[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
REGROWING RURAL AMERICA THROUGH
VALUE-ADDED AGRICULTURE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON RURAL ENTERPRISES,
AGRICULTURE, AND TECHNOLOGY
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, JULY 17, 2001
__________
Serial No. 107-18
__________
Printed for the use of the Committee on Small Business
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COMMITTEE ON SMALL BUSINESS
DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD,
ROSCOE G. BARTLETT, Maryland California
FRANK A. LoBIONDO, New Jersey DANNY K. DAVIS, Illinois
SUE W. KELLY, New York WILLIAM PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio DONNA M. CHRISTIAN-CHRISTENSEN,
PATRICK J. TOOMEY, Pennsylvania Virgin Islands
JIM DeMINT, South Carolina ROBERT A. BRADY, Pennsylvania
JOHN THUNE, South Dakota TOM UDALL, New Mexico
MIKE PENCE, Indiana STEPHANIE TUBBS JONES, Ohio
MIKE FERGUSON, New Jersey CHARLES A. GONZALEZ, Texas
DARRELL E. ISSA, California DAVID D. PHELPS, Illinois
SAM GRAVES, Missouri GRACE F. NAPOLITANO, California
EDWARD L. SCHROCK, Virginia BRIAN BAIRD, Washington
FELIX J. GRUCCI, Jr., New York MARK UDALL, Colorado
W. TODD AKIN, Missouri JAMES R. LANGEVIN, Rhode Island
SHELLEY MOORE CAPITO, West Virginia MIKE ROSS, Arkansas
BILL SHUSTER, Pennsylvania BRAD CARSON, Oklahoma
ANIBAL ACEVEDO-VILA, Puerto Rico
Phil Eskeland, Deputy Staff Director
Michael Day, Minority Staff Director
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Subcommittee on Rural Enterprises, Agriculture, and Technology
JOHN THUNE, South Dakota, Chairman
ROSCOE BARTLETT, Maryland TOM UDALL, New Mexico
FELIX GRUCCI, New York DONNA M. CHRISTIAN-CHRISTENSEN,
MIKE PENCE, Indiana Virgin Islands
BILL SHUSTER, Pennsylvania DAVID D. PHELPS, Illinois
BRAD CARSON, Oklahoma
Brad Close, Professional Staff
C O N T E N T S
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Page
Hearing held on July 17, 2001.................................... 1
Witnesses
Nelson, Wayne, President, Communicating for Agriculture and the
Self-Employed.................................................. 2
Jorde, Terry, President & CEO, Country Bank, USA................. 5
Reis, David, President-elect, Illinois Pork Producers Association 8
Truitt, Jay, Executive Director for Legislative Affairs.......... 11
Appendix
Opening statements:
Thune, Hon. John............................................. 27
Udall, Hon. Tom.............................................. 32
Prepared statements:
Nelson, Wayne................................................ 39
Jorde, Terry................................................. 45
Reis, David.................................................. 56
Truitt, Jay.................................................. 61
REGROWING RURAL AMERICA THROUGH VALUE-ADDED AGRICULTURE
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TUESDAY, JULY 17, 2001
House of Representatives,
Subcommittee on Rural Enterprises,
Agriculture, and Technology,
Committee on Small Business,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:10 a.m., in
Room 2360, Rayburn House Office Building, Hon. John R. Thune
[chairman of the Subcommittee] presiding.
Chairman Thune. Let's get this hearing this morning under
way. I want to welcome our witnesses this morning and others
who are interested in the subject. This is a subject that is
near and dear to my heart, and today's hearing has been called
to discuss how we can regrow rural America through value-added
agriculture.
Agriculture is the lifeblood of many rural States'
economies, and value-added enterprises will greatly aid the
revitalization of rural communities. Producers want and need to
reach up the agriculture marketing change and capture the
profits generated from the processing of raw commodities in
order to compete in an increasingly concentrated marketplace.
