Initially, the consensus was for a quick downturn and recovery. As the problems have persisted, most economists are becoming increasingly pessimistic about the scope and severity of the situation. For U.S. agriculture, these problems are translating into reduced exports into that region, with corn being one of the hardest hit. Compounding the problems for U.S. corn exports has been the presence of China as an increased exporter.

PUTTING THINGS IN PERSPECTIVE

Barring any major production problems, crop and livestock prices will average substantially lower in 1998 and 1999 than what was observed in the 1995-97 period. However, we must remember that prices in those years were much above historical levels. In addition, those prices brought increased area, which together with good yields, gave more production. These additional supplies have increased export competition and are the primary reason for the lower prices. A secondary reason is, of course, the Asian financial situation. It is also difficult to attribute much of the current price situation to specific provisions of the 1996 FAIR Act.1

SUMMARY

We should not forget that lower crop prices do provide benefits for the livestock sector in the way of lower feed costs. However, when we net out the positives and negatives and look at U.S. net farm income, the result will be certainly be negative when compared to recent times. For 1998 and 1999, FAPRI projects that net farm income will average $46 billion, a drop of 12 percent from the record level in 1996. While the news sounds rather bleak and certain regions are under tremendous stress, the U.S. agricultural economy, as a whole, is still in much better shape than the early to mid 1980's. Income levels are well above those of the earlier period and debt-to-asset ratios have remained at relatively low levels.

In closing, Mr. Chairman, I would like to thank you for the opportunity to address the committee and welcome any questions.

Wheat

SUMMARY OF THE U.S. COMMODITY OUTLOOK

• Despite a decline in U.S. wheat area to 65.8 million acres, above-average yields will push wheat production above 2.5 billion bushels.

• Increased supplies should build wheat ending stocks above 850 million bushels for the 1998/99 marketing year.

The season average farm price is expected to fall to $2.90 per bushel for the current marketing year.

• 1999 will likely bring even lower wheat area in response to the weak prices. Assuming some strengthening in exports, farm prices should recover somewhat. Corn

• The sluggish pace will keep corn exports below 1.5 billion bushels for the 199798 marketing year. The weak exports are the result of the Asian economic crisis, China continuing to export corn, and an increased supply of feed-quality wheat on world markets.

For 1998, increased area and yield will give 3 consecutive years of corn production in excess of 9 billion bushels.

• Large crops and weak exports will push ending stocks above 1.75 billion bushels for the 98/99 marketing year, four times the level observed at the end of the 95/ 96 marketing year.

The season average farm price is projected to average $2.20 per bushel for 199899. With relatively more weakness in the wheat and soybean markets, corn area should increase slightly in 1999, keeping pressure on prices.

Soybeans

• The U.S., Brazil, and Argentina have all responded to market signals with increased area. For 1998, U.S. area is 10 million acres, or 16 percent, above the 1995 level.

With a projected yield of 39 bushels per acre, total soybean supplies are expected to reach 3 billion bushels for the 98/99 marketing year.

The demand side will not keep pace with the increased supplies as soybean ending stocks rise above 375 million bushels.

The 1998-99 season average farm price will average approximately $5.50 per bushel, down $1 from the previous year's level.

Barring a significant reduction in plantings or yield, soybean supplies are likely to increase further in 1999.

Cotton

• In response to lower cotton prices, producers reduced upland plantings by almost 1 million acres in 1998.

• Yield potential has been greatly reduced due to the drought conditions in Texas, dryness in the Southeast, and excessive moisture in California. The result will be an upland cotton crop of 14 million bales, the smallest since 1989.

• Upland cotton prices will average $0.69 per pound for the 1998–99 marketing year, an increase of $0.05 from the previous year.

Upward price strength will be dampened due to reduced imports by Asia and good crops in other major-producing countries.

Beef

• Production for 1998 is expected to exceed the 1997 level by approximately 400 million pounds due primarily to heavier slaughter weights.

Nebraska-direct steer prices have been pressured this year with additional supplies of beef and a slower growth in exports. Prices are projected to decline to $65 per cwt in 1998.

• Prices are projected to exceed $70 per cwt in 1999 as supplies of beef decline by over 1 billion pounds.

Pork

Hog prices are projected to remain below $40 per cwt on an annual average basis for both 1998 and 1999.

• Production of pork continues to occur at record levels. 1998 production is estimated at 18.8 billion pounds, an increase of 1.5 billion pounds over the 1997 level. • Exports of pork this year have exceeded earlier predictions as the decline in prices has sent more pork out of the country than anticipated. Current expectations suggest exports of 1.2 billion pounds for 1998.

Dairy

Price volatility in the dairy sector will likely continue for the next few years as the sector adjusts to less government intervention.

• Federal order reform can cause the regional outlook for the dairy sector to change from where it is today. The details of the reform will dictate to what extent regional impacts will occur.

Farm Income

Lower crop and livestock receipts will push 1998 net farm income below $45 billion. The drop in farm income is mitigated by lower production expenses, especially feed costs.

• Market receipts should hold steady in 1999 as higher livestock receipts offset declines in crop receipts.

