June 28, 2001, Thursday
CAPITOL HILL HEARING TESTIMONY
COMMITTEE: SENATE AGRICULTURE, NUTRITION AND FORESTRY

TESTIMONY-BY: MR. LELAND SWENSON, PRESIDENT
NATIONAL FARMERS UNION

JUNE 28, 2001
STATEMENT OF MR. LELAND SWENSON PRESIDENT NATIONAL FARMERS UNION
BEFORE THE SENATE AGRICULTURE, NUTRITION AND FORESTRY COMMITTEE

Chairman Harkin, Ranking Member Lugar, members of the Senate Agriculture, Nutrition and Forestry Committee, I am Leland Swenson, President of the National Farmers Union (NFU). It is a pleasure to appear before the committee today on behalf of the NFU's 300,000 farmer and rancher members to discuss our ideas for new agriculture policy that can provide a more sustainable and predictable long-term economic safety net for producers and create new opportunities for producers, their families and rural communities.

We recognize that appropriate and effective agriculture policy represents a significantly greater range of important topics than specific programs for crops, livestock and dairy. Some of these issues, including agricultural research, conservation, rural development and nutrition assistance programs are directly within the purview of this committee. Others, such as trade, credit, energy, environmental programs, fiscal and monetary policy, and agricultural concentration and consolidation must also be considered by other committees but have a profound influence on U.S. agriculture and individual producers.

Over five years ago Congress approved and the President signed the Federal Agriculture Improvement and Reform Act dubbed Freedom-To-Farm by its proponents. This legislation was adopted during a unique period in agriculture characterized by continued pressure on federal agricultural spending, greatly improved nominal commodity prices and an expanded level of gross agricultural export earnings.

The Act was designed to significantly reduce the federal role in U.S. production agriculture based on a set of speculative assumptions that the future would continue to reflect the optimistic conditions existing at the time. The FAIR Act, with declining, de-coupled payments as its centerpiece, represented reform to the extent it would end the historic role of commodity specific programs that were designed to be counter-cyclical to market conditions. It is increasingly apparent the legislation has neither represented an improvement to the short or long-term economic stability of agricultural producers or rural communities, nor achieved the promise of a broad, market-based environment of opportunity for farmers and ranchers.

Freedom-To-Farm advocates assumed that: 1) World population and income growth would create new export demand for U.S. farm commodities. 2) Improved risk management programs, such as crop insurance, could replace other economic safety net programs. 3) Reduced government regulation could be achieved that would increase production efficiency and lower operating costs. 4) A combination of arbitrarily established marketing loans and de-coupled; direct payments would ensure adequate farm income levels to allow the transition to a market-oriented agriculture system. 5) Reduction in our production-based producer safety net would force others, primarily our export competitors; to absorb any needed production adjustments.

None of these assumptions have been proven correct since the implementation of the Act. Since the adoption of Freedom-To-Farm, the optimistic forecasts of increased net U.S. agricultural exports have been wrong. In fact our agricultural surplus has declined substantially and agricultural production and competition for export markets have increased. (table 1) Surplus stock levels have grown significantly since the mid-1990's. (table 2) U.S. net farm income from production and commodity prices collapsed (table 3, table 4) due to rational behavior by individual producers trying to respond to declining incomes and other less predictable events while production costs continued to increase. (table 5, table 6) Risk management programs, while continuing to be improved, remain inadequate to fully address price and production losses. It is unlikely that adjustments to agricultural regulations, if they occur at all, will significantly reduce production costs or increase the level of efficiency. In addition, the combination of inequitable and arbitrarily established commodity loan rates with de-coupled payments has increased the level of distortion in production, marketing, land rents and program benefit distribution.

Congress has acknowledged the inadequacy of the current safety net as an economic stabilizer for producers by providing annual ad hoc emergency assistance programs, thus making this the most expensive farm bill in history.

The nature of modern production agriculture; due to its inherent relationship to the physical environment, importance as a national security issue, lack of alternatives for much of the resource base, relatively inelastic demand, impact of new technology and technology transfer, limited market transparency and competition and the rational economic behavior of individual producers suggests the future is unlikely to provide any new evidence in support of the aforementioned beliefs.

We believe the primary goal of commodity programs should be to provide economic stability and opportunity for producers over time consistent with a responsible view of market realities, resource sustainability and food security and safety issues. These programs must ensure a reasonable level of cash flow and producer income in the short term and achieve the goal of providing 100% of the full cost of production in the long run to maintain a sustainable, independent family farm production agricultural structure.

It is our hope that Congress will be able to approve new farm program legislation prior to the 2002 crop year that will eliminate the necessity for supplemental assistance programs for 2002 and into the future. If new policies are not implemented for 2002, supplemental economic assistance for crop producers and an extension of the dairy price support program will likely be required.

We are recommending a new crop commodity policy that is substantially different from the current program. We recognize that contractual obligations exist between the government and producers under the Agricultural Market Transition Act of the current farm bill through the 2002 crop. We believe eligible program participants should be given the option of continuing their farm program contracts through the expiration date of the current law or terminating those contracts in order to participate in the new commodity programs.

For the eight program crops, our analysis was performed by the Agriculture Policy Analysis Center at the University of Tennessee utilizing the Policy Analysis System (POLYSYS). The model uses the National Agricultural Statistics Service Agricultural Statistical Districts as the base unit of crop supply analysis. Crop demand is modeled nationally for feed, food and industrial demand as well as exports.

The livestock sector is included to estimate the linkage effects among sectors and their impact on demand and farm income.

The baseline to which POLYSYS is anchored contains the macroeconomic and policy assumptions released by the Food And Agriculture Policy Research Institute (FAPRI) in February 2001. The baseline assumes a continuation of commodity marketing loans at current rates and an extension of AMTA contract payments based on an adjusted FY 2002 spending commitment equal to $3.938 billion for all program crops.

In addition to the baseline projections, we have provided estimates, based on the use of POLYSYS computer simulations, concerning the effect of our policy recommendations on the areas of interest to the Committee over a 10-year period. The simulations include 1) a modified marketing loan "only" program; 2) a modified marketing loan program plus limited commodity reserves, and; 3) a combined policy of marketing loans, reserves and a discretionary, voluntary set-aside program. The results of these simulations are summarized in: table 8 - Summary of Projected Expenditures, table 9 - Summary of Crop Acreage and Receipts, table 10 - Summary of Average Prices Received for Major Commodities, table 11 - Program Crop Exports, and table 12 - Cattle and Hogs: Production and Prices Received.

In the case of dairy, our estimates are based on FAPRI dairy production, and price projections. The moving average cost of production level, adjusted for expected production cost increases over the period, are projected from FAPRI cash cost of production estimates. We have estimated the number of dairies with more than 143 cows based on January, 2001 USDA/NASS data. We then estimated the percentage of those dairy operations that milk more than 143 cows that would continue to increase production beyond the expected annual market growth. (table 13)

The conservation program analysis reflects the expected outlays required to achieve the maximum level of participation in the Conservation Reserve Program (CRP) over three years, and a gradual entry of land in the soil rehabilitation program that remains at the maximum authorized level once that point is achieved. The conservation incentive program estimates are based on an assumed level of funding into which program functions will be designed. (table 14)

The rural development section includes estimates of the additional funding required above current program levels to implement our recommendations. (table 14)

We have assumed no additional budget outlays to implement the trade, credit or concentration recommendations provided. We do recognize however that USDA resources may need to be reallocated or enhanced to address our policy concerns.

For each policy initiative we have attempted to summarize the impact of both the combination of policy recommendations as well as individual policy component on federal budget outlays, farm income, production, WTO commitments and other agricultural sectors. More extensive data summaries are contained in the tables at the end of the document and complete copies of the simulations, that include commodity specific information, have been provided to the committee staff.

For the program crops, our recommendations represent a substantive departure from current policy, in that we eliminate de-coupled payments (AMTA contract payments).

Our counter-cyclical approach to economic assistance is based on an improved commodity marketing loan program and does not include other "supplemental income assistance programs". Additional components to this policy include limited commodity reserve programs and discretionary set-aside authority.

Non-recourse commodity marketing loans represent a relatively simple administrative mechanism to provide commodity specific, counter-cyclical income support to the producers of eligible crops while allowing domestic and international markets to determine commercial commodity prices based on market fundamentals within the inherent limitations of that function.

The program is commodity specific in that the actual level of farm production, within any applied limitations, is eligible for the program. Marketing loans are counter-cyclical to the market such that public transfer payments to eligible producers are made only to the extent that local producer market prices are below the established loan rate. Thus producer assistance increases when specific commodity prices decline and the level of payments are reduced or eliminated as those prices rise. The non-recourse function of the program provides a "fail safe" mechanism by allowing producers to forfeit crops to the government in satisfaction of their loan obligations should a local market aberration occur. This situation can occur if the sum of the actual market value and available loan deficiency payment rate for the commodity adjusted for quality is less than the local marketing loan rate. Effectively, the program crop producer is provided an economic safety net based on his actual production and the higher of the local market price or the commodity loan rate.

