taking on more debt relative to their repayment capacity from current income. Following recovery from the mid 1980's farm financial crisis, farm debt fell by the early 1990's to 45 percent of the maximum debt producers could repay given current income, so-called debt repayment capacity utilization. This year, use of debt repayment capacity is expected to be up to about 60 percent. Fourth, low prices coupled with several consecutive years of below average crops and low cattle prices have greatly increased the financial vulnerability of certain areas, particularly the Northern and Southern Plains and lake States. And, as I indicated earlier, many producers are also suffering from the effects of extreme weather. Wet weather has reduced California production prospects, hot, dry weather is reducing crop yields in New Mexico, Oklahoma, Texas and several southeastern States and flooding has also wiped out crops for some producers.

MAJOR CROP DEVELOPMENTS

Farm income from wheat, corn, cotton, and soybeans will all be down this year. Record global production caused wheat prices to plummet this year following 2 years of strong prices. This season, wheat prices will be pressured by large beginning carryover stocks, a large winter wheat crop and strong foreign competition. U.S. wheat stocks on June 1 compared with consumption were the highest since 1991, and the 1998 yield per acre is expected to be a record high. Texas, Oklahoma and Kansas all had record-high wheat yields, harvesting before the effects of the current drought set in. Wheat prices are down nearly 25 percent from 1 year ago and the lowest in 7 years. For the 1998-99 season, wheat prices are projected to average $2.90 per bushel, down from $3.40 per bushel last year and $4.30 2 years ago. The average farm price during June was only $2.72 per bushel, and recently prices have been as low as $2.00 per bushel in Southern Illinois and $2.25 in central Kansas.

Corn and soybean prices are also down compared to last year and for 1998 are expected to be below the average of the 1990's. During June, farm-level corn prices were down 14 percent and soybeans down 26 percent, compared to a year ago. Current weather patterns have not adversely affected the primary corn and soybean crop producing areas, and large U.S. and global production is expected to pressure prices for these crops in the coming season. For the 1998/99 season, corn prices are projected to average $2.15 per bushel, compared with an estimated $2.45 this season. Soybean prices are expected to fall from $6.45 per bushel this season to $5.35 in 1998/99.

In June, cotton and rice prices were about unchanged compared with a year ago. Since 1995/96, U.S. rice producers have had three consecutive years of relatively strong prices and export demand. U.S. cotton production is currently projected to fall by over 20 percent this year due to weather problems in the California, Texas and several other southern States.

LIVESTOCK, POULTRY AND MILK MARKET DEVELOPMENTS

Record-large per capita meat and poultry supplies have reduced livestock prices, with hog and beef prices in 1998 expected to average below last year and below the average of the 1990's. The decline in hog prices has been especially severe, with prices down by nearly one-third during the first half of the year, compared with a year ago levels. Over the coming months, hog supplies are projected to continue to remain high, keeping prices below production costs for many producers.

Fed-cattle prices continue to be below cash expenses and little improvement in prices is expected over the next several months. Prices had been expected to strengthen during the second half of 1998, following 2 years of herd liquidation. However, price recovery now appears more distant as producers continue to reduce herds, increasing nearby beef supplies. Poor pasture and range conditions in the Southern Plains are motivating producers to market cattle, and low cattle prices are encouraging cattle feeders to feed to heavier weights.

Broiler and milk prices have risen recently and most poultry producers appear to be operating in the black. Broiler prices were about unchanged during the first half of the year and are expected to average about 2 percent higher in 1998. Farm-level milk prices up about 7 percent during the first 6 months of 1998, compared with a year ago. Recent strength in dairy product markets marked by strong increases in butter and cheese prices suggest that milk prices will remain strong over the coming months. Lower grain and protein prices will reduce livestock and milk producers' production expenses.

ACTIONS TAKEN TO DATE

USDA reacted quickly to the Asian financial crisis and since late 1997 has made available export credit guarantees under the GSM-102 program totaling $2.4 billion. Overall GSM-102 credit guarantees now operational worldwide total nearly $5.8 billion, up from $4.6 billion last year. We also continue to help U.S. producers develop foreign markets through a variety of programs, such as the Market Access Program, Foreign Market Development Program, Cochran Fellowship Program, and Emerging Markets Program.

President Clinton recently announced that USDA will purchase surplus wheat utilizing the surplus removal authority of the Commodity Credit Corporation (CCC) Charter Act. Initially we expect to purchase roughly 2.5 million tons of wheat. The Department is in the process of purchasing the wheat and the first tender for 550,000 tons was issued last Friday.

