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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 142 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. In 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.
STATEMENT OF NEIL E. HARL, CHARLES F. CURTISS DISTIN
GUISHED 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 I 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.
Because the light will probably cut me off at some point, I would like to turn to my suggestions which are at the end of my paper.
In my view, it is critically important not only for farm exports but for worldwide stability for the IMF to be funded adequately. I cannot emphasize strongly enough how important I think that is
otal economic stability, and certainly in the agricultural sector. IMF-led efforts to stabilize economies in Asia and bring about reforms, structure reforms, I think will pay large dividends. Without that happening, I think our exports will decline significantly. The effects of that Asian crisis will have a greater impact on the U.S. economy.
In that regard, I would ask you to turn to a table on page 5 of my paper. I would invite you to look at the pattern of agricultural imports and exports over the last 20 some years; and we, of course, have experienced some decline, but what I would like to emphasize is not that, because further decline is in the realm of the speculative. What I would like to emphasize is what happened between 1981 and 1986 when we lost 40 percent of our agricultural exports because of problems relating heavily to unstable fiscal and monetary policies in the seventies and into the eighties. The dollar rose very strongly from a very weak dollar to a strong dollar. The efforts to try to bring inflation under control slowed economic growth worldwide so that the countries with the very high elasticity demand were not eating as well. That was a 40 percent, roughly, decline.
If we experience anything similar to that, and we could if we take about the worst case scenario from the problems in Asia and elsewhere, I think it is absolutely critical that we do what we can to try to shore up that side.
Now, on the matter, if you turn back now to the second page of my testimony, I would like to just say a word or two, before I am totally out of time, about the role of low prices.
Low prices have certainly returned. Farmers are the world's best economic citizens. Given half an incentive, they will increase production every time and drive down price, and they will bid their profit into land values, as we have seen the discussion this afternoon.
Now, there is also, of course, weather; which as we note on the second page is something about which we are not very clever. We are clever with respect to seed and chemicals and machinery. We are not clever in managing the weather.
And, secondly, there is the question of the number of producers, making it very difficult for the economic shift of the state of agriculture to get turned around once we head down a path of too much production.
The market is now signaling that we do have too much, at least given the current level of demand and given the fact that we have a certain idea about what price is acceptable. But at the bottom half of page 2, I discuss a little bit about the dynamics of adjustment, the fact that land use shifts occur, and we should be prepared to see production recede in some areas; and in administering that medicine, the market is rather indifferent to where that is. It is true, in addition, that the medicine is painful for even the people in the areas that will remain in production, in the core production long term. But surrounding every major crop area which is more compact, always remaining in production corn, soybeans, cotton, wheat, we will have the "swing zones" of land that will swing into production and out of production over time. This is painful in terms of the community, as well as painful for the producers.
We need to isolate and separate in our thinking the fact that we are going to be dealing with adjustment in this fashion. Between 1933 and 1996 Government was really the agency that tried to balance demand and supply. It did it in checkerboard fashion, idling some of the best land and some of the worst. Not very rational, but it spread the pain and
adjustment over the face of the sector, and it also was administered without exacting a lot of pain from the producers, but that is not how the market functions, and we need to remember that.
And so there will be some districts and some represented here that may not be producing intensive crops all the time. They may shift to grazing land, and that is a fair jolt, and it is simply the way that the market tends to function. So I would suggest that we look at that and keep that separate from the issue of disasters.
My other two suggestions toward the end of my testimony were, in addition to the IMF funding, we made a point also and I am very supportive of efforts to do something about the disaster side.
Thirdly, I am not at all opposed to some increase in the loan rates and a strengthened storage program so long as it doesn't induce too much supply-focusing attention on the marginal lands that would most likely be responsive to that. But I do believe that this would be part of the fine-tuning, without losing and changing the basic nature of the 1996 farm bill.
I do think that we need a better downside net in terms of protecting producers from these very difficult spikes down that really are difficult to turn around, short of something that I think we do have in place now. Thank you.
[The prepared statement of Mr. Harl appears at the conclusion of the hearing.)
Mr. COMBEST. Thank you, Dr. Harl.
Mr. SKEES. Thank you. I think I had the unfortunate prospect today that my area of expertise is risk management. The rest of you have been able to comment on prices, and it is my job to come in here and talk about risk management, and that is a tough area to talk about, particularly in light of the particular problems in your district and Texas and North Dakota. Clearly we have serious problems.
I heard a discussion a little bit ago about unintended consequences, and I decided whenever I accepted this assignment to write about the bigger picture and unintended consequences rather than to get into the nitty-gritty detail about the crop insurance program, and I will talk about that in the questions and answers.
As we think about unintended consequences, we have some serious things to consider here, it seems to me. Agricultural responses in the past have encouraged producers to grow additional acres on