[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
          HELPING AGRICULTURAL PRODUCERS RE-GROW RURAL AMERICA

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                   WASHINGTON, DC, SEPTEMBER 29, 1999

                               __________

                           Serial No. 106-34

                               __________

         Printed for the use of the Committee on Small Business


                              


                     U.S. GOVERNMENT PRINTING OFFICE
60-375                       WASHINGTON : 1999




                      COMMITTEE ON SMALL BUSINESS

                  JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
DONALD A. MANZULLO, Illinois             California
ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
SUE W. KELLY, New York               BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania           DONNA MC CHRISTENSEN, Virgin 
DAVID M. McINTOSH, Indiana               Islands
RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
JOHN E. SWEENEY, New York            DENNIS MOORE, Kansas
PATRICK J. TOOMEY, Pennsylvania      STEPHANIE TUBBS JONES, Ohio
JIM DeMINT, South Carolina           CHARLES A. GONZALEZ, Texas
EDWARD PEASE, Indiana                DAVID D. PHELPS, Illinois
JOHN THUNE, South Dakota             GRACE F. NAPOLITANO, California
MARY BONO, California                BRIAN BAIRD, Washington
                                     MARK UDALL, Colorado
                                     SHELLEY BERKLEY, Nevada
                     Harry Katrichis, Chief Counsel
                  Michael Day, Minority Staff Director



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 29, 1999...............................     1

                               WITNESSES

Kruse, Charles, President, Missouri Farm Bureau..................     4
Ludwig, Dale, Executive Director, CEO, Missouri Soybean 
  Association....................................................     7
Stockman, Bruce, Executive Director, Minnesota Corn Growers 
  Association....................................................     9
Ward, Jeff, Director, National Pork Producers Council............    11
Flanigan, Virgil, Professor, Director, University of Missouri-
  Rolla..........................................................    26
Kalaitzandonakes, Nicholas, Agriculture Department, University of 
  Missouri-Columbia..............................................    28
Christianson, Rodney G., CEO, South Dakota Soybean Processors, 
  Inc............................................................    29
Watkins, Dayton, Administrator, U.S. Department of Agriculture...    33

                                APPENDIX

Opening statement: Talent, Hon. James M..........................    47
Prepared statements:
    Kruse, Charles...............................................    50
    Ludwig, Dale.................................................    52
    Tumbleson, Gerald (Stockman, Bruce)..........................    54
    Ward, Jeff...................................................    59
    Flanigan, Virgil.............................................    66
    Kalaitzandonakes, Nicholas...................................    73
    Christianson, Rodney G.......................................    79
    Watkins, Dayton..............................................    91
Additional Material:
    Testimony of the American Bankers Association................    98
    Letter from Aida Alvarez, Administrator, Small Business 
      Administration, to Chairman James M. Talent................   126



          HELPING AGRICULTURAL PRODUCERS RE-GROW RURAL AMERICA

                              ----------                              


                     WEDNESDAY, SEPTEMBER 29, 1999

                          House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
2360, Rayburn House Office Building, Hon. Jim Talent (chairman 
of the committee) presiding.
    Chairman Talent. Good morning. I want to welcome the 
participants here today for the Small Business Hearing 
entitled, ``Helping Agricultural Producers Re-Grow Rural 
America''.
    Your willingness to take the time to testify at this 
hearing about the opportunities and needs of agricultural 
producers as they pursue the development of value-added 
enterprises will provide us with invaluable insight into what 
Congress needs to do to assist these entrepreneurs.
    Thomas Jefferson is of course, remembered for many things. 
In particular, Jefferson believed that the love of land and 
business, farming and commerce, was a part of America's fiber. 
But on several occasions Jefferson referred to the virtues of 
agriculture and the first importance of it to our nation's 
prosperity.
    In his first inaugural in 1801 Jefferson wrote, 
``Encouragement of agriculture and of commerce as its handmaid, 
I deem one of the essential principles of our government and 
consequently, one of those which ought to shape its 
administration.''
    Although Jefferson's America was one in which the majority 
of the people were engaged in the production of food and fiber, 
I still believe that his spirit of admiration for agriculture 
and his dedication for the encouragement of agriculture, should 
remain true today.
    He could never have imagined what our agricultural system 
has become. On average, each and every American farmer and 
rancher feeds and clothes himself and 126 other people. We have 
the safest, most abundant, and cheapest food system in the 
entire world. Our agricultural producers truly deserve to be 
honored for their hard work in providing our nation with the 
most affordable, most abundant, and safest food supply in the 
world.
    This plenty that American producers provide to our 
citizenry has allowed our nation to prosper beyond any of the 
expectations of Jefferson. However, record high disasters and 
record low commodity prices are hurting America's farmers and 
ranchers. I believe it is one of the essential principles of 
our government to ensure that our agricultural system remains 
viable.
    Plainly, we must help producers through these tough times. 
While it is obvious that producers need near-term assistance, 
it is important that we do not become short-sighted and loose 
vision of the opportunities for the future.
    The future depends on the expansion of export markets for 
our farm products and the development of new and innovative 
producer-owned marketing systems, which is what this hearing is 
about. The current world demand, unfortunately, has been down 
for our agricultural products. This is directly affecting the 
livelihood of U.S. producers.
    For example, historically the Southeastern region of 
Missouri, due to the availability of river transportation to 
the world market, has enjoyed at worst, a neutral basis, the 
difference between cash price and futures price, and often a 
positive basis on corn during August.
    This August though, corn producers in Southeastern Missouri 
were faced with cash, farmgate prices as much as 50 cents below 
future prices. This downturn in world demand is caused by the 
Asian economic crisis and the unfair trade barriers on U.S. 
agricultural products by the EU, based on the fear of 
biotechnologically-enhanced crops.
    On top of this, our government continues to hold our 
producers hostage by using food as a weapon in foreign policy 
through trade sanctions. We must as a government, advance the 
position of U.S. agricultural products on the world market.
    This can be done through lifting of trade sanctions, 
aggressively negotiating the removal of EU trade barriers on 
biotechnologically-enhanced crops, ensuring the health of the 
emerging markets of Asia, and utilizing and strengthening the 
trade promotion programs of our government.
    The greatest opportunity of the future is the development 
by agricultural producers of new and innovative marketing 
systems for their products. In August, two House Committee on 
Small Business field events were held to examine agricultural, 
tax, regulatory and trade issues that are critical to the 
agricultural community.
    At both of these events an underlying theme surfaced from 
the witnesses: the need and desire of producers to reach up the 
agricultural marketing chain and capture some of the profits 
generated by processing their raw commodities.
    Agricultural producers have an inherent, innovative quality 
and I was impressed that even during this time of extremely 
adverse pricing and production conditions, producers and farm 
organization representatives are energized about looking for 
inventive, entrepreneurial opportunities for the future.
    I believe that our American agricultural system depends on 
these innovative producers and can be enhanced with the 
establishment of producer-owned, value-added enterprises. We 
need an agricultural system in which producers are the vertical 
integrators and no longer totally rely on the existing highly 
consolidated, agricultural marketing chain, or on the volatile 
world market.
    With this system producers will be in the position where 
farmgate prices effectively have much less meaning as their 
profit concern will be the soybean crush margin, the price of 
ethanol, and the pork or beef slaughter margin made by their 
processing plants.
    This was the overwhelming consensus of farm groups at our 
field events. It is one of the reasons we are having this 
hearing today and I hope we can gain a further understanding of 
how we in the government can nourish the entrepreneurial fire 
of current and future agricultural small business owners 
without impeding their success, by ensuring that the American 
agricultural system remains viable and becomes more profitable. 
We can re-grow rural America for generations to come.
    I am very much looking forward to the witnesses. I want to 
of course, defer to my colleague, Ms. Velazquez, for any 
comments she may wish to make.
    [Mr. Talent's statement may be found in the appendix.]
    Ms. Velazquez. Thank you, Mr. Chairman, and good morning. 
Thank you for holding this hearing. I know how important this 
issue is for rural America. One of the benefits of being in the 
small business community is that our members come from such 
diverse backgrounds that we can truthfully say that we have 
experts in most fields: from regulations to access to capital, 
to agriculture.
    Today, I have the pleasure of yielding to the gentleman 
from Illinois, Congressman Phelps,who also serves in the 
Committee of Agriculture and who has been working on this issue.
    Mr. Phelps. I want to thank the gentlelady for yielding and 
providing me this unique opportunity as a new member 
especially, and I thank the Chairman for holding this hearing 
and commend him on his leadership in this area. I greatly 
appreciate all of you being here this morning to discuss a 
topic which is particularly important to me as a member and not 
only of the Small Business Committee but also the Agriculture 
Committee.
    I am pleased to be able to participate in a hearing that 
ties the two together so well. In my opinion, they are 
inseparable. Over the past few years America has experienced an 
unprecedented economic boom. Unfortunately, this prosperity has 
not been enjoyed by everyone. Many of our communities, 
especially those in agriculture, are in crisis.
    My Congressional district covers 27 counties in Central and 
Southern Illinois. Every one of the communities I represent is 
deeply impacted when agriculture experiences tough times, and 
these are indeed some of the toughest in recent memory.
    We are all well aware of what is happening in rural 
America. Rural America has not, not only shared in the good 
economic times but has possibly suffered more severely because 
of the crisis in agriculture. Many have regarded rural problems 
as being temporary when indeed, they are permanent.
    Although it is clear that we must continue providing 
emergency relief to help our farmers survive the current 
crisis, this will not solve the underlying problems facing 
agriculture communities. This Congress should look to the 
future and support policies that help farmers help themselves.
    One area that deserves our close attention is providing 
farmers with tools that will enable them to fully participate 
in the process of bringing to market the goods they produce. We 
all know that farming is inherently a risky business and 
enterprise.
    Farm production levels can vary significantly from year to 
year, primarily because farmers operate at the mercy of nature 
and fluctuations in the marketplace. When commodity prices 
fall, as they have done in the past year, not only do producers 
suffer but consumers see no corresponding benefit. Shoppers 
continue to pay the high prices set by middlemen while our 
farmers begin to go out of business.
    An obvious conclusion presents itself. We should help 
farmers take control not only of production but also of 
processing and marketing their own products, of course. An 
excellent model of exactly this kind of arrangement already 
exists: the farmer co-operative. Today, about 30 percent of 
farmer's products are marketed through co-ops, including some 
well-known brand names that can be found in supermarkets 
throughout the country.
    Another way farmers can achieve stability is by finding new 
markets for their products and new products for their markets. 
Increasingly, farmers are beginning to look for new ways to 
process what they grow, thus creating new, value-added products 
to be sold in the new markets.
    I look forward to hearing about some of these innovative 
strategies from our panelists this morning. Today's hearing 
will focus on the barriers that prevent many farmers from 
forming or joining co-operatives and how some of these might be 
removed.
    In addition, we will discuss incentives and assistance that 
can be provided to spur innovation in processing and marketing. 
Our panel this morning includes representatives from producer 
and processing groups, members of the academic research 
community, and Department of Agriculture officials who will 
share with us how they are helping farmers with access to 
capital, technical assistance, education and research.
    When rural America is struggling, an entire way of life is 
threatened. Our purpose today is to generate a discussion about 
what we can do to keep our heartland alive and help it grow and 
become even stronger.
    I would again like to thank the Chairman for his leadership 
and sensitivity to this subject and ranking member for her 
recognizing the importance of this issue, and I look forward to 
hearing the testimony of our distinguished panelists. Thank 
you, and I yield back.
    Chairman Talent. I thank the gentleman and if our first 
panel of witnesses will come forward we will get going with the 
testimony.
    And I am honored today to welcome my long-time friend, 
Charlie Kruse, to this hearing of the Small Business Committee. 
Charlie has a very impressive bio with a number of 
achievements. I think he probably just as soon be introduced as 
a row crop farmer from Dexter, Missouri. He is also president 
of the Missouri Farm Bureau.
    Thank you for coming, Charlie, and why don't you share with 
us your thoughts on the opportunities of value-added 
agriculture.

