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(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

(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.


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,

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 142 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 dears 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, pamely 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 hnological 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, 143,000 (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.



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.

Initially, the consensus was for a quick downturn and recovery. As the problems have persisted, most economists are becoming increasingly pessimistic about the scope and severity of the situation. For U.S. agriculture, these problems are translating into reduced exports into that region, with corn being one of the hardest bit. Compounding the problems for U.S. corn exports has been the presence of China as an increased exporter.

PUTTING THINGS IN PERSPECTIVE Barring any major production problems, crop, and livestock prices will average substantially lower in 1998 and 1999 than what was observed in the 1996–97 pe riod. However, we must remember that prices in those years were much above historical levels. In addition, those prices brought increased area, which together with good yields, gave more production. These additional supplies have increased export competition and are the primary reason for the lower prices. A secondary reason is, of course, the Asian financial situation. It is also difficult to attribute much of the current price situation to specific provisions of the 1996 FAIR Act. 1

SUMMARY We should not forget that lower crop prices do provide benefits for the livestock sector in the way of lower feed costs. However, when we net out the positives and negatives and look at U.S. net farm income, the result will be certainly be negative when compared to recent times. For 1998 and 1999, FAPRI projects that net farm income will average $46 billion, a drop of 12 percent from the record level in 1996.

While the news sounds rather bleak and certain regions are under tremendous stress, the U.S. agricultural economy, as a whole,

is still in much better shape than the early to mid 1980's. Income levels are well above those of the earlier period and debt-to-asset ratios have remained at relatively low levels.

In closing, Mr. Chairman, I would like to thank you for the opportunity to address the committee and welcome any questions.

SUMMARY OF THE U.S. COMMODITY OUTLOOK Wheat . Despite a decline in U.S. wheat area to 65.8 million acres, above-average yields will push wheat production above 2.5

billion bushels. • Increased supplies should build wheat ending stocks above 850 million bushels for the 1998/99 marketing year.

• The season average farm price is expected to fall to $2.90 per bushel for the current marketing, year:

1999 will likely bring even lower wheat area in response to the weak prices. Assuming some strengthening in exports, farm prices should recover somewhat.

Corn • The sluggish pace will keep corn exports below 1.5 billion bushels for the 1997– 98 marketing year. The weak exports are the result of the Asian economic crisis, China continuing to export corn, and an increased supply of feed-quality wheat on world markets.

• For 1998, increased area and yield will give 3 consecutive years of corn production in excess of 9 billion bushels.

• Large crops and weak exports will push ending stocks above 1.75 billion bushels for the 98/99 marketing year, four times the level observed at the end of the 96/ 96 marketing year.

• The season average farm price is projected to average $2.20 per bushel for 1998 99. With relatively more weakness in the wheat and soybean markets, corn area should increase slightly in 1999, keeping pressure on prices.


• The U.S., Brazil, and Argentina have all responded to market signals with increased area. For 1998, U.S. area is 10 million acres, or 16 percent , above the 1995 level.

• With a projected yield of 39 bushels per acre, total soybean supplies are expected to reach 3 billion bushels for the 98/99 marketing year.

• The demand side will not keep pace with the increased supplies as soybean ending stocks rise above 375 million bushels.

The 1998-99 season average farm price will average approximately $5.50 per bushel, down $1 from the previous year's level.

• Barring a significant reduction in plantings or yield, soybean supplies are likely to increase further in 1999.


• In response to lower cotton prices, producers reduced upland plantings by almost 1 million acres in 1998.

• Yield potential has been greatly reduced due to the drought conditions in Texas, dryness in the Southeast, and excessive moisture in California. The result will be an upland cotton crop of 14 million bales, the smallest since 1989.

• Upland cotton prices will average $0.69 per pound for the 1998–99 marketing year, an increase of $0.06 from the previous year.

• Upward price strength will be dampened due to reduced imports by Asia and good crops in other major-producing countries.


• Production for 1998 is expected to exceed the 1997 level by approximately 400 million pounds due primarily to heavier slaughter weights.

• Nebraska-direct steer prices have been pressured this year with additional supplies of beef and a slower growth in exports. Prices are projected to decline to $65 per cwt in 1998.

• Prices are projected to exceed $70 per cwt in 1999 as supplies of beef decline by over 1 billion pounds.


• Hog prices are projected to remain below $40 per cwt on an annual average basis for both 1998 and 1999.

• Production of pork continues to occur at record levels. 1998 production is estimated at 18.8 billion pounds, an increase of 1.5 billion pounds over the 1997 level.

• Exports of pork this year have exceeded earlier predictions as the decline in prices has sent more pork out of the country than anticipated. Current expectations suggest exports of 1.2 billion pounds for 1998.


• Price volatility in the dairy sector will likely continue for the next few years as the sector adjusts to less government intervention.

• Federal order reform can cause the regional outlook for the dairy, sector to change from where it is today. The details of the reform will dictate to what extent regional impacts will occur.

Farm Income • Lower crop and livestock receipts will push 1998 net farm income below $45 billion. The drop in farm income is mitigated by lower production expenses, especially feed costs.

• Market receipts should hold steady in 1999 as higher livestock receipts offset declines in crop receipts.

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