USDA continues to purchase beef, pork and poultry for domestic food assistance programs. Purchases approved thus far this fiscal year for meat, poultry and fish have totaled over $440 million. USDA has also purchased over $135 million of nonfat dry milk under the dairy price support program, which under the Federal Agricultural Improvement Act of 1996 (the 1996 Act) will be phased out on January 1, 2000.

USDA is proposing to revise crop insurance regulations to provide more effective assistance to producers in the Northern Plains and other regions where successive disasters have sharply raised premiums and reduced coverage. We are also expanding our research into developing new strains of wheat that are resistant to scab and other diseases.

Earlier this month, the House and Senate passed and President Clinton signed the Agricultural Export Relief Act of 1998 exempting the USDA's GSM export credit guarantee programs and certain other USDA programs from mandatory sanctions imposed by the United States under the Arms Export Control Act. This allowed Pakistan to purchase 300,000 tons of U.S. wheat the day after President Clinton signed the bill into law. This rapid action by Congress and the administration ensured that our wheat exports to Pakistan will not be lost. Pakistan is the third largest export market for U.S. wheat and the leading export market for U.S. white wheat. More broadly, President Clinton has stated our view that food should not be used as a weapon and that whenever possible, basics such as food and medicine should not be withheld. The administration_supports Congressional efforts to develop a more reasoned U.S. sanctions policy. The President should have the authority to waive sanctions when it is clearly in the national interest to do so.

SENATE-PASSED APPROPRIATIONS BILL

The administration supports the Senate amendment to the FY 1999 Agricultural Appropriations Bill to provide emergency assistance to farmers and ranchers who are experiencing income losses. Year-after-year disasters create farm cash-flow problems beyond the ability of insurance to cover. Because of deductibles and other factors, insurance does not make a farmer fully whole from a crop loss; the cumulative financial effects of repeated loss years can be painful, even for fully-insured farmers. If the Senate amendment is adopted in conference, USDA proposes a Supplemental Crop Insurance Benefit program to address this immediate cash need in hard-hit areas within the crop insurance framework. The supplemental benefits would be 25 percent of the total indemnities received during those years.

In addition, the Risk Management Agency would develop a plan of insurance that provides the producer an option of purchasing protection against repeated years of crop loss if the producer also purchases a policy for the same crop or crops for each of those years. This product would be offered not later than the 2001 crop year, where practical and feasible.

In some areas, long-term flooding has been occurring since 1992, and the most severely affected crop and pasture land has been flooded and submerged since 1993. The topography and soil of the affected regions provide no outlet for drainage; the land will return to production only after the water has evaporated some years from

now.

USDA has proposed developing a multi-year program to compensate farmers and ranchers who have crop or pasture land under standing water for several years. USDA projects that approximately 1 to 1.5 million acres could be eligible for this program annually at a cost of $40 to $60 million per year.

During the past 2 years, USDA has funded livestock disaster assistance programs from the sale of grain in the disaster reserve, but the funds from the sale of disaster reserve stocks are depleted and will not be sufficient to meet current and potential futures losses from natural disasters. Changes mandated by the 1996 Act and the

FY 1997 supplemental appropriations bill leave USDA without the authority to replenish the disaster reserve and capped the disaster reserve at 20 million bushels. USDA proposes using part of the authorized funding to partially replenish the disaster reserve. The disaster reserve could be used to provide emergency assistance to producers of foundation livestock in danger of perishing and isolated from normal feed supplies, cover losses of milk and egg production caused by natural disasters, reimburse livestock owners for livestock deaths caused by severe weather and provide feed assistance for livestock producers suffering feed losses. This program would benefit all livestock producers nationwide. Similar programs were implemented, using disaster reserve funds over the past 2 years, helping producers from almost all States, with the largest number of recipients from North Dakota, South Dakota, Kansas, California, Texas, Oklahoma, Colorado, New Mexico and New York. Finally, as I noted earlier in my statement, the Senate amendment also calls on the Department to develop a proposal to address losses in farm income due to natural disasters. We will be presenting to Congress the needs, financial and program, resulting from our reevaluation of the emergency situation.

ADDITIONAL ACTIONS NEEDED

We have proposed legislation to Congress to improve the 1996 Act by strengthening the safety net for family farmers. In addition to the changes in the crop insurance and livestock disaster programs that we are considering if the Senate-passed version of the appropriations bill is adopted, our proposals would extend the term of marketing assistance loans; allow flexibility in farmers receiving advance 1996 Act payments, improve credit availability and modify the "one strike" policy for farmers who have had a debt write down; and let farmers use USDA guaranteed operating loans to refinance debt.

