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STATEMENT OF
THE AMERICAN FARM BUREAU FEDERATION

TO THE
HOUSE COMMITTEE ON AGRICULTURE

REGARDING
THE STATE OF THE AGRICULTURAL ECONOMY

Presented by

Dean Kleckner

President

July 30, 1998

Mr. Chairman, thank you for the opportunity to address you today concerning the state of American agriculture. Certainly, these are not the best times for agriculture. We are faced with not only low prices for most commodities, but also weather related problems in several areas of the country. It seems whenever things get difficult in farming, there are always some who are looking for something or someone to blame. That is the case now from those who are assigning the blame to the Federal Agricultural Improvement and Reform Act (FAIR Act) passed in 1996. They argue that it is largely the cause of low commodity prices.

As a corn and soybean producer in Iowa, I am well aware of the present low commodity prices. The price of com at the local elevator where I market much of my crop was $2.00 yesterday. The price of soybeans was $5.82.

I sold my 1997 soybean crop at an average price of $6.30. But, regrettably, I have not priced any of my 1998 soybeans. That is my decision and nobody else is to blame. Many other producers have done what I didn't do and priced some or most of their 1998 production.

On the other hand, I still have 60 percent of my 1997 corn to sell and at $2.00 per bushel, I'm not all that anxious to sell it. But, the fact that I'm still holding that production and therefore saddled with a $2.00 per bushel price is not the fault of the FAIR Act. When I look in the mirror in the morning, I know who to blame.

The FAIR Act is working as it was designed. The market is providing producers with pricing opportunities while the Market Tra tion Payments and the loan rates are providing them with a safety net. Congress must avoid abandoning the market-based policies of the FAIR Act. Producers are reallocating their resources in a more efficient manner than the government could ever dictate. We are pleased with the flexibility to adjust crop acreage in response to both economic and agronomic factors. In talking with Jim Harmon, President of the North Dakota Farm Bureau last week, he drove home the point of the value of having to plant what we want rather than what the goverment dictates. In North Dakota this year, it is especially important. As Jim said, “Having the freedom to diversify out of a disease-prone crop like wheat into other alternative crops has put more profit potential into my operation. I shudder to think what would have happened if I would have been forced to plant my entire wheat base as I would have under the old safety net program.”

There is a saying that one form of insanity is doing the same thing over and over -- and expecting a different result. If we increased loan rates and extended the loan maturities, it would be very reminiscent of steps taken in the early 1980s. That caused U.S. grain and oilseeds to become non-competitively priced in world markets. The U.S. lost export sales to competitor nations. U.S. producers, through the loan program, “sold” grains and oilseeds to the government.

Over several years, the government accumulated huge stocks of grain and oilseeds while farm program costs grew to record high levels. Although loans for grains and oilseeds now have marketing loan features which will result in less government stock building, the general effect of increasing loan levels would be the same as in the early 1980s. Producers would be encouraged to produce for increased farm program benefits instead of market returns. The period of low prices would be prolonged because the market signals necessary to increase consumption of agricultural products and to reduce or shift production to other products would be blocked by government action. Higher taxpayer costs would likely lead to the renewal of acreage reduction programs to control government spending.

Let's talk about the “safety net” for a moment. It is important to remember that the loan program was intended to be a method to lessen pressure to sell at harvest time and to spread sales throughout the marketing year. It is a marketing tool for producers, not an income support program. But, the loan program is not the only source of support, farmers also receive market transition payments.

So, for those who want to talk about income support, it is worth doing a little comparison. As the following chart shows, in most cases the current loan rate and market transition payments are equal to or in some cases may actually exceed the “safety net” provided by those who propose to increase the loan rates to 85 percent of the five-year average price. Mr. Chairman, it makes little sense to spend a significant amount of federal government funds -- and to alter a program which is working as intended -- and yet not make any real change in the current “safety net.”