We believe the non-recourse commodity marketing assistance loans for the wheat, feed grains, oilseeds, cotton and rice crops represents a viable compromise in terms of differing policy views.

On the one hand, there are those who advocate that government establish commodity price floors to stabilize and enhance farm income, and suggest the impact of such a program on production and markets is at best minimal.

On the other, some are concerned about U.S. market competitiveness in an era where trade and the actions of others are an important economic component of agriculture. The U.S. is now a less dominant supplier of many commodities in the global market and we are increasingly subject to the potential of increased imports of those commodities due to commitments to reduce or eliminate domestic border protections.

Provisions of the FAIR Act established initial loan rates based on a historic average price basis for the major crops and inter-commodity price relationship for minor feed grains and oilseeds. The bill limited the potential future upward adjustment of the rates by applying arbitrarily determined caps. Discretionary authority was provided the Secretary of Agriculture to reduce loan rates for some commodities under specified circumstances. That authority was also arbitrary in nature by precluding or limiting the adjustment for different crops in different ways.

In order for the marketing loan program to be an equitable, less distorting and more effective component of the production agriculture economic safety net policy, it must be significantly modified.

There is a broad consensus that current marketing loan rates are inequitable across the eligible commodities, distorting the production and market decision making process of producers as a result of the loan rate establishment process contained in the 1996 farm bill. Most farm and commodity organizations also now support the idea that commodity marketing loan rates for the grain and cotton crops should be adjusted upward in relation the oilseed loan rate, while rejecting the notion that oilseed rates be reduced. We concur with this position.

Some who now advocate "re-balancing" marketing loan rates suggest utilizing a moving average price basis for determining loan rates. Others propose that the rates simply be adjusted for the majority of eligible crops to an arbitrarily higher level, or implement a procedure based on a view that some type of fixed, proportionate market price relationship among the commodities has existed in the past and that the same relationship will continue in the future.

We believe the methodology for determining the level of each commodity loan rate should be reviewed to better ensure its effectiveness in enhancing producer economic and financial stability. This will require a more rational, consistent long- term approach that can be applied annually to determine loan rate levels avoiding the potential they will become so greatly distorted in the future. Use of historical prices or price relationships is a flawed loan rate adjustment mechanism for several reasons.

First, while prices of the program commodities appear to move up and down somewhat in tandem, the movement is neither parallel across all the crops, likely to occur simultaneously, nor even occur consistently for a single crop across all production regions, crop classes or sub-classes.

Second, it is questionable whether an appropriate market price relationship can be determined on either a historical or future basis due both to the past levels of production and market intervention here and abroad and the fact that for some crops there are not alternative or substitute markets where price arbitrage takes place. For example, wheat is a food and occasionally feed grain while cotton is primarily a non-edible fiber. What is the predictable relationship between these two crops over time that is not arbitrary or potentially distorting?

Third, as a safety net program, the marketing loan should address the full economic equation of those crops, not just their nominal prices. For example, if marketing loan rates were based on a percentage of mid-1990's market prices and not reduced as prices declined, the effective level of economic security for producers and their creditors would be greatly diminished today compared with that base period due to increased per unit production costs. Although a producer's economic situation might certainly be better than it is currently, the relatively low rate of inflation during the late 1990's coupled with the significantly increased costs of energy-based inputs recently would have eroded the value of the safety net. In addition, it would have done so disproportionately among regions and crops based on their individual energy input requirements for fuel, electricity and fertilizer.

It is our goal that new farm policy provide a non-recourse commodity loan program that yields a return to producers equal to the full economic cost of production. The national average commodity marketing assistance loan rate for each eligible commodity should be annually established at the highest possible level and not less than 80% of the three year moving average of the full economic cost of production per unit per planted acre as calculated by the Economic Research Service utilizing the most recently available data. Our initial analysis is based on marketing loan rates established at 80% of the 3-year average of full economic cost of production, adjusted each year through the application of the model's calculations of changes in costs and yields.

This methodology for establishing marketing loan rates has several advantages over other calculation procedures while maintaining the market oriented counter-cyclical approach inherent in the program: (1) Provides a more meaningful economic safety net to those who actually engage in the production of the eligible crops. (Table 7) (2) Creates a predictable, long-term basis for determining the loan rates on an annual basis that is equitable across the program crops reducing the current level of distortion. (3) Provides an automatic annual adjustment procedure that accommodates both changes in all production expenses and productivity. (4) Tempers the distorting effect of a variety of short-term production and market shocks by utilizing a multi-year average of costs that will implicitly lag behind actual expenditures by at least one year. At the same time, it provides future predictability to producers and lenders that short or long-term structural change in costs or productivity will be accounted for. (5) Avoids the potentially distorting and self-defeating effect of arbitrarily establishing loan rates based on market price levels and relationships.

By creating a more equitable production-based, commodity specific marketing loan program and eliminating de-coupled payments; we believe the limited planting flexibility provided in the FAIR Act can be expanded to allow full planting flexibility to producers.

Although some suggest the current program's de-coupled payments are not production distorting, we believe that the potential cross-subsidization of non-program crops through AMTA payments was the rationale employed by supporters of Freedom-To-Farm to limit planting flexibility in the legislation.

Authority to implement commodity reserve and buffer stock programs was eliminated in the FAIR Act with the exception of the Food Security Commodity Reserve.

We support the necessary authority and funding to establish limited government owned, farm-stored commodity reserve programs. Storage payments to participating producers should reflect local, commercial storage rates subject to appropriate conditions concerning quality maintenance and other factors. We have estimated the storage payment rate to be $.30 per bushel per year.

The purpose of these reserve stocks, that would be isolated from the commercial food market, would be to help ensure our long-term commitment to the continued development of the renewable fuels industry and provision of humanitarian nutrition assistance.

A renewable energy reserve would be established to provide feedstock commodities to that sector when renewable fuels production is at risk of decline due to reduced feedstock supplies or significant commodity price increases. The reserve would be limited to the type and a quantity of commodities necessary to provide approximately one-year's utilization plus additional commodities to provide incentives for research and development of new renewable fuels/bioenergy initiatives. Currently we estimate the required reserve level would be approximately 600 million bushels of corn and other feed grains and about 50 million bushels of oilseeds.

Quantities from the reserve would be sold at the discretion of the Secretary to eligible renewable fuels/bio-energy enterprises at the government's procurement price when the market price for those commodities exceed 100% of the farmer's full economic cost of production. These sales will effectively average down the input costs of renewable energy producers reducing the potential that higher commodity prices force a contraction in renewable energy production.

We support efforts to establish a national renewable fuels standard as a component of a broader U.S. energy strategy. If implemented, demand growth for ethanol, bio-diesel, etc. is projected to more than triple over 10 years. We believe such a shift in demand would necessitate a corresponding increase in the size of the renewable energy reserve that is not included in our projections. While the potential growth in demand will improve the price expectations for crop producers, the impact of increased feedgrain and oilseed meal prices on U.S. livestock producers will be significantly less than one might expect due to the residual feed products produced by the bio-energy industry.

A humanitarian food assistance reserve would be created to ensure our capacity to fulfill our current and future commitments for nutrition assistance programs. Similar to the renewable energy reserve, this reserve would be utilized to continue and expand U.S. nutrition programs during periods when commercial supplies of commodities are low and/or commodity prices have increased to levels that threaten interruption of these programs. The Secretary would be authorized to release stocks in the humanitarian food reserve when market prices for those commodities exceed 100% of the farmer's full economic cost of production.

For the program crops, our analysis has assumed that an additional 300 million bushels of wheat, 50 million bushels of oilseeds and 25 million bushels of rice would be purchased by the government to create the food assistance reserve in addition to current reserve quantities.

We support the current initiative to establish an international school lunch program in developing nations. While envisioned as a cooperative program among the developed countries, we expect the level of U.S. participation in such a program would require additional reserve levels to meet the potential needs of the program that have not been factored into our analysis.

We also support new authority and funding for the implementation of a limited, farmer-owned production loss reserve program (PLR). Participants would receive annual storage payments consistent with those provided under the government-owned reserve programs, an average of about $.30 per bushel per year.

We urge the Committee to provide authority that would allow producers, participating in the crop insurance program, to redeem and market reserve grain at a discount to the entry-level price. These stocks would be used offset a portion of actual insurable production losses not indemnified through multi-peril or other "buy-up" crop insurance policies.

We believe the PLR should be limited to about 20 percent of the annual average production of each crop and provide for immediate entry at the prevailing commodity marketing loan rate for the county in which the grain is stored. Initially, the reserve would be open to all producers to enter up to 20 percent of their individual annual production of the eligible crops. Recognizing that some producers will not participate in the program, the Secretary would be authorized to accept additional reserve entries up to the maximum national quantity. We expect the Secretary to ensure that equitable participation opportunities are provided all eligible producers within the limited scope of the program.

