MANAGING WEATHER RISK

Nonetheless, the ravages of weather will reduce individual yields throughout the corn producing areas of the country. In the Corn Belt, farmers in Iowa, Illinois, Indiana and Ohio have lost yield from excess moisture, grey leaf spot and green snap. In Texas, hot, dry weather has devastated crops. Many farmers will look to crop insurance to indemnify some of these losses. But even though Federal crop insurance works as well for corn as for any crop, it is still an imperfect solution for many producers.

First, repeated losses lead to lower total coverage and higher premiums. In addition, the current rating system inexplicably results in some local rates pricing crop insurance out of the individual farmer's list of risk management options. Furthermore, at 65 percent coverage, a producer has a deductible equal to 35 percent of the average production for the insured unit. Remember, at this level, the insurance payment is still less than my break-even point. A producer may be able to survive 1 or 2 years with a 35 percent deductible, but most producers cannot recover from repeated losses. One possible solution would be to increase the subsidy for 75 percent and even 85 percent coverage. This would make improved coverage more affordable for the most vulnerable producer.

FREEDOM TO FARM WORKS

We firmly support increased planting flexibility and less government intervention in basic production decisions as key to enabling farmers to respond to the marketplace. Freedom to Farm has worked well for U.S. agriculture, and we would oppose any efforts to substantially modify producers' contracts or limit their flexibility. However, consistent with the position we took during the 1996 Farm Bill debate, NCGA supports an uncapped marketing loan rate calculated at 85 percent of the average price of the commodity over the previous 5 years, excluding the highest and lowest annual price. Any effort to lift loan rate caps this year must be off-budget. A marketing loan that is tied to past prices will more accurately reflect the changes in production costs and will provide a level of support when market forces push commodity prices lower. At 85 percent of the average price, the loan rate should not encourage additional production.

Perhaps two of the most distressing consequences of the Production Flexibility Contracts and the high prices during the summer of 1996 were significantly higher land costs for 1997 and the termination of some long-standing leases. It was especially disheartening for tenants who leased land in 1995 and repaid unearned deficiency payments to watch their previous landlords custom farm the land in 1997 when the contract payment rate included the unearned deficiency from 1995.

FREEDOM TO TRADE

While prices have been moving lower and thus reducing farm income, corn buyers in Asia are facing higher prices for corn. This is because currency devaluations in many Asian countries, along with the strength of the U.S. dollar, have made corn prices denominated in local currency increase dramatically. The Asian financial crisis has had a significant impact on our ability to sell corn and has compounded the effects of low prices on corn farmers.

When comparing corn prices and exchange rates from a year ago to this week, the problem becomes evident. Right now, with corn at Chicago below $2.25 per bushel, customers in Japan will pay 13 percent more for corn in real terms than they did 1 year ago, Korean customers pay 33 percent more, and Taiwanese customers pay 12 percent more. While we benefited from a weaker dollar and inflation in the past, we farmers are on the losing end of this equation today due to the super-charged strength of the U.S. dollar.

Moreover, the Asian financial crisis has had a serious wealth effect in many countries. In the recent past, the economic success of the Asian Tigers contributed to a higher standard of living for consumers in the region. As a result, meat and poultry consumption increased, creating more demand both for U.S. livestock and poultry and for U.S. grain to feed livestock raised in Asia. But now, belt-tightening in Asia is reducing consumption across the board, negatively affecting the demand for superior goods like meat and other livestock products.

The current crisis in Asia underscores the need for the Federal Government to be involved in establishing and maintaining financial stability in that region and elsewhere. NCGA supports full funding of the International Monetary Fund as a clear step toward creating financial stability throughout the world and ensuring the future health of our agricultural economy.

Fast track trade negotiating authority is another tool that is critical to enable the U.S. to negotiate trade agreements that benefit_agriculture, both by opening new markets and improving access to existing ones. Corn farmers have already lost significant market opportunities due to the failure to renew the president's fast track authority. The United States was very close to a trade agreement with Chile that, among other provisions, would have lowered tariffs on U.S. corn. But without fast track, the Clinton administration was unable to complete the deal. Meanwhile Chile continues to negotiate with our competitors in Argentina, Brazil, Canada and Europe. Chile is perhaps the most immediate example of lost opportunity, but the list of potential market-opening agreements is virtually endless.