The 1996 Act limits the duration of marketing assistance loans for grains and oilseeds to 9 months and for cotton to 10 months. Under previous legislation, the loan period could be extended depending on marketing conditions. We have proposed that the authority be granted to extend loans under certain conditions, such as when market prices are abnormally low or when transportation bottlenecks create marketing problems for producers. We believe adoption of this provision would increase the flexibility of producers to market crops during periods of depressed prices.

The 1996 Act provides that producers may elect to receive a 50 percent advance of their crop year payment on either December 15 or January 15. USDA must make the final payment by September 30. Previous legislation gave the Secretary the authority to make more than one advance payment and flexibility in issuing those payments. The constraints on issuing advance payments are unnecessary and prevent farmers from accessing funds that could be used to relieve financial stress. Our proposal simply accelerates payments by a few months.

I know that the committee is considering legislation to make the entire FY 1999 payment available to farmers on October 1, 1998. While we support advancing these payments, we would caution the committee about its proposal. Farmers frequently, some every year, reconstitute or reorganize their operations and leasing arrangements, meaning crop shares may change between landlords and tenants and, often, some individuals who share in the farm operation one year do not the next. In most cases, those arrangements are not final until planting season; meaning that for crops covered by the FY 1999 payment, farm operating plans and leasing arrangements may not be finished until next spring. That means that if the entire FY 1999 payment is made available on October 1, some individuals who are on that date eligible for the payment may elect to receive it and then may not remain in the farming operation for the 1999 crop year, the crop this payment is intended to cover. New tenants actually producing 1999 crops on the farm may then be denied a share of the payments for that year. USDA officials are currently working to provide your staff with some possible modifications to your legislation which we believe will alleviate some of these administrative concerns.

The 1996 Act imposes a lifetime ban, without exception, on USDA loans to family farmers who have previously received debt forgiveness. There is no such rule for obtaining private sector credit. We have requested Congressional authority to give creditworthy USDA borrowers a second chance. Unless this provision changes, some producers will be forced out of business, even though they have the ability to repay the loans they need.

A major key to improving the farm economy is expanding agricultural exports. In the coming months, the administration will make every effort to further open markets for agricultural products. We will continue the relentless attack on barriers to trade and trade distorting practices of other nations. We urge Congress to pass leg. islation to fund the International Monetary Fund. We believe such legislation would

aid in improving the economic recovery of Asian economies, a key market for U.S. agricultural products.

CONCLUSION

U.S. agriculture is in an economic downturn following the record high prices, incomes and exports over the past couple of years, all of which are expected to be down in 1998. With the stronger farm commodity and asset markets of the 1990's to this point, most producers appear to be better positioned financially than during the farm financial crisis of the 1980's. However, the combination of declining commodity prices, adverse weather and crop disease is greatly increasing farm financial stress in the Northern Plains, Southwest and Southeast. These problems cannot be addressed adequately with the existing crop insurance program, and program changes mandated by the 1996 Act have hampered USDA's ability to respond to the economic problems being faced by producers in these and other regions of the country.

This administration applauds the additional funding contained in the Senatepassed agricultural appropriations bill to help producers with crop income losses, and we urge the House to support that action in conference. Yet, more needs to be done. I have previously sent to Congress several proposals to improve the safety net for farmers and ranchers addressing farm loans and commodity loans and payments. These proposals are common sense, cost-effective improvements in the 1996 Act that do not undermine the farm bill's basic tenet of less government intervention in agricultural markets. In addition, I will submit to Congress the Department's estimate of weather-related losses and additional proposals to address losses in farm income in mid August.

Mr. Chairman that concludes my testimony. I will be happy to respond to questions.

TESTIMONY OF BILL NORTHEY

Thank you Chairman Smith. My name is Bill Northey. I farm near Spirit Lake, IA and am a past president of the National Corn Growers Association. I raise corn and soybeans in my operation. Thank you for the opportunity to testify today concerning the state of the agricultural economy on behalf of the NCGA, which represents more than 30,000 corn farmers in 25 affiliated States.

Farming is about risk and risk management. There are risks you accept, risks you transfer and risks you attempt to minimize. We have marketing tools, hedging, options and contracts that we use to minimize price risk. We have crop insurance, irrigation, and crop rotations to manage weather and disease risk. I and others like me join associations to also manage risk-we band together to mitigate risk associated with things we cannot manage individually, such as trade disputes and tariffs, regulation and tax policy. Most of my comments today will focus on managing trade

risk.