  STATEMENT OF CHARLES KRUSE, PRESIDENT, MISSOURI FARM BUREAU

    Mr. Kruse. Thank you, Mr. Chairman. I certainly want to 
commend you for holding this hearing. And to the members of the 
Committee, commend you all for taking time to talk about this 
very important issue.
    As Chairman Talent said, my name is Charles Kruse. I am a 
fourth-generation farmer from Stoddard County, Missouri, in 
Southeast Missouri, where my family and I raise corn, soybeans, 
wheat and cotton. I serve as President of the Missouri Farm 
Bureau, our state's largest general farm organization.
    Again, Chairman Talent, I want to commend you and the 
members of the Committee for your continued interest in 
empowering agricultural producers to take advantage of the 
benefits of adding values to the commodities we produce.
    The Missouri Farm Bureau participated in both the field 
hearings that Chairman Talent mentioned were conducted last 
month, and we believe this Committee is determined to address 
the difficult issues we are facing. This morning's hearing is 
especially timely as Congress is debating how to assist farmers 
and ranchers during the economic crisis we are facing.
    Let me assure you, this is indeed a crisis. The devastating 
combination of low prices and disastrous yield have come 
together at a very inopportune time. Corn and soybeans are 
being harvested in Missouri as we speak here today, and yields 
in many cases of less than 50 percent of average are all too 
common. And I am sure that is true in all the other states 
represented here.
    In the short term we must have economic assistance from 
Congress. Farm Bureau's top priority is getting economic 
assistance to producers in a timely fashion. We simply cannot 
have a repeat of 1998. Assistance is needed now, not a year 
from now.
    Economists at the Food and Agricultural Policy Research 
Institute at the University of Missouri are projecting that 
farm prices will improve over the 2001-2002 period. However, 
until that time we can expect dismal prices to continue. Our 
goal is to help farmers hang on and government assistance is 
crucial.
    Yet, government cannot be expected to solve agriculture's 
woes alone. There is no simple solution. We must have a system 
of policies and programs that allows our agricultural sector to 
prosper. This will require the cooperation of every sector 
including public, private, and academia.
    The purpose of this hearing, ``Helping Agricultural 
Producers Re-Grow Rural America'', is especially important. I 
have heard Chairman Talent highlight this issue during meetings 
in Missouri and we have heard the message loud and clear from 
our members.
    We recently held a series of six regional meetings around 
the state in which we listened to our members' thoughts on how 
the crisis is affecting their family, their farms, and rural 
communities. A common theme emerged from the meetings: we must 
look for ways to capture a greater share of the consumer food 
dollar.
    Some states are already doing a very good job of this. New 
generation co-operatives have been formed to process 
commodities into products ranging from pasta to ethanol. These 
states have made a commitment. Missouri too, is making a 
commitment.
    Our Missouri General Assembly provided a boost earlier this 
year by creating new incentives for producer-owned ventures. 
This will indeed give us an important boost as our producers 
continue working to establish ethanol and pork producing plants 
in our state.
    But there is a void remaining. While interest in these new 
ventures is growing, little attention has been paid to the 
availability of technical assistance. Producers and 
organizations alike need access to information that will 
convert an idea into an enterprise.
    Where do we turn for product research, feasibility and 
marketing studies, legal assistance, and information on 
financing options? The information is available but it needs to 
be user-friendly.
    Perhaps we should consider creating special teams comprised 
of representatives of state and federal agencies and colleges 
and universities. These teams could provide timely information 
on subjects ranging from financing options and environmental 
permits to tax incentives and equipment design. Ideally a 
``cook-book'' could be developed that interested parties could 
use to help jump-start the process.
    At the federal level, we have a unique opportunity to 
assist producers. Earlier this year, Farm Bureau supported and 
Congress appropriated, $145 million to the USDA's Section 32 
Fund. These funds were appropriated to provide direct cash 
payments to hog producers who continue to suffer from extremely 
low prices.
    Unfortunately, Secretary Glickman has announced that only 
$100 million will be paid in direct payments. If the remaining 
funds are not used for direct payments, we believe they should 
be used to fund programs that will encourage producers to add 
value to their products.
    For example, these funds could be used to provide grants to 
groups to assist with start-up costs. We are encouraging USDA 
to work with agricultural organizations to develop the 
parameters of such a program.
    In Missouri we have a group working to construct a new pork 
processing plant for independent producers. They could make 
good use of grant funds to assist with legal fees and other 
start-up costs.
    Mr. Chairman, in closing let me reiterate that encouraging 
producers to add value to their products is a key to our long-
term prosperity in agriculture. We believe there is a need to: 
(1) establish diverse teams or entities to focus on the needs 
of those considering value-added ventures; (2) develop a 
``cook-book'' so to speak, that provides information on 
pertinent issues and available assistance; and (3) encourage 
USDA to use the remaining funds appropriated under Section 32 
to develop programs to assist producers interested in adding 
value to their products.
    Agriculture remains the anchor of our rural communities and 
our nation will continue to reap the benefits of this 
relationship well into the future if we can simply ``tap into 
the vein'' of value-added processing.
    Thank you very much for this opportunity to testify, Mr. 
Chairman. I will be glad to answer any questions at the 
appropriate time.
    [Mr. Kruse's statement may be found in the appendix.]
    Chairman Talent. Thank you, Charlie, and really appreciate 
your idea about using some of that money appropriated for the 
pork producers to assist in these value-added. Let us hope that 
Secretary Glickman looks favorably on that.
    Next, another good friend, Dale Ludwig. I want to thank 
Dale for appearing before the Committee. He is the Executive 
Director and the CEO for the Missouri Soybean Association and 
the Missouri Soybean Merchandising Council. He also farms in 
Cape County in Southeast Missouri.
    And during his tenure as Executive Director, the idea of 
value-added has become a major and an important one with the 
Soybean Association, and Dale has been a leader in 
proselytizing it around the country. Welcome, Dale.
    Mr. Ludwig. Thank you very much, Chairman, for this 
opportunity to share some ideas and comments. I will try to 
keep my comments brief but I would ask that my written 
testimony be included in the official record.
    Chairman Talent. Sure; without objection.

  STATEMENT OF DALE LUDWIG, EXECUTIVE DIRECTOR/CEO, MISSOURI 
                      SOYBEAN ASSOCIATION

    Mr. Ludwig. As you said, I am Dale Ludwig. I serve as 
Executive Director of the Missouri Soybean Association, and 
Merchandizing Council representing soybean farmers in the state 
of Missouri. I also farm. I raise corn, soybeans and we have a 
livestock operation.
    But the soybean farmers in Missouri certainly are--they are 
one of the greatest examples I think, of farmers trying to help 
themselves; as one of the groups I represent, the people that 
actually pay in check-off dollars to help develop technology.
    I am proud of that group or both the groups that I work 
for, but especially that, because they are trying to help 
themselves. And we have actually been able to develop pieces of 
technology that farmers own, and I think that will be important 
when we take a look at some of the other opportunities that we 
have here.
    I think Mr. Kruse did an outstanding job of kind of 
explaining how Missouri and all of agriculture are having some 
tough times and so I won't go into that, but would prefer to 
talk about, what are some of the opportunities that we see in 
agriculture, especially as it relates to value-added type 
things.
    What we have done in our office is try to take a look at 
the things that actually have worked. What things have other 
companies done and what sort of commonalties if you will, can 
we put together that we believe are going to help some of these 
groups in agriculture be successful?
    A couple of pretty basic things but, economies of scale is 
one. If you look at, you have to have a basic size component 
that is going to allow you to have the staying power and spread 
your fixed costs over a large number of units. But also, 
vertical integration seems to be one that many companies that 
have been successful, have gone into as well.
    If we look at agriculture and some of the things that we 
have tried to do with generating additional volume, short-term 
it certainly is an answer to bring prices up somewhat, but if 
welook at the long-term opportunities for producers to actually 
capture more value out of agriculture, we are going to be able to have 
to do that in additional industries and not only count on, because of 
alternative uses we increase the overall value of a unit of that crop.
    With that in mind, this whole vertical integration idea is 
something that we believe is extremely important. Let me give 
you a couple of examples of some things that are going on in 
Missouri, and not necessarily unique to Missouri.
    In Northern Missouri we have a group of farmers that have 
gone together to look at the possibility of putting in a 
crushing facility for soybeans there; where we would produce 
protein and oil. As a result of that we allow those producers 
an additional market. We create additional demand in that area 
that pushes the price up. But maybe more important, and we 
believe more important, is they have an opportunity to capture 
additional value from that enterprise.
    It is owned by farmers. It actually does the two things 
that we have talked about: economies of scale, because we pull 
all these people together; and the vertical integration.
    Our next step in that vision is a number of other types of 
industries or businesses that too, would be potentially 
producer-owned. I talked about the technology earlier that was 
developed as a result of check-off dollars. It is owned by 
farmers, they could use it to generate additional small 
businesses that farmers would own along with neighbors perhaps, 
and even potentially, customers.
    And we think that those additional steps, that vertical 
integration and additional opportunities to capture value, is 
what is going to make agriculture successful in connection with 
small business in rural America. Creating additional jobs for 
people outside of agriculture is part of the bigger picture 
that is going to make agriculture stronger long-term.
    Short-term, again as Mr. Kruse said, there are some real 
issues that need to be addressed. But what we are trying to do 
is look longer term into the future and see what opportunities 
are going to be there.
    But maybe the most important thing, the message that I want 
to leave with you today, is farmers are professionals. They 
have expertise in producing crops. But when it comes to 
technology and understanding technology and how to go into a 
business and be able to adjust some of the things that are 
going to make it successful, they don't have that expertise.
    And maybe even more important is, business structures. We 
throw in some legal advice, but especially business structures. 
How do we work through a business arrangement as we have 
producers moving into areas that we haven't been in before? 
This is some of the expertise that we need to have and this is 
one of the things that you can do for us, so we hope that you 
will do that.
    We can do that through grants; giving grants to form some 
of these self-help business groups and technology groups. But 
also the other part that I feel extremely strongly about is tax 
credits. And tax credits will help to put an infusion of cash 
into some of these new businesses that are going to help us to 
compete with larger producers. And long-term, if we are going 
to be successful we have to help them pay down that, and tax 
credits will allow us to do that.
    I would be happy to answer any questions. Thank you.
    [Mr. Ludwig's statement may be found in the appendix.]
    Chairman Talent. Thank you, Dale, and one of the reasons I 
want to have this hearing is, we know something on this 
Committee about starting new enterprises and how the government 
can assist in providing technological assistance to do that. So 
I was hopeful that we could focus the Committee's attention on 
that problem as it relates to rural America and maybe come up 
with some good ideas in cooperation with you.
    Our next witness is Bruce Stockman from Minnesota. Bruce, I 
was under the understanding that there was going to be a 
substitute here for you today so I don't have your bio here. So 
I am going to let you introduce yourself as the Executive 
Director of the Minnesota Corn Grower's Association. It's good 
to have you here, Bruce.

STATEMENT OF BRUCE STOCKMAN, EXECUTIVE DIRECTOR, MINNESOTA CORN 
                      GROWERS ASSOCIATION

    Mr. Stockman. Thank you very much. I appreciate very much 
being here. Actually, I am a replacement and the reason why I 
am a replacement is, I work for farmers who are busy 
harvesting. And our President, Gerald Tumbleson, was to be 
here, and he is absent for that reason.
    Mr. Chairman, I appreciate very much you and the Committee, 
the other panel members of this Small Business Committee for 
having this hearing today. It is extremely important in our 
opinion, that this subject be brought forward. There are many 
conversations that are occurring with pretty broad-based 
knowledge that agriculture is not enjoying what the rest of the 
economy has been.
    And obviously, there are a number of reasons why that has 
taken place. Our concern is for the farmer. Some things we can 
control and some things we can't, and for those things that we 
can make an impact on, that is what we would like to work on.
    The reason why I come here to you from Minnesota today, the 
Chairman asked on behalf of his staff and others, for someone 
from Minnesota to share some of the things that we have been 
doing.
    I have been in Minnesota since 1990 as Executive Director. 
I came there from Missouri. I worked for the National Corn 
Growers and I originally grew up in Eastern Kansas as a farmer. 
And what we are trying to do in Minnesota builds on those 
experiences in that we over the past few years, have stimulated 
the creation of well over 100 closed co-ops.
    You would say, well why do we need help if we have that 
many new ventures? What is the problem? The problem is as 
follows. In many cases, farmers have joined together, created 
these new-age co-ops, these closed co-ops, and in doing so they 
moved from one commodity to another.
    They moved to ethanol and co-products, they moved to pork 
or dairy, or whatever the co-op is that they created. And what 
they found out is that there are some things they don't know 
about that new business. They found out that there are some 
resources that are difficult to obtain. There is no point 
central to find and access state, federal, foundation and other 
efforts that are all trying to help.
    Twenty percent of our economy, and in our case in Minnesota 
it is actually greater than that, but at least 20 percent of 
our economy is based on the new dollars that are created by 
agriculture. Whether you are in the implement business or you 
are selling vehicles or you are the grocery store in town, if 
the farmers are hurting in rural America, so is the rural 
America economy.
    And that is the case. I am sure that many of you have 
visited with many of those people. All of them are looking for 
solutions. One of the things that we found as a problem in 
creating the 11 farmer-owned ethanol plants and the many co-
products that they produce, with 8,000 farm families invested 
in those, we have created a partnership with state and federal 
governments as incentives and farmer-owned dollars.
    In moving to that new level of production we have created 
$200 million of additional demand for our corn in the form of 
ethanol annually, just in Minnesota alone. So what I am saying 
to you is that just creating a value-added by itself isn't 
enough. It has to have some extra value, something different. 
It has to have a niche in the marketplace. Something other than 
just be competitive at another commodity level.
    I brought with me an example of something that yet can be. 
The diversity of what we have in the state is broad. This is a 
shirt that is not being made in that way. This is a fiber that 
is made from corn. I will share it if you want to pass it 
amongst the Committee members.
    Chairman Talent. Please do. Thank you.
    Mr. Stockman. The technology was developed in Minnesota; 
the production is occurring in Nebraska. It is made from 
Nebraska corn. And it is compostable and degradable. I suppose 
if it was flavored it would be edible, but it would actually be 
kind of bland.
    Anyway, the purpose of----
    Chairman Talent. I suppose I can grill it or anything.
    Mr. Stockman. Yes, you could, if you would like a grilled 
shirt. The reason why I brought it as an example is, it is one 
of those opportunities that creates a niche. You will find that 
fabric like that is blended with cotton or wool or other 
fabrics and it adds value to those commodities as well.
    Because that currently is being sold in the form of prills. 
They make it into like a polymer and it is shipped abroad and 
it is being made in Japan as we speak. Wouldn't each one of you 
like to have a production facility owned by the real community 
and farmers in your district producing that as a locally-owned 
product?
    That is the kind of thing we are talking about; for 
medicines to all kinds of unique technology. The problem that 
we have is that we need a point central, a library, a resource 
center, consultants; some network. And as Charlie put it, a 
cook-book. We need a mechanism to bring this point central to 
help facilitate the resources that are there.
    We need the encouragement of producers and for them to be 
the self-help they can be. This is a long-term fix; it's not 
short-term. And so the other things that are being worked on 
for short-term we also want to encourage.
    But this is something to invest in our future. And our 
whole society depends on it because corn and other commodities 
are not just food. They are food, fiber and fuel. Thank you.
    [Mr. Stockman's statement may be found in the appendix.]
    Chairman Talent. I am going to be interested in the 
question time in asking in greater detail what you mean by 
point central. So please be thinking about it.
    Our final witness on this panel is Mr. Jeff Ward. He is the 
Director of Producer Education for the National Pork Producers 
located in Des Moines. Jeff has had a lot of experience in the 
banking industry. I also understand he is a graduate of the 
University of Missouri at Columbia, which is a fine university.
    Jeff's responsibilities at National Pork include issues 
relating to the environment, genetic improvement, animal care 
and value-added marketing. Jeff, thanks for being here and 
please share with us your thoughts about value-added 
opportunities.