U.S. corn exports face an array of market barriers around the world, from an unworkable procedure to approve genetically enhanced corn in the European Union, to tariffs on corn-derived fructose into Mexico, to a 25 percent tariff on corn imports in Pakistan. Without established rules, global trade is at the whim of the forces of political expediency. Only with fast track negotiating authority will the United States be able to pursue comprehensive trade agreements.

Finally, if the United States expects our trading partners to abandon efforts to become self sufficient in food, we must be seen as a stable and reliable supplier. When the United States imposes sanctions on other countries that limit their ability to buy our agricultural products, our reputation as a reliable supplier is seriously jeopardized. As a case in point, a recent U.S. Grains Council mission to Cuba determined that lifting sanctions to that country would give us an immediate market of 1 million metric tons, just a few miles off U.S. shores, with the potential to grow to a 2.5 to 3 million metric ton annual market. We support congressional efforts to eliminate food and other agricultural products from unilaterally imposed economic sanctions.

MOVING OUR GRAIN

The river and rail transportation infrastructure also has a significant impact on the state of the farm economy. A strong transportation system means strong prices for corn and other commodities. A poor transportation system means low prices.

Presently, the United States enjoys a comparative advantage in corn production world wide. To maintain this advantage, we must have viable, efficient transportation systems. Currently, the per-ton cost for transporting corn in the United States is lower than in other countries. But as other countries gain the ability to transport their corn at lower costs, they become more direct competitors to U.S. exports and domestic corn markets.

The United States has allowed our river transportation infrastructure to deteriorate, thereby jeopardizing our position in world markets. Unless we make improvements along the river, U.S. agriculture will pay the price. But last fall, the river system was closed early for maintenance. We need to make sure no similar bottlenecks occur this year. We face higher transportation costs as delays on the river increase. We also face the potential loss of domestic and export markets if our transportation costs do not allow us to remain competitive in these markets.

The accessibility of rail service to agricultural communities has diminished rapidly over the past year and a half. Logistical difficulties resulting from the Union Pacific/Southern Pacific merger exacerbated rail service problems in the western United States. Reliable rail service during harvest is always difficult to ensure, but the fall of 1997 was especially bad-and the outlook for this fall is no better. A great deal of corn is still in storage from last fall when elevators were not receiving rail cars. In many areas of the country, elevators are refusing to store grain for farmers because of the lack of space. Instead, they are offering only to buy the grain for cash or provide a deferred or delayed price contract.

Thus, we're looking at a situation where rail service problems will be compounded by strong carry-over stocks, declining world demand, and what we expect to be a healthy grain harvest this year. In response, the Burlington Northern Santa Fe Corp., the biggest deliverer of grain in the United States, is already warning farmers that it can't handle two harvests at one time and therefore won't be able to service the full load of grain shipments this summer or fall.

WHAT'S NEXT?

The NCGA was the first national commodity organization to embrace the Freedom to Farm concept during the 1995 and 1996 farm bill debate. Our support was contingent upon Federal Government support for agricultural research, adequate risk management tools, market expanding opportunities, a fair tax system, and relief from excessive regulation. We still support the concept-farmers will always make better production decisions than Washington bureaucrats, but we need the Federal

Government's 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 15 million bales - the smallest cotton crop since 1989 when a 25 percent ARP saw planted acres fall below 12 million and yields were also below average. In 1998 the U.S. 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 1.75 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 domestic 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 negotiations 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 U.S. 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.

US 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:

authority for producers to receive advances against future AMTA payments; ⚫reauthorization of disaster assistance payments;

improved emergency loan program;

increased FSA direct operating loan authority and improvements in agency's operating loan guarantee program;

waiver of all FSA user fees;

• waiver of limitations on farm program benefits;

annual appropriations for boll weevil eradication, pink boll worm and other priorities; and

exploring:

• implementation of step 1;

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