forts 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 percent 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.

TESTIMONY OF TED WINTER

Good afternoon, Mr. Chairman and members of the House Agriculture Committee. I want to express my appreciation for having the opportunity to testify before this committee on the state of the agricultural economy. My name is Ted Winter, and I own and operate a diversified farm in Fulda, Minnesota. I also serve as majority leader of the Minnesota House of Representatives. I am here today to testify on behalf of the National Farmers Union which represents 300,000 independent farmers and ranchers from across the United States.

First, I want to express my deep concerns about the severity of the current farm crisis and its impact on hardworking farmers and ranchers across America. Low prices for our commodities-no matter what type, corn, wheat, soybeans, cattle, hogs or dairy-threaten the economies of rural communities everywhere in America. The low prices are affecting all farmers, regardless of where they live. For example, corn prices are well under $2 per bushel in much of the country (in fact, in my area corn is selling for $1.80 per bushel); winter wheat under $2.50 per bushel; spring wheat, $3.10; and soybeans, approximately $5.50 per bushel.

Some regions are in even worse shape, as low prices combined with reduced yields due to weather or disease, have combined to nearly devastate the economies of certain areas and force many efficient producers out of business. For example, in my home State of Minnesota, the northwest part of the State has experienced multiple disasters a 500-year flood, the worst winter in history, and excessive moisture for several years in a row, that has increased yield-robbing disease such as scab. And to make matters worse, the crop insurance program does not protect us from these risks.

For these reasons, many producers are getting out of farming--both voluntarily and involuntarily. Farm auctions, so rare a few years ago, are as numerous as they were in the mid-1980's in northwest Minnesota, and the northern Plains. Other regions are just as bad; Texas, Oklahoma, Georgia, Florida and parts of numerous other states are suffering the double hit of low prices and disastrously low yields. And the impact is not just crop related. Livestock producers are suffering from low prices as well. Cattle prices are below break-even levels, hog prices continue to decline, and the price of milk is well below what is profitable. Traditionally when crop prices were low, farmers in diversified operations could count on livestock to make up for the loss. Today, farmers are unable to recoup their losses because prices are low across the board.

The bottom line is that all of agriculture is in trouble as a result of low prices. This trend should not be allowed to continue. The time for action is now.

What can we do about the problem? While there is a consensus here in Washing ton that something needs to be done to resolve the crisis, there is a difference of opinion about the solutions.

There are a number of steps we urge Congress to take to address this crisis:

(1) Remove the Cap on Marketing Loans. The Federal Agriculture Improvement and Reform (FAIR) Act of 1996 froze marketing loan rates at 1995 levels. Removing the cap and allowing the rates to float at 85 percent of the 5-year Olympic average (minus high and low years) would allow farmers more marketing flexibility to ride out the low-price years. It would immediately increase marketing loan rates for wheat by approximately 60 cents per bushel, corn by 30 cents, and soybeans by 30 cents. The impact on producer income is significant-for example, a farmer with 1,000 acres of wheat with a yield of 30 bushels per acre would receive $18,000 more by eliminating the loan cap.

(2) Extend the loan period for marketing loans by 6 months. Currently commodity loans are for a period of 9 months. By extending them by an additional 6 months, it will give producers extra time to market their crops, to sell when prices are high

er.

(3) Create Indemnity Payments. Crop insurance is a good tool, but it has serious flaws that have yet to be fixed. In the meantime, thousands of producers in disaster areas are suffering, and crop insurance in these areas has failed to provide the risk management we had expected. Fixing crop insurance is a long-term proposition. In the short-term, Congress should provide indemnity payments to provide relief to farmers and ranchers suffering from multiple disasters.

(4) Increase Exports. Eliminating trade sanctions, stabilizing foreign currencies, replenishing the International Monetary Fund, increasing food aid, and continuing to promote U.S. agricultural exports abroad are positive steps that could improve commodity prices in the near term and provide additional price stability in the future.

(5) Aid Livestock, Dairy. Traditionally farmers and ranchers have been able to rely upon livestock sales when crop prices fell. That has not been the case recently as hog, cattle and milk prices are all well below break-even levels. For these reasons, we urge Congress to pass legislation to: require mandatory price reporting of livestock sales to ensure fair and open markets; require country-of-origin labeling on imported meats; and stabilize milk prices by enacting a floor price.

In conclusion, Mr. Chairman, we must recognize that the price paid to farmers and ranchers is a small fraction of the price in the grocery store. Yet, the economic health of farmers and ranchers and their communities is essential to keep our nation strong. Mr. Chairman, we applaud you for holding this hearing and urge you to take quick, decisive action to bolster commodity prices. America's farmers and ranchers are counting on it.