In addition to the potential as a production loss supplement to crop insurance, we recommend that producers be allowed to withdraw and market reserve stocks when individual commodity price levels achieve 100% of the full economic cost of production. At that point, government storage payments to producers would also be curtailed. The reserve loans for specific commodities would be "called" by the Secretary when commodity specific market prices reach 110% of the full economic cost of production.

While we support efforts to increase demand for agricultural products, it is possible that market expansion through bio-energy production, expanded humanitarian assistance and commercial domestic and export utilization will not exceed the production and market potential of U.S. producers. Over the long term, no business or sector can continue to produce in a volume that exceeds the available market demand. We support providing the Secretary of Agriculture with discretionary authority to offer a voluntary set-aside type program to contain program expenditures and help bring production in line with demand.

When implemented by the Secretary, it should be based on a range of participant options at 5, 10, 15 and 20 percent of total program crop production acreage and applicable set-aside from the previous year.

Participation incentives should be based on an increase in the producer's individual commodity marketing loan rates for the crops in production. We recommend the incentive be established at one-half of the set aside percentage level applied by the producer. For example, a producer who sets aside ten percent of his program crop acreage for the prior year would receive a five percent increase in the commodity marketing loan rates for the balance of his eligible production.

Producers who voluntarily decide not to participate in the program should be subject to a percentage reduction in the marketing loan rates for their crops equal to the average national percentage incentive payment rate increase provided set- aside participants.

In order to enhance the integrity of the program and reduce the so-called slippage factor, we support the application of both cross and offsetting compliance measures.

The current dairy program extension expires at the end of 2001 and new program authorities should be adopted prior to the program's expiration. We believe new dairy policy should address not only the more traditional program components but also the issue of Milk Protein Concentrate (MPC) imports and utilization as well as surplus production issues that may arise due to dairy compacts and other regional pricing mechanisms.

Imports of MPC are not limited under the Harmonized Tariff Schedules thus the WTO negotiations on dairy failed to provide for U.S. application of import quotas or tariff rate quotas on MPC because the potential impact of this form of dairy trade was unforeseen at the time. Since then, U.S. imports of MPC have dramatically increased and are displacing 350-400 million pounds of non-fat dry milk or approximately 4-4.6 billion pounds of U.S. domestic milk production.

Imports of MPC and casein displaced an estimated 9 billion pounds of milk in 1998. Also at issue is the apparent lack of enforcement of existing U.S. regulations that prohibit the use of MPC and casein as ingredients in standardized cheese. In addition, NFU is concerned about the sanitary and phytosanitary impacts of importing MPC and casein.

We support immediate negotiations to include MPC products within the tariff rate quota schedules. In addition, we urge that enforcement of current product standards for standardized cheese be strengthened through the use of end use certificates and increased inspection of manufacturers by the Food and Drug Administration.

A dairy price support program should be authorized and funded at a level that will enable efficient family-sized dairy producers to market milk at prices that return a reasonable profit and maintain income stability within the sector while providing high quality, reasonably priced products for consumers.

We recommend that Congress consider two alternatives for a national dairy program.

Establish a price support mechanism, with the support price set at $12.50 per cwt. We believe the support level can be maintained in the market place through a combination of government and privately funded purchases of dairy products. Government purchases should be limited to no more than 3% of the higher of U.S. utilization or production. A producer-financed purchase system would then be utilized to remove any additional surplus product from the market in excess of the level procured by the government to stabilize dairy prices at or above the support level. Stock accumulations under either program would be utilized for humanitarian assistance and public nutrition programs or as buffer stocks to ensure future domestic and export supply reliability.

Producer financing for excess purchases would be the responsibility of those who increase production by more than 2 percent from the previous year. Those who produce less than 2.6 million pounds, approximately equal to the output of a 143-cow dairy, would be exempt from responsibility for financing. For the purpose of analysis, we have assumed the producer purchase financing requirement would be $.25 per hundredweight for the non- exempt production. Our analysis also assumes that of those dairies with more than 143 cows, 50% will continue to expand production in excess of the estimated 2% annual market growth.

As an alternative or supplement to the recommended support price program, we support implementation of a target price deficiency program for dairy producers. A target price would be established at 80% of the moving, 3-year average economic cost of milk production, as measured by USDA/ERS.

Our analysis of the dairy target price deficiency program is based on FAPRI price projections and a 3-year moving average cost of milk production adjusted by projected inflation in producer costs over the 10-year period.

The producer payment would be calculated as the difference between the target price and the appropriate base price for Class III or Class IV milk multiplied by the percentage of a producer's milk priced under the applicable Class. For purposes of analysis, we have assumed that nationally, 42% of the total milk production is priced using the Class III base and 58% is priced using the Class IV base.

Producers who produce more than 2.6 million pounds and increase production by more than 2 percent of their previous year's output would be ineligible for any deficiency payments.

In addition to the need for national economic safety net program for dairy producers, we recognize that dairy compacts or regional programs to establish floor prices for producers in excess of the federal support level can provide an effective mechanism to enhance producer economic stability appropriate for a given region. However, we believe that compact-type arrangements must contain adequate supply management provisions to avoid unfair competition with other regions and be consistent with comprehensive national policy that enables dairy producers with sound management practices to earn a fair price in all regions of the country.

Farm program benefits have been subject to limitations for a number of years in order to target safety net programs to small to moderate sized farming operation and satisfy both budget and political reality. Unfortunately, adjustments to these regulations over time, in an attempt to address rapidly changing economic conditions in agriculture, have resulted in a confusing and sometimes counter-productive system that disproportionately rewards the largest farming operations and minimizes their risk of even further expansion.

It is our view that payments resulting from economic assistance programs should benefit all eligible producers up to specified point, and beyond that point, those who wish to further expand their operations should assume an increasing level of risk. In other words, the government should provide a realistic level of support for all producers, however, the programs should not encourage producers to decide they wish to farm the whole county in order to maximize their farm program benefits.

The NFU supports legislation that effectively targets benefits to farmers based on a realistic view of the operational scale necessary to maintain a full-time family farm operation. We believe several elements are critical to enhancing the integrity of any system designed to target the benefits of economic safety net programs.

First, benefits should attributed to single individuals based on their assumption of production and market risk. This element requires the elimination of the so-call "3-entity rule", but does not adversely effect the type of farm organization individual producers may utilize in their operations.

Second, by establishing an adequate, counter-cyclical safety net, the need to modify payment limitations annually to accommodate the benefits provided through ad hoc programs can be reduced or eliminated.

Third, the integrity of any targeting system requires that the capacity to avoid the effect of limitations be curtailed. We support rescinding the current rules that allow commodity certificates to be utilized as a means to circumvent the limitations that apply to marketing loan benefits.

Finally, while we support increased reliance on counter-cyclical programs to provide economic security to producers, we realize that the level of payments under those programs can vary significantly from year to year. A targeting mechanism must accommodate the increased level of variability in safety net payments.

The NFU is currently analyzing several alternatives to the current payment limitation regulations. One option we are reviewing would implement a targeting mechanism that provides for a reduction in the level of the safety net, based on USDA defined farm typology, as the operating scale of the producer increases.

Total federal outlays for the program crops with a combination of marketing loans, reserve programs and set aside recommendations are projected to range from a low of $4.05 billion in 2009 to a high of $8.2 billion in 2004 and average about $5.15 billion per year over the period. Baseline expenditures over the same period range from $4.0 billion to $7.8 billion and average $5.5 billion per year. The significant reduction in crop program outlays is due to the cost reducing effects of the reserve and set-aside programs that result in a reduction of loan deficiency payments that greatly exceed the cost of operating the reserve and set-aside programs. (table 8)

Compared to the baseline, a farm program based on commodity marketing loans in combination with the other policy recommendations results in a significant redistribution of acreage across the eight program crops resulting from the removal of current policy distortions. However, total program crop acreage increases very little, (table 9) due to the fact that, when combined with the acreage entered into the CRP, the U.S. has little additional acreage that is likely to shift into program crop production even at the improved safety net levels established by the program.

Under a marketing loan program, commodity purchasers, whether they are independent livestock producers, domestic or multi-national merchandisers and processors or national governments are able to procure commodities at prices determined by the market. They are not disadvantaged or made less competitive in the market by the program, and our competitors receive no "price umbrella" protection that some suggest could encourage increased foreign production and/or reduced U.S. export and domestic market opportunities. In and of itself, the marketing loan program does not distort the economic activity or well being of other sectors.

In terms of our WTO commitments, the marketing loan program, when utilized in conjunction with the reserve and set-aside programs, the U.S. "amber box" expenditures are no larger than the levels achieved over the past two years. (table 8)

Under Option 1 of our dairy proposal, (table 13, page 1) the support price is increased to $12.50 per hundredweight. For those dairymen who produce less than 2.6 million pounds of milk per year or control their production within the expected annual 2 percent market growth. This option provides an improved counter-cyclical economic safety net that is $2.60 per hundredweight better than the current program.

