<> Testimony <>
Hon. John J. Cavanaugh
Chairman & CEO, Summit Limited
Committee on Agriculture, Nutrition and Forestry, Subcommittee on Production and Price Competitiveness
Hearing On Expanding U.S. Agricultural Production Export Markets
Tuesday, July 18, 2000
Mr. Chairman and members of the Committee: I am pleased and honored to have been invited to be with you today and to participate in this timely and important hearing on expanding U.S. agricultural export markets.
The American farmer continues to be the envy of the world for his productivity and efficiency while remaining a perpetual economic victim of an erratic and, at times, capricious global market.
The challenge for American policy makers is to match the American farmer's genius for producing food with creating a global trading system and marketplace of equal efficiency.
This is a daunting and almost endless challenge. This committee is to be commended for confronting the challenge. I have one very specific and practical proposal, which can be implemented immediately. It could have a significant, positive effect on the current crop cycle and has potential to become a major tool in the development of long-term markets in emerging economies throughout the world in addition to Russia.
PL-480, Title I provides for government-to-government sales of agricultural commodities to developing countries under long-term credit arrangements. Repayments for agricultural commodities sold under this title may be made either in U.S. dollars or in local currencies on credit terms up to 30 years, with a grace period of up to seven years. Local currencies received under Title I sales agreements may be used in carrying out activities under section 104 of the Agricultural Trade Development and Assistance Act of 1954, as amended. Activities in the recipient country for which these local currencies may be used include developing new markets for U.S. agricultural commodities on a mutually beneficial basis, paying U.S. obligations, and supporting agricultural development or research. The local currency provisions contained in section 104 have not been implemented for budgetary reasons.
In the 1996 Farm Bill, the Congress exercised considerable foresight in amending the Title I loan authority provisions to include permitting loans to private entities in addition to foreign governments.
To date, this authority has been utilized only for a single facility financing in Indonesia.
PL-480 Title I government-to-government commodity loans have been utilized successfully to facilitate the sale of millions of tons of American agricultural commodities to developing economies throughout the world. In 1999, Title I was used to finance the sale of 1.7 million metric tons of agricultural commodities to Russia in the wake of the 1998 Russian economic collapse, which occurred at the same time that Russia, experienced its lowest grain harvest in 40 years. This sale occurred at a time when all Russian credit facilities, both public and private, had collapsed as a result of the devaluation of the ruble and debt default of the Russian Government. The sale succeeded in stabilizing Russian food supplies during this critical period in Russia's transition and no doubt contributed to the maintenance of social stability as well as leading up to the first successful democratic transfer of political power in Russian history. Without this utilization of PL-480, Title I loan authority, Russia would have no doubt experienced a much more severe economic and social crisis during the past 12 months and American farmers would have lost the opportunity to sell these commodities.
However, while the mutual benefits to both Russian consumers and American producers were substantial in this utilization of Title I loan authority on a government-to-government basis, there were also significant short and long-term adverse consequences to the transaction. Among the most important concerns raised both in Russia and the United States are the following:
1) The use of government to government loan authority resulted in the Russian Government directing all commodity sales through the former Russian Government monopoly trading organizations to the detriment of what had been a rapidly developing private commodity trading structure.
a. Consequently, private traders and food processors were further disadvantaged because they were denied access to commodities and credit. Traders also experienced the revitalization of government trading monopolies, which had collapsed in the face of market competition.
1) Deliveries of the commodities to Russia and distribution of the commodities within Russia were based upon Russian Federal and Regional Government goals and directives rather than actual market demand for specific commodities resulting in disparities in pricing and utilization of the commodities delivered.
2) Significant increases in Russian domestic poultry and pork production resulting from the widespread availability of American feed corn and soymeal at affordable prices were not sustainable because of the lack of a follow-on program and the failure to revive commercial trading structures and credit facilities.
3) The use of proceeds from the sale of the loaned commodities were directed at funding the Russian pension system rather than reinvested in improving Russian agricultural production or reviving commercial trade in U.S. commodities.
Russia's food problems are still urgent today. There is an immediate need for two million metric tons of feed grain. Predictions for this year's harvest range from 52-65 million metric tons, far short of the market requirement of 75 million metric tons. These needs represent important opportunities for American agriculture.
