Pursuant to Rule XI (2)(g)(4) of the House of Representatives, the American Oilseed Coalition submits the following information. 1. 2. Disclosure Statement The Coalition for a Competitive Food and Agricultural organizations interested in agriculture policy. CCFAS has Information Required from Nongovemmental Witnesses Al Ambrose Chairman-Elect National Oilseed Processors Association 1255 Twenty-Third Street, NW Washington, D.C. 20037 (202) 452-8040 Mr. Ambrose in testimony before the House Agriculture Mr. Ambrose serves as the Chairman-elect of the the Associations Agricultural Retailers American Bakers Association Federation American Feed Industry Association American Frozen Food Institute American Great Lakes Ports Arkansas Poultry Fed. Biscuit and Cracker Florida Poultry Federation Kansas Fertilizer and Millers National Federation National Food Processors National Grain and Feed National Grain Trade Council National Pasta Association North American Export Grain Oklahoma Fertilizer and Coalition Members Omaha Chamber of Pacific Northwest Grain and Railway Progress Institute Southeastern Poultry & Egg Sweetener Users Association Terminal Elevator Grain Merchants Assn. Texas Agricultural Industries Texas Grain and Feed Assoc. Companies Albany Transport, Inc. American Commercial Barge American Foods Group, Inc. Arbor Acres Farms, Inc. Benson-Quinn Company Bunge Corporation Central Soya Company, Inc. ConAgra Feed Company Continental Grain Company CSX Transportation, Inc. DeBruce Fertilizer, Inc. Gold'n Plump Poultry, Inc. Illinois Central Railroad Ingram Barge Company J.G. Boswell Company Midwest Feed Company, Inc. Rocco Farm Foods, Inc. Union Pacific Railroad Co. July 30, 1998 Testimony of Dr. Jerry R. Skees Before the Committee on Agriculture Consequences of Possible Responses to Current Farm Problems Once again this committee finds itself examining difficult financial times in the agricultural sector. I am sure that the pressures on members from districts suffering from the weather related problems are tremendous. To make matters worse, many farmers in certain regions are suffering from both low yields and lower prices than the past several years. The committee is driven to engineer a response. None of us can say we don't care about the problems of those who are suffering. Nonetheless, we must recognize that short-run responses that demonstrate we care can and do have long-run consequences. My message today is difficult in light of the suffering that is occurring. But the message is simple -- if you wish US agriculture to become more market-based, you must stay the course set with the 1996 Farm Bill. There are important differences in the problems of today and those of the 1980s. Damaging monetary and fiscal policies as well as the energy crisis in the 1970s led to high inflation. Attempts to fix the inflation by tightening the money supply resulted in tremendous hardship as interest rates soon exceeded double digits and agricultural assets were quickly devalued. Today the macroeconomy is much stronger. Inflation is low and interest rates are reasonable. Keep these important differences in mind as you search for appropriate policy responses. The root of today's problems may actually be the expectation that government will, in fact, bailout farmers when there is a problem. What is done today in the name of compassion will have important consequences tomorrow. Agricultural policy has a long history of short-run responses with long-run negative consequences. Again, if you are serious about a market-based agricultural economy, some tough decisions may be in order. Tough decisions here require helping farmers recognize that they must take personal responsibility in managing their own risk with market-based instruments. Market-based agriculture also requires that US agriculture must be more engaged in the broader capital markets and in prudent individual capital management. Agricultural policy responses of the past have encouraged growers through out the US to take on additional risk. This has placed downward pressure on commodity prices but it also creates a damaging cycle that has more serious implications for the future. As you attempt to protect growers from the new risks they assume, they take on still more risk. In turn there will soon be more losses, more disasters from the same weather events, and more calls for a policy response. As long as the government creates incentives for people to take on more risk, they will do so! The Challenge of Understanding Individual Risk Responses There are numerous examples of risk behavior that communicate what should concern you in your effort to respond to current problems. Consider what happened just over 20 years ago as engineers recognized that there was a serious problem with tractor accidents. Farmers were dying or suffering serious injury when pinned beneath wayward tractors. Upon examining the problem, the engineering solution was straightforward -- a steel-reinforced bar over the driver's seat would prevent the tractor from crushing the driver. A few years after mandated roll bars on tractors were in place, the death rate and rate of serious injury remained the same. Upon closer examination, people with roll barequipped tractors were driving harder, faster, and on steeper slopes, resulting in the same rate of fatal accidents as before the engineered response. A basic principle of risk-taking behavior