For producers who continue to expand milk production beyond current market demand, the safety net is reduced by $.25 per hundredweight. We estimate this will effect about 7200 dairies nationally, 50% of those dairies with more than 143 cows. The assessment should help limit surplus production as well as increase purchases for donation to non-commercial markets thereby strengthening milk prices for all operators.

The estimated cost of this program option is $640-700 million per year, for government purchases of dairy products, excluding any increased outlays associated with the "make allowance" provided manufacturers.

Due to the formula for determining the Aggregate Measure of Support (AMS) for WTO "amber box" compliance purposes, the AMS for this option would increase to about $9.0 - $9.8 over the 10- year period, nearly double the current AMS notification levels.

Under Option 2, (table 13, page 2) the operation of a $9.90 dairy price support coupled with a target price/deficiency payment program based on a percentage of cost of production should result in similar income levels for eligible dairy producers as would occur under Option 1.

Similar to Option 1, the assessment program should help deter expansion of dairy production beyond market growth and provide additional stocks for humanitarian and nutrition programs.

Government outlays for commodity purchases and deficiency payments under Option 2 are estimated to range from $2.3-3.1 billion annually. The AMS calculation results in an increase in the level of "amber box" support of $1.8-2.0 billion per year, equal to the level of annual deficiency payments to producers.

Neither option should have a significant impact on other livestock sectors, since there is no incentive provided to liquidate or reduce current herd size in order to qualify for program benefits.

The conservation programs currently authorized under the Federal Agriculture Improvement and Reform (FAIR) Act of 1996, have, for the most part been sound programs. They have served to conserve our soil resources, enhance wildlife habitat and improve the quality of both air and water through participation incentives and technical assistance. However, we believe there is room for improvement in two general areas. First, it is important that the level of funding be adequate to ensure the long-term success of these initiatives. Second, a key priority of these programs should be to target assistance to family-sized farm and ranch operations. We believe such an approach will serve to promote the broadest possible development and application of conservation measures, while reducing the likelihood that these programs encourage further concentration of agricultural resources or provide unneeded subsidies to large, integrated agricultural operations.

After reviewing the current programs we would make the following observations and suggestions concerning specific conservation program authorities and funding levels:

The Conservation Reserve Program has been the most successful conservation program in our nation's history. The original CRP legislation has significantly reduced soil erosion and dramatically improved wildlife habitat, by idling highly erodible and environmentally sensitive land.

We support raising the cap on total enrollment to at least 40 million acres, while ensuring compensation rates are comparable to local rental rates. In order to lessen the impact on rural communities, the emphasis on whole farm enrollments should be reduced and the aggregate county entry limits should be reviewed and enforced. However, whole field enrollment, where common sense dictates, can encourage producer actions to maximize the conservation and habitat benefits of the program.

In addition, the requirements and benefits of planting expensive and often unneeded five-way seed mixtures as cover crops should be reviewed. For CRP acreage that is to be re-enrolled in the program, a field inspection should be conducted to determine whether the current cover crop contains desired multiple plant species.

We also support authorization to allow the enrollment of farmable wetlands into the CRP, similar to a pilot program about to be implemented in South Dakota.

We recommend expanding the WRP by removing the cumulative acreage cap and providing such funds necessary to address the current and future demand for this worthy program.

A number of states have initiated state-funded farmland protection programs. We support additional funding for this program to encourage greater cooperation between federal and state authorities in order to protect and preserve farmland from development.

The Wildlife Habitat Incentives Program is a program to encourage the development of habitat for fish and wildlife on private property through cost-share assistance for habitat development and implementation. We support the goals of the program, encourage that endangered-species habitats be included as a priority and urge that the program be re-authorized and funded at sufficient levels.

This program has been successful in providing financial, technical and educational assistance to farmers and ranchers. However, its success has been limited due to funding levels that were reduced shortly after the program was authorized. The lack of adequate funding has resulted in the rejection of many worthwhile projects that would have received cost-share assistance under the old Agriculture Conservation Program (ACP), the predecessor to EQIP, and forced a singular focus on broad-based watershed priorities. As you might expect, this has created bitter feelings among some farmers and ranchers. We recommend additional funding for EQIP to address the tremendous demand for this program, which has been estimated at three times the current funding level.

This program is beneficial to farmers and ranchers that receive cost-share assistance for implementing conservation systems. However, action is needed to ensure that NRCS has the resources to provide technical assistance to those producers who want to adopt sound conservation practices but are not seeking cost-share assistance.

For example, if a producer already has terraces in place and wants to shift from a minimum tillage to no-till planting, he needs access to timely technical assistance in order to successfully make the transition to a higher level of applied conservation.

This initiative is designed to provide technical, educational and related assistance to owners of private grazing lands in order expand the multifunction of this resource through better management, erosion protection, water conservation, habitat development and greenhouse gas sequestration. Although not a cost-share program, the technical assistance concepts contained in the CPGL are clearly consistent with the development of a mutually beneficial private/public partnership to enhance the productivity and sustainability of privately owned resources and should be supported.

In addition to suggested improvements in the existing conservation, habitat and technical assistance programs, the National Farmers Union also urges consideration of several new initiatives that are complementary to the ongoing efforts to ensure the sustainability and high level of stewardship of our agricultural natural-resource base.

The Conservation Security Act (CSA), a bipartisan congressional proposal, provides voluntary incentive payments to producers for the application of appropriate conservation measures on land that is currently and likely to remain in production. The CSA is designed to target conservation payments to family farmers and ranchers engaged in production agriculture in a way that is consistent with our obligations under the World Trade Organization (WTO), while encouraging increased levels of environmental stewardship. We support this framework for conservation payments as a way to reward both those who have undertaken the establishment of conservation practices in the past and those who implement future activities.

The Conservation Security Act creates the Conservation Security Program (CSP) that provides a comprehensive, flexible, voluntary approach to farm conservation policy by providing incentive payments to all farmers and ranchers ("farmers") for maintaining or adopting conservation practices on land in production. The stated objectives of the CSP are to promote conservation and protection of soil, water, and energy; protection of wetlands and wildlife habitat; and bio-diversity.

In order to participate in the CSA, farmers enter Conservation Security Contracts that contain a conservation security plan outlining the practices to be adopted, with the secretary of agriculture. There are three Tiers of practices. Tier III practices are the most extensive. Tier I contracts last 5 years and Tier II & III contracts last from 5 to 10 years at the option of the farmer or rancher.

Tier I practices including nutrient management, pest management, cover cropping, can be adopted individually. Tier II practices are system practices, including rotational grazing, buffers and borders, wetland restoration, in addition to Class I practices. Tier III requires implementation of practices that address all resources of the farm, in addition to Class I and II practices.

The Tier I annual payment cap is $20,000, while the annual payment caps for Tier II and Tier III are $35,000 and $50,000 respectively. As participants in the CSA, farmers and ranchers will receive a one-time immediate payment equal to the greater of 20 percent of the annual payment or $1,000 for Tier I, $2,000 for Tier II, or $3,000 for Tier III that is deducted from the total value of the contract. The payments would be categorized as non-trade distorting "Green box" payments and therefore not subject to WTO discipline.

Payment criteria are based on environmental benefits; forgone income for maintaining or instituting the practices, benefit to wildlife, cumulative watershed benefit (if a certain percentage of landowners in a watershed participate, the payment is higher), costs associated with farm research and demonstration projects and costs of monitoring the results.

The CSP complements current conservation programs, and does not take money away from other federal conservation programs. Farmers can still receive incentive and cost-share payments under federal agriculture programs that cover non-CSP land. In addition, a participant may receive payment and cost-share from any other non-federal source on the same land enrolled in the CSP.

Program funding comes from the Commodity Credit Corporation. In addition to the technical assistance provided to USDA (NRCS), the CSA includes funding for education, outreach, and monitoring.

In many parts of our country, adverse weather, disease, and pests have decimated significant areas of cropland. The incidence of these problems has reduced the productive capacity of the land and poses an ongoing threat to that capacity for at least an intermediate term of 3 to 5 years.

We support the implementation of a limited, intermediate-term soil rehabilitation program that would provide both technical and economic assistance to family farmers so they may undertake needed stewardship activities to restore these resources to at least a historic level of productivity.

For example, in the Northern Plains the disease fusarium head blight, also known as scab, has reduced the yield and quality potential of wheat, durum and barley production significantly in recent years. Due to the accumulation of disease innoculum in the soil, lack of resistant grain varieties and agronomic limitations on alternative crop production, producers must either assume excessive production risk or discontinue production of those traditional crops until the level of the pathogen is reduced to more manageable levels.

The program would apply to those who experience devastating droughts and floods causing soil productivity to be severely affected. Currently very limited tools exist to address reduced productivity and soil rehabilitation problems that are for the most part, beyond the economic capacity of most producers to rectify without federal assistance. In addition, this program will help mitigate the loss of Actual Production History for crop insurance purposes and reduce crop insurance indemnity payments as well as pressure for ad hoc disaster programs.

