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 to total 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 after

noon.

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.
Dr. Skees.

STATEMENT OF JERRY R. SKEES, PROFESSOR, DEPARTMENT OF AGRICULTURAL ECONOMICS, UNIVERSITY OF KENTUCKY 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. Člearly 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

more risky land in a continuous pattern. This places downward pressure on prices. It has also meant that we have had serious implications into the future because we would have more losses from the same natural disasters, the same natural weather patterns. We would have more exposure, and I have written a couple of stories in here as a student, and I still consider myself a student of risk management. We have been struggling with a book for 5 years on risk management. It is not finished yet. You guys keep changing the rules, and we have to keep going back and restarting the thesis of the book. But I will tell a couple of stories that should bring some points home.

A few years back, about 20 years ago, the engineers looked at the problem of tractor safety, and they said there is a serious problem here. People are dying when tractors turn over. They thought that they could engineer this problem away, and they put roll bars on tractors. And after they did this, they looked and saw that the statistics in terms of the rate of deaths had not changed. And they went back and said, What happened here?

And what happened was that people drove on steeper slopes, they drove faster and harder, and just as many people died.

We had a nice issue of National Geographic, the last issue, tremendous maps in there showing that the population of the U.S. is moving into the areas where we have natural disaster risk. The thing that National Geographic failed to mention or even discuss was quite possibly the reason people do this is because they realize that the Government is going to protect them when the natural disaster occurs.

These are tough issues. This is not an easy message. When I teach my students, I often tell them I don't want to be the one interviewed on NPR saying don't give disaster assistance because it has long-run consequences, but today I am here to talk about those consequences.

Time and again, we have to consider these kinds of things. We must recognize that there is a behavioral response. The incentives, the things that you do as a body of Congress, does have implications down the road. And it is in the record so I am not going to through all of the details. But what I do try to do is compare the risky regions of the country with the less risky regions, and I am not trying to pit one region against the others, because this is a story that happens on every individual farm that has any kind of marginal land; the same story will occur.

If you take the risk away, farmers are going to accept a higher threshold of risk. That is the thesis. It is a reality.

When we look through the data and the story that I try to tell here with some of the major crops, with the Plains States versus the Midwest where about 80 percent of our major commodities are grown, through the period of 1988 through 1993, we transferred about 25 cents on a gross dollar of revenue to the Plains States. That was about 12 cents in the Midwest. The reason was because of the very design of the programs, and the design of the programs the details are here but the design of the programs basically favored risky production. And the concern and the issue you should think through is the very simple fact that as you provide protection in the risky regions, people will take on more risk.

Texas cotton before 1980, 7 percent of the acres that were planted were not harvested. Since 1980, 14 percent of the acres that have been planted have not been harvested.

It is my contention that part of that is public policy. Those are hard pills to swallow, because what that means is that the very actions that we take to try to help people do have long-run consequences, do change people's behavior.

There is a threshold of risk that people are willing to take, and they will move to a higher threshold. You can't take the risk away. I am sorry. That is a reality. I sat here and listened to the Secretary a while ago say that it would be nice if, for every time there is an act of God, we make sure that somebody doesn't get hurt. That is very difficult, because what I am painting for you is a very simple fact that if you do that in a way that is not market oriented, you are going to continue to cause people to produce in more risky regions and in the longer run, you are going to have to pay more losses.

So that is the thesis of what I have written here.

And in the conclusions, I conclude with a couple of things that you might want to think through, if you do seriously want U.S. agriculture to become more market oriented. One of those is clearly a need to think about multiple-year risk and helping facilitate private sector developments in protecting against multiple-year risk. And we have done some work on this and we have some ideas. One of the ideas is that maybe we could develop a trade in land prices, asset values, because as we all know, asset values do ultimately reflect the downturns in the agricultural economy.

So I have delivered a painful message. I know that is not a popular message to deliver today, but earlier some members did talk about unintended consequences, and that is what my message is about, unintended consequences. And I know it is a tough decision

for you.

Thank you.

[The prepared statement of Mr. Skees appears atthe conclusion of the hearing.]

Mr. COMBEST. Thank you, Dr. Skees. That obviously is interesting. I don't know what Mr. Stenholm is going to do. We need to make him not grow any more cotton in his district; it is all over, move it all over to mine. I thought he was talking about me.

The interesting thing is, I find more and more as we do this business, I don't think there is a one of us of the 50 on the-thank goodness you all are not here, you don't have to listen to each one of us.

We all have the same intent. We want to-we are obviously interested in agriculture. We desire to be on this committee and are not drafted to be on it, and-but how we get to where we want to be, obviously all of us have some differences on that. That is true of the five of you there at that table and exactly how we get there. Dr. Harl, I don't disagree, but as you are indicating Dr. Gardner is talking about loan rates and didn't think that was the thing to do; and you are talking about the chance of increasing to that point at which you don't-we don't know what that point is. And that is one of the real difficult things is, how do we really know where that point is and how we get there, because we are doing it before

hand, rather than after the fact. And if we could look back and see and change it in the past, it would be a lot easier.

And I think that is where where we have a lot of caution and obviously a lot of concern, that what we don't do what we do do in an effort to try to be helpful in a situation does not only make the problem worse or only cure the problem for today and make it more complicated tomorrow.

Tax issues are part of it. Mr. Pomeroy mentioned earlier his concerns, as did the Secretary, relative to the bill that is going to be dealt with on Monday, relative to advancing the pardon me the AMTA payments, and if anyone thought this was a catchall and it was the end of all discussion about the fact we have got a problem out there, it certainly is not.

It is one of the things that we find very difficult. You can't do one thing and fix everybody, so what we are obviously having to try to do is to look at a number of ways in which we can possibly help.

You talked about tax policy. We are talking about the Ways and Means Committee. There are a number of things there that potentially they can do, that are going to help farmers as they help other people capital gains and some of those things. But there are some specific farm things that we are looking at; and particularly, given the last few years of how they happen, income averaging is something that a tremendous number of people on this committee, I think, support, providing the opportunity so that payments can be looked at in terms of not creating an additional tax liability this year.

I think you raised a very good point about some of the other issues that need to be looked at in terms of tax consequences.

Mr. HARL. I spent a great deal of time educating practitioners in quite a number of States every year. And several of these points I mentioned here come up time after time after time. So I commend you for working with Ways and Means, instead of Finance, especially on the constructive issue, as well as the issue on the 1-year deferral, because those two are central.

I spend great deal of time in North Dakota every year with the practitioners up there. And this is a big problem; it is going to be very large this year. I think it is a small item in terms of budget, but it is a very large one in terms of

Mr. COMBEST. This can be one of those things that help us a great deal in terms of providing more money to the farmer. While it may not come in a higher price or it may not come in a disaster program, whatever, if that farmer can keep more money, rather than having to pay it in terms of taxes, then the farmer gets to keep more money.

Mr. HARL. Mr. Chairman, can I comment a little on your first point, which is the supply response if the loan rates are raised. The easy thing is to say, well, focus on the cost of production, the marginal lands. That is too easy, because it isn't the total cost of production that influences the behavior of people as much as it is their variable costs versus their fixed costs. And so it takes a very careful assessment not to unleash even more production, because the one thing you don't want when you already have low prices is to cause a greater problem.