Mr. Chairman, thank you for the opportunity to address you today concerning the state of American agriculture. Certainly, these are not the best times for agriculture. We are faced with not only low prices for most commodities, but also weather related problems in several areas of the country. It seems whenever things get difficult in farming, there are always some who are looking for something or someone to blame. That is the case now from those who are assigning the blame to the Federal Agricultural Improvement and Reform Act (FAIR Act) passed in 1996. They argue that it is largely the cause of low commodity prices.

As a corn and soybean producer in Iowa, I am well aware of the present low commodity prices. The price of corn at the local elevator where I market much of my crop was $2.00 yesterday. The price of soybeans was $5.82.

I sold my 1997 soybean crop at an average price of $6.30. But, regrettably, I have not priced any of my 1998 soybeans. That is my decision and nobody else is to blame.  Many other producers have done what I didn’t do and priced some or most of their 1998 production.

On the other hand, I still have 60 percent of my 1997 corn to sell -- and at $2.00 per bushel, I’m not all that anxious to sell it. But, the fact that I’m still holding that production and therefore saddled with a $2.00 per bushel price is not the fault of the FAIR Act. When I look in the mirror in the morning, I know who to blame.

The FAIR Act is working as it was designed. The market is providing producers with pricing opportunities while the Market Transition Payments and the loan rates are providing them with a safety net. Congress must avoid abandoning the market-based policies of the FAIR Act. Producers are reallocating their resources in a more efficient manner than the government could ever dictate. We are pleased with the flexibility to adjust crop acreage in response to both economic and agronomic factors. In talking with Jim Harmon, President of the North Dakota Farm Bureau last week, he drove home the point of the value of having to plant what we want rather than what the government dictates. In North Dakota this year, it is especially important. As Jim said, "Having the freedom to diversify out of a disease-prone crop like wheat into other alternative crops has put more profit potential into my operation. I shudder to think what would have happened if I would have been forced to plant my entire wheat base as I would have under the old safety net program."

There is a saying that one form of insanity is doing the same thing over and over -- and expecting a different result. If we increased loan rates and extended the loan maturities, it would be very reminiscent of steps taken in the early 1980s. That caused U.S. grain and oilseeds to become non-competitively priced in world markets. The U.S. lost export sales to competitor nations. U.S. producers, through the loan program, "sold" grains and oilseeds to the government.

Over several years, the government accumulated huge stocks of grain and oilseeds while farm program costs grew to record high levels. Although loans for grains and oilseeds now have marketing loan features which will result in less government stock building, the general effect of increasing loan levels would be the same as in the early 1980s. Producers would be encouraged to produce for increased farm program benefits instead of market returns. The period of low prices would be prolonged because the market signals necessary to increase consumption of agricultural products and to reduce or shift production to other products would be blocked by government action. Higher taxpayer costs would likely lead to the renewal of acreage reduction programs to control government spending.

Let’s talk about the "safety net" for a moment. It is important to remember that the loan program was intended to be a method to lessen pressure to sell at harvest time and to spread sales throughout the marketing year. It is a marketing tool for producers, not an income support program. But, the loan program is not the only source of support, farmers also receive market transition payments.

So, for those who want to talk about income support, it is worth doing a little comparison. As the following chart shows, in most cases the current loan rate and market transition payments are equal to or in some cases may actually exceed the "safety net" provided by those who propose to increase the loan rates to 85 percent of the five-year average price. Mr. Chairman, it makes little sense to spend a significant amount of federal government funds -- and to alter a program which is working as intended -- and yet not make any real change in the current "safety net."

Except for soybeans, the market transition payments and loan rates (safety net) meet or exceed the 85 percent Olympic loan rate. The Olympic loan rate is the five-year average price minus the high and low years.

The big picture actually doesn’t look too bad.

1. During the first two years of the FAIR Act, farm income has averaged from 14 to 20 percent higher (depending on the definition used) than it did over the prior five-year period covered by the previous farm bill. USDA projects that 1998 farm income will be down by about 10 percent from the average of the past two years, but will still be 5 percent higher than the average of the prior five years.

