help achieve multiple objectives by reducing production, providing income support to producers, and achieving significant environmental benefits. Payments or incentives to producers should be considered to help them reduce the risk and cost of producing using certain conservation practices that provide environmental benefits as well as improve their land for the future.

SURPLUS REMOVAL: We need to continue the President's Food Aid Initiative that will help reduce stocks and improve conditions for prices to recover. Under the existing program, USDA has moved almost four times as much food aid this year as it did in prior years. I believe we need to expand the program to include crop and livestock commodities beyond wheat. A modest amount of additional commodities could be donated overseas again this year without displacing commercial sales.

Additional quantities also could be placed in the Food Security Commodity Reserve to be used in the future when stocks are lower. An additional 55 million bushels of grain (wheat equivalent) can be added to the reserve under current law. Also, Congress should consider authorizing me to replenish the Disaster Reserve and re-authorize the emergency livestock feed programs that utilized the reserve which were suspended by the 1996 Act.

STIMULATE INDUSTRIAL USE OF CORN AND SOYBEANS: Congress should consider a new program to stimulate industrial use of corn and soybeans and other biomass crops in the production of renewable fuels such as ethanol and biodiesel using surplus commodities. Supporting ethanol and biodiesel would improve our national energy security by reducing fossil fuel imports; reduce greenhouse gases; and would reduce costs for fuel suppliers in meeting clean air act requirements.

EXPANDING EXPORTS: Expanding exports is also a critical element in addressing the farm crisis. Congress should consider providing additional funding for programs that expand our exports and provide sufficient resources to USDA to enforce trade agreements and ensure that the new round of multilateral trade negotiations which will begin in Seattle in November is a success. New programs proposed in the President's budget, including the Quality Samples Program and full funding for the Foreign Market Development Cooperator Program through CCC should be approved.

OTHER CHANGES TO THE 1996 ACT ARE ALSO NEEDED

Other changes to the 1996 Act are also needed. If the 1996 Act is a transition Act, as some have described it, then it is fair to ask the question, "transition to what?" I don't believe we are able to answer that question today, but it is not too soon for us to fix some of the obvious shortcomings of the 1996 Act that are now apparent. For instance:

RISK MANAGEMENT: Risk management programs need to be improved and we urge the Congress to also act on crop insurance reform proposals to expand and improve crop insurance coverage at affordable rates, consider livestock coverage, facilitate development and marketing of new risk management tools and improve the Non-insured Assistance Program. There are many good proposals that have been put forward of both the Senate and House Agriculture committees and the Administration. It is time to move forward, so we can have crop insurance reform in place by the 2000 crop year.

DAIRY: The dairy price support program ends December 31, two years before the rest of the 1996 Act. Congress should consider extending that program to provide a continued modest underpinning for the safety net for dairy producers.

COTTON STEP 2: Congress should consider additional funding for the cotton "Step 2" program. This program increases U.S. cotton exports and keeps U.S. textile mills competitive with foreign textile mills. Funding for Step 2 was exhausted in December 1998-far sooner than was anticipated. U.S. Producers are expecting a very large 1999 crop. Additional funding for Step 2 is needed to revitalize U.S. cotton exports, which this past year fell to their second lowest level in the past two decades. Funding Step 2 would have the added effect of reducing the livelihood of triggering additional cotton imports under the 1996 Act's competitiveness provisions.

LIVESTOCK ASSISTANCE: Disaster assistance programs for livestock have repeatedly been provided on an ad hoc basis since the 1996 Act. It may be time to consider whether to enact some more permanent authorities for this protection.

CCC BORROWING AUTHORITY AND PROGRAM DELIVERY ISSUES

Additional CCC borrowing authority will be needed to fund any new programs. We are dangerously close to using up all current authority; there is a risk that without additional appropriations, CCC could exhaust its borrowing authority before the end of this fiscal year although current projections are CCC will exhaust them early in the next fiscal year. The Congress needs to be prepared to enact appropriations to restore CCC's borrowing authority in a timely manner, otherwise CCC will run out of funds to continue operations this fall.

Finally, I must mention that our ability to deliver additional assistance to farmers is extremely limited. Resources to deliver even our current programs will be reduced by pending Congressional appropriations for FY 2000 which begins this fall. The greater than expected demand in recent months for marketing assistance loans/LDP's, farm credit, conservation plans to help farmers and ranchers meet their obligations under the clean water act and other current programs means that workload for our county offices, will exceed available resources again this fall. Any new assistance programs will require

even more delivery resources. And caps imposed by the 1996 Act on use of CCC funds to support automated data processing and other program delivery support functions have resulted in the loss of that source of funding support for critical elements of the delivery system as well.

Absent further action by the Congress, the Department may be required to reduce its staff level in the county-based agencies of the Farm Service Agency, the Natural Resources Conservation Service and Rural Development in FY 2000 at a time when farmers need more help, not less. Clearly we can not provide the service our producers will need this coming year without taking advantage of every opportunity to make the delivery system more efficient. Several years of budget reductions which reduced staffing and limited investments in modernized technology have left us with a delivery system that is severely strained to provide the assistance our producers need in this time of crisis. I believe that with the Congress' help we can get the job done.

CONCLUSION

In conclusion, I must reemphasize that the farm crisis is real. Mr. Chairman, we support a legislative proposal to address the problems afflicting the farm economy. We are ready to work with Congress to ensure that it addresses the range of problems I have outlined today.

Thank you.