The issue of global warming caused by greenhouse gas emissions is becoming more scientifically validated each year. Agriculture is in a unique position to provide an environmental offset to carbon dioxide releases into the atmosphere through sequestration of carbon in the soil.

We support appropriate greenhouse gas emission regulation, incentives and technical assistance to encourage the implementation of crop and livestock production activities to establish and compensate producers for on-farm carbon sequestration. In addition, this initiative should promote the development of a commercial market for carbon sequestration credits that is open to participation by producers and or their cooperatives.

Our analysis of the conservation programs provides a projection of expected outlays, including an increase in the expected payment rates for new entries in the CRP and soil rehabilitation program above current average CRP levels. (table 14) While many of these programs will also likely result in improved commodity prices, we have not attributed any potential commodity program savings to their implementation.

The NFU has historically supported strong and effective crop insurance program, including adoption of the "Agricultural Risk Protection Act of 2000". We do not believe, however, that crop insurance should be considered a substitute for other domestic economic safety net programs.

The crop insurance modifications approved in last year's legislation provide both increased participation incentives to producers as well as the opportunity to expand coverage for non-traditional crops and geographic regions. While we believe the program needs a reasonable amount of time to be fully implemented and reviewed, we remain concerned that, even with the program improvements, crop insurance still subjects the producer to significant economic risk before any indemnification begins. For this reason, we have proposed commodity program elements that allow a producer to reduce his risk while resulting in potential savings to the government for the commodity and/or crop insurance programs.

The production loss reserve (PLR) provides eligible producers with the option to hold a portion of their average annual production in a reserve that can be utilized to offset a portion of the losses they suffer before crop insurance coverage begins. This program can serve to reduce farm program outlays as well as the need for ad hoc emergency assistance. In addition, by requiring the purchase of "buy-up" insurance as a condition of eligibility, the PLR also provides an incentive that will encourage an even broader level of participation in the crop insurance program improving its actuarial soundness and reducing its public cost.

We believe the intermediate-term soil rehabilitation program is also consistent with our long-term risk management goals. By encouraging a limited number of acres to be retired from production for a period of time in order to restore their productivity, the program will reduce the level of indemnities paid on land that most would concur is "high risk" until the production problems can be resolved. At the same time the economic risk for producers is reduced in the short term while they are allowed to maintain their Actual Production History at a level more in line with the long term yield expectations.

It is remarkable that in this time of unprecedented prosperity, declining federal debt and large tax cuts that a significant number of people in this huge land mass we call rural America are being left behind. Farmers have become more dependent than ever on federal funds to survive. Small rural communities continue to decline and disappear. Just as in the 1930's and 1940's farmers and rural American's must be given the tools to find their own type of prosperity. We are beginning to see the re-emergence of the same spirit that caused our parents and grandparents to break new land, string electric wires, start new cooperatives, build homes, and build schools and whole communities. This renaissance of the old value of self help is expressing itself in the creation of new value added farmer owned cooperatives, new sources of energy including ethanol and wind, and increased desire to access the new technologies. It is incumbent on the federal government to recognize that since the time it gave away free land to encourage the settlement of the plains and prairies that it has held the role of developing the rural economy. It's primary tool for that development effort has been the programs provided by the United States Department of Agriculture.

In the seven years since it's creation in 1994, USDA Rural Development has taken on some of the most difficult, and-by necessity, most creative tasks in rural America. Whether it is the creation of new value added projects in farm country, a new cooperative housing project in the deep South or an Empowerment Zone on the Pine Ridge Indian Reservation, Rural Development has consistently stepped up to the plate and found solutions to tough problems.

National Farmers Union believes it's time to expand the mission of this agency by adding new tools to the toolbox and by expanding on the existing ones. We do not propose broad new programs but we do propose to expand on the philosophies that currently drive the mission area's four major thrusts. With our proposed adjustments we believe that hundred's of rural Americans will see an improvement in their standard of living. The price for these expanded services will be modest, approximately nine percent more then the current budget. Rural Development's four agencies, Rural Utilities Service, Rural Housing Service, Rural Business Cooperative Service and the Office of Community Development, are uniquely positioned among federal agencies to address the needs of rural America. With their local field office structure and experienced staff the agencies of Rural Development have the greatest potential for successfully addressing the needs of our rural citizens.

The adoption and implementation of our proposals will mean improved housing in our most rural areas, new value added cooperatives in our farm communities and greater access to technology in remote communities.

We believe it is imperative that USDA continues as the principal agency in development and delivery of these programs under the oversight of the House and Senate Agriculture Committees.

We have addressed our proposals to modifications in the law relative to each of Rural Development's four major missions:

We believe that our proposed new emphasis on cooperative development, program adjustments and new programs will assist farmers in becoming part of a value added cooperative and help reduce the increased dependence of farmers on federal government payments for their income. These changes directly improve the capacity of the government to assist the formation of these new ventures. First, the Cooperative Development Centers should be expanded to all states and funding established on a three-year cycle to encourage these centers in their efforts. We also recommend that the Cooperative Stock Share Program be improved by making it available for expansion of existing cooperatives, removal of the requirement for review of farmer's financial statements and elimination of the requirement for additional collateral besides the stock. This program has not been implemented in the way Congress intended. We believe it is necessary to clarify these issues in order to insure it's full utilization.

We also support providing each state economic development office with $1 million of feasibility study money. The feasibility of any venture is critical and these funds will help make sure that these projects are in fact viable prior to the investment of larger amounts of capital.

Congress should increase the cooperative development staff by 50, one for each state. USDA has not been able to meet the growing demand for cooperative development services. These new FTE's are essential to accomplish the mission.

We recommend the creation of a forgivable loan program for investment in intangible assets that can't be funded by existing programs. Current programs require collateral before a loan can be made but some newly created marketing cooperatives do not have hard assets and have needs for capital.

We encourage Congress to authorize and fund a rural cooperative and business equity fund. Under-capitalization has been one of the significant downfalls of many cooperatives. Additional capital would make the difference between success and failure for some cooperatives.

In addition, we support the initiation of a cooperative stock share risk program for which the government accepts part of the risk for a small farmer to invest in a value-added cooperative. Many limited resource farmers are not able to become part of new generation projects by accepting part of the risk USDA would make it possible for them to be included in value-added ventures.

We also believe the fees on Business and Industry Loan Guarantee fees should be capped at 2 percent. Currently, there are proposals to raise this fee to 3 percent, capping it at 2 percent will help keep the program affordable.

Finally, the name of the service should be changed to the Rural Cooperative Business Service, to recognize the importance of development of new cooperatives and shift the agencies focus to this mission.

We believe these changes will assist thousand's of farmers and small town residents in accessing previously unavailable funds for housing. Additionally, families will see a reduced cost in achieving affordable housing in rural areas. In order to accomplish this, the program rules need to be changed to assist farmers and citizens of small communities in accessing affordable housing by adjusting the program to allow for the way farmers calculate income. There is a significant gap in availability for 30-year credit for homes on farms. Farms Service Agency programs seldom are used and Rural Housing Service programs were not designed for farms. The agency should also be required to aggressively offer the program to farmers. In addition, regulations should allow for appraisal adjustments in small towns. Small towns often lack available credit because appraisals frequently don't meet the requirements of the agency; adjustments would help make more loans possible. Finally, rollback the increased loan guarantee fees from the current 2 percent to 1 percent. The recent increase in loan guarantee fees have made these loans much less affordable and have negatively impacted on the program.

These changes could improve access to technology, create new jobs and provide new alternative energy sources. We support adding tele-work as an eligible purpose to the distance learning tele-medicine program and increase its funding. Creation of distance working centers are one of the most creative new ideas for creating jobs in remote area's, this proposal allows for grants and loans to start these centers. Furthermore, we believe a grant/loan program for remote communities should be established to access delivery of high speed internet and other technology services. The program would work similarly to the existing water and sewer program, making technology as affordable in remote locations as in more heavily populated areas.

These strategic proposals would reaffirm the empowerment process and continue the Office of Community Development's efforts to expand the agency's efforts in providing technical assistance. These proposals could directly benefit 75,000 rural Americans. We recommend that a new round of five rural Empowerment Zones and twenty Enterprise Communities be authorized. While there are other alternative proposals this empowerment process has proven itself and should be continued. State Directors should also be allowed to create and assist Champion Communities and Enterprise Communities within existing budget authority. Providing state directors greater latitude to use their resources to meet the needs of special circumstance communities would greatly improve effectiveness of the program. In addition, we support the authorization of a new grant program to assist small business facilitation programs.

The overall impact of these changes will dramatically expand the mission of USDA/Rural Development. During discussion of the farm bill, it is important that Congress recognize the need to aggressively expand the missions of USDA/Rural Development. If rural America is going to move toward a time of more sustainable economic development, we must address these priorities.

The total cost for these programs is estimated to be approximately $625 million in FY 2002 and $225 million each year thereafter. (table 14)

The National Farmers Union fully understands and appreciates the potential benefits that can be achieved through agricultural trade. We recognize these benefits can accrue not only to America's farmers and ranchers, but also our economy in general as well as a significant portion of the world's population that is, at least in part, dependent upon agricultural trade to ensure an adequate level of nutrition.