2. Farmland values continue to rise. As the following chart shows, average farmland values in the U.S. rose 5.8 percent in 1997 and are expected to increase by a similar amount in 1998. (USDA data on the 1997 land prices is not available until fall). Other surveys such as those done by the Federal Reserve Banks indicate the year-to-year increase in farmland values in the Midwest are up 6 to 10 percent through the first quarter of 1998. Even in the "hard-hit" states of South and North Dakota, land values rose 10 percent and 1.5 percent respectively.

U.S. Farmland Values

(As of January 1)

3. Producers in a fairly sizable section of the country are having bumper crops. Just last week, Congressman Thune told us he had never seen the crops "from one side of the state of South Dakota to the other look so good." Prices are less than optimum for many producing those bumper crops, but I always also remember that 150 bushel corn selling at $2.00 per bushel grosses the same as 100 bushel corn selling at $3.00.

4. The market transition payments authorized by the FAIR Act have amounted to $11.5 billion. Estimated payments under the previous farm bill are $3.6 billion. Therefore the FAIR Act has put $8 billion more in farmers’ pockets than farmers would have received under the previous farm bill. AFBF economists project that government payments over the next five years will be $7 billion in excess of what farmers would have received under the previous farm bill.

5. What about marketing opportunities? During the first quarter of 1998 (January through March), producers could have either entered into contracts with local elevators to deliver commodities this fall or put on futures hedges at prices that were equal to or above the target prices of the previous farm bill if you add in market transition payments.

While these prices are less than those experienced during the past two years, they are for the most part, substantially higher than the average prices received during the last decade when supply-control programs were in effect.

On the flip side:

1. The financial crisis in Asia has had a negative impact on our export markets. Most pronounced is the impact on the corn markets. The Asian financial crisis has reduced our overseas demand. According to President Clinton, "40 percent of all exports go to Asia and there has been a 30 percent reduction in farm exports to Asian countries because of the Asian financial crisis". This crisis is a large reason why our exports will likely fall to $55 billion this year compared to 1997’s high of $60 billion.

2. If you compare USDA’s Supply/Demand projections of a year ago with today’s projections for the 1997/1998 crop, corn exports have declined 28 percent, soybeans are down 7 percent, and wheat is down 5 percent. Only in cotton is there an improvement in world demand with exports projected to be up 4 percent over a year ago.

3. Global production has reached record levels. The following charts show that the stocks-to-use ratios for the major crops have increased.

4. In general, prices of the major commodities have been under downward pressure during the first half of 1998 (see appendix). Beyond the Asian crisis, this is also due to an increase in world supplies. Soybeans and wheat have been especially pronounced. Certainly, the record soybean crop in South America has weighed heavily on our soybean and oilseed prices.

5. Disease problems and weather events are impacting farm prices in several areas of the country far more than low prices. North Dakota State University’s study on the reasons for the current problems in agriculture show that almost 75 percent of the reason in that state was weather related.

6. The increase in supply and drop in demand has had a devastating impact in prices. Corn prices will probably average 30-40 cents a bushel less in the 1998/99 crop year than a year ago. However, it is interesting to note that corn is the only commodity where prices for the crop year we are concluding, 1997/98 are actually less than where they were projected a year ago. Utilizing the mid-point range of price projections from the USDA, soybean prices for the 1997/98 year will actually be about 45 cents more a bushel than projected a year ago and wheat prices averaged approximately five cents a bushel more than projected a year ago. The USDA doesn’t make projections on cotton prices. Some U.S. crops experienced better than expected prices the past two years. That is one of the reasons farmland prices and rents continued to rise into the spring of 1998.

7. Weather and disease problems such as scab, which has affected wheat and barley producers for several years, floods and late planting due to excess rain, drought, and extreme heat has lowered production and highlighted diseases and high levels of aflatoxin.

There has been progress in implementing solutions to address those situations over the past few weeks. It has taken a lot of efforts from Congress, the Administration, and certainly all of the farm and commodity groups, but the efforts have paid off. Items of note include:

Last week, Congress extended normal trading relations with China. China is currently a $2 billion market for U.S. farmers with a potential for much greater sales. A bill was signed into law to remove the sanction and reopen the wheat market in India and Pakistan to American exports. We have already been notified by Pakistan that they intend to purchase 300,000 metric tons of U.S. wheat.

