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hang on for longer periods of time and just add to the surplus problems we already have?
It seems to me from the supply and demand, from an economic standpoint, that would seem to be the case. I am curious to know what your thoughts are.
Secretary GLICKMAN. The key part of the 1996 farm bill was flexibility so people can move from crop to crop. I think higher loan rates might encourage more production. As long as you have the loan rates pretty much in sync with each other, you won't have that.
If we wanted to get rid of the loan rates, I would assume that Congress would have done away with them in the 1996 farm bill. What they did was cap them. They capped them at a level that didn't relate to the market price. I just think you are better off supporting a level based upon a percentage of the market price, because that gives a little more security to a producer during up and down-particularly during down markets. Up markets, it is not needed as much.
I think you have a situation of big crops in the world and weaker demand, and when the market goes to hell, basically there isn't that floor that we used to have. And it scares people. I think it scares their bankers, quite honestly.
But I don't think that if you had the loan rates that we had pre 1996 during that 5-year period, it would have encouraged more production, provided you had planting flexibility and people could move from crop to crop.
Mr. THUNE. Going back a few years under this bill, prices are fairly comparable to where they are today and under the old system. But the loan rate itself, which acts as a floor, you have market prices already below the floor today.
Secretary GLICKMAN. And you will have loan deficiency payments because of that as well.
Mr. THUNE. I just appreciate your answer to that and I yield back, Mr. Chairman.
The CHAIRMAN (presiding). I thank the gentleman. We will have a vote very shortly, Mr. Secretary, and I thank you for your patience, and those who are waiting to testify as well.
I want to ask you if you would agree with us on this committee that it is time to hold a high-level meeting with Canada regarding livestock and grain, wheat. We would like you to think about inviting your counterparts, Ms. Barshefsky, to Washington so that members of this committee and those interested could have a sit down with the Canadians as soon as possible. We will work with you about the timing, but we just want to state that is of great interest to us and we have great problems on our northern border.
Secretary GLICKMAN. I think that is a good comment, and we will work with you.
The CHAIRMAN. I am going to read from a piece that was sent on July 28, 1998, written by Dwight Ackrey, who the gentleman may know, who is from North Dakota State University Extension Service, and I think it adds to the total discussion here.
The 1996 farm bill, commonly called Freedom to Farm, has been criticized as the primary cause of the financial difficulties our farmers are facing. That is only true if it is compared to a benchmark that doesn't exist. In other words, for the 2 crop years covered by the current farm program, the region's farmers are financially better off than they would have been under both of the previous two farm bills.
He points out the total transition payments received in North Dakota for the 1996 crop year were $311,500,000.
If the previous farm legislation, the 1990 farm bill, had been in effect, the total deficiency payments would have been zero. The next year the total transition payments received by North Dakota for the 1997 crop year were $246,900,000. If the 1990 farm bill had been in effect, deficiency payments would have been $197,148,000.
Then he goes on to identify the 1998 crop would have been down some $150,000,000. I place that in the record only to point out that maybe this fellow is right and maybe he is wrong, but he does point out the facts. It doesn't take care of the situation. It is not an excuse for where we are, I don't mean it to be, but I want to put the balance of the decision here.
Mr. MINGE. Mr. Chairman, would you yield? The CHAIRMAN. I would. Mr. MINGE. I would like to follow-up and ask the Secretary for his comments on the extent to which these payments have actually been benefiting production agriculture and the extent they have been captured in land values, and in essence benefiting landownership. And it is my understanding from publications that have come from USDA that the Freedom to Farm transition payments have had the unexpected benefit for landownership and not for production agriculture.
Secretary GLICKMAN. With the chairman's indulgence, I might ask my chief economist to respond to that. I think perhaps he is better equipped to answer it than I am.
Mr. COLLINS. Only 30 seconds?
Mr. COLLINS. I think there is some evidence that the payments have been capitalized in land values. That is the way payment programs have traditionally worked. Over the first 3 years of this farm Hill, the average land values in the United States have gone up 6 to 7 percent per year. Last year, 1997, farm land values went up 6 percent. That is pretty high. Part of that reflects the higher income prospects we have had the last few years and part of it reflects the lower interest rates, but I think part of it also reflects the payments. Only landowners who share in the crop get the pay. ment directly, but other landowners who have cash rents can still get it by raising the rental rate. I can't tell you what percentage exactly, but a large part has probably gone to landowners.