  STATEMENT OF JEFF WARD, DIRECTOR, PORK PRODUCER EDUCATION, 
                NATIONAL PORK PRODUCERS COUNCIL

    Mr. Ward. Thank you, Chairman Talent. It is a pleasure to 
be here today. As you said, I am Director of Producer Education 
at the National Pork Producer Council and due to various 
economic factors over these past couple of years I have spent a 
great deal of time studying how you put value-added groups 
together and assisting groups in doing that.
    As most of you know, live hog prices in December last year 
dropped below ten dollars a hundred-weight for the first time 
since '55. When you adjust that for inflation, those were the 
lowest prices than even we had in the Depression. So we 
obviously had a crisis that needs to be addressed.
    The University of Missouri estimates that the producer 
sector lost $2.6 billion in equity in '98 and another one 
billion in equity drained to the industry in 1999. So as we 
look at this there is definitely a need for producers to be 
able to take advantage of the pork marketing chain.
    And 1998 also saw producers received their smallest 
percentage of consumer dollars in history. We had an increased 
supply of market hogs with a reduced slaughter capacity system 
that created an economic disaster. This happened however, 
during a record year for pork consumption and in some cases, 
pork retain prices.
    As this unfolded it became very evident that the dollars in 
the pork chain were at or near the consumer. So my job over the 
past couple of years has been, how do we get producers closer 
to that consumer?
    One example that I will give as we go through this, and I 
was really kind of given three questions on the e-mail I got 
about this meeting, and the first one was, can producers do 
this? And I believe yes, they can.
    In 1997 we had Dennis DiPietre at the University of 
Missouri and Brian Buhr at Minnesota do a study for us to 
determine if there were unmet or underserved pockets of demand. 
We heard about niche markets in the previous speakers, and were 
there market niches that producers could slot themselves into 
that would allow them to get closer to that customer?
    The goal of the study was to determine if there were 
differentiated pork preferences among ethnic groups and if so, 
how do producers identify and capture those preferences? The 
results of that study are in a book that is way too big to read 
to you today but we can get a copy of that to you if you would 
like to see it.
    But the study quite conclusively showed that--well if I can 
back up a moment. As we studied this we picked the Hispanic 
consumer in the United States to look at and it showed quite 
conclusively that there were cut preferences, different carcass 
breaks that were not found in the current commodity market.
    And that there was also, when we did the economic work, a 
willingness by those consumers to purchase additional 
quantities of pork if it was provided to them in a way that 
they preferred. The study did provide a very direct insight 
into that market. But more importantly we put this together in 
an educational format; if there were other pork chains out 
there where producers could slot themselves into if they were 
not in an ethnically diverse area.
    As a result of that study a group of smaller, independent 
pork producers in Utah went together to attempt to access this 
market. And if you are familiar with Utah demographics I don't 
think you can call it really an ethnically diverse state by any 
means.
    But they started out with the proverbial seven pigs in the 
back of a pickup one Saturday and delivered them to a market. 
They are now marketing 44,000 head per year to these ethnic 
markets in the Salt Lake Valley. So when I am asked if I think 
it can be done, yes it can. It justtakes an entrepreneurial 
spirit to pull this off.
    The second issue that I was asked to address was: what are 
the barriers to creation of these? And they have already pretty 
well been alluded to with the previous speakers. But as I work 
with producer groups the first barrier seems to be a lack of 
knowledge or resources when you start talking about market 
access and market discovery issues.
    There are various resources out there. Some of those are 
cost prohibitive without some kind of assistance. We also have 
some out there that are very self-serving and not looking out 
for the producers' best interests. So any assistance, and I 
will get to that in a moment, but any cost-share kinds of 
things would be very beneficial in that area to help provide 
technical assistance.
    We had, as Mr. Kruse mentioned earlier, put together what 
we are calling some technical assistance teams to help 
producers, but the sheer magnitude of that project is going to 
prevent us at this time to get to everybody that certainly 
needs help.
    The second area that we see, and has already been 
mentioned, is the lack of access to capital for start-up and 
operations. As you look at these, a lot of the conventional 
sources of capital that producers have used in the past are not 
familiar with these kinds of ventures; therefore they are 
requiring high equity input by producers to come into these 
things. They are requiring loan guarantees.
    So one of the solutions to this, I guess I would encourage 
as you are working through this, that the loan guarantee 
process be made much more user-friendly and available to 
producers to work through.
    Finally I guess, and the third question in this was, what 
programs are needed to encourage? And I am going to just kind 
of echo what the rest of the group has said. But in addition to 
the financial and technical assistance, I believe it also needs 
to be in an educational format so we don't continually re-
invent the wheel.
    You have already seen here, we have Farm Bureau doing 
something, we have Corn Growers doing something, we have 
soybean people doing something. There are all these factions 
out here that doing something and in some cases we are all just 
re-inventing the wheel. And so I think it also needs to be an 
educational process where duplication of efforts can be 
reduced.
    I think assistance in the area of business planning and 
marketing plans and feasibility studies are very important. We 
recently did some case studies on three producer groups that 
have successfully added into value-added marketing 
opportunities.
    And I guess really to our surprise as we worked through 
those, they all had a very well thought-out, well written and a 
business plan that they did follow on a day-to-day basis. And 
they all felt that that was very key to their success.
    Finally I guess, most of you are familiar that in June, 
National Pork Producers announced the formation of a national 
co-op to explore further processing activities for pork 
producers. I think that is one umbrella that some of this could 
come under because it will allow other groups to attach to it 
and avoid that duplication of effort that I talked about 
earlier.
    Finally, I believe by providing easier and increased access 
to loans, grants and loan guarantees for feasibility and start-
up and operations, I believe will allow producers to have an 
opportunity to determine their future in the pork industry.
    Thank you.
    [Mr. Ward's statement may be found in the appendix.]
    Chairman Talent. Thank you, Mr. Ward, and all the 
witnesses. I have a few questions and then I will recognize the 
Committee members.
    Mr. Ward, you talked first about niche marketing and I 
understand the relationship between that and value-added in the 
sense that you are talking about both require a market-driven 
kind of model. In other words, you have to be thinking in terms 
of not what you are going to produce but what consumers want, 
and then tailor your production to that.
    How else does that niche marketing though, relate to value-
added? In other words, you don't necessarily need for producers 
to invest in processing or slaughterhouse to do the niche 
marketing, do you?
    Mr. Ward. No. In fact, the Utah group that I alluded to, 
they recently started out doing a custom, total slaughter 
arrangement with two small slaughter facilities in Northern 
Utah.
    Now, they do now own their own slaughter facility but I 
think a key to that--and they were one of the case studies we 
did--was the market dictated their growth into owning a 
slaughter facility. They didn't do the, build it and they will 
come sort of philosophy. And I think the model that they put 
together there was a real key one in their success.
    Chairman Talent. The mindset is the same, in developing 
either value-added or niche marketing?
    Mr. Ward. Right.
    Chairman Talent. You have to think of yourself not as a 
producer so much but as somebody who has got to figure out that 
market and then produce what they want. To think in a broader 
sense, as a business person, in other words.
    Mr. Ward. Exactly. And what they are doing, they are not 
necessarily extracting any more value out of that customer; 
i.e., a pork chop selling for $2.30 instead of two dollars a 
pound. But they are tying up more steps in that process getting 
to that consumer.
    And the other thing, they are close enough to the consumer 
that they are able to visit with them on a day-to-day basis and 
have direct feedback with what those customers want instead of 
having to come through these various layers.
    And one of the things that you will see there in the paper 
is, in this market-driven model that especially exists in the 
pork industry, there is very little information sharing from 
the consumer to the retailer to the packer/processor, down to 
the producer. And so the closer you are able to get to that 
then the better knowledge you have of that consumer and the 
quicker and the faster you can supply that product to them.
    Chairman Talent. Let me address the other question to the 
panel as a whole, because I am sure other members of the 
Committee felt the same thing when they were listening.
    When you all are talking about starting new enterprises 
whereby entrepreneurs who are aggressive but need help with 
technical assistance, making sure they know what they are doing 
and then some seed money to start up, I mean, you are talking 
about things that the Small Business Committee is very familiar 
with in a number of different contexts.
    So I would like to ask you all to try and address more 
specifically, how you think we can best help get you that kind 
of technical assistance that you need. What kind of a program 
or incentive? How we can do that in the ag market to help you 
the best. And is there a model out there that you particularly 
like? Maybe in Minnesota which seems to have gotten further in 
this area.
    Bruce, is there a model for government assisting? For 
example, we have a program called SBCD, Small Business 
Development Corporation. You guys are familiar with this in 
another context. They provide assistance to entrepreneurs 
either with start-up or expansion-type operations.
    Would it be good to vest them with some particular 
portfolio in this area? Do we need a separate type centers, ag 
innovation centers? Give me some ideas on that.
    Mr. Stockman. Mr. Chairman.
    Chairman Talent. Yes; anybody on the panel.
    Mr. Stockman. I would like to answer that. Exactly what you 
have suggested is what I was referring to when I said point 
central. I apologize for not explaining it further. That is in 
fact, the problem that we had in Minnesota, and I assume 
elsewhere. Is that there is no one place that can pull these 
resources together or advise where to find those resources.
    Whether it is the Small Business Development Center or an 
innovative center, there needs to be a point central; a focus 
point that can locate, be the library, find the consultant or 
at least recommend consultants, suggest both state and federal 
as well as private resources that are available.
    There are a number of tools that are available but there is 
no coordination of those tools at this point, and that is 
really what I'm asking for; is a center or something like that.
    Chairman Talent. Does anybody else want to comment on that?
    Mr. Ludwig. Real quickly. I think that what Bruce was 
talking about is very much kind of what our vision was of 
having a center that, although we talk about agriculture it's 
more likely to be someone who would have engineering expertise 
that would be able to help guide and direct, through general 
projects and then identify some of those specialists as a 
result of specialty needs.
    At this point in time I am not sure we can even venture to 
guess what some of those needs are going to be long term. So I 
think it was very close to what our vision was.
    Chairman Talent. Dale, tell me why you think--I mean, I 
agree with you but I'm going to play devil's advocate for a 
second here. Why do you think that soybean producers can 
compete with ADM and Cargill in the crushing business?
    Mr. Ludwig. Well, you know, that is a great question and it 
is one that I have spent a great deal of time giving thought 
to. And part of the answer is not even a great one but part of 
the answer is that if we don't figure out how to do that our 
future isn't very bright.
    But the reason I believe we can is kind of twofold. And 
that is part of the reason that I ended up my testimony saying, 
here are a couple of areas that you can help and the tax credit 
one I think, is one that is critical. You may have a better 
idea. You understand how tax credits work better than I do and 
you may even have some other areas how you do that.
    But we have to help level the playing field, or in my 
opinion, even tilt it towards these producers to put a larger 
percentage of cash equity in that facility so that long-term 
they have some of that staying power.
    The other thing that is very, very important is when you 
talk about--I don't know if niche market is the right word--but 
in an area where they have a much better opportunity to 
survive. And that means you do a feasibility study, you do a 
business plan, you go into areas where you are not going to 
compete head-to-head with an ADM.
    Quite honestly, I would not look forward to doing that as a 
producer group. So you go to an area where you don't have to do 
that.
    Chairman Talent. One more question for Charlie. If we were 
to get the Secretary to redirect the $45 million in pork 
producer's amount, how would you recommend that we invest that 
to have the greatest impact on value-added?
    Mr. Kruse. As I said in my testimony, Mr. Chairman, we had 
hoped that that money was going to be directed to hog farmers 
for direct assistance but it appears that is not the case. So 
given that, I think market feasibility studies, technical 
assistance. And I think the common thread on this panel, 
everybody on this panel has talked about the desire on the part 
of producers to get involved in these kinds of activities.
    I think there is a real eagerness, if you will, on the part 
of producers today, to really get involved in some kind of 
value-added project. And it is not one of these situations 
where we as farmers are saying government take our hand and 
walk us through this. That is not it at all.
    Farmers are willing to share in the risk, share in the 
investment. We just need some help in bringing together 
technical assistance, expertise, market feasibility studies; 
sort of a how-to. That is why I mentioned in my testimony about 
perhaps having some kind of a cook-book that we can work 
through together.
    But hopefully we can encourage the Secretary to direct 
these dollars that way because I know you all in this Committee 
have been very active in doing this in other sectors of the 
economy. I think agriculture is in a situation now where we 
really need to do all that we can to help farmers get involved 
in adding value.
    And Mr. Chairman, as you said in your opening comments, to 
get farmers to the point of being directly involved in the 
vertical integration that is taking place. I think that is a 
very good point.
    Chairman Talent. All right, thank you. I will recognize Mr. 
Phelps.
    Mr. Phelps. Thank you, Mr. Chairman. Thank you all for your 
testimony. It is very beneficial to us. Just real quickly, I 
think you all have alluded to technical assistance item and the 
Chairman covered that very much thinking that small business 
centers would be a viable focal point to possibly work from.
    Just for those of you, maybe Mr. Ludwig, it seems like that 
the soybean community has been a leader possibly because of the 
ethanol that has been a product that has proven to show you can 
diversify agriculture.
    And maybe you have mentioned some of these but from the 
priority list, one or two, what would be some of the lessons 
that you have learned for trying to form co-ops and getting the 
job done as you have in this particular area where soybeans and 
ethanol has taken off, that you could give to the ag community 
who might be looking to form a co-op? Are there particular 
barriers to avoid, are there some prime target things? Steps 1 
and 2 that you would recommend? Because your leadership in the 
soybean area has been commendable.
    Mr. Ludwig. Well, you know, that is a great question and I 
appreciate you asking it. What I would like to do is just share 
some of our experiences. Actually, in Minnesota they have had 
much more experience with actually putting those groups 
together.
    You know, I think that there are a couple of things that we 
have tried to do, especially with soybean research. And a 
couple of those things are, you hear a lot of people talking 
these days about environmental benefits, you talk about how 
things that are renewable, all those things are fantastic.
    And we believe that they are but one of the things that we 
have learned is that as we take a look at this research and 
then try to move it into some sort of business structure that 
people appreciate the fact that it is environmentally friendly, 
that it is renewable, that it is biodegradable, provided it 
costs less than the current product that is in the market.
    So bottom line, you have to deliver either additional 
value, a better product, or you then have to be able to deliver 
that product to the current market at a lower price than what 
you had.
    But the second part of your question is, what are some of 
the pitfalls? You know, and Bruce actually might be in a better 
position because they have more co-ops there in Minnesota 
thanwhat we have in Missouri.
    Mr. Phelps. We just need to recognize success stories and 
build on that and avoid the problems that you may have faced, 
because you have the leadership in this area.
    Mr. Ludwig. Right.
    Mr. Phelps. Can you add to that, Mr. Stockman, from a 
Minnesota perspective?
    Mr. Stockman. Mr. Phelps, thank you for asking. I will try. 
In effect, several of the groups experienced what their 
predecessor did. Whether it is how to come together as 
independent farmers and function as a Board; how to make policy 
decisions and stay out of the management; how to decide and 
come up with a strategic plan; where to go for resources; how 
to find those services that are currently offered and where do 
I go to find them.
    All of that are the kinds of thing that I have seen almost 
every one of these organizations as they come together, repeat 
in some way. And so it seems to me that an innovative center or 
a center of some sort could provide that how-to, that cook-
book, that list, even serving as advisors in some cases 
themselves directly, on whether or not they've got their stuff 
together ready to take the next step or whether they need to go 
back and start over.
    Some of them have started with their feet running and 
really didn't know where they were going. And so there are all 
those kinds of problems to get focused first.
    I think another thing that has happened is that in many 
cases they really say, I want to diversify and own something 
further up the chain but it just moves them to a different 
level they didn't anticipate. They need to know what else, 
where else, how else.
    Mr. Phelps. Thank you very much. Just one last question, 
Mr. Chairman. Mr. Ward, in your testimony you alluded to the 
problems that led to our disaster in the pork industry. An 
increased supply of market hogs combined with a reduced 
slaughter capacity created this situation for producers, and 
also, even though there is a record high year for pork 
consumption.
    And I guess my question is, why do we not have those 
indicators far enough ahead to try to get organized to avoid at 
least some of that, if not most of it? Did it come that 
quickly? I mean, usually we have warnings even of hurricanes, 
but it seems like we ought to have some experience somewhere in 
the industry saying that the vertical integration such as the 
poultry industry experience, this is coming down the pike. We 
had better get ready for it.
    Mr. Ward. Sure. Very good question and certainly one that 
we have had to answer before. And there were obviously, very 
strong indicators that we were going to be up in production 
about ten percent in '98. The proverbial straw that broke the 
camel's back I guess, was the plant in Detroit that closed last 
summer.
    The system was going to be loaded and prices were going to 
be down but not to the level they went. You could see that 
coming. And then when we lost that 12,000 or 14,000 head a day 
capacity out of that Detroit plant last summer that was 
literally the straw that broke the camel's back and ultimately 
caused it to drop where it did.
    We were probably, and I don't have those numbers in front 
of me, but I believe mid-20s to low-30s were what most of the 
economists were predicting for that incident.
    Mr. Phelps. So we have two extra-large processing elements 
that are critical to the whole process?
    Mr. Ward. Exactly, and one of the things as we are looking 
at this, and we have announced this national co-op to explore 
potentially building some plants to address some of that issue, 
but you have this and you have producers that are in charge of 
these situations through closed co-ops or whatever it is, is 
one way of somewhat addressing that concentration issue because 
you are putting producers back in control of their own destiny 
and getting them ultimately closer to that consumer.
    Mr. Phelps. Thank you. I yield back, Mr. Chairman.
    Mr. Bartlett [presiding]. Thank you very much. Let me at 
this time recognize Mr. Thune.
    Mr. Thune. Thank you, Mr. Chairman. I will pass for the 
moment and reserve my questions for the second panel.
    Mr. Bartlett. Thank you very much. Let me now recognize Ms. 
Christian-Christensen.
    Ms. Christian-Christensen. Thank you, Mr. Chairman, and I 
want to take this opportunity to thank our Chairman and ranking 
member for calling this important hearing on how we can help 
agriculture re-growth in America.
    I am the ranking member on the Subcommittee on Rural 
Business Enterprise and Agri-Business, and my colleagues and I 
on that Subcommittee take a special interest in this subject.
    Even based on my own experience in a place that is not very 
agricultural, the Virgin Islands, I hear the same issues raised 
and so I agree with what I have heard all of the panelists say; 