USDA should respond to the market opportunities in Russia and should be strongly encouraged to use the private sector loan authority granted by Congress in 1996 in any future PL-480 Title I lending program for Russia. Extending long-term commodity loans to private organizations focused on development of private agriculture and commercial trade in Russia will have immediate and long-term benefits to Russia and for American producers. An expanding private, market based Russian agriculture sector represents large, long-term market opportunities for American producers and food processors. Reviving the commercial food trade with Russia disrupted in 1998 and building an expanded agriculture market for American farmers -- should be major goals of U.S. trade and economic policy for Russia.
During the past year, U.S. policy makers have withheld support for further development of the private sector in Russia, adopting a wait-and-see approach to the new Russian Government. The result has been a further weakening of the private sector in Russia at a critical time in the Russian evolutionary process.
All of the USDA private sector development initiatives have been held in suspension in the Interagency Review process in which all USDA program initiatives are reviewed by the State Department, Treasury, OMB and NSC. Rather than achieving the goal of coordinated policy initiatives toward Russia, the process seems to produce policy paralysis. During the past year all private sector initiatives to develop or revive the agricultural sector in Russia and commercial trade have been stymied by this Interagency Review process. As a result, the current market opportunities for U.S. commodities are not being met.
Russia can be a major consumer of U.S. poultry and meat products and of U.S. feed grains but we need to do what we can to help develop the market. By channeling long-term commodity loans through the private sector, which will use the proceeds of the loan to both repay the U.S. treasury and to spur investment and provide commercial trade finance, we can do much to jumpstart long-term market opportunities. Russia should be a consumer of a minimum of 500,000 MT of U.S. poultry and meat products annually and at least two to five million metric tons of grains annually for the foreseeable future.
Two things are needed in order to develop Russia into a long-term and stable consumer of U.S. agricultural commodities, inputs and technology.
1) Commercial credit and trading structures destroyed in the 1998 debt default must be replaced
2) Russian private domestic food production processing and distribution enterprises must have access to equity and credit financing.
A proper use of private sector commodity loans through PL480 Title I, targeted at achieving those strategic goals could break the cycle of Russian dependence on emergency food assistance and help to transform Russia into a stable and reliable customer.
The United States has a multiplicity of interest in assisting Russia to achieve long-term economic and political stability and integration into Europe and the global economy.
The greatest threat to maintaining a stable, democratic Russia and developing a strong Russian market economy is the ongoing decline in Russian agricultural production.
Russia is continuing a decade-long decline in all aspects of its agricultural production. Russia has undergone a massive liquidation in animal production with cattle, hog and poultry populations all at record low levels. Russia does not currently have the ability to produce an annual grain harvest that meets the basic subsistence needs of the Russian people.
Russia has experienced a parallel decline in per capita meat consumption, which has declined from 70 kg per person per year in 1990 to 42 kg in 1999. Russian per capita meat consumption is now less than half of the average for all industrialized nations. U.S. meat consumption is approximately 123 kg per capita.
Russian annual grain production is now chronically below its 75 million metric ton annual requirements achieving a 40-year low of 47 million metric tons in 1998.
The Russian food production system is in desperate need of dramatic restructuring if it is to avoid a major disaster.
The severity of the Russian agricultural crisis has been masked first by the Russian economic bubble which burst in August of 1998 which had permitted imported food products to replace lost domestic production and subsequently by a major food assistance program in 1999 which replaced commercial imports of food products.
Russian consumption and nutrition levels have continued to decline to levels that now threaten the health and social fabric of Russian society.
Russian male life expectancy has declined dramatically during the past decade and at 59 years of age and is the lowest of all industrial countries.
The following chart dramatically demonstrates the severity of the ongoing crisis.
Russia has the natural and human resources required to achieve food production levels, which would allow the Russian people to achieve nutritional levels comparable to any country in the industrialized world. To unlock this potential, major changes must occur.
Using the private loan authority Congress has granted under PL-480 Title I to support programs designed to break the cycle of Russian dependence on periodic food assistance and rebuild domestic Russian food production would be mutually beneficial in both the near term and the long run. Programs and policies that are directed at strengthening the Russian private sector in agricultural supply, production and processing will create stable and reliable markets for U.S. producers.