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Governments help to address the real problems facing agriculture that are beyond farmers' control.
We need a commitment to research to keep us competitive in the future by unlocking new uses, maximizing production levels and preventing major disease problems. We need affordable, effective crop insurance tools to help us manage the risk inherent in an industry dependent on weather. We need a strong global economy and access to markets around the world. We need a tax system that allows us to keep a reasonable portion of what we own. And we need viable, efficient transportation systems to best serve our customers at home and abroad.
This committee has repeatedly voiced its support for most of this agenda. We want to find ways to work with you to make this agenda a reality.
TESTIMONY OF JACK HAMILTON
Mr. Chairman, thank you for the opportunity to testify before this committee today on the situation facing U.S. agriculture in general and cotton producers in particular. I am Jack Hamilton, a cotton producer from Lake Providence, LA. I am the president of the National Cotton Council. In addition to producing cotton, I also operate a cotton gin and cotton warehouse.
It has been a difficult year for cotton producers. In the early part of the season, low prices and difficult financing discouraged plantings across the belt. So before we faced weather problems, we knew our crop would be somewhat smaller than usual. Now, disastrous weather across almost the entire belt has slashed our production expectations and caused a small rebound in prices.
The western region had a very difficult planting season, suffering from cold and wet conditions. As the season progressed, drought settled into Texas and Oklahoma and has adversely affected the cotton crop. Weather has also taken a toll on the Southeastern crop. The slight rebound in prices we have seen cannot begin to offset the losses our producers will sustain this season, nor is the weather-related price increase likely to be sustained.
Mr. Chairman, the National Cotton Council is still in support of the long-term, growth-oriented actions we have recommended to this panel in previous testimony. Those actions include additional funding for the International Monetary Fund, a Caribbean Basin Parity bill, and fast-track negotiating authority. You passed the Ag Research bill, and we thank you and this committee for that significant victory.
While we remain focused on those needed proposals, the Council also sees the need to consider the immediate difficulty now facing farmers as a result of weatherrelated losses. I want to be clear today about the differences in economic pressures facing cotton producers. The weather has brought a new urgency and forces us to consider some new, short-term approaches to helping farmers. But many long-term economic forces still concern us and will be there waiting on producers when they get through this tough summer.
CURRENT CROP SITUATION The U.S. is currently projected by USDA to produce 16 million bales - the smallest cotton crop since 1989 when a 25 percent ARP saw planted acres fall below 12 mil. lion and yields were also below average. In 1998 the U.$. cottonbelt has experienced searing drought in the Southwest, the wettest and coolest conditions on record for planting in the West and extraordinary heat in the Midsouth and Southeast. This decline in production is jeopardizing extensive investment in infrastructure related to cotton. The average U.S. cotton crop for the 4 previous years is 18.8 million bales.
Regionally, the impacts of the production decline are larger outside the Southeast as producers there have kept planted acreage near previous levels and weather has been generally more cooperative. Production in the Southeast will probably_be slightly less than 4 million bales, just below last year's total of 4.07 million. The Midsouth is experiencing the largest reduction in cotton acreage of any region. The projected crop in the Midsouth, is likely to be 1 million bales lower than last year's 5.7 million bale crop. The Southwest, with the largest acreage, has experienced one of the most difficult years in history. Drought and heat have combined to cause growers already to abandon over 1.76 million acres of cotton. This year's Southwest crop will likely be 1.6 million bales less than last year's 5.3 million bale crop. Growers in the West saw cool temperatures and rain which delayed planting and crop development. Production in the West will likely be less than 2 million bales compared to 3 million bales in 1997.
SHORT-TERM CONCERNS With respect to weather-related losses, I will discuss the impact of Federal crop insurance, problems we see with emergency loan programs, and note one aspect of the FAIR Act's payments that enable it possibly to be more beneficial during a disaster year than previous law.