that the farmers are the experts but what they need is 
assistance with technology with business expertise, and with 
looking for those niches that can make their businesses 
successful.
    We have had good experience with the business and co-
operative services at USDA, and I was wondering, and I direct 
this question to Mr. Stockman but anyone else can answer, again 
on the one-stop center of expertise, the resource center.
    What about the Rural Business and Co-operative Service at 
USDA and what services are they providing that meet your needs 
and what do you think that they could add to their services? 
Are they a good source of that information; those resources?
    Mr. Stockman. I apologize for not being able to expound on 
that. I guess that is part of the problem, is that the 
awareness of what is available is part of this problem. And 
that is why a center or something like that would bring those 
resources to better use.
    I appreciate you asking that question. I am answering in 
this way so you understand that that is part of the problem. It 
is not that they are not functioning and I am not pointing 
fingers. I am just saying that there is no way oftentimes to 
find where those resources are in an effective manner.
    Ms. Christian-Christensen. And we have been discussing 
possibly holding a hearing just with that Department and rural 
development to discuss some of those issues on our 
Subcommittee. Did anyone else want to answer that?
    I don't have any other questions for this panel, Mr. 
Chairman. Thank you.
    Mr. Bartlett. Thank you very much. To maintain the rotation 
to the two sides of the aisle, let me ask a couple of questions 
now.
    You have been talking about two different things: vertical 
integration and niche marketing. These are of course, two 
different things although they could be combined. Recently as 
everybody knows, we have had large disparities between the 
consistency of pricing of milk at the farm and pricing in the 
store.
    Our dairymen were getting as much as $18 a--I say as much 
as; that is really very low if you had indexed it--getting as 
much as $18 per 100 for milk on the farm. And then it has now 
dropped down to about $12 per 100. And in the store there was 
not a ripple.
    This obviously begs for vertical integration. What happened 
to that six dollars per hundred? The farmers didn't see it and 
the consumer didn't see it. It certainly didn't drop in the 
store. So that obviously begs for vertical integration.
    We will pause for a moment while the beepers tell us that 
there are a series of votes on, whichis what those bells mean.
    I am particularly interested in your comments about 
alternative uses. I was reminded of that this summer when we 
had a severe drought in our area. Our pastures dried up on our 
farm. And I bought barley for less than $80 a ton.
    Hay would have cost me a whole lot more than $80 a ton and 
barley is a whole lot easier to haul and handle than hay is, so 
I simply bought barley and saved the hay for winter feeding; 
which was for farming, an alternative use of barley as a 
substitute for hay.
    Two years ago I bought corn for about $80 a ton. Last year 
it was about a bit under $100 a ton I guess, and it is going to 
be what, closer to $80 a ton this year. If you look at corn at 
$80 a ton, and if you look at cord wood for your stove for your 
fireplace at $100 a cord, there is a whole lot more energy in 
that ton of corn than there is in that cord of wood.
    And if you are looking at pellet stoves, and corn comes 
already pelletized, you are talking about $120 a ton at a 
minimum for pellets. Corn is a whole lot cheaper than that and 
I suspect has more energy than that.
    I go to dinners put on by farmers and they don't offer me 
milk as a drink. Well, they do now in our district because I 
have been yelling about it. But ordinarily there wasn't milk 
there as a drink.
    My question is, what sort of energy are we putting in to 
finding alternatives uses? I would like to see milk in vending 
machines. It is not just a drink. It is a very high quality 
food. There isn't any reason that we can't make it attractive 
to those who frequent vending machines, and milk ought to be 
there.
    And by the way, you can pay almost as much for water as you 
can for milk. And you pay a whole lot more for coca-cola than 
you do for milk. What sort of energies as an industry are we 
putting into looking for alternative uses for our products?
    I saw the shirt with great interest that you had made from 
corn fiber. That is an interesting alternative use. What sort 
of energies are we putting in? And is there a concerted effort 
to find these alternative uses in niche markets?
    Mr. Ludwig. At the Missouri Soybean Association, we 
actually have a national check-off; that we put nearly a 
million dollars a year that go into research for alternative 
uses.
    And part of that includes, I think, some of the most 
exciting at this point in time, or even developing soy oils or 
identifying soil oils that can be used for industrial purposes, 
and taking a look at all the different things that we can 
potentially do beyond what we have considered normal or 
regular, conventional uses for soy oil.
    We have done some of the same things with protein but the 
protein seems to be a little tougher to identify, at least in 
conventional soy beans. But there is no shortage of effort that 
goes into that, and certainly, you know, again I think that we 
need to recognize farmers for farmers actually taking their 
dollars and putting dollars into research that has the 
opportunity to affect or direct their future.
    And there is no question that in our industry it is a great 
deal of effort is going into those areas.
    Mr. Bartlett. Mr. Stockman.
    Mr. Stockman. I would love to comment on that. It is true 
with most of the commodities, and corn in particular, there is 
well over 3500 different kinds of products currently available 
to be made from corn alone.
    I went to a general discount store recently with a manager 
who I knew, and I asked, would you do a project with us? And 
the idea of the project was a contest for their customers, but 
the idea was, they had a form to fill out of how many things in 
that general type of a store were made utilizing corn in one 
way or another.
    And after they got to about 75 percent of the products in 
the store they quit. They said, enough. They literally were 
putting these marks on the shelves of everything practically, 
with the exception of steel or rubber. And in some cases they 
can make a rubber type of material. But their rubber was not.
    The point is, there is a lot of technology on the shelf 
ready to pull off. The missing link is how to match that 
opportunity of something with the opportunity in the 
marketplace. The marrying of the idea along with the need is 
the missing link, and that is where these centers I believe, 
could help.
    Mr. Bartlett. Thank you very much. As you have heard, 
several bells have gone off. We have a series of votes, I 
gather. This might be a good time to break for votes and we 
will return as soon as we can.
    If there is just a single vote it will be in 15 minutes or 
so. If it is a series of votes the second vote and a third if 
there is one, will not be more than five minutes each. So it 
shouldn't be too long until we return. We will stand in recess 
until the end of the vote.
    [Recess.]
    Mr. Bartlett. Thank you very much. We want to make sure 
that there are no members who wish to ask questions of this 
panel who have not yet had a chance to return from the vote. So 
if we can occupy for a few moments until we see if there are 
any of those who will return, then we will be able to excuse 
this panel and convene the second panel.
    The Chairman promises to return and to be with us in a few 
minutes. I hope that is true because I need to leave in a few 
minutes.
    Let me return to the subjects that we were discussing 
before the break for a vote and that is the opportunities for 
niche marketing, for diversification.
    It is clear that we need both vertical integration and 
niche marketing. And my concern is that this is a role in the 
diversification which could very well be niche marketing. But 
is there a role there for government? Generally, I see 
government trying to play too much of a role.
    And my concern is that I am not sure that government at 
either the state level and particularly the federal level, is 
stepping up to the opportunity of providing a structure in 
which our agricultural people can look at not only vertical 
integration but also diversification and niche marketing.
    And I am wondering if you have some suggestions as to what 
we might do; appropriate legislation that would help us to use 
the relatively few dollars that we have to help farmers to be 
more productive in opening up future opportunities for them by 
looking at other opportunities for diversification and niche 
marketing.
    Mr. Ludwig.
    Mr. Ludwig. Well, again to paraphrase real quickly what Mr. 
Stockman said earlier, I think we have done a great job at 
developing technology, and maybe the missing links are the 
technology expertise and actually then molding that technology 
into real products. And that is the thing we have to move 
forward on; is turning these things into real products, into 
real businesses.
    And I think that one of the things that is going to help 
that the most--and I mentioned tax credits before. And I think 
that is an excellent way to infuse some capital into some of 
these things. You have a commitment on the side of those people 
who are going to be involved, and then you incentivize them for 
doing that.
    And that is part of the reason that I keep talking about 
that side of the equation. I think in some cases we have more 
government than we need, but in this particular case we are 
taking people that are truly interested in doing it, because 
they are willing to put their dollars into it, and then we 
incentivize them on the other side for having done that.
    Mr. Bartlett. Anyone else have a comment?
    Mr. Stockman. I guess I would add to that, the shirt that I 
used as an example before I will use as an example one more 
time. Right now that is being utilized by private industry. 
Part of the research for the polylactic acid was partnered with 
organizations such as ours, and in Missouri and other places.
    There have been several different technologies that have 
come from that. One, a company specialized in themselves and in 
developing it further now are developing markets accordingly. 
There is no reason why government couldn't assist farmers 
capturing those opportunities rather than just let those who 
happen to have the capital ready to do it.
    So both division and capturing that opportunity, and then 
also linking it to the producer and the consumer.
    Mr. Bartlett. Looking at that shirt I was reminded of a 
marketing opportunity that we are missing. When our dairymen 
got into trouble recently I was amazed--now a very small 
percent of the people in our district are dairymen--but I was 
amazed at the enormous support that dairymen have. And it is 
because almost everybody can remember visiting their 
grandfather's farm.
    And although very few of our people live on farms today 
they have a great nostalgia for the family farm. And Americans 
want to support the family farm. And if that shirt were in the 
store and it cost a little bit more than one made in China but 
it was advertised as a product of American farmers made from 
corn, I think that you would have a lot of people paying the 
few pennies more for that shirt as compared to the shirt that 
is made in Taiwan or Korea or China.
    I think we are missing a marketing opportunity because I 
think America is 100 percent behind the family farm and I think 
that we need to exploit that in our advertising.
    Mr. Stockman. I applaud you. We agree wholeheartedly. And 
pulling that together will make a difference.
    Mr. Ludwig. I also believe that, you know, people in 
general have a good, warm feeling about family farms, but maybe 
the point that they don't understand is that the more people 
that we can keep involved in production agriculture and the 
more competition there is there, the better there is for 
consumers long-term as well.
    It is something that truly is good for the average person 
in this country, average consumer, that oftentimes they 
probably don't recognize. But if we are successful at 
developing some of these new businesses and are able to bring 
new products, in many cases better products, products that are 
indeed, more friendly to the environment, there are many 
benefits there that oftentimes we don't think about, and maybe 
we in one way or another need to do a better job at just 
communicating with them.
    Mr. Ward. Yes, I would agree with that. We have a group in 
Iowa right now, a producer group that has gone together and are 
doing some packaged, pre-cooked, different kinds of products. 
And they have been very successful. Now obviously, they do have 
a differentiated product which has given them an advantage, but 
it is so-and-so county family farm-something on the label.
    And I guess I thought they would succeed because they put 
their plan together right but I have been real pleased with the 
growth and the way they have been able to market that product 
and get it on store shelves and then ultimately having the 
consumers buy it. So I would agree with that.
    Mr. Bartlett. Thank you very much. There is another dynamic 
in this support for the American farmer that I think that we 
can exploit to the advantage of agriculture.
    I think that a lot of our people are supporting the family 
farm because they recognize that this is a part of our 
heritage; that when we have lost that we have lost something. I 
think they recognize that the young men and women that came off 
our farms were kind of a breed apart from what comes out of 
suburbia and the cities today. And I think there is a lot of 
nostalgia, there is a lot of concern that we are losing 
something in America if we lose the family farm.
    So I think that we can exploit the broad support for the 
family farmer across America in getting a bigger market for 
many of these alternative products--you know, they are used to 
buying soybean oil and they are used to buying bread.
    But if they are now buying a shirt which is made from corn 
fiber and if they are now putting soybean oil in their diesel 
car, which I understand is quite doable with a modest 
modification, I think we are going to find big support for the 
American farmer.
    I am on the National Security--it used to be the National 
Security Committee; now it is the Armed Services Committee. I 
have an additional interest in agriculture in this country and 
that is from a national security viewpoint.
    You know, I am concerned that we are now importing much of 
our manufactured goods. You know, we don't need to be importing 
food and fiber that we can grow on our farms, and if we keep 
going the way we are we will be importing more and more of that 
and I think ultimately it is a national security concern.
    We have held this panel for a few moments to see if there 
are additional questions. Ms. Millender-McDonald, do you have 
questions for this panel before we excuse them and reconvene 
the next one?
    Ms. Millender-McDonald. Well, thank you so much, Mr. 
Chairman. I too, am very pleased to have the agriculture 
industry to come before us, members of that industry. Those of 
us who are in the urban and suburban side of this country tend 
to look now at agriculture, or this member does, because I see 
the importance of you more so than ever before; certainly as I 
sit representing the two ports that make up the largest port 
system in the nation: the ports of Los Angeles and Long Beach.
    And it is important that we look at the empowering of you 
to further do value-added commodities. And so I perhaps, Mr. 
Chairman, there were some questions that I wanted to raise but 
wanted to more or less thank the Chairman for bringing this 
information or this group to us because of the importance of 
agriculture.
    And those of us who sit in the House who are urban and 
suburban, need to get more information on this so we thank you 
for being here. And don't think because we are in and out and 
have not been here, we are not reading your script, because we 
have it.
    I guess one of my questions is, what agriculture 
commodities are best suited for these value-added businesses? 
That is a question that may have been asked but I just need to 
know that. Either one of you can answer.
    Mr. Ward. I think probably all commodities can take 
advantage of that and you know, when you think of pigs, when 
you think of pork, you think of the products sitting there on 
the shelf in the grocery store, but currently the highest value 
per pound pork product are these dried ears for dog chews. So 
you know, there are I think opportunities in every commodity 
area.
    Mr. Ludwig. I think specifically here today there have 
been, you know, a couple of the commodities that are 
represented are some of the most important in the country if 
you look at what our largest commodities are.
    On the crop side it is obviously corn and soybeans and then 
livestock, pork, poultry, beef and dairy. And so those are the 
ones that have the critical mass; the number of producers that 
are going to be able to supply it at a lot larger scale if we 
have to if we are outrageously successful and can go to that.
    But just an example of how we don't necessarily--we cross a 
bunch of different industries as we talk about value-added. One 
of the things that we do in Missouri is grow soybeans that go 
into the food bean market that go to Japan and they are loaded 
out in Long Beach. They go through that port from Long Beach. 
And so it is interesting how we actually affect, not just 
agriculture but rural development as well as some of the 
largest industries in the country.
    Ms. Millender-McDonald. Absolutely.
    Mr. Stockman. Anything made from petroleum can be made 
from, if you will, biomass; all these crops, corn included. It 
seems to me that the greatest opportunity comes from those with 
the most abundance.
    If in fact, something was very scarce--gold, something like 
that--the abundance is lacking so the creativity and the need 
for expanding value is not the same as it would be for 
something that's very plentiful. And so those things that are 
more plentiful and less expensive really create the greatest 
opportunity, and our commodities right now are all in that 
shape.
    Ms. Millender-McDonald. How many of these value-added 
businesses can we look to in exporting to other countries for 
our percentage of exportation to other countries? Or can any of 
these value-added businesses be as a future, an exportation 
type of commodity to other countries?
    Mr. Stockman. There are several things that are happening 
quite frequently and that is, identity preserved in several 
different ways. But our desire is not just to capture that. Our 
desire is to create the jobs that make something special out of 
it first before it is exported, rather than as a commodity or 
even an identity preserved commodity.
    We think the opportunity for our economy and our country is 
much greater to create those jobs right here first. Because of 
what has happened in agriculture, the tradition has been 
shipping the raw production because farmers are experts at 
producing. With the technology and a whole lot of things, the 
volume of our commodities has grown quite rapidly.
    But that is only part of the story. In fact, by giving it 
away or selling it at a basic commodity price you have given 
away the biggest part of the opportunity because the margin in 
a box of cereal goes from a few cents to several dollars, and 
that is where the margin is.
    Ms. Millender-McDonald. I couldn't agree with you more that 
we certainly should make ready jobs in this country for 
purposes of our economic growth. But clearly, as I talk to 
other agriculture folks that come through my district, being 
that I am representing the ports, I am interested in 
international trade in agriculture.
    I would like to see that growth market go across the 
seaways and the airways as well. And so I will further listen 
to the other panelists but do recognize the importance of your 
industry, even though I represent the urban and suburban.
    Thank you, Mr. Chairman.
    Mr. Bartlett. Thank you very much. I caution people not to 
criticize our farmers and our farm programs with a mouthful. I 
can remember as a boy that it was a general rule of thumb that 
25 percent of your budget went for food. Today that is down to 
about ten percent.
    A few Americans know that and understand it and really 
appreciate farmers. It is our challenge to let every American 
know that so that they will appreciate farmers even more, 
because farmers have freed up a full 15 percent of income for 
other spending. They don't have to spend it on food because the 
farmers are producing food so efficiently that the share of the 
family budget that used to be 25 percent for food is now down 
to ten percent.
    We are just missing I think, a lot of marketing 
opportunities to sell farming. And it is not a tough sell by 
the way, to sell farmers and farming to the American public.
    Well, I want to thank the----
    Ms. Millender-McDonald. Mr. Chairman, can I just----
    Chairman Talent. Go ahead.
    Ms. Millender-McDonald. Let me concur with what you are 
saying. We don't see enough of the farmers in other areas of 
the country other than in your rural areas. And so when you get 
out and start doing your marketing across other districts can 
we better appreciate.
    Now we all eat your food and we certainly enjoy and 
appreciate what you are doing. But to really get to the crux of 
how this is done we need to have more interchange. And so I 
welcome any agriculture member to come to my district, even 
you, Mr. Chairman, to talk about that.
    Mr. Bartlett. Thank you very much. Thank you very much. I 
want to thank this panel. By the way, you don't see the farmers 
because they are working 16 hours a day; that is why you don't 
see them.
    I want to thank this panel very much for their 
contribution. We will excuse you and convene the second panel.
    [Recess.]
    Mr. Thune [presiding]. We will reconvene. I am pleased to 
have the second panel with us today and I would like to start 
by introducing Dr. Virgil Flanigan. I thought I might need a 
rocket scientist to explain some of the opportunities of value-
added agriculture so the Chairman did invite Dr. Flanigan to 
enlighten us a little bit on that.
    Early-on his career he was on the design team for both the 
Saturn delivery vehicle and the Sidewinder missile, so he 
really is a real rocket scientist. And over the past years Dr. 
Flanigan has developed and headed one of the most successful 
and visionary crop utilization and processing research programs 
in the nation at the University of Missouri-Rolla, which has 
focused on new uses for soybeans.
    So Dr. Flanigan, please share with the Committee your 
vision of where producer-owned, value-added agriculture can 
take our agricultural system, and then we will move on with the 
panel from there.