We are concerned however that U.S. agriculture has become so focused on the volume of exports as a panacea that will cure for all its economic problems and miraculously create prosperity for farmers that we fail to maintain any sense of objectivity when discussing trade issues. Instead, we find a variety of excuses for the inability of agricultural trade to meet the high level of expectation that we ourselves create while doing little to resolve those issues or recognize them as inherent long term limitations on our trade future. At the same time we generally ignore our domestic market that has provided the most consistent and highest level of growth for agriculture even while we experience greater competition in our own backyard. Furthermore, the U.S. market continues to present new opportunities for increased demand for not only food and fiber products but also alternative markets for farm commodities.

The policy direction of the 1996 farm bill was in large part based on the assumption that the volume growth in U.S. agricultural exports that in fact peaked in 1996 would continue unabated in the future. Growth in export demand from the U.S. was expected to be driven by world population growth, increased incomes overseas and a domestic farm policy that would force others to adjust to market conditions. None of these assumptions have been proven to be correct. In fact, the opposite has occurred.

Countries continue to place a high value on food self-sufficiency, security and national views concerning food safety, quality and the "value" of a domestic agricultural system.

In addition, for U.S. producers and farmers around the world, their inability to influence the prices they receive for their production results in a rational decision to maximize production even when commodity prices decline.

Agricultural trade continues to provide the residual supply necessary to supplement domestic food production when it fails to meet local demand due to weather or other factors.

We understand the emphasis export merchandisers place on sales volumes, as the major determinant of their economic success. We also note, that most exporters, including some U.S. cooperatives, operate multi-nationally, thus their company interest is not the same as our national objectives in terms of ensuring that benefits from trade accrue to U.S. farmers or the domestic economy in general. For our farmers, however, the situation is different, their market concerns are a combination of both sales volume and price associated with domestic and export markets as well as the effects of import competition.

In 1996 little attention was paid to farm prices, producer incomes or imports of competitive products because of the belief that U.S. farmers would be the "low cost" producers of commodities ensuring their competitive position in world markets if various forms of government intervention could be reduced or removed. As we should now be aware, our comparative production and trade advantage predicated on a superior natural resource base, adoption of advanced technology and an efficient marketing system no longer assures our competitiveness.

Compared to the 1990/91-1991/92 period, U.S. agricultural export volumes for wheat declined in the 1995/96-1996/97 period by 4.6 percent. Farm-gate export earnings however increased 50 percent. The positive improvement was due entirely to the prices received by wheat growers. For the 1998/99-1999/00 period export volume further declined to a level 9.3 percent below the base period while the producer value of exports fell 17.6 percent. Nearly one-half of the decline in wheat export earnings was due to reduced prices.

For corn, compared to the same 1990/91-1991/92 period, the 1995/96-1996/97 farm-gate export earnings increase of 57.2 percent was about 38 percent due to increased export volume and 62 percent the result increased producer prices. An increase in volume of 18.3 percent and decrease in the farm-gate export value of 4.3 percent characterized the 1998/99-1999/00 period. Declining corn prices from the base period resulted in a loss of nearly 23 percent of potential export earnings.

The soybean example provides a similar conclusion. In the mid-1990's volume increased nearly 47 percent over the base years, while producer export earnings increased about 83 percent. Over 43 percent of the improved soybean export situation was due to price. For the 1998/99-1999/00 period compared to 1990/91-1991/92 export volume increased 50.7 percent but export earnings were up only 26.8 percent due to producer price declines relative to the base period.

Commodity prices have had a much greater impact on producer income from exports than have export volumes.

While a great deal of attention was focused on our export performance in the mid-1990's, policy makers and analysts ignored the other side of the ledger, that of competitive imports - those imported products that are also produced in the U.S. In 1979, U.S. farm exports were about 53 percent of the 1996 level but competitive imports were only 28.4 percent of our agricultural exports, and our agricultural balance of trade was nearly $16 billion.

By 1989 our agricultural balance of trade had grown to over $18 billion, but competitive imports had increased to over 38 percent of our export levels and amounted to nearly 71 percent of all imports.

In 1996, our record export year, our trade balance declined about $1 billion from the 1989 level as competitive import products represented over 40% of our export level and 75% of all agricultural imports.

Preliminary data for 2000 project a positive trade balance of only $12 billion, about two-thirds of the 1989 level, while imports that compete directly with U.S. production increased to over 60 percent of our export sales and nearly 80 percent of all U.S. agricultural imports.

The U.S. can continue to blame periodic failure of the export market to achieve our expectations on one or more global events and/or trade policies such as the Asian financial crisis, trade distorting public policy or U.S. food sanctions. We agree these issues have an impact on our export potential. However, any objective person would not assume away these issues in planning for the future when no mechanisms have been put in place to fully mitigate their impact or when other, likely more important, concerns fail to be discussed or acted upon.

For farmers and ranchers, the test of trade policy and export promotion and sales programs is the impact those initiatives have on their income and future economic opportunity. Creating a "level playing field" to address a broad range of trade distorting and anti-competitive practices rather that some philosophical or moral "high road" in global trade should be the objective of our policies here at home as well as in negotiations with our trade partners and competitors.

The U.S. has tended to view the traditional trade issues of export subsidies, market access, sanitary/phytosanitary regulations, dispute resolution and domestic agricultural support programs as the universe for trade negotiations and application of domestic trade law remedies. The farm bill provides an opportunity to further elaborate trade issues and develop a cohesive U.S. agricultural trade strategy. However, we too often have utilized this tool as a way to legislate a reaction to the policies of others or extend, without a full review of their effectiveness, current domestic trade objectives.

We support efforts to limit the most distorting characteristics of these issues as long as responsible food security and agricultural policy flexibility is maintained. We believe, however, this rather myopic view of agricultural trade has led us to promote and accept trade agreements that both ignore other important issues that impact our trade competitiveness and potential, as well as sacrifice significant protections against the unfair trade practices of others.

Issues such as exchange rate fluctuations and manipulation, labor standards and the application of environmental practices may well have more to do with our global competitiveness and ability to achieve consistent long term export demand growth than the traditional undertakings in trade negotiations.

The U.S. should expect limited export gains from further multilateral discipline of export subsidies or market access provisions unless and until the issue of exchange rates can be satisfactorily resolved. In addition, the growth in competitive imports should be expected to continue as relative currency values make foreign goods cheaper in our own market that remains one of the least protected from agricultural imports of any in the world. It is unlikely U.S. farmers will benefit from enhanced market opportunities as long as the U.S. dollar remains strong and overvalued compared to the currencies of our major export/import competitors as well as potential international customers.

For many producers, particularly those engaged in labor intensive, specialty crop production, the issues of labor cost and availability directly effect our ability to compete with other global producers. It should not be our goal to reduce the economic position of workers or the health and safety regulations that serve to enhance their productivity. The U.S. likely has more to gain than any other nation by ensuring that progressive commitments are made to establish comparable and enforceable labor standards as part of all future trade agreements.

Environmental standards impact not only the competitive position of the U.S. producers, but also represent increasingly important elements in ensuring long term global food security and natural resource sustainability that in many cases go hand in hand with efforts to improve and harmonize sanitary and phytosanitary regulations.

For U.S. producers, domestic environmental regulations provide "public" goods in a variety of ways including cleaner air and water and enhanced safety for both agricultural workers as well as domestic and international consumers. However, these regulations also require U.S. producers to incur costs that many of our competitors avoid. In many cases it is the application of U.S. domestic laws that contribute to the reduced competitiveness of our own growers. For example, last year, U.S. producers were precluded from purchasing a less expensive but equally safe and efficacious wheat fungicide from Canadian sources that was comparable to a product registered for use in the U.S. although we allowed Canadian wheat to be imported that was treated with the "illegal" product. Similarly, we do not allow U.S. producers to purchase products already registered in the U.S. from foreign sources, e.g. Canada, even though the only difference in the product is the price and style of the label.

These problems have only been exacerbated with the introduction of genetically engineered crops. These crops generally require the payment of premiums and technology fees as well as commitments to other contractual obligations by U.S. producers, while the same seed may be purchased by a competitor without any of the conditions imposed by the developer in the U.S. market.

Furthermore, many products that have either been banned for use by U.S. farmers or never registered in the U.S. are available to foreign producers who then export their production to us or directly compete with U.S. producers in overseas markets.

Whether in the area of crop production products or resource management, the U.S. should be proud of the efforts it has made to date as well as our future prospects that will promote a more environmentally friendly and sustainable production agriculture system. However, we must recognize these benefits accrue a cost to producers that cannot be passed on to consumers through higher commodity prices in the marketplace without further eroding our competitive position.

Environmental policy considerations should be a component of trade negotiations to ensure fair market competition and encourage higher, enforceable global standards for environmental stewardship. In addition, U.S. environmental and resource conservation policy should be a significant part of our domestic policy discussions to provide compensation to producers for the public benefits they provide while making sure that programs and regulations make sense and are consistently enforced within our country and at our borders.