STATEMENT OF

THE AMERICAN FARM BUREAU FEDERATION

TO THE

HOUSE COMMITTEE ON AGRICULTURE
REGARDING

THE STATE OF THE AGRICULTURAL ECONOMY

Presented by

Dean Kleckner

President

July 30, 1998

Mr. Chairman, thank you for the opportunity to address you today concerning the state of American agriculture. Certainly, these are not the best times for agriculture. We are faced with not only low prices for most commodities, but also weather related problems in several areas of the country. It seems whenever things get difficult in farming, there are always some who are looking for something or someone to blame. That is the case now from those who are assigning the blame to the Federal Agricultural Improvement and Reform Act (FAIR Act) passed in 1996. They argue that it is largely the cause of low commodity prices.

As a corn and soybean producer in Iowa, I am well aware of the present low commodity prices. The price of corn at the local elevator where I market much of my crop was $2.00 yesterday. The price of soybeans was $5.82.

I sold my 1997 soybean crop at an average price of $6.30. But, regrettably, I have not priced any of my 1998 soybeans. That is my decision and nobody else is to blame. Many other producers have done what I didn't do and priced some or most of their 1998 production.

On the other hand, I still have 60 percent of my 1997 corn to sell -- and at $2.00 per bushel, I'm not all that anxious to sell it. But, the fact that I'm still holding that production and therefore saddled with a $2.00 per bushel price is not the fault of the FAIR Act. When I look in the mirror in the morning, I know who to blame.

The FAIR Act is working as it was designed. The market is providing producers with pricing opportunities while the Market Transition Payments and the loan rates are providing them with a safety net. Congress must avoid abandoning the market-based policies of the FAIR Act. Producers are reallocating their resources in a more efficient manner than the government could ever dictate. We are pleased with the flexibility to adjust crop acreage in response to both economic and agronomic factors. In talking with Jim Harmon, President of the North Dakota Farm Bureau last week, he drove home the point of the value of having to plant what we want rather than what the government dictates. In North Dakota this year, it is especially important. As Jim said, "Having the freedom to diversify out of a disease-prone crop like wheat into other alternative crops has put more profit potential into my operation. I shudder to think what would have happened if I would have been forced to plant my entire wheat base as I would have under the old safety net program."

There is a saying that one form of insanity is doing the same thing over and over -- and expecting a different result. If we increased loan rates and extended the loan maturities, it would be very reminiscent of steps taken in the early 1980s. That caused U.S. grain and oilseeds to become non-competitively priced in world markets. The U.S. lost export sales to competitor nations. U.S. producers, through the loan program, "sold" grains and oilseeds to the government.

Over several years, the government accumulated huge stocks of grain and oilseeds while farm program costs grew to record high levels. Although loans for grains and oilseeds now have marketing loan features which will result in less government stock building, the general effect of increasing loan levels would be the same as in the early 1980s. Producers would be encouraged to produce for increased farm program benefits instead of market returns. The period of low prices would be prolonged because the market signals necessary to increase consumption of agricultural products and to reduce or shift production to other products would be blocked by government action. Higher taxpayer costs would likely lead to the renewal of acreage reduction programs to control government spending.

Let's talk about the "safety net" for a moment. It is important to remember that the loan program was intended to be a method to lessen pressure to sell at harvest time and to spread sales throughout the marketing year. It is a marketing tool for producers, not an income support program. But, the loan program is not the only source of support, farmers also receive market transition payments.

So, for those who want to talk about income support, it is worth doing a little comparison. As the following chart shows, in most cases the current loan rate and market transition payments are equal to or in some cases may actually exceed the "safety net" provided by those who propose to increase the loan rates to 85 percent of the five-year average price. Mr. Chairman, it makes little sense to spend a significant amount of federal government funds -- and to alter a program which is working as intended -- and yet not make any real change in the current “safety net.”

Except for soybeans, the market transition payments and loan rates (safety net) meet or exceed the 85 percent Olympic loan rate. The Olympic loan rate is the five-year average price minus the high and low years.

WHAT IS THE STATE OF AMERICAN AGRICULTURE?

The big picture actually doesn't look too bad.

1. During the first two years of the FAIR Act, farm income has averaged from 14 to 20 percent higher (depending on the definition used) than it did over the prior five-year period covered by the previous farm bill. USDA projects that 1998 farm income will be down by about 10 percent from the average of the past two years, but will still be 5 percent higher than the average of the prior five years.

2. Farmland values continue to rise. As the following chart shows, average farmland values in the U.S. rose 5.8 percent in 1997 and are expected to increase by a similar amount in 1998. (USDA data on the 1997 land prices is not available until fall). Other surveys such as those done by the Federal Reserve Banks indicate the year-to-year increase in farmland values in the Midwest are up 6 to 10 percent through the first quarter of 1998. Even in the "hard-hit" states of South and North Dakota, land values rose 10 percent and 1.5 percent respectively.

3. Producers in a fairly sizable section of the country are having bumper crops. Just last week, Congressman Thune told us he had never seen the crops "from one side of the state of South Dakota to the other look so good." Prices are less than optimum for many producing those bumper crops, but I always also remember that 150 bushel corn selling at $2.00 per bushel grosses the same as 100 bushel corn selling at $3.00.

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