      STATEMENT OF VIRGIL FLANIGAN, DIRECTOR, CENTER FOR 
 ENVIRONMENTAL SCIENCE AND TECHNOLOGY, UNIVERSITY OF MISSOURI-
                             ROLLA

    Dr. Flanigan. Thank you, Mr. Chairman. Just a little bit of 
my present position. I am the Director of the Center for 
Environmental Science and Technology at the University of 
Missouri-Rolla, but I have been involved for the last 40 years 
in looking at agricultural products and trying to use them as 
a, typically as an energy product.
    And we have always had the problem when we do this of 
trying to get good economics. Wealways had a renewable, 
environmental-friendly, and biodegradable product but we always had the 
difficulty with economics. We always had to pay more money as compared 
to the alternate fuel.
    So that always was something we had difficulty with. But in 
the last five years I have started working with products, 
especially oils from our commodities, and all of a sudden we 
begin to see economic opportunity as well as opportunity based 
on biodegradable, renewable and environmentally-friendly.
    And it is amazing the products. You know, just looking in 
our little operations, we are looking at making a product for 
jet airplanes, we are looking at making a product for recycling 
polystyrene which is a huge problem all over the world, and we 
are looking at building houses in Honduras, all using these 
oils from the commodities.
    And I thought what I would do is, I might just go through a 
couple of our projects that are of interest, at least to me, 
and I hope I can share with you my excitement for these 
products. We got started basically, due to an opportunity of 
moving the Chemical Weapons School from Alabama to Missouri. 
And it is Fort Leonard Wood which is only like 25 miles away 
from Rolla and they were having trouble with the fog oil they 
are using as an obscurant smoke.
    We looked at it and we looked at soybean oil and it 
appeared to be a perfect replacement for the fog oil, the 
petroleum-based product. We tried that in the Army equipment; 
it worked beautifully well. We also analyzed the soybean oil as 
compared to the fog oil and we discovered that the soybean oil 
was really the only oil that could meet the specifications.
    The Army fog oil did not even meet its own specifications. 
It had poly-aromatic hydrocarbons which are cancer-causing 
products. So here we had a product which was perfectly suited 
for an Army application.
    And when the Army was doing the poly-aromatic hydrocarbon 
control they hydro-treated the product and it made the product 
expensive, so not only did we have excellent environment 
effects, we also had the economics based on what they had to do 
to the fog oil to make it usable.
    As well, when we began looking at the oil in more detail we 
discovered that it absorbed infrared rays as compared to the 
petroleum oil which does not; which is totally transparent to 
the infrared. So the Army has to add graphite to the oil to 
make it infrared opaque, where we can produce a product simply 
from the oil which is infrared opaque.
    So we had all of these advantages for the products and all 
we are waiting for is for the Army to adopt the program. It 
will represent about a quarter of a million bushels of soybeans 
a year just at Fort Leonard Wood to provide the obscurant 
smoke.
    I think this leads to another important point when you 
think about trying to produce these products and trying to get 
them adopted. It has got to be bigger than the University of 
Missouri-Rolla; it has got to be bigger than the Center for 
Environmental Science and Technology. We have to have the 
support of the Soybean Association, the Corn Growers 
Association.
    We have to have the support of these people in terms of 
adopting these products because without their support it will 
just drop. The Army won't adopt it and nothing will happen. So 
it is very, very important that we form these kinds of groups.
    I will just do one other quick demonstration here; one of 
our products. This is a composite material that we made. It is 
carbon fiber of composite. It is exactly like the material that 
is used in airplanes. We have added soybean oil to the resins 
in making this product and it has extremely good 
characteristics.
    If you think about it, that sounds good. You are going to 
make little black rods, but what are you going to use the 
little black rods for? Here is a product that, this is a rebar 
replacement made from composites.
    Okay, and in order to do this--now the reason they want to 
do that is because of all the damage we have every year. We 
have salt on the bridges. So if we could use a composite 
material we would get rid of all the corrosion problems.
    But the composite material is brittle so it doesn't have 
toughness. So they have to wrap this with a braid by adding the 
soybean material; the soybean oil, the epoxydized soybean oil 
to the resins. We have gotten rid of the braid. We don't have 
to have the braid. Again, economic opportunity to produce a 
product which has a real need in all of our infrastructure 
throughout the whole United States.
    We are also looking at esters--am I done? That was quick. 
Well, there are lots of other products that we are working on. 
They are really exciting. We have got a new way to separate the 
oil. We have worked with co-ops. We think that engineering 
expertise is absolutely essential and I think my friend Nick is 
going to tell you a little bit more about how important it is 
to have good financial and management services.
    So, thank you.
    [Dr. Flanigan's statement may be found in the appendix.]
    Ms. Millender-McDonald. Mr. Chairman, I know that this is 
out of turn but I have got to leave for another committee. But 
I just wanted to ask the professor, or Dr. Flanigan----
    Dr. Flanigan. That is good. Professor is fine.
    Ms. Millender-McDonald. Scientist. You are saying that corn 
and soybeans are important commodities for the production of 
oil or any other, I guess, exploration that we are endeavored 
in. Are you suggesting that you cannot get them to come to the 
table?
    Dr. Flanigan. The Army? That is true. We have had great 
difficulty getting this adopted. But it is continuing and we 
are----
    Ms. Millender-McDonald. So the Army is the one that is 
precluding this match, is that what you are saying?
    Dr. Flanigan. Yes, ma'am.
    Ms. Millender-McDonald. Very well. Thank you. Thank you, 
Mr. Chairman.
    Mr. Thune. I thank the gentlelady for yielding back and the 
gentleman for his testimony.
    Dr. Flanigan. Thank you.
    Mr. Thune. Even a guy with all those impressive degrees 
still knows the red and the green.
    Dr. Flanigan. Yes, I am a great sell.
    Mr. Thune. That is right. That is better than I can for 
many of us on the panel. We sometimes tend to get long-winded. 
But next we will move to Dr. Nick Kalaitzandonakes. And I don't 
think that is phonetically--by reading your name here that 
can't be right but I will take you at your word and I can tell 
you that is probably not Norwegian since I come from a 
Scandinavian country.
    But please, will you share with us? Nick joins us from the 
University of Missouri-Columbia, Agriculture Economics 
Department. Is a renowned expert in the field of agri-business 
development and the impacts of biotechnology on agriculture. So 
Nick, welcome, and thank you for coming today to share your 
vision for value-added agriculture.

STATEMENT OF NICKOLAS KALAITZANDONAKES, UNIVERSITY OF MISSOURI-
          COLUMBIA, AGRICULTURAL ECONOMICS DEPARTMENT

    Dr. Kalaitzandonakes. Thank you, Mr. Chairman. I have 
thrown away my prepared comments since many points have been 
covered. You already have my testimony. I would just like to 
reinforce some points that were made earlier. As an economist I 
know that they are valid because we have data to support them.
    Now farmers, want to participate in value-added because 
economics are pushing them that way. A larger portion of the 
food bill is going towards value-added, post-farmgate. And that 
means that a smaller portion is being captured by the farmers.
    In addition, value-added is tied increasingly to technology 
and unless you are either the owner or the manager of that 
technology you are not capturing much of that value-added 
anymore.
    So economics are working their way down to the farm and the 
trend is very clear. Unless farmers can participate in that 
value-added activity they are increasingly going to be 
capturing less and less value from the foods they are 
producing. Point number one.
    Point number two, there are increasing opportunities 
available for capturing value--there was a lot of discussion 
about niche marketing and value-added markets and how these 
relate to each other. What we do know is that opportunities for 
niche marketing are increasing because we have a better 
understanding of what markets look like. Right off my computer 
I can tell you what the market in any particular location looks 
like in terms of demographics, in terms of income, in terms of 
product distribution, details that make us better at 
positioning products to markets.
    So we are getting better at recognizing opportunities for 
product positioning. Electronic data interchange, scan data, 
internet--all contribute in that direction. So we are getting 
better at this and we can position products better.
    There is also no shortage of products and technology that 
need to be positioned, as you have already heard from Dr. 
Flanigan. And you have already heard that farmers can 
participate in creating that technology and can take it post-
farmgate.
    Significant disconnect occurs every time in this product-
market coordination effort; this is where we need business 
planning, strategy for value capture and value creation, 
business plans, organizational design, contract design, and so 
on.
    There was discussion about the issue of ``farmer-owned, 
farmer controlled,'' brand having value in the marketplace.
    In many cases, farmers may process a product only as a 
stepping stone for creating a brand. And maybe the brand, this 
``farmer-owned, farmer-controlled,'' brand may have more value 
than a processing margin. So we have got to explore these kinds 
of opportunities and we have to be proactive about it.
    And by proactive, what do I mean? There was discussion 
about cook-book business assistance solutions. In many cases 
cook-book solutions may work. But what we in my opinion, need 
is an increasing level of coordination between farmers and 
technical assistance people that design strategies up-front, 
even before products and technologies are developed.
    So that we go hand-in-hand with markets, products and 
technology to capture more value.
    So I would like to close my statement by saying that where 
the disconnect right now occurs is in the technology assistance 
and the market assistance level, and we can do much better for 
the farmers. When that happens ample opportunities exist and 
can be captured in the marketplace. Thank you very much.
    [Dr. Kalaitzandonakes' statement may be found in the 
appendix]
    Chairman Talent [presiding]. Thank you, Doctor. Our next 
witness is Rodney Christianson who is the CEO of the South 
Dakota Soybean Processors, Inc., and very interested in having 
you testify. Appreciate your coming, Mr. Christianson because 
you are the CEO of a successful, producer-owned, value-added 
cooperative, so I am sure you have a lot of insights to offer 
the Committee, and thank you for being here.

