Mr. Chairman, and Members of the Committee: I am Phil McLain, a wheat producer from Statesville, North Carolina, where I operate a diversified, dryland farm. I am the immediate Past President of the National Association of Wheat Growers. It is a pleasure to once again appear before the Agriculture Committee on behalf of the Nation’s wheat producers. We appreciate the opportunity to discuss the state of the wheat economy and agriculture in general.

In a word, Mr. Chairman, the economic prospects for many wheat farmers and others involved in the industry are bleak! Unfortunately, there appears to be a strong indication that things may likely get worse before they get better. While recent media attention has focused, for good reason, on the economic crisis in the Northern Plains, wheat producer incomes, and hence the financial viability of families and farms, rural agri-businesses and communities are suffering across all wheat production areas of the Nation.

For the record, I have attached several charts and tables containing USDA data that help illustrate the situation. Chart 1 provides data on U.S. wheat prices received by farmers from 1991 through June, 1998. As you will note, nearly all the price gains achieved in the first one-half of the decade, culminating in 1996, because of increased demand and declining reserves, have been erased over the last two seasons. The prices paid index, Chart 2, indicates that while the inflationary pressures on production costs have moderated after matching the prices received trend through 1996, production costs have failed to decline since that period. Table 1 summarizes wheat yield data for the years 1995-1998 by State and for the U.S. Table 2 lists the prices received by farmers for all wheat by month for the same period. Of special interest to me personally, and Mr. Chairman, to your wheat producers in Oregon is Table 3 provided by Almota Elevator Company, a large country grain merchandiser located in Colfax, Washington, that lists the August cash bids for white wheat delivered to Portland from May 21, 1998 through July 24, 1998. Please note that over the period covered, the August price for soft white wheat has declined by over $.50 per bushel, a decline exceeding 15% is two months. This data reinforces recent projections of significant reductions in farm and wheat producer income for this year.

A simple calculation of producer yields times prices received over the past three years effectively demonstrates why an economic crisis is brewing in wheat country. For some farmers, recent yields have been high enough to maintain the economic integrity of their wheat farming operations at the prevailing price levels when coupled with the market transition payments of the FAIR Act. A large number of wheat producers, however, are failing to cover their increased production expenses. A significant cost-price squeeze now exists for most wheat producers. This is not an isolated or regional circumstance, but a widespread situation.

Mr. Chairman, the impact of this situation does not stop at the farm gate. Although less graphic than the North Dakota auctions or the Texas drought, banks and agri-businesses in the PNW and elsewhere are concerned about non-performing loans and production credit extended for the current crop. An increasing number of producers are being told that they will not be eligible for operating loans for next year. Rural businesses are being forced to tighten their belts as well. Generally this occurs through reduced employment, in many cases, in areas where job opportunities are already limited. The farm crisis does not stop at the private sector either. Declining farm and rural community incomes are pressuring public services as well. In Whitman County, Washington, the Nation’s largest wheat producing county, several public school levies have failed, some for the first time in memory. Whitman County has not been ravaged by weather or disease, and in fact, has produced above average crops for the past several years.

There are a number of events that can be pointed to as cause of the rapid decline in farm income and the economic health of the wheat industry. Weather is the major determinant of both production and income for direct and indirect reasons. Some U.S. wheat production areas have been ravaged by severe weather occurrences, such as flooding and drought, that have forced reductions in plantings, negatively impacted wheat yields, contributed to severe disease and other pest infestations, and reduced the quality, and hence, the market value of the production that did occur. Other production regions in the U.S. and globally have been the beneficiaries of nearly a perfect production environment leading to record yields. When coupled with the declining financial and economic crisis in Asia and elsewhere, and continued unfair trading practices of both exporters and importers, demand for U.S. wheat exports has not maintained a level necessary to provide economic stability for wheat producers or minimize the growth of wheat stocks that remain in storage.

The 1996 FAIR Act has not caused the economic difficulties that face the wheat industry. The farm bill cannot impact the weather. However, the failure of the Congress and the Administration to fully enact the underlying commitments made during consideration of the farm bill, including an aggressive U.S. export and trade posture, improved risk management opportunities, expanded agricultural research efforts and tax and regulatory reform, has created a situation where our unilateral shift to a market oriented policy is causing extreme distress in the wheat industry. Additionally, the economic safety net contained in the Act is proving inadequate in the face of a growing economic recession in major import markets, continued market distorting policies of our competitors, and other policy and production factors that remain beyond a farmer’s control.

