Statement of the

National Grain and Feed Association

Before the

Committee on Agriculture, Nutrition and Forestry

U.S. Senate

February 1, 2000

The National Grain and Feed Association appreciates the opportunity to submit this statement on the Grain Inspection, Packers and Stockyards Administration (GIPSA). Specifically, we will provide comments on the program within GIPSA known as the Federal Grain Inspection Service (FGIS). The FGIS administers the U.S. Grain Standards Act (USGSA) and provides official inspection services to NGFA members. The industry values the credibility and integrity of the official inspection system and believes it provides benefits to U.S. agriculture in domestic and international markets. We note that the number of complaints on the quality of U.S. grades on export shipments by foreign buyers has declined in recent years.

The NGFA consists of about 1,000 grain, feed, processing and grain-related companies that operate 5,000 facilities that store, handle, merchandise, mill, process and export more than two-thirds of all U.S. grains and oilseeds. About 70 percent of NGFA member firms are small businesses--country elevators and feed mills. Also affiliated with the NGFA are 36 state and regional grain and feed associations.

The FGIS has changed in many ways since Congress authorized it in 1976. These changes include a dramatic downsizing of the Agency in the early 1980's and in 1994 a merger with the Packers and Stockyards Administration (PSA) to form the Grain Inspection, Packers and Stockyards Administration. FGIS is largely a service agency to the commercial grain sector. User fees paid by exporters and domestic commercial shippers and receivers fund approximately 75% of Agency operations.

The FGIS and industry maintain a positive working relationship. Agency management routinely meets with NGFA and its Grain Grades and Weights Committee to discuss issues affecting the official system. In 1998, the FGIS announced a strategic plan that, in part, seeks to "increase the efficiency of U.S. grain marketing… to streamline grain inspection and weighing" and "provide … cost-effective … grain inspection and weighing services." We are supportive of these goals but remain concerned that FGIS may lack sufficient managerial flexibility to fully achieve them. On the other hand, the Agency has been working with industry to improve automation at export facilities, an effort we applaud.

The Agency was last re-authorized in 1993 for seven years. Thus, by September 30, 2000, Congress must re-authorize several provisions of the USGSA to allow FGIS to continue providing official services. These provisions include collection of fees for official inspection and weighing activities, the 40% cap on administrative and supervisory costs and the authority for the FGIS Advisory Committee. The 2000 Agency re-authorization provides an opportunity for industry and Congress to consider what changes may be needed in the official inspection system to ensure it can continue to meet the needs of the marketplace.

In this regard, we would like to share our perspective on several issues affecting the official system. Several of these issues are not new having been shared with FGIS management and Congress in the past.

The Operating and Cost Structure of the

Domestic and Export Official System Markets

The cost of the official system in domestic and export markets remains a concern to NGFA members.

· Domestic Markets: Official inspection and weighing of U.S. grain in domestic commerce are performed upon request by private agencies granted an exclusive license by FGIS to perform official services in a particular area. In 1993, the GAO study found that the use of the official system in the interior markets has declined because of high costs, inflexible service, consolidation within the industry, and increasing acceptance of unofficial and in-house grades by the market. While it appears that utilization of the domestic official system may have stabilized somewhat in recent years, a 1999 survey of NGFA members indicates that cost of service remains a strong concern.

As a result of the GAO survey, the NGFA recommended during the 1993 re-authorization of the Agency that Congress require FGIS to conduct pilot programs to open selected interior official territories to competitive bidding for services. The Agency began a series of pilot programs in 1995 and the results indicate that granting FGIS permanent authority to allow increased competition within the domestic official system may be beneficial.

· Export Markets: The U.S. Grain Standards Act (USGSA) requires that export grain be officially inspected and weighed by FGIS personnel. Over the past 10 years, the FGIS has experienced significant financial losses, seriously depleting the Agency's financial reserves. As a result, the FGIS has instituted a series of fee increases over the last several years that has resulted in making the cost of official inspection one of the top operating expenses at export elevators. While the Agency reported approximately $1.8 million in profits at the end of Fiscal Year 1999, the cost of official inspections at export locations and future management of those costs remains a concern. We believe managerial that both FGIS and industry would benefit if FGIS management had additional flexibility to control costs and maximize operating efficiency.

On February 2, 2000, the NGFA's Grain Grades and Weights Committee will meet to discuss a number of policy options to assist FGIS efforts in fulfilling its role under the USGSA. One option under serious consideration by NGFA would shift FGIS from a more traditional government agency model to a Performance Based Organization (PBO) within government. The PBO concept was designed as a business model for government agencies heavily focused on service to the private sector, a description that fits much of FGIS operations as well. The PBO concept has been used successfully in the federal government's Student Financial Aid.

While several questions remain, we believe the PBO concept is attractive because it may offer FGIS greater flexibility in the way its manages its operations while retaining strong federal government oversight of the inspection functions. To move forward with this concept would require authorizing legislation. NGFA's committee will be studying the pros and cons of this concept and decide whether to make a formal legislative proposal shortly.

Another policy option that should be considered is reducing 40% cap on administrative and supervisory fees to 20%. Reducing the 40% cap would be consistent with trends within private industry. Furthermore, the Agency reported in 1995 that administrative and supervisory costs represented 23% of total program costs. Thus, a reduction to 20% may also be consistent with trends within the Agency itself.

FGIS Advisory Committee

The FGIS Advisory Committee was created to provide advice to the FGIS Administrator on implementation of the USGSA. Over the years, the direct users of the official inspection system - those actually paying for the service - have increasingly come to question the relevancy of the FGIS Advisory Committee to assisting the Agency in its responsibilities. We think a stronger representation by direct users on the Advisory Committee would help address this situation and recommend that Congress authorize that that at least 10 of the 15 advisory committee members represent companies that are direct users of the official system.

Biotechnology

The introduction of corn and soybeans enhanced through the techniques of modern biotechnology for increased insect resistance and herbicide tolerance has raised concerns in some foreign markets and creates the need for accurate and affordable tests to quickly distinguish these new varieties from those developed through conventional plant breeding. Responding to a recommendation from NGFA, the FGIS has announced its plan to establish a reference laboratory at its Technical Center in Kansas City, Missouri to verify the accuracy and repeatability of test kits used to detect biotechnology-enhanced crops. We support this approach.

The FGIS has also indicated that it is considering developing standards for the identity preservation (IP) of grains that either possess or do not possess traits introduced through the techniques of modern biotechnology. The procedures concerning the process to ensure the delivery of non-biotechnology-enhanced commodities often vary between customers. Therefore, we believe that they should be left, whenever possible, to contractual agreements between buyer and seller at this time.

Reauthorization

As noted previously, the FGIS was re-authorized in 1993 until September 30, 2000, i.e., for a seven year time frame. We understand that FGIS is suggesting that it be re-authorized for 10 years. We believe that in today's rapidly changing global business environment a 10-year reauthorization is simply too long. In fact, we believe that rather than extending the re-authorization period from seven to ten years, Congress should consider reducing the period of reauthorization to no more than five years.

Conclusion

Through its efforts to maintain accuracy and consistency in the official inspection and weighing system, the FGIS assists in maintaining the economic efficiency of the U.S. grain marketing system. The credibility and integrity of the official system is very important to grain handlers and very beneficial to U.S. exporters. However, managing system costs and improving FGIS management capabilities to reorganize to enhance efficiency and productivity of FGIS employees present challenges to the long-term viability of the system. The upcoming re-authorization debate presents an opportunity for Congress to consider potential changes to the official system to ensure that it will continue to provide a needed and cost-effective market service.