  STATEMENT OF RODNEY CHRISTIANSON, CEO, SOUTH DAKOTA SOYBEAN 
                           PROCESSORS

    Mr. Christianson. Mr. Chairman and fellow members of the 
Small Business Committee. Thank you for the opportunity----
    Chairman Talent. Excuse me just a minute. If you will 
suspend for a second.
    Let me recognize Mr. Thune for a more extensive 
introduction.
    Mr. Thune. Thank you, Mr. Chairman, that's not really 
necessary. I think Rodney is ready to go. But let me just add 
to what you said by commenting on what I think is a remarkable 
success story in the area of value-added agriculture and that 
is the soybean crushing facility at Volga.
    It really, truly is I think, what we are looking at in 
terms of a model. I would certainly hope that it is the first 
of what will be many successful ventures like that in the 
future, and Mr. Christianson is here with us today. He is the 
CEO of that fine organization and I think has a great deal of 
insights into what makes it work, what some of the problems 
are, what some of his concerns are with respect to the future 
and how those might be addressed.
    So I am delighted to have a fellow South Dakotan here with 
us today to be able to talk about what I think are some of the 
really salient high points in value-added agriculture but also 
perhaps point to some of the things that we might be able to do 
to make it more probable in the future.
    Chairman Talent. And I thank the gentleman for his 
comments. We have models that are successful and they point the 
way, so tell us how you did it, Mr. Christianson.
    Mr. Christianson. Thank you, Mr. Chairman and fellow 
members of the House Committee on Small Business. Thank you for 
the opportunity to be here with you today to talk about helping 
American producers re-grow America.
    As they mentioned, I am the Chief Executive Officer of 
South Dakota Soybean Processors. It is a direct 2100 farm 
family owned cooperative. Our producer members reside primarily 
in Minnesota and South Dakota. Our goals as a farm-owned co-
operative are to add value to our members' soybeans, to 
maintain a financially strong business unit, and to return a 
maximum value-added patronage to our members annually.
    Certainly the 2100 farm families that invested in South 
Dakota Soybean Processors believed: (1) that it is possible for 
the U.S. producer to participate and find success in value-
added processing; and (2) for future viability, today's 
producers need to capture a larger and more equitable share of 
the food dollars by adding value to their products.
    If it is the desire of this Committee and Congress to 
create an environment--and I will stress, create an 
environment--for agriculture producers to participate, your 
assistance should be targeted to the following items: capital 
formation; producer education and resource centers; and 
protection against potential anti-competitive and near 
monopolistic practices of industry giants. Somebody mentioned 
before that, how do you compete against the giants?
    From the early stage of conception the producer needs 
assistance in the area of education and resource centers. As 
mentioned previously, a cook-book. Well, the cook-book that you 
shouldhave is for the process. The solution and how you 
implement those solutions are not a cook-book and you leave it to the 
creativity of the producers to make those decisions.
    After all, it is those individuals who will be investing 
their hard-earned money. They have to have that control. But as 
they go through that process, the challenges they face include 
overseeing the development of a feasibility study and business 
plan, creating a capital formation plan, particularly when 
security laws from state to state vary, developing an 
organizational structure for the co-operative, and then having 
the ability to attract the large number of producers to provide 
both the commodity to be processed and the capital to start and 
build the operations.
    Investments in value-added processing requires outside-the-
box thinking by the producers, and likewise for that core 
leadership group, they need to apply their managerial skills 
outside of their core competencies of running their farm. They 
have the skills, but the application is different.
    Programs targeted to assist producer education, development 
of regional resource centers, and seed money for feasibility 
studies would help create that environment that encourages new 
value-added processing.
    The project's core leadership and potential producers/
investors will be told all the reasons why their project will 
fail out of the gate. Producers and their leaders need to be 
equipped to make solid, informed decisions to proceed or not to 
proceed. And they can't be afraid of making the decision not to 
proceed if it is not economically a viable project.
    After the conception is completed and the decision is made 
to venture into a value-added project, capital is absolutely 
needed as the fertilizer to make the seed grow. A cooperative 
being undercapitalized is one of the top reasons for failure. 
Value-added processing is capital-intensive, cyclical in nature 
in both commodity prices and margin structure, and is in a 
highly competitive, ever consolidating corporate world.
    If Congress had to choose only one method to assist 
agriculture producers entering value-added processing, I would 
strongly urge capital formation as the area that you should put 
your resources.
    The use of low-interest loans, loan guarantees for 
individual producers to purchase co-operative stocks, and low 
interest or loan guarantees directly to the co-operative would 
also encourage producer participation.
    Over the last year it is my understanding that $200 million 
was available out of the Co-operative Stock Loan program 
through Rural Development. This program could have provided 
producers and lenders to producers up to 80 percent loan 
guarantees on the purchase of value-added co-operatives. While 
well-intending as that program was, one needs to question why 
this program was not utilized at any measurable degree. It is 
my understanding that the complexity of this program prevented 
lenders from participating. Certainly, simplifying red tape 
requirements for funding availability is essential if Congress 
truly desires to implement a successful assistance program.
    SDSP would also specifically request that in such programs, 
the requirements of ``new'' co-operative qualifications be 
dropped from the program. Unlike the co-operative systems that 
have been in existence for several years returning 20 to 30 
percent of the profits to members through patronage dividends 
each year, the value-added co-operative is driven to have a 
maximum value-added payment every year.
    SDSP has returned 70 percent of our profits each of the two 
years that we have declared a patronage dividend to our 
members. Therefore, should SDSP desire to expand into major 
projects, we will require receipt of capital from our existing 
members or new members. It only makes sense to support value-
added ventures as a whole, whether a new, high-risk co-
operative or a proven, stable successful one.
    The last area that I request your consideration is how and 
will Congress be willing to provide a level playing field so 
that a producer entering into a value-added project will have 
an opportunity to return an equitable return for their 
investment?
    I am confident that the U.S. producer who invests in value-
added processing is willing to compete fairly in those chosen 
industries. The question I would raise, will Congress be 
willing to provide a level playing field for that producer-
owned venture against industry giants and the food 
transportation industry?
    Many producers have severe reservations about investing in 
value-added agriculture due to anti-competitive action by 
industry giants. SDSP has had a couple of situations that we 
have struggled with, both with the rail transportation system 
where there is a lack of competitive corridors in all areas, 
and also with the Chicago Board of Trade and some changes that 
they've made.
    And if you have questions we can go into that. You have 
that in your written testimony for the details on it. But I 
think that it is important that you take a look at it, and 
again, I am going to stress that the U.S. producer that invests 
in value-added agriculture is willing to compete fairly with 
those chosen industries.
    But let us be honest and realistic at the same time. The 
business and the profits captured by agricultural producers 
will be considered business and profits lost by a major 
competitor.
    A successful campaign that will encourage farmer investment 
will include assistance with capital formation, producer 
education and resource centers, and protection against special, 
anti-competitive or near-monopolistic practices of industry 
giants.
    On behalf of our 2100 farm families I would like to thank 
you again for this opportunity.
    [Mr. Christianson's statement may be found in the 
appendix.]
    Chairman Talent. Thank you, Mr. Christianson. I hope that 
you could give some further thought to helping the Committee to 
determine what those assistance centers or ag innovation 
centers or whatever you want to call them, what they ought to 
look like, to help us learn from your experience and then 
provide some shortcuts to some people maybe in other states.
    We have learned over the years, everybody starting in a new 
kind of business needs some assistance in technical assistance. 
And some of our programs have been very good. Some of them have 
missed the mark. And it just depends a lot on how you set them 
up. And since you have a real life experience I hope you would 
be available to help us.
    Mr. Christianson. I will try to help you on that.
    Chairman Talent. Okay. The next witness is Mr. Dayton 
Watkins. He is the current Administrator of the Rural Business 
Co-operative Service of the USDA. This division is part of the 
USDA's world development mission area.
    Mr. Watkins, thank you for appearing today to tell us what 
the USDA has been doing to encourage producer-owned, value-
added endeavors and to share any other observations you may 
think appropriate.

  STATEMENT OF DAYTON WATKINS, ADMINISTRATOR, RURAL BUSINESS-
 COOPERATIVE SERVICES, UNITED STATES DEPARTMENT OF AGRICULTURE