One of the many changes brought about by the FAIR Act was the increased reliance on Federal crop insurance to help producers overcome weather-related disasters. With that increased reliance comes increased responsibility. I must tell this committee frankly, there are virtually no cotton producers who are happy with the crop, insurance program. Crop insurance may be the only life preserver many cotton producers have this year, but the problems cotton producers have had in general with this product over the past several years have been very frustrating:
There are few aspects of crop insurance that can't be improved to the benefit of producers. The Council has urged USDA for over 2 years to fix crop insurance. Cotton coverage is inequitable, prevented planting provisions are antiquated, yields and price levels are not accurate. The program is just too separated from real economic impacts at the farm level.
Last week the President himself stated that crop insurance was not working for most farmers and said it had to be improved. Mr. Chairman, at least on the subject of crop insurance, it sounded like I wrote the President's remarks. He was concerned with the prevented planting provisions; referred to the need to get to actual yields; wants more flexibility for farmers to replant; and criticized the regulators tendency to hide behind the actuarially sound provisions of law instead of trying to fix the program.
The President's statement on this program is the first really good news the cotton industry has heard concerning crop insurance for sometime. He asked for advice and ideas. The Cotton Council intends to take the President at his word and work with him and the Secretary to make this program work.
The emergency loan programs that will be available to many producers offer another immediate means of providing needed economic assistance. The Council supports recent efforts in both the House and the Senate to improve the terms of these and other loan programs to make them useful to commercial size cotton operations. The combination of weak prices and terrible weather has put significant economic stress on even the most efficient producers. Making credit available on favorable terms is a very important aspect of any assistance package.
Income assistance payments under the FAIR Act are not calculated based on average farm prices, but are fixed. That makes the consideration of advancing next year's payment a more viable policy option. The Council favors giving producers the flexibility to request next year's payment early.
Another proposal that should receive some consideration is the forgiveness of insurance premiums for producers who suffer disasters. This and other means of infusing cash into an agricultural disaster should have high priority in this Congress.
And although some may not consider additional funding for the International Monetary Fund to be a short-term boost for US agriculture, the cotton industry will suffer greatly if the buying power of Asian economies is dampened further. Ensuring that the IMF will be able to provide meaningful assistance should the Asian financial crisis worsen is simply the thing to do. I urge the Congress to provide the necessary funding for the IMF.
LONG-TERM EFFORTS There is no question that the most important agenda facing US agriculture is the short-term economic condition that has been worsened by a bad growing season. If we get through this emergency, there will be other economic crises waiting for us. The
cotton industry was facing a difficult year before the weather turned bad. There is a significant amount of cotton in most other cotton-producing countries. Therefore, world prices have not taken the bump that US prices have seen in response to the drought. We will face aggressive price competition from that cotton in markets around the world. Moreover, it is almost certain that special import quotas will be triggered in the next few months which will enable cheaper foreign cotton to be brought into the United States. I am afraid the modest price recovery we have seen in recent weeks may be short lived.
Nothing is worse for the cotton economy than to be uncompetitive in world or do mestic markets. Because of the operation of the Step 2 program, cotton sales have continued rather well, despite the moderate increase in domestic cotton prices, when compared to international prices. The presence of the Step 2 program has kept a bad situation from getting worse.
We anticipate that should Step 2 funds be exhausted, it is likely the Step 3 quota would open within a fairly short time frame. Opening of Step 3 quotas will create additional volatility in the domestic cotton market. The Council firmly believes the Step 2 program has provided valuable, long-term assistance to the US cotton industry. The Step 2 program needs to be adequately funded for the life of the FAIR Act. Its positive impact on the US cotton situation this year is solid evidence of its value.
Over the long-term, demand building actions that this Congress can take now remain important to the cotton industry. A Caribbean Basin Parity bill will better enable our industry to compete with textile imports from Asia and will help ensure greater use of US cotton and US textiles. The cotton industry continues to be concerned about the Africa trade bill passed by the House. That legislation opens up our markets to transshipped textiles from Asian countries, injuring U.S. textile workers without providing meaningful economic development for Africa.
Giving the President fast-track negotiating authority will make meaningful nego tiations for a Latin American Free Trade Area possible and will add impetus to further market liberalization under the World Trade Organization. The Council firmly believes that greater access to markets is a precondition to the economic health of US agriculture.