Crop insurance administrative expenses were fully funded for the next five years, thus eliminating the annual uncertainty by producers of the program’s availability. The agricultural research title of the Farm Bill was reauthorized and a new competitive grants program targeted at a few high priority issues was implemented.

Market Access Program funding was maintained at $90 million.

The Administration announced it will use its discretionary authority to purchase surplus commodities from the market and donate those commodities to foreign countries suffering humanitarian needs.

Far more needs to be done. There are indeed problems in agriculture. But they are primarily regional problems – caused by weather and crop diseases. Current prices are reasonably good for rice, dairy, and cotton. They’re not so good for soybeans, wheat, feed grains, cattle or hogs. But

we must remember that agriculture is a cyclical business. Fortunately, we’ve had several years of very good prices in the grain industry. Now we’re faced with the pendulum swinging towards at least one year of low prices.

The problems are diverse enough between commodities, between regions of the country, and between individual producer crop production patterns that a "one size solution won’t fit all." We must recognize and separate the problems of low prices and weather-related issues when seeking solutions.

Last week, Chairman Smith and Speaker Gingrich proposed legislation to allow farmers the option of receiving all of the market transition payments for FY99 immediately as early as October 1, 1998. This makes $5.5 billion available to producers as much as one year early to help with cash shortages. Farm Bureau strongly supports this initiative. Advancing market transition payments can be utilized to deal with both low prices and weather-related disasters. I strongly support Chairman Smith’s flexibility in allowing producers to choose to take future payments early or to leave the program as currently written.

While we view Chairman Smith’s bill as a good first step – and while it may be adequate to deal with problems for some producers – it won’t be enough for others. Farm Bureau is currently analyzing other bills and concept papers to ascertain what would be both most helpful and most sound. We are guided by several principles including a) maintenance of the sanctity of the marketing aspects of the FAIR Act; b) an assurance that the disaster programs will not send the wrong signal to producers and discourage them from purchasing crop insurance in future years; c) an emphasis on trade and market development; d) assurance we are finding solutions for not only program crop producers, but also equity for minor crop and livestock producers; and e) an evaluation of the proposals effect on a balanced budget.

We are interested in several ideas which have been presented, including:

A yearly land diversion program to address emerging disease and pest situation such as wheat scab, potato blight and Karnal bunt. However, this should not be considered or used as a set-aside program.

I would also caution that the wheat scab situation has been exacerbated by another part of the farm program -- the Conservation Compliance rules. In order to minimize erosion, farmers must utilize a no-till or low-till system that leaves a residual of crops on the ground. This allows the scab an over-winter feeding medium that has caused this disease to reach epidemic proportion.

The law of "unintended consequences" has come to bear in this situation. Conservation Compliance was enacted in 1985 and farmers had to implement a farm plan by 1990. Sometimes it takes a long time before the full impact of these changes come to light. As important as erosion reduction may be, it is time to consider offering a variance for a year or two which would help control this rapidly spreading disease.

We must pass fast track negotiating authority. Continuing to delay the implementation of fast track is reducing critical time needed to define and advance U.S. negotiating objectives for the next round of multilateral negotiations, and the opportunity to realize meaningful gains in increasing market access.

Congress and the President must replenish the International Monetary Fund (IMF). IMF support is critical in reinvigorating the sale of U.S. farm commodities into Asia.

The Administration must live up to its commitment to use the Export Enhancement Program to its maximum to secure foreign markets for U.S. farmers. The FAIR Act provided $1.5 billion ($50 million per month) available for the program, but the Administration has used little of those funds.

Trade sanctions must be lifted. We impose trade sanctions on nations who don’t live up to our concept of where they should be, or not doing what we think they should be doing. Sanctions don’t work. They only hurt us, as we surrender yet another market to competitors who are only too happy to sell in our absence. We cannot export our social reforms or impose labor or environmental standards.

USDA and the U.S. Trade Representative must continue to work to eliminate tariff and non-tariff barriers with our Canadian and Mexican neighbors.

We must continue to pursue fair trading practices with the Europeans regarding genetically modified organisms (GMOs). Corn shipments exceeding 2 million metric tons to Europe are still being blocked.

The next tax bill should include elimination of estate taxes, FARRM accounts, full deductibility of health insurance premiums, capital gains tax reform, and income averaging for farmers and ranchers.