As the U.S. engages in the negotiation of regional and global trade agreements as well as the development of domestic trade and export policy, we believe certain objectives must be achieved to create opportunities for farmers and ranchers to realize the benefits of agricultural trade.

The current U.S. position concerning trade agreements continues to focus on the traditional issues. We believe a critical component of that process is to seek the correction of many of the problems that exist with current agreements. These include: 1) strengthening our capacity to monitor compliance, particularly in the case of new agreements or the expansion of agreements to additional countries, 2) reforming the dispute resolution process in both the WTO and regional agreements; and, 3) ensuring that comparable health, safety, labor and environmental standards that apply to U.S. producers are implemented and enforced by our trading partners.

Furthermore, we should extend tariff and tariff rate quota coverage to imports that currently circumvent our customs schedules such as "stuffed molasses" and expand the application of end-use certificates to legally imported products where utilization is restricted under domestic law, e.g. milk protein concentrate. In addition, the U.S. should require country of origin labeling for imported agricultural products.

We will oppose further proportional reductions in trade and domestic policies that serve to reduce our capacity and flexibility to respond to unfair or unforeseen trade and economic circumstances until other nations achieve a comparable level of reduction relative to the size of their agricultural industry.

In terms of domestic trade policy, we oppose any effort to weaken or negotiate reductions in current U.S. trade law including the antidumping, countervailing duty, Section 201 and Section 301 trade remedies.

The NFU urges a full review of all current export promotion and sales incentive programs funded by the government to determine their impact on producer incomes. In addition, we support an expanded review of current practices, policies and barriers to fair trade employed by others to include the impact of exchange rates and the effects of differing labor and environmental standards.

We support legislation and/or executive action that eliminates the application of foreign policy sanctions on other nations with regard to agricultural or medical products, including Cuba.

Furthermore, we support domestic policies that provide and extend assistance to agricultural sectors or producers that have been adversely effected by the unfair trade practices of others or subject to the negative impact significant increases in the level of import competition. This should include full implementation of the so-called Byrd Amendment to the FY 2000 agriculture appropriations legislation as well as expansion of the Trade Adjustment Assistance Act to include appropriate provisions that would apply to production agriculture.

Addressing the aforementioned concerns and objectives can improve the potential for U.S. farmers and ranchers to benefit from agricultural exports. In addition, other opportunities should be pursued to increase both short and long-term demand for U.S. food products and achieve a better balance between global agriculture production capacity and real consumer demand.

We fully support and encourage both unilateral and multilateral action to expand the use of humanitarian food assistance for developing nations, including the implementation of an international school lunch program and appropriate commodity reserves to ensure supply adequacy during periods of production shortfalls.

The school lunch program will result in improved levels of education and nutrition for a population estimated to exceed 300 million children who are currently malnourished. Additionally, it will provide a solid foundation for future economic development and commercial demand for agricultural products in countries whose capacity for economic growth may remain severely limited without assistance. At a time when the developed countries and their agricultural producers face real problems due to an oversupply of farm commodities, this cooperative program can help achieve a better supply/demand balance globally. Furthermore such a program will reduce the incentives for surplus producing nations to utilize trade-distorting practices to maximize export volumes in order to maintain or expand market shares.

Even the best efforts to enhance global demand and distribution for agricultural products may still be inadequate to achieve a balance of supply and demand that provides reasonable returns to producers while ensuring global food security at affordable consumer prices. We believe the U.S. should seek international cooperation to address the potential for surplus production of agricultural commodities and contain and reduce the anti-competitive practices and results of increased integration within agriculture.

This should be accomplished in ways that are consistent with international food security objectives such as shared buffer stock responsibilities, global environmental needs including the reduction of greenhouse gases through on-farm carbon sequestration and national priorities that address non-food production benefits of agriculture and rural communities.

The NFU believes that future economic success for farmers and ranchers is dependent upon access to an adequate amount of reasonably and competitively priced credit that is available to all producers who meet consistently applied eligibility criteria without regard to race, gender or operating scale.

By many financial measurement tools, it would appear that U.S. agriculture is in reasonably good health and adequate credit is available from a wide range of traditional sources. However, the improved financial condition of agricultural lenders, reduced level of loan delinquencies and charge-offs and supply of credit are do in large part to a combination of factors that suggest the financial health of agriculture is not as rosy as the data may suggest.

Since 1996, the federal government has provided about $69 billion in payments to agricultural producers through farm programs and additional economic support through a more broadly available crop insurance program that has improved participation incentives. Program payments include: Agricultural Market Transition Act (AMTA) contract payments and loan deficiency payments or marketing loan gains as well as just under $30 billion in supplemental economic assistance since 1998. Subsidized crop insurance coverage has been expanded to more crops and regions and purchase incentives have been improved through both ad hoc programs as well as permanent legislative action in addition to the revival of annual production-loss assistance programs.

The financial situation of U.S. producers, agricultural lenders, other agricultural sectors and many rural communities would look entirely different if producers had been forced to rely solely on the market oriented promises of the FAIR Act and had not received annual infusions of new capital through the supplemental assistance provided over the last three years.

Although the current situation is significantly different than that which existed during the farm financial crisis of the 1980's, the underlying problem is much the same. The period leading up to the 1980's crisis was characterized by significant inflation in production costs, fixed asset values and high nominal interest rates that were unable to be sustained by either the earning capacity of individual farms or alternative uses for agricultural resources. Increased debt loads were accommodated through equity financing based on inflated assets. When policies aimed at reducing the level of inflation pervasive throughout the economy were implemented, both many farm families and their creditors were placed under great stress resulting in a large number of family farm bankruptcies, agricultural bank failures and the near collapse of the farm credit system.

As a direct result of the late 1980's experience, both farming and agricultural lending have undergone significant restructuring and consolidation. Agricultural lending standards have been modified to incorporate better analytical tools and focus more on cash flow and repayment capacity.

The structural change in agriculture today is less abrupt in terms of foreclosures, bankruptcies, bank failures and auction sales and therefore less noticeable to the public than that which occurred in the 1980's. However, at the farm level significant adjustments are continuing.

Changes in credit practices, when combined with a generally soft farm economy in terms of the relationship of prices received by farmers to prices paid have contributed to the further consolidation of commercial farms and a noticeable shift in farm operation characteristics to the extremes. Increasingly, agriculture is characterized by a relatively small group of very large farms, i.e. with sales over $500,000 per year, and a large number, about 80% of all farm operations, that are smaller farms with annual sales less than $100,000. Many of these smaller farms are part-time operations dependent on off-farm income.

Commercial agricultural credit is generally obtained from four sources: commercial banks, Farm Credit System associations (FCS), life insurance companies and supplier credit provided input suppliers, merchandisers and processors.

Banks and the FCS provide the vast majority of agricultural credit across a wide range of needs, while insurance company agricultural portfolios are almost entirely comprised of long-term real estate loans.

An increasing amount of credit is provided by input suppliers and processors through intermediate-term credit for asset purchases such as machinery and equipment as well as short-term operating credit based on accounts receivable for production inputs or commodity delivery contracts.

The structural and operational adjustments made by commercial banks and the FCS as a result of the 1980's experience, the more general consolidation of financial institutions in recent years and increased use of agricultural credit guarantees provided through the Farm Service Agency has resulted in greatly improved financial strength of commercial lenders and, at least the appearance that an adequate level of agricultural credit is available at least for some borrowers.

The Farm Credit System had a 19.7 percent share of all farm operator debt. However, nearly 36 percent of its lending to farm operators was to operations with over $500,000 in sales but only 10.7 and 16.9 percent respectively of its lending was to operators in the Under $100,000 and $100,000 to $250,000 sales classes where farming was the primary occupation of the operator.

The Farm Credit Administration proposal for National Chartering within the FCS may as suggested, increase market competition among lenders. In the short term this could result in reduced interest and loan fees for borrowers. However, allowing national chartering may result in a new round of system consolidations and further reductions in local control that could exacerbate the distribution of credit among all producers, and result in a greater disparity in credit availability and borrowing costs among different sized farm operations.

Similarly, the number of commercial agricultural banks declined by about 2900 banks or over 25 percent between 1992 and 1999. In 1999, commercial banks provided 43 percent to 50 percent of the credit in each USDA sales class, comparable to its 46.6 percent share of all agricultural debt. However, 21.4% of its lending portfolio to farm operators was to those with over $500,000 in sales while 15.1 percent was to operators with less than $100,000 in sales and 17.1 percent to those with $100,000 to $250,000 in agricultural sales.

USDA's Farm Service Agency is responsible for administering the direct and guaranteed loan programs for farm ownership and operating credit and direct emergency disaster loans. Portions of the non-emergency loan funds are reserved for socially disadvantage family farmers and beginning farmers.