The family farmer is America's original small business
owner, and in today's concentrated ag marketplace, producers
have often been forced to accept lower prices for their
commodities. This trend toward consolidation has been very
pronounced during the last decade. For example, the hog
industry has consolidated rapidly with the four largest firms'
share of hog slaughter now reaching roughly 57 percent compared
with 32 percent in 1980. In the cattle sector, the four largest
beef packers account for about 79 percent of all cattle
slaughtered, compared with 36 percent in 1980.
In addition, from 1984 to 1998, consumer food prices
increased 3 percent, while the prices paid to farmers for their
products plunged 36 percent. The average wheat farmer, for
instance, earns about 3 cents on every box of Wheaties and
about 5 cents on a loaf of bread.
The problem facing Congress is how to help farmers become
price makers instead of price takers. To many of us, expanded
opportunities for value-added enterprises are the answer.
While producers have great interest in pulling together to
add value to their products, two primary barriers stand in the
way. First, producers do not have the technical expertise to
launch extremely complex business ventures like value-added
cooperatives. Farmers are outside their arena when it comes to
putting together processing plants. Second, producers are
currently cash-strapped. Even if enough investment capital
could be accumulated to initiate development of producer-owned
value-added processing, many of the consolidated players in the
market could squeeze producer-owned entities out before
becoming profitable.
To help jumpstart the process, I, along with my colleagues
Jo Ann Emerson of Missouri and Dennis Rehberg of Montana, have
introduced two bills to assist farmers who want to create new
value-added enterprises. H.R. 1093, the Value-Added Development
Act for American Agriculture, provides $50 million in grant
money to States to form agriculture innovation centers. The ag
innovation centers would provide desperately needed technical
expertise, engineering, business, research and legal services
to assist producers in forming producer-owned value-added
endeavors.
H.R. 1094, the Value-Added Agriculture Investment Tax
Credit Act, allows producers to receive a 50 percent tax credit
on investments in producer-owned value-added enterprises. The
bill provides a maximum tax credit benefit of up to $30,000 per
year per producer, and the tax credit may be applied over a 20-
year period.
Congress needs to help provide opportunities for producers
to create new value-added ventures, and these two bills are an
inexpensive way to accomplish that very goal.
Again, I want to thank our witnesses for appearing before
our Subcommittee this morning, and we look forward to hearing
your testimony.
[Mr. Thune's statement may be found in appendix.]
Chairman Thune. Before we begin receiving testimony from
the witnesses, I do want to remind the witnesses that we would
like each of you to keep your oral testimony to 5 minutes. In
front of you on the table is a box, which is not lit up yet,
but should be, which will let you know when your time is up.
When it lights up yellow, you will have 1 minute remaining, and
when 5 minutes has expired, a red light will appear. Don't
worry. There is no trap door or anything there, but that should
signal that you should begin wrapping up your remarks.
Our first witness today is a gentleman from my home State
of South Dakota, who has a long history of involvement in
agriculture and a very keen interest in this particular issue.
He is Mr. Wayne Nelson, a grain farmer from Winner, South
Dakota, which is out in God's country in South Dakota, west of
the Missouri River, which is where I call home. And Wayne is
the president of the group Communicating for Agriculture and
the Self-Employed, and also is, as I happen to know from
visiting with Wayne and from past history, he is an active
farmer as well in the Winner area.
So we will start, Wayne, with you and welcome you to the
Committee and look forward to hearing your testimony.
STATEMENT OF WAYNE NELSON, PRESIDENT, COMMUNICATING FOR
AGRICULTURE AND THE SELF-EMPLOYED, WINNER, SD
Mr. Nelson. Thank you.
Chairman Thune and members of the Committee, I thank you
for the opportunity to speak to you today about an issue that
has long been a priority to the members of our organization, an
issue that we believe is a vital part of long-term strategies
for the success of rural America, how to spark the development
of successful value-added agriculture enterprise.