We need to look for new ideas in the area of risk management. Farm Bureau is strongly supporting the FARRM legislation which would encourage farmers and ranchers to save for a "rainy day" by allowing them to deposit up to 20 percent of pre-tax net farm income into an interest bearing account. Funds could be withdrawn and taxed over the subsequent five-year period.

The Commodity Futures Trading Commission needs to revise their interim rules to make sure that agricultural trade options are a more viable risk management tool for producers. The current proposal does not provide the incentive that private industry needs to develop new management tools for farmers.

Congress authorized $600 million over the next five years for a new targeted competitive research grant program. Numerous studies have documented that publicly funded agricultural research has consistently earned an annual rate of return of at least 35 percent. Congress has the opportunity in this year’s appropriations deliberations to fully fund this initiative. If we are to maintain or enhance our competitive advantage in world markets and respond to future consumer needs, the federal investment in agricultural research must be increased.

Last, but certainly not least is the area of regulation. Many farmers have told me they believe their greatest obstacle to profitability is oppressive regulations which unilaterally raise production cost and/or reduce yields. We want to reduce undue and unnecessary duplication of laws and regulations. We want a review of all existing federal rules. We want Congress to lay down specific guidelines and restraints on the agencies that administer the laws and are given the power to adopt rules and regulations. In other words, we want the regulators regulated. Federal regulations cost farmers and ranchers at least $20 billion of what should be net income. While we tie ourselves in knots trying to conform to federally mandated contortions, we lose productivity and opportunities. Instead of working on better ways to farm, we waste creative abilities an management time on useless paperwork.

First and foremost our are extreme concerns about the implementation of the Food Quality Protection Act (FQPA). The Environmental Protection Agency’s approach to promulgation of rules based on the "risk cup" theory is of great concern. The whole idea of increasing the safety factors by ten-fold and more on a repeated basis is a guaranteed way to eliminate crucial pesticides necessary for crop production. Important, essentially irreplaceable pesticides derived from organophosphates and carbamates would be eliminated under the criteria offered by the EPA.

Secondly, we are concerned about the schedule for the phase-out of methyl bromide. Under the Montreal protocol, industrialized nations are required to phase out the use of methyl bromide by 2005, while developing nations will have until 2015 to discontinue use. However, the Clean Air Act requires U.S. companies to discontinue the manufacture of methyl bromide by 2000. Such action will place the U.S. producers at a severe competitive disadvantage for 10 to 15 years. With Mexico our primary competitor in the U.S. fresh fruit and vegetable markets, this schedule is simply unacceptable.

The implementation of regulations regarding the total maximum daily loads (TMDLs) and the unrelenting drive to reclassify non-point sources of run-off from agricultural land as point-sources under the Clean Water Act is also a concern. This effort is manifested in EPA’s effort to promulgate regulations for animal feeding operations/concentrated animal feeding operations (AFOs/CAFOs) as well as discussions to limit nitrogen application rates based on the hypoxia situation in the Gulf of Mexico.

The administration seems intent on pursuing the Kyoto Protocol and forcing farmers and other businesses to suffer the onerous impact of higher energy costs. EPA has readily admitted execution of the protocol would raise energy prices as much as 25 percent and private estimates suggest it could be double that amount. The net consequences to agriculture are appalling. Our economists indicate that such action could decease farm income from 25 to 50 percent.

Now, let’s stop and think about that for a moment. We are talking about a potential 10 percent reduction in farm income as a result of the current commodity prices. Joining the Kyoto Protocol could have an impact on net farm income 2-1/2 to 5 times greater than that. Yet, some of the same people who are so worried about the current situation are indeed advocating actions that will be far more devastating to the farm economy.

It is time for Congress and the USDA to speak -- and speak loudly -- for regulatory reform. Overregulation has the potential to place the agricultural sector in much greater jeopardy than any bout of low prices or weather disasters.

In summary, I would reiterate that an increase in loan rates and extension of loan maturities do not deal with the important issues that affect market prices and farm income. We strongly urge Congress to "stay the course" on the marketing aspects of the FAIR Act and to address our concerns about trade issues affecting market development, regulatory reform, additional and improved risk management tools, and tax issues. When producers agreed to support the FAIR Act in 1996, Congress assured us that this "unfinished agenda" is where efforts would be focused next. We ask you to keep that promise.