Under the guaranteed loan program, USDA guarantees a private lender repayment of the interest and 90 percent of the loan principal. Qualifying borrowers may be eligible for interest rate assistance where FSA pays for a 4-percentage point reduction in the borrower's interest rate. USDA has also implemented a preferred lender program that allows qualified lenders to expedite the process of providing guaranteed loans to eligible borrowers. Direct loans are made and serviced by USDA with interest rates based on the cost of borrowing from the U.S. Treasury.

The quality of the government's agricultural credit portfolio has improved significantly in terms of the relative number and value of loan delinquencies for both the direct and guaranteed loan programs due in large part to supplemental payments to producers over the past three years.

For fiscal year 2001, FSA lending authority is $4 billion comprised of $3 billion included in the FY 2001 appropriations legislation and $1 billion in unused funds carried over from the prior year. This compares to $5.6 billion authorized in FY 2000 of which $3.7 billion was utilized in that year's programs. The 2001 appropriations legislation provided authority for FSA to address funding shortfalls in specific programs by allowing it to transfer funds between the farm ownership and operating loan programs.

In addition, the 2001 program levels indicate a continuation of the trend toward greater reliance on the guaranteed loan program for both farm ownership and operating credit as the direct loan program level is reduced about 30 percent from the prior year.

Since the passage of the Agricultural Credit Act of 1987, farm credit legislation has attempted to determine the proper role for USDA as a "lender of last resort". Credit initiatives, including the credit title of the 1996 farm bill, have increasingly tightened the requirements concerning loan delinquencies and write-downs as well as program eligibility requirements. Like many legislative actions, these efforts tended to reflect the improved outlook for agriculture based on the conditions existing at the time of passage.

We are concerned that the impact of these changes in agricultural lending is resulting in structural changes in production agriculture that encourage and disproportionately benefit large scale operations to the disadvantage of family farmers. We urge the Committee to authorize a study and solicit recommendations from a qualified third party to review the impact and effect of concentration and expanded financial service opportunities in the commercial and cooperative lending sectors on all scales of farming and ranching operations, related agricultural sectors and rural communities.

The National Farmers Union believes that all producers who meet the eligibility requirements for FSA loan programs should be assured access to credit in a timely fashion. We recommend that the Secretary of Agriculture be given even broader flexibility in transferring funds from program to program and state to state in order to ensure the timely availability of credit to producers. In addition, we urged the Committee to consider providing the Secretary emergency short-term borrowing authority from the Commodity Credit Corporation to address any temporary short-falls in appropriated funds that may occur in the programs.

In order to expedite the application, review and approval process, we request the Committee review on a regular basis USDA efforts to: 1) Expand the preferred lender program. 2) Ensure adequate personnel levels and training for credit specialists in local FSA offices. 3) Develop new, simplified application procedures, such as electronic decision trees, to ensure comparability in the qualification and application process. 4) Explore the need and desirability of providing a centralized, potentially electronic review, oversight and appeal process. 5) Review the conditions that encourage and/or require graduation from FSA lending programs to commercial credit, including the consistency of their application in all regions of the country.

Given the on-going economic problems faced by farmers and ranchers due to generally low commodity prices and weather-related production losses, the potential for an increase in the level of delinquent payments and need for loan restructuring and/or write-downs could increase. We believe the limitations concerning eligibility for FSA direct and guaranteed loan programs should be reviewed as they apply to producers who have availed themselves of previous loan reductions programs.

Anecdotally, we have also received may comments this spring from producers who were having difficulty obtaining operating credit due to their inability to make timely payments of prior loan obligations because of the uncertainty of payments under various federal disaster programs. It appears that either the Secretary's authority to mitigate these problems is not being fully utilized, or additional authority is required.

In addition, many shared appreciation agreements that were signed during the last agricultural credit crisis are maturing at a time when the ability of many to fulfill those obligations is diminished although farm asset values have been stable or increasing. There is also confusion concerning capital investment in assets after a shared appreciation agreement was executed and any producer liability for the asset appreciation due to those improvements. We support utilizing production value as a basis for shared appreciation and forgiveness of any appreciation resulting from conservation easements. The asset appreciation impact of any post agreement investment should also be deducted from the current value of the assets subject to shared appreciation, including those that matured prior to August 18, 2000. Also, FSA should be required to notify and offer the special financing of recapture repayments contained in the fiscal 2001 agricultural appropriations act to all producers subject to shared appreciation agreements.

Specific levels of FSA credit funding have been allocated and reserved for beginning farmers since 1994 to encourage new entrants into production agriculture. The direct supervised credit program programs have been successful, and should be expanded through an increase in budget authority of $100 million and a $1 billion increase in program level. Additionally, new, cost-effective innovations should be explored and implemented on a pilot program basis to further encourage the intergenerational transfer of farming operations.

While credit is one important component of such an objective, we believe additional options should be explored utilizing USDA's credit guarantee authority through programs such as "Aggie Bonds" and private sales contract guarantees for farm purchase transactions by beginning farmers.

Integration of FSA farm loans and grants to states in a "Farm Link" program could create a cost-effective opportunity for beginning farmers by providing assistance to both them and retiring producers. The expanded grant portion of this program would cost an estimated $25 million per year.

Additionally, a grant-in-lieu-of-credit program, limited to outlays similar to those associated with the cost of interest rate buy-downs could be effective in providing beginning farmers with the equity necessary to enter agriculture without the high leverage factor associated with credit programs.

Success in agriculture, particularly for beginning farmers, socially disadvantaged farmers and other smaller producers, is increasingly tied to market access and the ability to enhance the value of their commodities through processing and merchandising. Unfortunately, many of the producers who most need the ability to share in value added businesses, including farmer-owned cooperatives, are unable to generate the capital required for participation. We support expanding the FSA loan guarantee program to include loans to finance producer ownership of value added enterprises, and encourage the Committee to explore additional means to provide initial capital for the creation of new value-added cooperatives, including direct investments by agricultural lending institutions.

Finally, we urge Congress, at a minimum, to approve in a timely manner an additional of Chapter 12 extension through June 30, 2002 or until such time as the provisions are made a permanent part of the code.

Price and competition are two issues that concern our members most. The rapid pace of agricultural concentration has played a significant role in reducing competition, and consequently reducing market prices. Today, the position of the family farmer has become even weaker as consolidation in agribusiness and food retail has reached all time highs. Farmers have fewer buyers and suppliers than ever before. The result is an increasing loss of family farms, a decreasing viability of rural communities and the smallest farm share of the consumer dollar in history.

Rapid consolidation is occurring in nearly every sector of agriculture. Today four firms control 81 percent of all beef slaughter, 73 percent of sheep slaughter, 57 percent of pork slaughter, 62 percent of flour milling and 50 percent of broiler production. (1) In addition, rapid consolidation at the retail level is changing the food distribution and marketing structure. At the retail level, the top five grocery chains now control over 40 percent of the U.S. grocery market. By comparison, the top five retailers accounted for 20 percent of food sales in 1993. (2) Moreover, the high levels of horizontal concentration are made worse compounded by the vertical integration that is occurring in the industry.

And yet, often people automatically equate mergers and consolidation with market efficiency. In too many cases, the opposite is true. As firms grow in size, they buy out their competitors, reducing the number of options in the market place. Consolidation is the antithesis of "market efficiency" for farmers and ranchers. Consolidation is patently ineffective for farmers, making it extremely difficult for farmers to compete in and earn their income from the marketplace.

Although farm families are witnessing low prices across many different commodities, these low prices have not translated to consumer savings. Instead, farmers and ranchers are receiving an ever-diminishing share of the consumer dollar, while processors and retailers gain more of the consumer dollar share.

While many of the issues pertaining to agricultural concentration that must be addressed are beyond the scope of U.S. agricultural policy, several topics should be included in new farm legislation to help ensure fair and open competitive markets for producers. Specifically, we support a competition and concentration title in the next farm bill that would serve to define the fundamental principles that should govern the agricultural marketplace and more effectively encompass the issues.

We are pleased that several bills have been introduced to improve antitrust enforcement and concentration. We strongly support S. 20, the "Securing a Future for Independent Agriculture Act," introduced by Chairman Harkin, and others that seeks to restore fair and open competition in the agriculture sector. We urge the Committee to include its provisions into the new farm bill.

We strongly support the language in S. 20 -- language similar to the legislation introduced last year by Chairman Harkin, the Agriculture Producer Protection Act of 2000 -- that pertains to contract fairness. The rapid increase in the use of agricultural contracts by large agribusiness has dramatically increased vertical integration in the U.S. There is growing concern among producers because of the large disparity in bargaining power between agricultural producers and contract companies that is resulting in unfair shifting of economic risk to the agricultural producer, unfair contract terms, and anticompetitive behavior. The bill language would: (1) require contracts to be written in plain language and disclose risks to producers; (2) provide contract producers three days to review and cancel production contracts; (3) prohibit secrecy clauses in contracts; (4) provide producers with a first-priority lien for payments due under contracts; (5) prohibit producers from having contracts terminated out of retaliation; and (6) make it an unfair prac

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Federal Document Clearing House Congressional Testimony