was ignored - there is a threshold of risk that people are willing to accept. As another example, a recent issue of National Geographic mapped the locations of the US population relative to locations of major natural disaster risk. The National Geographic writer simply pointed out that people are moving to where disasters occur. The question is -- Why? Is it possible that people simply expect the government to bail them out when they suffer losses from a natural disaster? Obviously giving free disaster assistance for natural disasters places tremendous environmental pressures on sensitive areas as well. We also attempted to engineer the risks from the Mississippi River with levees at the turn of the Century. The response was that people moved to the riverbanks. Nearly one million people were displaced in the 1927 floods. The 1993 flood was also much worse than it would have been without our attempts to engineer solutions. When people don't have to internalize the cost of risky decisions they will take on more risk. When the disaster strikes there will be more losses and the suffering will be greater. Important lessons and parallels can be drawn as you attempt to engineer policy responses to the current agricultural problems. Two major lessons relate to the choices before you: 1) Recognize that people will always adjust their behavior based on the new incentives created by any new policy response that you develop. 2) Keep in mind that you cannot really engineer the inherent risks in US agriculture out of the industry. Since decision makers will respond to any solutions you design, it is quite likely that they will simply find a new threshold of risk that equals that which created some of the current problems. Evidence of Consequences of US Agricultural Policy It is hard not to applaud the engineer who seeks to design systems that are safer. Still, the thoughtful engineer will understand the system fully before embarking on the quest for solutions. Understanding the complete system requires an understanding of the behavioral responses. Part of that understanding can come from examining policy of the past 25 years. Agricultural programs have attempted to engineer the risk out of US 2 agriculture. Farmers adjusted in ways that many did not anticipated. As programs reduced the risk, growers took on greater risks. While the evidence I provide below examines regional shifts in major crops grown in the US, the same story likely occurred on every farm in the country that had any land of marginal cropping quality. It is a story of adjustment. If the government attempts to reduce risks, individual farmers will plant more acres into risky crops. This is true for any farm in any location. The story is best illustrated with the Midwest versus the Plains states.' The Plains states have significantly more production risks. The story below illustrates what happens when agricultural programs are designed to take the risk out of agriculture. Many factors determine what type of agricultural products individual farmers will produce. Relative profitability and relative risk play a major role in this determination. There are numerous forces that determine relative profits and relative risk for agricultural commodities: 1) the inherent risk and productivity of the soils and climate; 2) market forces that influence both input and output prices; 3) technological changes that influence the cost per unit of production; and 4) government policies that influence market prices, risk-sharing, and technological developments. I will not attempt to examine all of these forces. Rather, I will focus on direct government intervention via the combination of three agricultural programs for major commodities: 1) price and income support programs; 2) disaster assistance and crop insurance; and 3) acreage retirement programs (including the Conservation Reserve Program -- CRP). Each of these programs has undergone significant change in recent years. Public and private decision-makers with a stake in US agriculture must strive to improve their understanding of how these changes will influence what commodities are produced where. Agricultural Policy has Caused Regional Shifts in Acres Planted to Major Crops Part of understanding the future requires a more fully developed understanding of the past. The stakes are heightened when comparing government-facilitated markets of the past to the attempt to move to more market forces. When the Soviet Union entered the US markets in the early to mid 1970s, commodity prices increased dramatically. These increases resulted in significant conversion of pasture and range land into cash crops (primarily in the Great Plains states). High commodity prices had the same impact in 1995 and 1996. The planted acreage of grains in 1996 was the largest since 1985. Areas at the extensive margin2 increased production the greatest. Acreage at the extensive margin has higher yield risk. The Great Plains states for this analysis include Montana, North Dakota, South Dakota, Nebraska, Colorado, Kansas, Oklahoma and Texas. The Midwest includes Minnesota, Iowa, Missouri, Kentucky, Ohio, Michigan, Wisconsin, Illinois, and Indiana. 2 The extensive margin is taken to be land that moves between intensive cropping and pasture based on relative profits. Profits can come from the market or from the government. Keep in mind that nearly every farm in the US has some extensive margin. |