The FAIR Act provided for increased planting flexibility, a provision the NAWG strongly endorsed at the time and continues to support. Wheat producers have generally benefited from and are using this flexibility to plant crops that will maximize their incomes and improve their ability to manage diseases, weeds and other pests. However, planting flexibility must go hand in hand with expanding and accessible export markets. And flexibility can only increase income when alternative crops can be planted to take advantage of strong market prices. For example, a number of alternative or substitute crops in the PNW, such as barley, dry peas and lentils, are in worse economic shape than wheat. In addition, it is difficult to produce economically viable alternative crops in a sizable portion of traditional wheat production land in the U.S. due to low moisture and other climactic limitations.

The Congress and Administration have made some progress over the last year to create a workable U.S. farm policy. The expeditious action by Congress to waive the sanctions prohibiting credit guarantees for agricultural sales to Pakistan and India will hopefully avoid the negative impacts of unilateral trade sanctions in that region. We urge the Congress to go farther and comprehensively review current law to ensure that domestic industry is not asked to bear the cost of economic sanctions imposed as a matter of U.S. foreign policy. The President’s announcement of expanded purchases of commodities for U.S. humanitarian efforts is also to be commended. The estate, health insurance and income averaging tax reform measures approved as part of the balanced budget agreement are a positive first step in resolving on-going tax equity issues for farmers and small business owners. The recent passage of the agricultural research title represents a renewed commitment to both agricultural research and U.S. competitiveness and productivity while stabilizing the federal crop insurance programs, a major component of our risk management policy.. However, much more must be accomplished, and soon, if we are to avoid further economic distress in the wheat industry.

The NAWG has engaged in discussions with Members of Congress and the Administration to promote short and long term actions that can help mitigate a number of the problems faced by wheat growers. Our Wheat Action Plan (Appendix 1) identifies specific proposals that should be acted on by Congress and implemented by the Administration. The NAWG also supports the legislative and administrative actions endorsed by a wide range of farm organizations to alleviate the stress in rural America. In addition, we appreciate the bi-partisan commitments made by this Committee, the Speaker of the House and your Senate colleagues, including Majority Leader Lott, to take legislative action on several of these issues during the remainder of this session.

We must recognize, however, that it will take time for farmers to feel the positive income effects of trade and market development initiatives. It is therefore imperative that Congress and the Administration take immediate action to address the economic stress in rural America.

The NAWG supports actions to provide additional compensation for producers who have purchased crop insurance, but suffered multiple years of crop losses. Our current crop insurance program remains a marginal risk management tool for most producers. For those with declining production histories due to weather disasters, the program is totally inadequate.

We also encourage Congress to remove the "caps" on the commodity marketing loan program for the current marketing year. By eliminating the commodity forfeiture option as a means of settling those loans, the government would not become the purchaser of "last resort". This action will provide immediate income assistance to producers while ensuring U.S. price competitiveness in export markets. As prices strengthen in response to efforts to create greater market demand, utilization and loan program costs will decline. Additionally, an effective marketing loan program can provide part of the leverage necessary to complete successful trade negotiations that will promote free and fair trade by all market participants.

The NAWG recognizes that higher marketing loans will increase government outlays. But the fact is that those costs are now being paid by farmers, agri-businesses and rural communities through reduced levels of income and economic activity and increased risk. We cannot continue to pay these costs without serious consequences for our industry and for the nation.

Finally, the NAWG urges Congress and the Administration to consider providing trade compensation to producers impacted by the continuation of unilateral trade sanctions on the sale of agricultural products. Currently, U.S. producers are precluded from participating in about 11% of the world wheat trade due to U.S. sanctions. Not only do these actions reduce U.S. sales abroad at the expense of U.S. farmers, but they also provide an "umbrella" of market protection for our competitors who continue to sell into the sanctioned markets. In many instances those competitors utilize the profits from sales to sanctioned markets to unfairly compete for market share and grain sales in the remaining open markets.

Mr. Chairman, for many producers the 1998 wheat harvest will be their last. The economic health of the wheat industry is in poor shape. We encourage the Congress and Administration to work in a bi-partisan fashion to develop and implement both a short and long term strategy for addressing this situation, and pledge our assistance in seeking appropriate solutions to the current economic crisis.

Thank you for the opportunity to appear before this Committee. I will be pleased to answer any questions you or your colleagues may have at the appropriate time.