    Mr. Watkins. Mr. Chairman, thank you very much. Thanks to 
the Committee. Thank youfor your vision for wanting to hold 
this hearing this morning.
    As you know, the Department of Agriculture falls under the 
House Committee on Agriculture, and it is very rare, certainly 
during the time that I have been with the Department of 
Agriculture, that we have had an opportunity to come before the 
House Small Business Committee. I applaud you and I am thrilled 
to have this opportunity.
    The Rural Development Mission Area views producer-owned, 
value-added enterprises as a means of assisting the individual 
producer increase profitability of their operations. We view 
them as critical to the stability of economies in many rural 
communities.
    Value-added enterprises create new employment opportunities 
in which most of the income generated from these investments 
tend to stay in rural areas and supports other businesses.
    I should point out that it is not only Rural Development 
that is involved in providing assistance to producers as they 
enter into the value-added arena. A number of agencies have 
contributed significant time and resources to specific 
projects, and success of these enterprises is dependent on this 
cooperation.
    The Alternative Agricultural Research and Commercialization 
Corporation, the Natural Resources Conservation Service, the 
Farm Service, Agricultural Marketing and Research and Extension 
components of USDA have been involved very actively and 
aggressively in these endeavors.
    A most recent example that involves a variety of sources of 
technical assistance and very little financial assistance in 
Northern Florida, a co-operative was created by limited 
resource farmers and they are providing fresh vegetables and 
fruits to the local school districts.
    This co-operative evolved through efforts of many parts of 
the USDA, including Natural Resource Conservation, Agricultural 
Marketing, and the Florida A&M University. The Rural Business-
Cooperative Service provided some assistance in helping the co-
operative organize and a local bank provided the financing for 
a processing and packaging facility.
    The Rural Business has a variety of programs that we are 
using to finance value-added facilities. But the flagship 
program that we have in the agency is our Business and Industry 
Loan Guarantee program. This program is used to provide loan 
guarantees or direct loans to value-added processing entities, 
growers and producers who are forming such entities, and for 
those growers to obtain financing to purchase stock in those 
co-operatives.
    For the past few years, the Business and Industry Loan 
Guarantee program had a program budget of one billion dollars. 
To stimulate agriculturally-related value-added projects we 
have a policy of setting aside $200 million of our B&I Program 
authority for value-added, grower, producer co-operatives.
    In 1998 we funded $36 million in value-added co-operative 
transactions, and in 1999, year-to-date, we have financed $44 
million. As an example, we provided $20 million guarantee to a 
sugar beet processing plant in eastern Washington.
    We have also provided a government guarantee to a swine 
processing plant in Minnesota. We are also using this program 
to participate in projects financed in part by the Agricultural 
Research and Commercialization Corporation. One such project is 
a soybean processing plant in Michigan.
    Other financing programs available from Rural Development 
Mission Area include the Rural Business Enterprise Grant 
program through which we are able to assist small and emerging 
businesses with facilities, feasibility studies and marketing 
studies, and the Rural Economic Development Loan and Grant 
program.
    The Rural Business-Cooperative Services also provides 
technical assistance, research assistance and the like, to 
existing and new co-operatives. The Cooperative Development 
Grant program provides technical assistance to cooperatives 
through a network of co-operative development centers that are 
located throughout the country.
    These centers have been instrumental in the establishment 
of new ventures. Examples would be a pasta plant in North 
Dakota, a bakery in Colorado and many others.
    In addition to Co-op Services here in Washington, D.C., we 
have a series of co-operative development specialists that are 
employed at the state levels and those who do not have full-
time co-operative specialists have co-operative specialists who 
have collateral duties. In other words they get involved in 
other business services that we provide through Rural Business.
    Mr. Chairman, let me conclude my comments with the next to 
the last paragraph in my testimony which says that, 
unfortunately the producer interest in co-operatives, in value-
added enterprises increases when commodity prices are low and 
wanes when prices begin to rise.
    It is fairly difficult and it has been difficult for USDA 
and our Co-operative Services Division to convince small 
producers and ag producers throughout the country that it is to 
their economic benefit to participate in value-added co-
operatives, though we are continuing in that fight and we think 
it is the direction we should, as the Agricultural Department 
of the United States, should be going.
    Thank you very much and I will be here to answer any 
questions that may arise.
    [Mr. Watkins' may be found in the appendix.]
    Mr. Phelps [presiding]. Thank you, Mr. Watkins. I have been 
given the scary assignment of holding the Committee in this 
hearing on the minority side. That may be a little bit unusual, 
too, but maybe we can do this with your help.
    I have several questions probably for all of you. I think 
we will be joined here very shortly with other members.
    Dr. Flanigan, you had mentioned--first of all, the dear 
gentlelady had mentioned from California, her interest in 
ports, and you alluded to the fact that, in answer to her 
question, that the Army has had some slow response or 
resistance. Why do you think that is? Are there competing 
interests or just a lack of focus on programs that we need to 
make sure happens from the Congressional view?
    Dr. Flanigan. I think that the first thing as you well 
know, the environmental permits for this kind of an operation 
are very difficult to obtain. So when you switch from one 
product to another product that is going to require some 
effort. And I think there is some lack of enthusiasm in terms 
of going through that exercise again.
    Even though I think the soy oil really shows so many 
positive characteristics as compared to the petroleum-based 
product. But I think that is one of the main ones. They are 
really reluctant to----
    Mr. Phelps. Transitional costs, then?
    Dr. Flanigan. Yes, even though I think, you know, we have 
talked to EPA and we have talked to the DNR in the state and 
they are both very encouraging in terms of making the switch to 
the soy product.
    Mr. Phelps. Is there any co-operative effort in trying to, 
I guess convince them that it doesn't have to be so abruptly? 
Is there not a gradual plan to get there that could pay for 
itself as they go along, so to speak? I think that would make 
sense.
    Dr. Flanigan. It does to me. We have suggested that. We 
have not gotten very far with that.It doesn't have to happen 
instantaneously, needless to say. It could be spread over five years, 
probably. But they haven't been willing to do that.
    Mr. Phelps. So there is just a resistance there in 
strategic planning, sounds like.
    Dr. Flanigan. Yes. And that is why it is so important, I 
think, to have the support of these farmer groups because they 
really can apply pressure that I as a researcher--you know, it 
is very hard for me to apply very much pressure, needless to 
say. I think with continuing pressure we will get there. It is 
just a matter of how long it takes.
    Mr. Phelps. Can you elaborate or clarify for me--I have 
some general understanding of esters. It is a biodiesel 
component, I guess. That is a lucrative market also, isn't it, 
that we can capture? Can you elaborate?
    Dr. Flanigan. In fact, if we go back to this product here, 
the smoke, we have looked at the methyl esters as well as the 
soy oil and we can even make a better smoke with methyl ester. 
And it has some improved properties. Methyl ester is going to 
be a real product of choice in the future.
    When you look at polymers I think you almost always end up 
going to methyl esters. And now we have developed some other 
esters--and I don't want to get into a long chemistry talk 
because everybody will go to sleep on me--but we have developed 
some new esters that even tie up the soy oil and the other 
vegetable oils much better in terms of making polyers.
    So there are all kinds of positive things in the 
relationship to esters. And we have got the ester for paint and 
we have got a patent and it is being sold presently. And the 
technology is being sold and it gives us all kinds of 
opportunities to try to get money back to the farmer.
    But it is not the methyl ester that you are used to in the 
soy diesel. It is another one using another product. So there 
are all kinds of opportunity there and I think we are going to 
see more and more esters being produced all the time.
    Mr. Phelps. So essentially your R&D funding has come 
through Congress or is it the private sector?
    Dr. Flanigan. No, most all of it has been from check-off 
funds.
    Mr. Phelps. Okay.
    Dr. Flanigan. Now we are working over in the hog area as 
well and that is all through some local state--we are looking 
at manure incineration in some of those, and odor detection, 
odor measurement. That is coming from other sources.
    Mr. Phelps. I see. I see.
    Dr. Flanigan. Other state sources, not federal sources, 
though.
    Mr. Phelps. The soy oil that you refer to, there are 
several advantages in your written testimony over petroleum-
based oil. Is lower cost you say, and----
    Dr. Flanigan. Well, it is in this case because they have to 
go through severe hydrotreating. But I think if you go in the 
markets you are going to see--Rodney can tell me better what 
today's price is probably than I can. But it is going to be two 
dollars a gallon or close to it. And so it is 25 cents a pound. 
Where gasoline, needless to say, is not that high, even with 
the rising prices.
    So that is why you have always got to be very careful when 
you are talking about these fuels when you want to look at them 
as fuels. Because it is difficult to maintain economic 
advantage, which I think you have got to have for the most 
part.
    Now, Nick will argue with me there. He says with brands we 
might be able to change that. Which is true.
    Mr. Phelps. Would you like to elaborate on that? Do you 
believe it is?
    Dr. Kalaitzandonakes. Sure. We have many, many examples 
right now where the bran is worth a whole lot more than the 
product itself in terms of how much money it brings relative to 
processing margins and so on. There are co-ops that have been 
very, very successful in marketing their products as ``farmer-
owned, farmer-controlled'' or ``farmer-produced,'' and create a 
whole lot of value out of that image.
    So in many cases, processing may be a good way of adding 
value and capturing some of the value. In many cases it is 
simply a stepping stone towards capturing value from other 
assets; in this case, a brand.
    Mr. Phelps. In your opinion--I am going to call you Dr. 
Nickolas if that is okay.
    Dr. Kalaitzandonakes. Sure. Absolutely.
    Mr. Phelps. In your opinion, I am interested in looking at 
your managing innovation of value-added products. There needs 
to be a--what is the single, most important coordinating 
factor? I mean, if we have these centers set up similar to what 
we have in small business and it is why I felt like the 
Chairman's vision of bringing agriculture and small business 
together was very resourceful.
    How can it be made to convince farmers that they are in 
good hands if you have a management problem, I guess barrier. 
You need a success story as you have had, like we said in the 
soybeans which Mr. Christianson has so ably indicated, how do 
we get there past this organizational problem? Do we need 
strong leadership somewhere? The private sector and government 
hand-in-hand?
    Dr. Kalaitzandonakes. Absolutely. And we need to put those 
things together in such a way that they make sense. Managing 
new technology fails typically in one, unique way; it doesn't 
matter what industry you are looking at. And that is bringing 
technology to the right market and the right market to the 
technology.
    In other words, putting those two together. A lot of very, 
very good technologies fail when they get to the market because 
they do not have a really good business plan or a good strategy 
for positioning.
    In other cases creating value does not mean that you can 
actually capture any. So how you put this together right is by 
making these functions go hand-in-hand.
    In other words, the technology side and the business side 
have to go together, and hopefully in a pro-active mode. The 
strategy and the business plan go before the technology is 
actually developed rather than after. But in some cases we do 
have really good technologies that we can market ex-post.
    Mr. Phelps. Mr. Watkins, thank you for your testimony, your 
input from the Department's standpoint. It seemed like one of 
the main difficulties that farmers have faced, at least in the 
past when trying to form co-operatives, and you have alluded 
to--all of you have sort of referred to capital being so 
important in the process; accessibility to capital.
    Especially when we are talking about farmers who are 
already in dire times. What is your Department doing to 
facilitate the--to encourage individual farmers to participate 
in co-ops? Are there incentives or things in place to help 
decide that?
    Mr. Watkins. Well, thank you very much, Mr. Chairman, for 
the question. Prior to 1996 farmers who wanted to join a co-
operative, a marketing and distribution co-operative, either 
had to use their own financial resources to buy their shares in 
a co-operative, or they had to go to a lender, borrow the 
money, and then they would have to, in the normal underwriting 
of the loan,they would have to pledge their assets.
    They would either have to pledge their land, their house, 
put up a personal guarantee, their next several year's crop 
production, or whatever. It made it very difficult for farmers 
to pledge their assets because now they're moving into other 
than agricultural production but a new business venture. A lot 
of those business ventures did in fact, fail and farmers did in 
fact, lose their property.
    In 1996 the Agricultural Committee, through its wisdom, 
added in the 1996 Farm Bill, an opportunity for my agency to 
use the Business and Industry Loan Guarantee program to 
guarantee a farmer's purchase of stock in a co-operative. The 
incentive is that a farmer now can go to a lender, borrow the 
money, and not have to pledge his assets but pledge the stock 
that he purchased in the membership co-operative.
    Now that, in and of itself, is an opportunity and it should 
in fact, create a groundswell of small producer's participation 
in value-added processing and production.
    However, to get to that point they need to be educated. 
They need to understand the opportunities of value-added 
processing; they need to understand the economic opportunities. 
They also need to be fully aware of the risk involved in 
participating in value-added processing. And we are in the 
process right now throughout the Department of Agriculture, of 
providing that information.
    We have the Co-operative Services Division within my 
agency. They provide technical assistance, education and 
feasibility studies to grower/producer groups who are 
interested in considering value added cooperatives. Even before 
they decide to form a co-operative, if they contact us we have 
people who are around the country who go out and provide 
technical assistance and education.
    In addition, the 1862 Land Grant Colleges and Universities, 
which are predominantly agricultural universities around the 
country, many of them have Small Business Development Centers 
located on those facilities.
    Farmers need to begin to access them as other small 
businesses that are involved in whatever their industries are 
around the country, to gain access to technical expertise and 
assistance.
    There are many other things, Mr. Chairman, that we are 
doing in the Department. We are currently--we have developed 
the specific part of the regulation that will address the stock 
purchase part of our B&I program. We have streamlined it, we 
have made it user-friendly, we have made it efficient and less 
bureaucratic for farmer groups who are becoming involved in 
value-added co-operatives to gain access through their local 
lenders.
    Mr. Phelps. So your long-range goals are somewhat in place?
    Mr. Watkins. Our long-range goals are in place. It is a 
highly visible objective and goal and priority for the 
Department of Agriculture to move more small producers into 
value-adding processing activity and to get them into niche 
markets.
    And let me add, very recently I began discussing the 
development of a partnership with the Foreign Agricultural 
Service Agency in USDA. What they want to do--heretofore, they 
have focused most of their time and efforts with big co-
operatives in terms of moving them into international markets.
    They now understand that the philosophy in USDA is to 
develop additional economic opportunities for small producers 
who are in value-added. Well, one of the problems with putting 
small producers in value-added is that once you get into value-
added you need a market for the distribution and sale of your 
product.
    Foreign Agricultural Service is partnering with us to help 
those small producers who develop value-added co-operatives 
find opportunities to export their product in foreign markets.
    So yes, we are well on our way to a long-term strategy 
within the Department of Agriculture, focusing on value-added 
and small producers and having them fully participating in that 
stream of economic opportunity.
    Mr. Phelps. And what local agencies through your Department 
actually will communicate that?
    Mr. Watkins. Well, all the agencies within Rural 
Development, which would include my agency, Rural Business and 
Co-operative Services. But it will include the Foreign 
Agricultural Services, the Agricultural Marketing Service, 
Natural Resource Conservation Service. So most of those 
agencies within Agriculture that have a role or an involvement 
in either identifying market opportunities in the international 
and within the domestic market, and those that provide 
assistance directly to the farming community--which is the farm 
services agency--and then my agency which provides the 
assistances to other than agricultural production businesses.
    Mr. Phelps. As I turn the chair back over to Congressman 
Thune I realize that allowing farmers, it has been said could 
be an advantage, to deduct from their taxes the dividends from 
their membership in co-ops.
    Is that a big problem? Is that something we can help 
develop through your agency? I know it may take action through 
Congress, but is that an encourageable item you think?
    Mr. Watkins. Frankly sir, I have not seen that as being an 
issue for creating and for farmers going into value-added co-
operatives. It may be. It has not been an issue that has 
surfaced to me.
    Mr. Phelps. And it might be that Mr. Christianson is going 
to elaborate on it because I know in your statement too, it 
caught my eye that creating the capital formation plan, the 
securities laws vary from state to state----
    Mr. Christianson. Well, with regard to taxes, any economic 
incentive that raises their return on their initial investment 
is beneficial. As the patronage comes to the producer today, it 
is considered normal income, so not only income taxes but also 
social security taxes apply to it unlike investments in other 
corporations. The dividends that come to them should be taxed 
differently, I believe. Any time you add value and increase the 
potential rate of return on the investment, I think you are 
going to get more people involved.
    Now with regard to securities, as you go across states, and 
again, most value-added businesses are going to require large 
commodity volumes. In the development phase, in order to raise 
capital from farmers in other states like Minnesota, North 
Dakota, Iowa, the hurdles to involve farmers from multiple 
states are different and you end up doing the same thing four 
or five times, which is costly.
    Our group itself decided not even to try in Nebraska 
because of some of the securities issues in that state. So even 
though that may have been an area that we may have gotten some 
interest--and again, Minnesota Corn Processors had success 
expanding down there--SDSP chose not to take that hurdle.
    Mr. Phelps. I see. Thank you very much.
    Mr. Watkins. Thank you.
    Mr. Thune [presiding]. If I might just--and forgive me if I 
am asking questions that have already been asked--but elaborate 
on some of the testimony and some I think line of questioning 
maybe you have already gone down.
    One of the things I was reading in a South Dakota 
publication the other day from theDepartment of Agriculture was 
that the number of producers who use computers in their operations is 
like 31 percent. Which would seem to me in this day and age, somehow we 
have got to be pushing that up higher.
    You know, if this in fact is a business operation that 
relies upon information for decision-making, that somehow--and 
to me it comes back to one of the things that we talked about 
and that is sort of the education curve and how do you get this 
information and this body of knowledge that you all are talking 
about, out in the hands of actually the producers and whether 
or not there is a federal role in that.