Mr. MINGE. There has been a great deal of anecdotal evidence in my area that landlords immediately demanded that these payments somehow be reflected in rents and that land values were increased precipitously not so much-also because of increased crop prices, but this coincided with it and augmented the increase.
Mr. COLLINS. I think the value of land reflects the expected return that the land can generate. Payments are part of that return. So as soon as the return is up because of the guaranteed payments in the 1996 act, that should raise the price of land and the rental rates.
Mr. LUCAS. Would the gentleman yield?
Mr. LUCAS. Isn't that reflected in any Government program or effort to create a higher return from land? Isn't the most valuable asset of any farmer his land? Won't farmers on any occasion bid as much as they can to control land? Isn't that the nature of anything that we do on the Federal level? Any program since 1933?
Mr. MINGE. I believe the question is directed to me, if I may respond.
The CHAIRMAN. Please respond.
Mr. MINGE. This, in a way, is revisiting the 1996 farm bill, which is perhaps a healthy thing to do this afternoon. One of the problems, it was pointed out, that a direct payment to the producer is more apt to be capitalized in land values than payments that are geared to respond to the nature of the farm economy to try to deal with the spikes, the valleys, and that payments that go for production as opposed to payments that are automatic are more difficult for the landowner to capture.
Mr. LUCAS. But, Mr. Minge, any payment that creates a potential higher return will cause the business person to respond by competing for those assets that potentially generate those payments with more intensity. The price goes up, that could be the 1996 farm bill, or the 1933. It is the net effect of any Government payments.
The CHAIRMAN. Gentlemen, it is an interesting exchange, but we are trying to interrogate the Secretary and we have many, many more witnesses. Could I ask that we allow the Secretary to retire, or is there something burning in your mind?
Secretary GLICKMAN. To move to Oregon?
The CHAIRMAN. Sure. Is there something of burning interest that Mr. Pomeroy has that in 30 seconds he will deliver?
Mr. POMEROY. I have great respect for the gentleman that you quoted from, and I am glad that his statement is in the record. I would like to quote another sentence within that document.
Farmers haven't yet experienced the downside of the 1996 farm bill, but this year they probably will. It is very likely that the fixed transition payments that the farmers received for their 1998 crop, plus the national average market prices they get will add up to less than the old target prices of $4 for wheat, $2.36 for barley and $2.75 for corn.
So we have this big hit of money in 1996 which got capitalized, and the consequence of this is higher cash rents and higher land payments. And now we are down here in 1998 where we have a price collapse situation and no response to it, leaving farmers with higher prices and no support in 1998.
For the crisis in 1998, it doesn't do much good to talk about what we did 2 years ago. It is not responding to the here and now in production agriculture. I thank the chairman.
The CHAIRMAN. The gentleman remembers that I mentioned that you are $152 million short in 1998, and I am quoting from this document.
Mr. Secretary, thank you very much, and Mr. Schumacher. They have a voice vote on the rule, so those of you who have been patiently waiting, please come forward.
The next panel is Dr. Gary Adams, Dr. Bruce Gardner, Dr. Neil Harl and Dr. Jerry Skees. These are professors and economists from as far away as Missouri and Texas and Maryland and Iowa and Kentucky. Dr. Gary Adams is accompanied by Dr. Scott Brown. Is Dr. Brown here?
Mr. ADAMS. Yes.
The CHAIRMAN. Please come forward, Dr. Brown. Thank you for being so patient. I hope it was an intriguing discussion.
Dr. Adams. STATEMENT OF GARY M. ADAMS, PROGRAM DIRECTOR, FOOD
AND AGRICULTURAL POLICY RESEARCH INSTITUTE Mr. ADAMS. Thank you. Let me begin by thanking the chairman for the opportunity to appear before the committee to provide information concerning the outlook for the U.S. agricultural economy. The testimony presented here is the result of the work of several analysts at FAPRI and it is designed to provide an update to the FAPRI outlook that was presented to committee staff back in March of this year.