As the Chairman said, I have a farm in western South
Dakota; been farming there with my wife, Pat, for 30 years. But
I also have the privilege of serving as president of
Communicating for Agriculture and the Self-Employed. CA is a
national nonprofit rural organization made up of farmers,
ranchers and rural small business people from across the
Nation. We work on a variety of legislative and public policy
issues, but none are more important than the one goal of
keeping rural America alive and healthy in terms of our
individual farmers and our rural communities.
Mr. Chairman, we want to thank you for calling this
important hearing to discuss ways to enable value-added
agriculture to help farmers and build new jobs and a stronger
economic base for rural communities. There are many reasons
value-added agriculture development is important, but we feel
the most fundamental reason is simply low farm income. This is
thefourth consecutive year of drastically low farm prices.
Today on my farm in South Dakota, we are preparing to harvest wheat in
the next few days. The price of wheat is about 2.60 a bushel, which is
about a dollar a bushel under the cost of production on my farm.
The markets have been consistently low for all the major
crops. Livestock and dairy prices have swung widely, but the
damage of low price periods has outweighed recent periods of
recovery.
The second reason to strengthen value-added agriculture has
to do with the changes under way and the structure of the farm
economy. It is now abundantly clear that vertical integration
in agriculture is here to stay. This is a cause of great worry
to many farmers. But the results of this trend are by no means
necessarily bad. Vertical integration can have many benefits.
The question is, can farmers participate, and will they share
in the rewards? Vertical integration from the farmer's field to
the grocery shelf offers a better opportunity to better line up
supply with demand. Both of these opportunities, if the new
system is working right, should result in additional income for
farmers in this kind of a system.
In this new farm economy, the old tools we have used to try
to shore up and protect farm income simply aren't enough to do
the job. We need a bigger tool box and some new tools. CA
believes that it is vital that we continue to have farm income
support programs. The last 4 years of low prices makes it clear
the farm programs have been and will continue to play a vital
role in providing a safety net for farmers.
CA also sees a need for new policies and programs involving
education, oversight, and regulation of contracting. We also
see a need for stronger Federal antitrust oversight and an
effort to preserve competition in agricultural markets and
supply chains.
We commend the Chairman and others for introducing H.R.
1526, the Agriculture Competition Enhancement Act, which would
put limits on mergers to prevent excessive concentration. We
also believe that one of the best ways to address vertical
integration is to find ways for farmers to participate as
equity holders of value-added enterprises, both cooperatives
and through various joint ventures.
We don't want the landscape of rural America to look like a
few giant farms and a few giant corporate processing facilities
located hundreds of miles away in large cities. We like the
present mix of family farms, and would like to see processing
facilities located in rural communities providing more jobs and
income.
In my home State of South Dakota, we have an example in a
small town in eastern South Dakota. Farmers are operating their
own soybean processing facility that has created a better
market and a better price for their product.
We think there are some new tools that would also help. We
offer our support and encouragement to approve H.R. 1094, the
Farmers Value-Added Agriculture Investment Tax Credit Act. As
you know, this bill calls for showing--allowing producers to
receive a 50 percent tax credit on investments and producer-
owned value-added enterprises. The tax credit could be for up
to $30,000 a year and applied for over 20 years.
Additionally, the companion bill, H.R. 1093, calls for USDA
to administer grants that would go for establishing innovation
centers to provide technical assistance, market and business
development services for the new value-added ventures. These
are good legislative proposals.
We also believe that it is important for us to find ways
for new beginning farmers to get started in agriculture and to
participate in value-added agricultural enterprises. CA would
like to see enacted a bill that would exempt State Aggie Bond
loan programs from the overall bond cap. This proposal is
included in H.R. 2347, introduced by Representative Nussle,
that is the TERFF Act, the same ag package that was introduced
by Senator Grassley in the Senate a couple of months ago. We
would also like to see a legislation develop that would allow
the Farm Service Agency loan guarantee to be used on Aggie Bond
loans. We support the entire H.R. 2347, the entire TERFF
package, which has some very good ag tax incentives to help
both farmers and the rural communities that the farmers serve.