Commodity

Wheat

Corn

Soybeans

Cotton

Rice

$2.58/bu

$1.89/bu

$5.26/bu

$6.50/cwt

1997-2002 National Loan Rate

51.92 cents/lb

65 cents/bu

36 cents/bu

$2.94/cwt

1998 Estimated MTP

Not
Applicable

7.87
cents/lb

$3.23/bu

$2.25/bu

$5.26/bu

$9.44/cwt

SAFETY
NET

59.79
cents/b

$3.16/bu

$2.17/bu

$5.54/bu

$7.59/cwt

58.31
cents/lb

Loan rate @
85% of 5-yr
average
price

Except for soybeans, the market transition payments and loan rates (safety net) meet or exceed the 85 percent Olympic loan rate. The Olympic loan rate is the five-year average price minus the high and low years.

WHAT IS THE STATE OF AMERICAN AGRICULTURE?

The big picture actually doesn't look too bad.

1. During the first two years of the FAIR Act, farm income has averaged from 14 to 20 percent higher (depending on the definition used) than it did over the prior five-year period covered by the previous farm bill. USDA projects that 1998 farm income will be down by about 10 percent from the average of the past two years, but will still be 5 percent higher than the average of the prior

five years.

2. Farmland values continue to rise. As the following chart shows, average farmland values in the U.S. rose 5.8 percent in 1997 and are expected to increase by a similar amount in 1998. (USDA data on the 1997 land prices is not available until fall). Other surveys such as those done by the Federal Reserve Banks indicate the year-to-year increase in farmland values in the Midwest are up 6 to 10 percent through the first quarter of 1998. Even in the "hard-hit” states of South and North Dakota, land values rose 10 percent and 1.5 percent respectively.

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1993

$736

3.2%

4.7%

$401

N.C.

1994

$782

6.3%

11.2%

$432

7.7%

7.2%

1995

$832

6.4%

18.3%

$458

6.0%

13.6%

1996

$890

7.0%

26.6%

$476

3.9%

18.1%

1997

$942

5.8%

34.0%

$504

5.9%

25.1%

1998
(Est.)

6-10% in
Midwest

10% in SD,
1.5% in ND

3. Producers in a fairly sizable section of the country are having bumper crops. Just last week, Congressman Thune told us he had never seen the crops “from one side of the state of South Dakota to the other look so good.” Prices are less than optimum for many producing those bumper crops, but I always also remember that 150 bushel corn selling at $2.00 per bushel grosses the same as 100 bushel com selling at $3.00.

4. The market transition payments authorized by the FAIR Act have amounted to $11.5 billion. Estimated payments under the previous farm bill are $3.6 billion. Therefore the FAIR Act has put $8 billion more in farmers' pockets than farmers would have received under the previous farm bill. AFBF economists project that government payments over the next five years will be $7 billion in excess of what farmers would have received under the previous farm bill.

5. What about marketing opportunities? During the first quarter of 1998 (January through March), producers could have either entered into contracts with local elevators to deliver commodities this fall or put on futures hedges at prices that were equal to or above the target prices of the previous farm bill if you add in market transition payments.

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While these prices are less than those experienced during the past two years, they are for the most part, substantially higher than the average prices received during the last decade when supplycontrol programs were in effect.

On the flip side:

1. The financial crisis in Asia has had a negative impact on our export markets. Most pronounced is the impact on the com markets. The Asian financial crisis has reduced our overseas demand. According to President Clinton, “40 percent of all exports go to Asia and there has been a 30 percent reduction in farm exports to Asian countries because of the Asian financial crisis”. This crisis is a large reason why our exports will likely fall to $55 billion this year compared to 1997's high of $60 billion.

2. If you compare USDA's Supply/Demand projections of a year ago with today's projections for the 1997/1998 crop, com exports have declined 28 percent, soybeans are down 7 percent, and wheat is down 5 percent. Only in cotton is there an improvement in world demand with exports projected to be up 4 percent over a year ago.

3. Global production has reached record levels. The following charts show that the stocks-to-use ratios for the major crops have increased.

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