STATEMENT OF BRUCE L. GARDNER

Mr. Chairman and members of the committee, my remarks are addressed to the causes of the difficult economic situation in agriculture that triggered this hearing and to what policies make sense in dealing with them. There are two main problems, which are quite different: emergency conditions due to crop failures in some areas, and a more widespread problem of low prices. With respect to crop failures the emergency is principally a matter of natural causes and the immediate policy issue is what can and should be done to remedy the losses. The problem of low prices, however, emerges from the working of the agricultural economy, Here the causes are more complicated and so is the choice of policy response.

In analyzing the problem of low prices, it is important to distinguish between temporarily low prices this year and low prices that will prevail over a longer time. And, there are important differences among individual farmers' situations. All feel the pinch of low prices. But for some who have little debt and who sold part of their crop forward when prices were higher, the economic threat is less serious than for others who are heavily indebted and whose losses at current prices threaten to put them out of business. The policy issue is how to find a remedy appropriate to each situation. It is important to distinguish the differences because you are unlikely to find a single remedy for all.

First I want to consider today's prices in a longer-term perspective, focusing on wheat and corn. Figures 1 and 2 show the real prices received by farmers since 1960 for wheat and corn. "Real" means adjusted for inflation. Since the price level today is almost 5 times its level of 1960, you have to multiply the 1960 price by 5 to get that price expressed in today's dollars. Both wheat and corn have experienced persistent long-term real price declines, and the mid-points of USDA's current projections for 1998-crop prices are the lowest of any of the historical data. USDA's forecast range is also consistent with recent new-crop futures prices.

What lies behind the trend of declining prices? Of the many causal factors in play, two seem to me most important: decreasing real costs of producing wheat and corn, and market competition. U.S. grain producers with the help of continual technological advances have been able to produce more output with given inputs. Farm productivity has been rising at a rate of 12 to 2 percent annually. This means that real costs per bushel are cut in half over a period of about 40 years, and this is roughly the trend rate of decline in prices that figures 1 and 2 show. Competition forces these prices down over time as farm productivity improves, because any prospects of profit generate increased production and this extra production only clears the market at prices near the marginal cost of production. In this situation it is fortunate that a third causal force has been positive over the last several decades,

namely expanding world demand for grain. Otherwise millions of acres of U.S. cropland would become redundant and farmers would face a further long-term threat to survival in marginal producing areas.

The downside of reliance on the export market is that it amplifies the competitive environment, a situation that more and more U.S. industries face in the global economy, and it makes U.S. agriculture vulnerable to other countries' protectionist policies. Under global competition, U.S. agriculture is fortunate to be able to produce at lower real cost over time (otherwise we would not be able to sell profitably in the world market.)

What explains the short-run drop in prices that is happening this year? The way was prepared by the worldwide production response to the high grain prices of 1995-96. In the last 2 years world wheat and coarse grain production rose by 12 percent and 8 percent respectively from the 2 preceding years. It's happening now because despite weather problems, the prospects are for big crops here and abroad again this year, at the same time the demand for a big crop isn't there because of weak foreign demand, particularly in Asia where our commodities cost so much more now that currencies in Asian countries have fallen, and the real incomes of our foreign buyers have stopped growing.

What steps does it make sense for Congress to take in this situation, either with respect to the long-term trend, or this year's especially low prices? First, placing international political considerations to the side, it is definitely in our economic interest to keep shipping farm products to willing buyers in China, India, Pakistan and elsewhere, and indeed to promote these sales and the reliability of the United States as a supplier. Second, with the longer term in view it is important to keep the pressure on for better access to foreign markets and reduced subsidies of foreign producers of grains by their governments. This requires intensive work both at the bilateral level and in multinational organizations such as the WTO and the World Bank. Both of these organizations have continually pressed countries around the world to reduce trade restrictions and subsidies. Congress should strongly support the efforts of these organizations. Unfortunately we get too caught up in reacting to objections expressed through such organizations to our own subsidies and trade restrictions. Third, it is crucial to keep investing in the scientific advances and infrastructure that give us the technological muscle to maintain our pre-eminence in world agriculture.

With respect to this year's low prices, what about the CCC loan program? Two aspects are important. One is the credit provided so that farmers don't have to sell their crop at low prices immediately to pay their production bills. The second is the price protection resulting from the government's obligation to accept the commodity at the price given by the CCC loan rate or to make equivalent loan deficiency payments. Harvest-time credit provision is a task that USDA has been able to carry out expeditiously and efficiently, and may be helpful to many producers this year. But the idea of raising the CCC loan rate to increase the price guarantee for producers is a bad idea. Assistance to farmers who are in desperate straits is a worthy objective. But this should be done by a mechanism that targets the assistance at those who are in desperate straits and does not foster future economic difficulties for those individuals or for agriculture as a whole.