And do not think that the rest of the world has followed the lead of the United States and disciplined agricultural subsidies. Certainly some countries have. But the primary competitors of 0.8. cotton remain developing countries that often have centrally planned or controlled textile economies. In those countries, the cotton market is distorted significantly—primarily to the benefit of their textile operations. Over the last 10 months China has gone from one of the world's largest importers of cotton to a significant exporter. Its export tenders so far have been significantly enhanced by subsidies.
UŞ agriculture must continue to be prepared to meet these unfair trade practices head on. Our products must continue to be competitive in the world market. The members of this committee have remained committed to export promotion. I appreciate your efforts to continue the Marketing Assistance Program, the export credit guarantee program and other market development activities.
Mr. Chairman, to some extent I have stated the obvious short term infusions of assistance cannot solve agriculture's long-term concerns: US agriculture must be competitive, it must stay ahead on research, our technology must provide a competitive advantage, and new markets need to be found and opened. But if agriculture cannot survive the short-term, of course, the long-term is meaningless.
We appreciate your focus on emergency assistance to enable farmers to ride out this very difficult year.
I have attached to my testimony a copy of a resolution passed by the Council's Board of Directors in June of this year. Even at that time, the Council Board was convinced that special efforts needed to be made to enhance producer profitability. The resolutions lists a broad array of policy options to be pursued by the Council. I have mentioned most of them today. Some of those options are a part of several legislative initiatives I have reviewed.
Without a doubt the membership of the National Cotton Council is concerned about the course of this growing season. With this disaster year, the infrastructure of the US cotton industry is threatened. The Council looks forward to working with this committee as we turn the tide and take US agriculture back to profitability.
POLICY RESOLUTION PASSED BY NCC BOARD OF DIRECTORS
FARM POLICY Pursue every opportunity, consistent with delegate policy of the Council, to optimize cotton industry profitability, including but not limited to:
• increased FSA direct operating loan authority and improvements in agency's operating loan guarantee program;
• waiver of all FSA user fees;
• annual appropriations for bolt weevil eradication, pink boll worm and other priorities; and
exploring: • implementation of step 1;
• supplementing AMTA payments with spending reductions for less essential program provisions;
TRADE POLICY AND EXPORT MARKET DEVELOPMENT Continue to work for legislative and regulatory provisions that promote the most favorable balance of trade for U.S. cotton and its products, including but not limited to:
increased funding for market development and export credit programs;
support for fast track negotiating authority; • passage of CBI parity legislation;
• aggressive enforcement of measures to prohibit transshipment of textile and apparel products;
defeat of African Growth and Development legislation; • opposition to WTO accession for China unless major reforms are made in economic and trade practices;
RESEARCH Continue aggressive support for (a) passage of the Agricultural Research, Extension and Education Reform Act of 1998, with funding for research, crop insurance, rural development and other measures intact and (b) implementation of priorities identified by NCC Focus on Research.
REGULATION Continue to support (a) timely, predictable science-based implementation of the Food Quality Protection Act, (b) fast approval of new crop protection products, (c) timely re-registration of existing crop protection products that are proven safe, (d) reasonable regulations governing development of biotech products, (e) simplification of FSA regulations, (1) reform of OSHA, EPA, and conservation regulations to be more reasonable and cost effective.
LABOR Support authorization of H2A pilot program and approval of TEAM Act and other managementlabor programs which promote efficiency.
TAX POLICY Continue to support (a) elimination of estate tax, (b) 100 percent deductibility of health insurance premiums, (c) permanent income averaging of schedule F, and (d) authorization of tax deferred risk management accounts.
TESTIMONY OF NEIL E. HARL
Thank you, Mr. Chairman, for the opportunity to appear today and testify on problems in the agricultural sector in this country.
My testimony is divided into three parts: (1) thoughts on longer-term farm policy; (2) commentary on the export picture; and (3) concerns about short-run economic and financial stress in the sector.
THOUGHTS ON LONGER TERM FARM POLICY Concerns about the 1996 legislation
The 1996 farm bill represented a significant departure from Federal farm legislation since 1933. While the transition away from government programs will likely produce a more rational system of resource allocation, several important implications of the shift deserve mention.