THE STATE OF THE CORN ECONOMY

Farmers had an extraordinary year in 1996 with record farm income caused by tight markets and strong world-wide demand for agricultural output. In 1998 almost every market factor that led to positive market performance in 1996 has turned negative. These changes are not caused by the Federal Agricultural Improvement and Reform (FAIR) Act of 1996 (the 1996 farm bill), but they do point out that regardless of how good a farm program is we will always face the possibility that farmers' cash income will not cover production costs and other expenses. When this happens there is disruption and despair among farmers and many wonder how Washington can help.

Generally speaking, corn prices have been lower in the 1997-98 crop year, compared to surging levels in the 1995-96 crop year. The recent low prices are directly related to declining U.S. exports caused by the Asian financial crisis, problems with European approval of genetically enhanced corn and other trade-related factors, which are compounded by ever-increasing U.S. stocks.

Certain regions of the country are being hit harder than others by the current price situation. For instance, in the State of Minnesota, which has traditionally been a residual supplier of corn, corn is selling for $1.80 per bushel, which is below the break-even point. Similar price scenarios are playing out in the Dakotas. The local price slumps are caused by the decreasing demand for corn in export markets. Areas that are not close to assembly points for export markets will tend to be more price

responsive when demand falls. Moreover, there are often few alternative uses for corn in these areas so that weak demand leads to weak prices. That is why so many farmers in southwestern Minnesota are forming cooperatives to produce ethanol. Their goal is to add value to their corn in State rather than rely on export markets. They have identified value-added alternatives as an insurance policy against falling prices caused by falling demand.

NCGA has long recognized the need for alternative uses for corn as a way of reducing the volatility of corn prices. That is why we worked so hard to win an extension for the ethanol excise tax exemption through 2007. Without the ethanol market taking five percent of our crop, corn prices would likely be much lower than they are today. The ethanol market also provides security when prices are high as they were in 1995-96. That year, more than 250 million bushels of corn that were projected to be made into ethanol went to feed livestock and fill export demand. Ethanol is a great example of how alternative market opportunities reduce risk by helping to stabilize prices. We owe a big thanks to many of the members of this committee for their support in this effort.

It is important to note that on average, while corn prices are low, they are not at record lows. The average corn price for the 5 years of the Food, Agriculture, Conservation, and Trade Act of 1990 was $2.49 per bushel. The average price for the first 3 years of the FAIR Act is projected to be $2.44 per bushel. Even with the exceptional price for the 1995 crop, the average corn price for the previous farm program was only five cents per bushel higher than the projected average for the 1996, 1997 and 1998 crops.

Crop Year and Season Average Price per Bushel

1991-92-$2.37

1992-93-$2.07

1993-94-$2.50

1994-95-$2.26

1995-96 $3.24 1996-97-$2.71

1997-98-$2.45 (estimated)

1998-99 $2.15 (projected price WASDE July 1998)

As of this summer, on average, corn program participants have received $50 more per payment acre under the FAIR Act than they would have received under the previous farm program. If budget reconciliation had required changes in the previous program, or if Acreage Reduction Programs had reduced the number of payment acres, then the advantage of Freedom to Farm would be even more pronounced. However, by next spring, when producers would have received both a five-month deficiency payment for 1998 and an advance deficiency payment for 1999, much of the Federal payment advantage of the FAIR Act will have eroded. But, the FAIR Act was never intended to maximize Federal payments to producers, rather, it was intended to provide certainty and flexibility for producers.

This planting flexibility enables producers to make the most efficient use of production resources. Farmers who were tied to a corn or other acreage base that was too large or too small have been able to implement a more productive crop rotation to better use fertilizer and pesticide inputs. This is perhaps the single most popular component of Freedom to Farm.

Total factor productivity-the amount of output produced at a given level of inputs-is increasing as farmers continue to become more efficient. Since 1948, productivity in U.S. agriculture has increased at an annual rate of 1.94 percent. This increase consists of a 1.88 percent annual growth in agricultural output and a 0.06 percent decrease in agricultural inputs. Therefore, the growth in output experienced over the last half-century is due to innovation on the part of farmers, agricultural scientists, and agribusiness working together and learning to do more with less long before that became fashionable.

This year, farmers planted approximately seven percent more acres to corn than the average planted for the 5 years beginning in 1991. While the acreage increase is rather modest, the projected production is higher than the average for those 5 years by more than 18 percent. USDA projects that this will be the third year in a row that U.S. corn farmers produce more than nine billion bushels, not so much because farmers are increasing acreage, but because average yields have been remarkably average. Unlike the early 1990's when yields varied from a low of 100.7 bushels per acre in 1993 to a high of 138.6 bushels per acre in 1994, average yields were very close to trend, 127 bushels per acre in 1996 and 127.1 bushels per acre in 1997. These strong yields have led to a more than adequate supply, which has contributed to lower prices.