    We all struggle with the current budgetary constraints that 
we are under here at the federal level as to what should be the 
federal role in terms of education, you know, and technical 
assistance. And I am just curious to successful models with 
channeling information for producers that want to add value to 
their products.
    I mean, what is working out there? And if there isn't 
something what is the federal role? And I understand that Mr. 
Watkins is involved in that on a day-to-day level, but are 
there other ways, better ways that we can improve the technical 
assistance that we provide?
    Mr. Christianson.
    Mr. Christianson. Well, let me respond as I look at 
successful models, and I am going to take note of two 
particular local organizations in the Dakotas. First the 
Quintin Burdick Center on the North Dakota State University 
campus has been focusing on providing education at the Board 
level for new generation co-operatives. The governance and 
responsibilities that a former Board member has in running a 
value-added co-operative, particularly with regard to the size, 
structure, and organization of professional personnel they hire 
to manage their cooperative, is much different than that of the 
local co-operative they all have been very familiar with in the 
past. The Quintin Burdick Center is trying to address that 
issue and they are through the development stage and I think 
can be used as one example.
    Then in South Dakota, through farmer groups like the 
Soybean Council, the Corn Growers, Pork Producers, as well as 
cooperatives such as South Dakota Soybean Processors and South 
Dakota Wheat Growers Association, have funded a non-profit 
organization led by an executive director. We are trying to 
focus on learning where the resources are so that a new farmer 
group coming along may be able to do one-stop resource 
shopping, if you want to say.
    The intent is to not replace the work of the Soybean 
Council or the check-off dollars through the Pork Producers--
but to help coordinate that. The other goal is to work together 
where help and support is needed, either from the state level 
or from the federal level. We don't want different groups of 
farmers thinking that the pie is a fixed piece and then 
fighting over it, but asking how do we move the whole process 
forward?
    Certainly the other models I think are a success, are those 
organizations that use check-off dollars like the United 
Soybean Board. That is a farmer-directed group doing a lot 
toward trying to understand and develop additional markets. Why 
would not that type of model also work toward farmers becoming 
owners of businesses? And certainly the Small Business 
Administration has been successful in the business environment 
all the way along.
    So I think there are several models out there that you can 
take a look at. And then the question is, how can the federal 
government help with some of the funding sources to establish 
and maintain resource centers?
    Mr. Thune. Anyone else want to comment on that?
    Dr. Kalaitzandonakes. Well, I can give you another example 
from Illinois where processing is not involved; where farmers 
got together and formed an LLC and basically got into identity 
preserved markets. They have very innovative contracts to 
deliver to specific end-users, specific soybeans from specific 
varieties with specific properties. That adds value to them and 
to the end-user; they share that.
    So back to the point. I don't think that there is any 
singular model to be had, and that is part of what we are 
discussing here in terms of the technical and business 
assistance; in that forming the right strategy in particular 
markets, even particular local conditions, is part of how 
farmers can be helped.
    I don't believe that there is a cookie-cutter, singular 
model that we can put in place and make it work.
    Mr. Thune. Okay.
    Mr. Watkins. Mr. Chairman, through our Co-operative 
Development Grant program, which is funded at the tune of about 
$1,750,000 a year, we are able to fund non-profit organizations 
within states that focus on co-operative development.
    And in 1999 we funded about ten. The average grant to them 
was about $180,000 apiece. And they have been quite successful. 
They have worked with local universities within their 
jurisdiction. They have probably worked with Small Business 
Development Centers as well, and other resources within the 
state to encourage grower groups participating in value-added 
processing.
    That might be a model for the Small Business Committee to 
consider in the future.
    Mr. Thune. Well, it just seems to me that there are in the 
existing infrastructure, ways out there of doing this. To me, 
value-added is really emerging as, not the salvation but 
certainly an important part of the future of agriculture in 
this country.
    And if we can redefine the mission or the role or whatever 
of some of these existing mechanisms that we have in place to 
provide that sort of assistance so they are more focused on, 
you know, co-operatives, value-added enterprises, things like 
that, it would seem in my judgment to make a lot of sense.
    But just one other question if I might. I see the Chairman 
is back. I will be happy to yield back to him in just a moment.
    One of the things that I have heard--I did it during the 
month of August; a 36-county tour across South Dakota. Granted, 
that is only about half of the counties we have in South 
Dakota, but I was primarily in rural communities, smaller 
towns, towns that there is a tremendous amount of frustration 
because of the economic difficulties that they are having out 
there.
    And much of it is tied to agriculture. There are fewer and 
fewer producers farming more and more land, and so you don't 
have the population base to support a lot of those small towns. 
So there is a real sense of frustration and sort of, and in 
some ways almost resignation, about where do we go from here.
    But one of the things that everybody was focusing on in 
terms of identifying, trying to define the problem of this 
whole issue: concentration. And I know Rodney, in your 
testimony you referenced this situation with the railroad and 
how at least at the transportation level, the lack of 
competitive alternatives is dramatically impacting your ability 
to market your product at a reasonable price and the cost of 
freight factored into that.
    My question I guess for you and for anybody else who would 
care to take a stab at it is, to what degree is this going to 
be a factor? How is it going to impact and what can we do to 
address that? There have been some suggestions that we come up 
with legislation that would prevent forexample, vertical 
integration; that would prevent packers from owning their own livestock 
unless they are ready for active slaughter, and some things that are 
legislative in nature in terms of solutions.
    And I don't know that that is the track we want to be going 
down. But it is a concern for producers and I am just curious 
what your observations might be with respect to that issue.
    Mr. Christianson. Well, certainly what I would stress for a 
producer to make that investment, the concern of consolidation 
and the market power of industry giants is a hurdle that they 
need to get over.
    I am not asking for any particular movement that prevents 
the flow of world economics. The pressures we are experiencing 
and it is not only happening in the United States, it is a 
world economic issue driven by consumers and by the 
shareholders of large corporations.
    We want to have a level playing field. You have heard from 
agricultural industries that want to have a level playing field 
in the world market because different countries, depending on 
the socio-economics of that country, have advantages and 
disadvantages.
    I believe that small producer-owned co-operatives against 
the industry giants could be viewed and looked at in that same 
way. There are areas of oversight that this government has that 
are available to use oversight in regulating actions we 
consider anti-competitive in nature.
    And let me refer to the Burlington Northern example. Now, 
their motivation and their view of marketing is that they are 
providing their customer marketing opportunities by allowing 
them to purchase meal from a variety of shippers located on the 
BNSF line. So the BNSF believes that they are doing the market 
justice.
    Our view from where we sit is that we have located our 
facility and have made other capital investments to more fully 
utilize rail systems, to put us as the high-quality, low-cost 
producer to particular market segments.
    Now, what the BNSF has done is increase our transportation 
rate to that particular location that puts our other 
competitors on a level playing field with us. But if a company 
has invested capital to expand their capacity so they have a 
lower unit cost, the end user might as well go for that option.
    One example in the written testimony is, we have shipped a 
fair amount of our meal up to Sweet Grass, Montana to be 
exported to the Canadian consumer. We pay $500 more for every 
car that goes that direction even though we travel 212 miles 
less.
    So from our perspective, the BNSF has taken an opportunity 
to capitalize on our producers' investments by keeping a little 
bit more of the profits in BNSF's pocket. And either the 
consumer or SDSP is going to have to pay that.
    Our approach is to try to introduce other transportation 
competition by first loading 1500 trucks with meal, shipping 
them 125 miles on South Dakota roads, and then reload them into 
the Canadian Pacific line. So we are not going to lay there and 
take that business because it is 30,000/35,000 tons we have 
been putting through there in the last two years.
    That is our recourse today. We would like to have a 
recourse that could challenge BNSF's rate structure 
effectively. When our cost per mile, due to the lack of 
competition, is 54 percent higher than other suppliers on the 
BNSF, we don't see that as just. But we are willing to compete 
and deal in that market.
    Chairman Talent. Would the Chair yield just for a minute?
    Mr. Thune. If not the Chair, I will at least yield the 
microphone with the Chair.
    Chairman Talent. No actually, I want you to continue 
because I want to develop this record as much as possible. This 
is an initial hearing and I am very hopeful the Committee will 
follow-up in this direction because again as I have said 
several times, what I have heard from the ag community--and in 
a united way.
    I mean, there are certain things the ag community is 
debating right now. But the importance of value-added, it 
isn't. And Mr. Watkins, if you have any contrary information on 
that please tell me. But this is something I get a sense from 
every part of the ag community that value-added is important.
    And we are very glad to have you here today. We have not 
before. Just so often when we encounter Small Business issues 
they were rural issues, they were ag issues. And so we did 
start a Rural Enterprises Subcommittee and we certainly want to 
work with you and the ag committee on all these issues and we 
are grateful for the work the Department has done.
    But I want us to follow up with this. And so I am going to 
have to go. I am sorry I have had to duck in and out but I 
would hope that you and Mr. Phelps if you want to, and others 
from the Committee with real experience on ag issues, would 
help us develop legislation or whatever we can do to help in 
developing these value-added enterprises.
    So I am going to let you stay in the Chair and please, as 
long as the witnesses don't mind, continue developing this 
record.
    Mr. Thune. Thank you.
    Chairman Talent. I will yield to Mr. Phelps if he has 
something.
    Mr. Phelps. I too, am going to have to go but I just wanted 
to commend you again for your being able to identify the value 
of these communities coming together, because agriculture is 
the backbone of not only this Nation, but of course the hub of 
rural America.
    So to the Congresswoman, the ranking member who has given 
me the opportunity I want to thank her because her interest, 
even though she does not have a lot of agriculture----
    Chairman Talent. We are told that she has a farm in her 
district. And Ms. Velazquez is going to try and find it. But 
she does have a farm and it really is--I want to also state for 
the record my respect and appreciation to her for her 
cooperation. Because this is not something that is immediately 
big in her district. But she recognizes the importance of it as 
well.
    Mr. Phelps. For those members of the first panel I didn't 
get a chance to say that I had the tee shirt, so forth. The 
only other thing I could say that might increase the market 
would be these biodegradable golf tees that I have seen. Very 
little I have used; I don't play much. But believe me, that 
could be an increasing market, especially the number I use 
trying to get off the tee.
    Thank you for the opportunity.
    Chairman Talent. I yield back and I thank you, Mr. Thune. I 
just would encourage you again, to put on the record anything 
that you need. Mr. Christianson's statements about how we need 
to put some things in the law to give them some assurance they 
won't get snuffed out by some larger enterprises is I think 
important, taking some of the risk out of this investment.
    And we have to decide how much we can do and how much we 
start getting into jurisdictional problems here, and I don't 
want to get any inside baseball-type things. But that is very 
interesting and I had not heard that related before your 
testimony.
    Mr. Thune. I thank the Chairman for yielding back. I don't 
have any further questions. If anybody else would care to 
comment on that last question on the concentration issue just 
for the record. If not, we will conclude and let you all get to 
lunch.
    Mr. Watkins. Mr. Chairman, let me suggest that the 
concentration issue is very important to us at the Department 
of Agriculture, and the Secretary's Office has been involved in 
havingstudies done and has created a task force within the 
Department to focus on that issue.
    Further, there is a task force that is comprised of the 
Economic Council of the President that is also looking at the 
concentration issues. So we are very much involved in it.
    Let me also add that, you know, we have had considerable 
experience in the Department of Agriculture in forming co-
operatives and in forming value-added co-operatives, as a 
matter of fact. The Co-operative Services program was created 
and has been in place for 73 years. So we have a cadre of 
experts who are knowledgeable in the area and they provide 
services and assistance throughout the country in rural 
America.
    And we serve on panels and participate with professors at 
the various local universities who are experts in their field 
as well. And we have had successes and we have had failures. I 
would just like to go on record with a couple.
    I mentioned in my testimony a sugar beet processing 
facility that was created in Washington State. The Co-Op bank 
last year provided $120 million to this value-added group of 
beet growers who wanted to create this facility. And they 
invested the money, they built the facility, installed all of 
the equipment. And on the day that they turned on the electric 
switch the equipment didn't work.
    They came to us this year and asked, would we guarantee a 
$20 million additional loan to the company, to the growers, for 
them to now correct the problems and begin to operate their 
plant.
    We did our review and analysis of transaction, they came in 
with a business plan, feasibility studies. They convinced us 
that they had the management and technical expertise now to go 
forward and to operate this business and to be successful. And 
so we did. We guaranteed the $20 million deal. So we are 
waiting to see what happens.
    In Maine, several years ago we financed a group of potato 
growers who decided that they wanted to do value-added to their 
potatoes so that their potatoes could compete with Idaho 
potatoes head-to-head in the marketplace. They met all of our 
requirements for a B&I loan guarantee. They borrowed about $8 
million; they built a new facility; they installed their 
equipment.
    As a start-up business they had startup problems. One of 
the major problems that they had was that they had 
miscalculated their market and they had miscalculated their 
ability to enter that market. And so they ran through their 
entire equity investment that they made in their company and 
came back to us for additional financing.
    Based on our review of the financials and our analysis of 
their financials going forward, the company could not assume 
any more debt. The only thing they could do was to find 
additional equity to put in your company.
    In the meantime, if they found that equity, we will put a 
moratorium on the payment of principal and interest on the debt 
until the company could be restructured and reposition to be 
successful. Lastly, they also have to find the management and 
technical expertise needed; not those of growers but those of 
business people who have been in this industry, who know this 
industry, who are experts in this industry.
    They have been able, in fact, to do that and just recently 
I got an e-mail from one of my staff who said that he was 
shopping at a Giant store in a local community here in 
Washington and he saw this company's potatoes in there; which 
is new because we haven't seen any in the local market since we 
financed this company.
    We also have a group of 500 growers in North Dakota. They 
decided that they wanted to do value-added oils: cremly oil, 
sunflower seed oil, other oils. They had their marketing and 
feasibility study, they had their business plan, they had their 
management and executive team in place. And we thought that 
their deal was an outstanding deal and we agreed to provide the 
guarantees.
    That was in 1995. They called me several months ago and 
asked me would I, because of problems that they had in this 
startup business, would I waive their, or forgive, $2.5 million 
of a $5 million loan?
    Unfortunately, in the Business and Industry Loan Guarantee 
program and in my agency which I tend to believe to be the 
business agency of USDA, we don't forgive loans that we make to 
business people. If there is a problem and we have to 
foreclose, then we foreclose and we sell the assets but we try 
to do the best that we can to replenish the funds so that other 
business people who are interested in their business activity 
in rural America can gain access to these resources.
    Long story short, yes, we would like very much to keep 
these 500 growers who decided to go in value-added processing, 
in business. And we came up with several scenarios for them to 
stay in business, one of which was, we will not forgive the 
$2.5 million loan. We will put a moratorium on the payment of 
principal and interest.
    We will, as a matter of fact, not charge you interest for 
the next 20 years. We will allow you to pay us a minimum 
payment every year based on the amount of profit that you make 
out of your business, but we want you to stay in business.
    As I understand, they didn't like that idea and decided not 
to accept it. Our only alternative is to foreclose on that 
plant, tear down the assets, sell them to whoever is interested 
in buying them, and close that business activity.
    Doing value-added business is just as risky as any business 
that the Small Business Committee has extensive knowledge on 
and extensive experience with.
    The same businesses that are technology-based that are 
located in urban and suburban communities, where you must know 
your market, you must know that you have the technical and 
expertise to enter that market, and that you are capitalized to 
the point that you can withstand the barriers that will be 
thrown in your direction to keep you out of it.
    We are not talking about new markets that these value-added 
companies that are owned by growers are going to be 
participating in. These markets and these products, for all 
practical purposes, are already being produced. Someone in the 
middle is producing the product. That person in the middle, 
that entrepreneur, that business that is located in rural 
America, is the competitor.
    So entering into value-added businesses is not as simple as 
it may seem. It is very risky, it is very difficult. But there, 
if you do it right, the opportunities for entering that 
business for growers is phenomenal. Thank you.
    Mr. Thune. Well, and I guess producers look at this in some 
regards as sort of the last hope, and that is why we want to 
make sure that everything is in place to do it right and there 
are some very notable success stories. But understanding again 
that there is a tremendous amount of risk in small business 
venture.
    So I want to express my appreciation to the panel. I thank 
you for your observations, insights. I look forward to 
exploring this topic further in the future. I do think that 
there is a real crossover between small business and ag.
    I also serve on the Ag Committee but I can certainly speak 
from firsthand experience that most of the small business in 
our part of the world in a lot of ways, is tied directly to 
agriculture.
    And so there is a lot of overlap there and these are issues 
that are important I think to the futureof this country since 
small businesses create a lot of the jobs. And I hope will continue to 
do that and hopefully keep a lot more people on the farm, too.
    So thank you again. We will, by unanimous consent, keep the 
record open for an additional ten days. If there are additional 
questions, comments on behalf of members of the panel so that 
we can get those answered. And I want to thank you again for 
coming, and with that, the hearing is adjourned.
    [Whereupon, at 1:14 p.m. the Committee was adjourned.]


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