In looking at the economic condition of farmers in detail what is most striking is the extraordinary diversity of their situations. For example, go back to 1990–91, the previous period of low wheat prices. USDA did a detailed survey of farmers' economic condition in 1991, the source of data they use to prepare the Family Farm Report that Congress requires each year. USDA estimated that 340,000 cash grain farms had an average farm-related net income of $9,700. Of these farms, 142,000 (41 percent) were estimated to have negative incomes. At the same time, 27,000 farms earned a net income of over $50,000. These latter tend to be the larger operations that are ready and able to reallocate their resources in search of profitable opportunities.

One problem with raising loan rates is that you will be allocating a lot of the benefits to people who are not in economic trouble, and this is on top of $4.5 billion each year that USDA will already be paying out in production flexibility contracts to wheat and feed grain producers in FY 1998 and 1999. Of course, deficiency payments formerly did the same thing despite payment limitations and payment bases. A more important problem is the economic production signals sent by higher loan rates. It is true that many grain producers, especially Plains wheat producers, have only limited options available for using their land. But some do have options to increase their acreage and increasing the guaranteed price is going to cause them to produce more wheat. It is such price responses that led to fixed bases and set-asides under pre-1996 programs. Without these restraints, raising loan rates now is going to create the potential for an even bigger price problem next year.

It is better for Congress to focus its efforts on creating a long-term regulatory, technological, and trade environment in which farmers can operate efficiently and compete effectively. The 1996 Farm Act promotes the idea of farmers using risk management tools that they control themselves, notably forward sales or put options. Farmers who bought put options or sold part of their 1998 wheat or corn forward have avoided the worst of the low prices this year and can generally smooth out the short-term swings that have always characterized commodity markets no matter what the policy regime. Even now corn can be sold basis March Chicago for $2.35 to $2.40 per bushel and wheat can be sold basis March Kansas City for $3.00 per bushel. Considering the usual basis between these futures prices and the average U.S. farm price, and the contract payments, producers can still lock in returns not far from what they would have been if the pre-1996 programs had been left in place.

STATEMENT OF GARY M. ADAMS

THE OUTLOOK FOR THE U.S. AGRICULTURAL ECONOMY

INTRODUCTION

Let me begin by thanking the chairman for the opportunity to appear before the committee to provide information concerning the outlook for U.S. agriculture. The Food and Agricultural Policy Research Institute (FAPRI) is a joint project between the University of Missouri and Iowa State University. Furthermore, we have formal relationships with Texas A&M University to examine market and policy changes at the farm level, with the University of Arkansas to analyze the world rice market, and with Arizona State University to examine the fruit and vegetable sector. My testimony represents the work of several analysts at these institutions and is designed to provide an update to the FAPRI outlook presented to committee staff in March of this year.

As 1998 has progressed, attention has increasingly been focussed on the downward pressure on prices for a number of the major commodities. This, of course, is occurring at the same time that some regions of the country are experiencing severe drought conditions, with the combination of the two putting even greater pressure on some producers. In regards to the lower prices, no single cause can be identified, but rather a combination of fundamental developments in the supply and demand of the commodities.

RESPONSE OF GLOBAL SUPPLIES

World grain and oilseed markets are being pressured by increased production that has allowed stocks to rebuild from the tight levels of 1995 and 1996. The higher production is due both to increased area and generally favorable yields. In response to strong price signals in 1995 and 1996, the area devoted to the major crops has shown a significant increase. For the 1996-98 period, world wheat area has averaged 4 percent above the 1991-95 period. Area devoted to the major oilseeds in 1998 is a 7 percent increase from 2 years earlier, with much of the increase due to higher soybean plantings in the U.S. and South America.

Coupled with increased area, world markets have also seen generally favorable yields since 1995. If current projections for 1998 prove accurate, world coarse grains will see a third successive year of above-average yields. In the past 30 years, we can only find one example, the 1984-87 period, when there were as many consecutive years above trend.

Price pressure due to increased supplies is not isolated to the crop markets. For livestock, the most notable example is pork. After seeing strong prices in 1996 and much of 1997, pork producers responded with increased herds and additional production. For 1998, production is expected to be 9 percent above a year ago. As a result, the annual average price is projected to be as much as 25 percent below the 1997 number.

CAN DEMAND KEEP PACE?

At the same time that production has increased, there are concerns about the strength of world demand. Most notably is the Asian financial crisis. Currency devaluations have reduced purchasing power in what had been one of the strongest growth regions. For total U.S. trade, the real trade-weighted exchange shows a 20 percent appreciation in the dollar since 1995.