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, DEPARTMENT 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

term real price declines and that the midpoints of USDA's current price projections for 1998 crop prices are the lowest of any of these historical data in real terms.

These forecasts are also quite consistent with recent new crop futures prices. There are two main causes behind this long-term trend decline.

The first is decreasing real costs of producing wheat and corn, and the second is market competition. U.S. grain producers have been able to produce more and more output with given inputs. Farm productivity has been rising at a rate of 12 to 2 percent per year for the whole post-war period. Real costs per bushel are cut in half over a period of 40 years, and this is roughly the trend rate in decline that those charts show.

Competition forces these prices down over time because any prospects of profit generate increased production, and this extra production only clears the market at prices that get down near these marginal costs 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. crop land would become redundant and farmers would face further long-term threat to surviving, especially in marginal producing areas.

With that in mind, what explains the short-run drop in prices that is happening this year? I agree with what I have just heard about this and what several members have mentioned here. The way was prepared by the worldwide production response to the higher grain prices that we had in 1995 and 1996. În the last 2 years, world wheat and coarse grain production rose by 12 percent and 8 percent respectively over the 2 years before that, and despite the weather problems that we have heard about, the prospect is for big crops here and abroad this year again. And at the same time, we have had some weakening of foreign demand, particularly in Asia, where commodities cost so much more now that the currencies in Asian countries have fallen and the real incomes of some of our foreign buyers have stopped growing.

It should be noted, too, that this outcome is not a big surprise. Over 2 years ago in CBO's scoring of the 1996 Farm Act, they based their projections on prices falling in 1998 to just about the levels where we now find them.

With that as background, what steps should Congress take in this situation, either with respect to the long-term trend or this year's especially low prices?

First, as many people have said, it is definitely in our economic interest to keep shipping farm products to willing buyers in China, India, Pakistan and elsewhere, indeed to promote these sales and the reliability of the United States as a supplier.

Second, with the long term in view, it is important to keep the pressure on for better access to foreign markets and reduce subsidies of foreign producers by their governments in those countries, and this requires intensive efforts both at the bilateral level and in organizations such as the WTO and the World Bank, in addition to the IMF. But both these WTO and World Bank organizations have continually pressed countries around the world to reduce

trade restrictions and subsidies, and Congress should strongly support the efforts of these organizations as well as of the IMF.

Now, what about this year's particularly low prices? What about the CCC loan program? Two aspects it seems to me are important. One is the credit provided so that the farmers don't have to sell their crops at low prices immediately to pay their production bills. The second is a 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. Harvesttime credit provision is a task that it seems to me USDA has been able to carry out well over the years and will be helpful to many producers this year. But the idea of raising the loan rate to increase the price guaranteed 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 of those who are in separate straits and does not further economic difficulties for those individuals or for agriculture as a whole.

When I look at the economic condition of farmers in detail, what is most striking to me is the diversity of their situation. And to get some comparison of where we are today, I look back at 1990 and 1991, and it is a previous period of low wheat prices, and again it is on the low side of this long-term trend. A detailed situation of farmers' economic condition was done in 1991 by USDA in the process of preparing the data they use in the Family Farm Report that Congress requires each year.

USDA estimated that of about 390,000 cash grain farms, they had an average farm-related income of $9,700 potential. Of these farms, 41 percent were estimated to have negative incomes. They operated at a loss. Seven percent of these grain producers earned a net income of over $50,000 from their farm operation. These were the larger farms, ready and able to allocate their resources in search of profitable opportunities.

The problem, it seems to me, is that the situation of raising loan rates together with the 4.5 billion in contract payments is going to send a counterproductive signal; so just to take a minute to finish this thought, while it is true that many grain producers, especially in the plains, wheat production areas, only have limited options available for using their land, some producers do have the options to increase their acreage, and an increase in the guarantee price that is going to wheat producers is going to cause them to produce more wheat.

It is such price responses that led to fixed basis and set-asides under pre-1996 programs, and without these kinds of constraints in place today, raising loan rates now is going to create the likelihood of an even bigger price problem next year. And for these reasons, I think it is better for Congress to focus its efforts on the long-run situation. Thank you.

[The prepared statement of Mr. Gardner appears at the conclusion of the hearing.]

Mr. COMBEST. Thank you.

Dr. Harl.

STATEMENT OF NEIL E. HARL, CHARLES F. CURTISS DISTINGUISHED PROFESSOR IN AGRICULTURE, AND PROFESSOR OF ECONOMICS, IOWA STATE UNIVERSITY

Mr. HARL. Thank you, Mr. Chairman, for the opportunity to appear here today. I would like to echo the Secretary in terms of his concern about the advance payments this fall. We think that there will be an unusual amount of renegotiation of leases, particularly cash rent leases. Landowners are going to resist dropping their cash rents. In some cases they eventually will, and in some cases these will shift to a share lease, and in some cases they may delay all winter until they make a final decision. So that is a significant problem in terms of any advance payment.

Now, I am hesitant to raise the second point because this is not the House Ways and Means Committee, but if there is a provision enacted that makes it possible for producers to collect the payment in the autumn or later at their option, this produces for taxpayers a very serious problem of constructive receipt.

So if it is possible jurisdictionally between this committee and House Ways and Means to include a little provision which says that receipt is what matters and that an opportunity to receive the payment would not be considered as taxable income, it is a very simple point but it is a very important one.

Now, related somewhat to that is the fact that we have a 1-year deferral opportunity for crop insurance and disaster payment, provided that you can show that there was a pattern of delay. Unfortunately, it appears that that does not apply to revenue insurance. Unless we get a legislative fix on that, there are going to be some surprised people who discover that their revenue insurance payments are not eligible for the deferral under section 451-D. Again it is a jurisdictional thing, but one that can be very important to producers.

Now, very quickly, because you have my testimony which devotes most of the space to three things: a longer term look at farm policy, commentary on the export picture and concerns about stress in the sector right now. Before I proceed, I should acknowledge that I have a modest conflict of interest. In addition to my day job at Iowa State University, I also own a couple of farms with my wife, and although I try to keep and isolate my investments from my policy commentary, you should be aware that there is that potential conflict.

I think the problems today are heavily the consequences of two factors, weather and exports, and as I have sat here today it strikes me that the mood here in this committee and the mood around the country as I have traveled the last several months is one of fine-tuning our agricultural policy.

With respect to weather, the only thing worse than bad weather is good weather in terms of what it does to price, and we are seeing the effects of that. We really have, I think, two different kinds of problems that we are facing today. One is a disaster question, and think that should be dealt with. The other is low prices, and that is, to a degree at least, the 1996 farm bill working. Markets are telling us something. They are telling us that we are producing too much. I will come back to that in just a moment.