As 1998 has progressed, certainly the market attention has been increasingly focused on the downward pressure on prices that we are seeing for a number of major commodities. This, of course, is occurring at the same time that some of the regions of the U.S. are experiencing severe drought conditions, with the combination of the two putting even greater pressure on those producers.
In regards to the price pressure we are seeing, it is difficult to isolate just one cause, but I think there are a combination of fundamental developments in the supply and demand of the major commodities that are at work here.
On the supply side, world grain and oilseed markets are being pressured by increased production that have allowed stock levels to rebuild from the tight levels that we saw in 1995 and 1996. The higher production has been the result of both increased area as well as generally favorable yields. In response to the strong price signals that we saw in 1995 and 1996, the area that is devoted to the major crops has increased quite significantly both in the U.S. and abroad. Just as an example, we have seen the world area devoted to major oilseeds is some 8 percent higher in 1998 than the 1996 level.
At the same time that we saw the increase in area, the world has also experienced several years of fairly good yields. If the projections for 1998 do bear out, this will be the third consecutive year where we have seen world coarse grain yields up above average, and if we look back over the past 30 years, we only find one period, the 1984 to 1987 period, where we saw that many consecutive years with above-average trend yields in the world.
Certainly price pressure is not limited to the crop sector. On the livestock side, the most notable example is the pork sector. Again, in response to some strong price signals, we are expecting that another 1.5 billion pounds of pork production will come on the market in 1998. This is expected to lower our prices some 25 percent below the 1997 levels.
As we look at the same time that we have had production increases worldwide, there are a number of concerns about the demand side. Most notably is the Asian financial crisis. We have seen currency devaluations in recent months that have reduced purchasing power for what had been one of our strongest growth regions. In addition, income growth levels for 1998 and for 1999 are expected to be much below the recent historical period.
I think initially the consensus was for a fairly quick downturn in recovery, but as these problems have persisted, economists are becoming much more pessimistic about the scope and severity of the problems.
I think if we look ahead for the rest of this year and into 1999, barring any major production problems, crop and livestock prices will average substantially lower than what we observed in the 1995 to 1997 period. But again we must remember that during the 1995 to 1997 period, prices averaged quite a bit above historical levels, and those were probably levels that could not be sustained for any length of time. If we look at reasons behind the low prices, the high prices that we saw back in 1995 and 1997 spurred additional production, and that has increased supplies and increased competition to the U.S., and that is the primary reason for the price situation that we are looking at now.
A secondary factor that is adding to it is, of course, the Asian financial situation. I think we can also add that it is very difficult to attribute much if any of the current price situation to any specific provisions of the 1996 FAIR Act.
I think as we look in aggregate, we should remember that lower crop prices that we are seeing do provide some benefits to the livestock sector in the way of lower feed costs, but certainly when we add up the positives and the negatives and look at overall net farm income, the negatives are still going to outweigh the positives.
We do anticipate as we look at 1998 and ahead to 1999, that net farm income is probably going to be some 12 percent or so below the 1996 level. And so while things sound rather bleak, and certainly we have heard many instances of that today, we should also remember that the income levels we are talking about are still below historical levels and certainly above the worse times that we have observed back in the 1980's. And also I might say that indicators such as the debt-to-asset ratio are still at fairly low levels as well.
In closing, Mr. Chairman, I would like to thank you for the opportunity to address the committee and would hope to have the opportunity to entertain any questions.
[The prepared statement of Mr. Adams appears at the conclusion of the hearing.)
Mr. COMBEST (presiding]. Thank you, Dr. Adams.
Dr. Gardner. STATEMENT OF BRUCE L. GARDNER, PROFESSOR, DEPART.
MENT OF AGRICULTURAL AND RESOURCES ECONOMICS, UNIVERSITY OF MARYLAND
Mr. GARDNER. I would just like to focus briefly on the low price situation and what might be done about it, particularly with reference to the grains.
First, one little bit of difference I would like to make in my presentation is to refer to the longer term perspective on real grain prices. I have a couple of charts in the back of my testimony that show the real prices of wheat and corn since 1960 and it is notable that both wheat and corn have experienced very substantial long