The loss of the so-called safety net as protection against low prices is proving to be a serious problem, as we had feared. While some sectors of U.S. agriculture have enjoyed favorable prices until quite recently, low prices have returned. U.S. farmers are the world's best economic citizens give them half an economic incentive and they increase output. The result is a disproportionate drop in price and in profitability. That means consumers are in a very favorable position, assured of an ample supply of food and fiber at a relatively low cost, long-term. But, it means also that producers periodically endure periods of low prices.
The agricultural sector, in terms of policy, is characterized by two important featues:
First, the number of producers is so great that no single producer can influence price with their output decisions and so they may not cut back on production until price drops below variable costs or they are able to shift to a more profitable alternative crop. This feature makes it difficult for the sector to reduce supply without government assistance.
Second, although we have become very clever in developing more effective chemicals, better seed varieties, larger and more efficient equipment and improved management, our cleverness still hasn't given us much influence with weather. Yearover-year, weather is the big factor influencing supply of the major crops in this country. Given the enormous capacity to produce, a series of years with favorable weather puts pressure on price. It was to be expected that farm commodity prices will be more volatile than during the era of farm programs. This is important to consumers as well as producers.
Elimination of the Federal farm programs will mean less economic buoyancy from government. While the proportion of farm income coming from government programs has dropped from the relatively high levels of the mid-1980's, as shown in figure 3, elimination of the farm programs will, of course, remove whatever buoyancy comes from government benefits.
After a period of adjustment, the economic returns to labor and capital will likely return to an equilibrium level.
Another significant feature of the elimination of Federal farm programs is the shift in land use patterns that will occur over time. Shifts in land use will be dramatic and will be felt across the agricultural sector, but the greatest shift will occur in areas of marginal land.
Under the farm programs from 1933 to 1996, government farm programs attempted to help balance demand and supply by idling land. Depending upon the year, the amount of idled land ranged from none to 70 to 80 million acres. The land was idled in checkerboard fashion, some of the very best land was idled and some of the poorest. This was not economically rational but it spread the burden of adjustment over the entire country and it did not squeeze producers economically as adjustments were made in the productive base.
Under the 1996 legislation, production decisions are left to the market. And the market doesn't adjust production in the same way as government programs. The market squeezes out the thinner soils and steeper slopes, the higher per-unit cost of production areas. With no land idled, production increases, crop prices fall, and land values come under pressure until there is less profitability for crop production on the least productive land than for the next most profitable use for that land. The least productive land then transitions out of intertilled crops to a less intensive use, to another crop or to grazing land. Depending upon the area, some might transition to wasteland. At least, the increase in supply of grazing land would assure that the less productive grazing land would decline in value.
Rather than having 70 to 80 million acres of farm land out of production on a checkerboard-pattern, there could be close to that many acres which would transition to a lower-valued use unless exports are maintained at high levels. However, the more productive land would not be among those acres moving to a lower-valued use. The transition would tend to be concentrated in areas with highly erodible, lower productivity land that has thinner soils and lower rainfall.
This movement of land to a less intensive use would spell economic pain for producers everywhere. Adjustment pain is felt not just by those at the periphery of the core producing areas, but by producers everywhere. Beyond that, those geared up to sell inputs to or purchase outputs from a crop-based agriculture also would have to adjust. Indeed, the transition for farmers is expected to be shielded in part by the Conservation Reserve Program. Little or no adjustment assistance is expected for those who dry, store or ship grain or oilseeds or who sell seed, fertilizer, chemicals and equipment for a row crop-based agriculture as the area transitions to grazing.
Figure 1 illustrates the fact that, for each major crop, there will be a "core" area of production and a "swing zone” at the periphery.
That zone of thinner soils and steeper slopes at the periphery of major crop producing areas becomes a swing factor in production. In times of good prices, it swings back into intensive production; when prices fall, it's squeezed out again. This is the reason now why the most intensive resistance to the 1996 farm bill is in those swing areas where the next best use represents an economic jolt for producers and others involved. And it means another dimension of instability for those areas.