In summary, CA believes we need new additional tools in the
agricultural policy tool box to put our family agricultural
system back on sound footing. Value-added agriculture is not a
panacea, but is one of the more important strategies that we
need to pursue more seriously than we have in the past.
We have all talked a good story about value-added
agriculture and the need for farmer participation for many
years now, but the truth is we have not--it has not been an
easy goal to achieve, and we need to work harder at trying to
achieve this goal.
Thank you very much, Mr. Chairman.
Chairman Thune. Thank you, Mr. Nelson.
[Mr. Nelson's statement may be found in appendix.]
Chairman Thune. And I neglected to mention earlier, and I
should have, the gentleman from Pennsylvania, Mr. Shuster, is
with us, and we have now been joined by Ms. Moore Capito from
West Virginia and the Ranking Member of this Committee, Mr.
Udall from New Mexico.
And I would like to open up if anyone would like to make
any opening remarks, or we can proceed with the witnesses.
Anybody have a comment?
Mrs. Capito. No.
Mr. Udall. I would just ask that my opening statement be
put in the record so we can get directly to the witnesses,
Chairman Thune.
Chairman Thune. Very good.
[Mr. Udall's statement may be found in appendix.]
Chairman Thune. I appreciate your comments, Mr. Nelson, and
we will now turn to Ms. Terry Jorde, who is president and CEO
of the Country Bank, USA, Cando, North Dakota. Ms. Jorde is
also a member of the Independent Community Bankers of America,
which represents a lot of the small community and independent
banks in rural areas of the country, places like many of us
represent here this morning.
So we welcome you to the panel and look forward to your
testimony.
STATEMENT OF TERRY JORDE, PRESIDENT AND CEO, COUNTRY BANK, USA,
CANDO, ND
Ms. Jorde. Thank you, Chairman Thune and members of the
Committee. And thank you for holding this important hearing. As
you said, my name is Terry Jorde, and I am on ICBA's
Agricultural-Rural America Committee and president and CEO of
Country Bank, USA. Our agricultural bank is located in the
small community of Cando, a town of about 1,300 people in
Towner County, North Dakota. I have lived in Cando for 22
years, and I am married to a potato farmer.
Over three-fourths of the community bank members of the
Independent Community Bankers of America are located in
communities of under 20,000 people; 86 percent are in
communities of less than 50,000. Our membership has a strong
interest in ways to help rural communities diversify and add
value to ag commodities. Our bank has tried to be a catalyst
for ruraldevelopment and has worked hard over the past decade
to create new jobs.
Cando established an economic development group called the
Durum Triangle Development Corporation back in 1978. That
organization has now evolved into a countywide development
corporation whose nine-member board consists of two community
bankers and an attorney, our hospital administrator, a city
council member, a county commissioner and various other people
from our county. This group, along with two local banks in
Cando, financed the first totally integrated pasta plant in the
Nation.
About 20 years ago very little durum wheat was milled in
North Dakota. Now, well over 10 percent of all U.S.-produced
durum is being milled there. Pasta plants such as this one have
created over 500 jobs in my local area.
Our bank has also helped originate a loan to a local
foundry that casts small agricultural implement parts. We were
able to convince a Canadian foundry owner to locate an American
plant in Cando. We brought lots of people together with various
types of expertise, a couple of bankers, an attorney, a State
legislative representative and the president of the local
electrical cooperative. We worked together to create a
financial package utilizing State and Federal programs, an
example of community involvement, to attract new business
ventures. This business opened in 1995 and now has about 90
employees.
Let me suggest four basic principals for rural development
through value-added initiatives. Number 1, target resources to
rural communities based first on population. Number 2, provide
tools to complement, not compete with, the private sector.
Number 3, target resources to various sizes of businesses,
including individuals. And, number 4, maintain the population
infrastructure.
First we must target resources to rural communities. Given
a choice, new business will always locate in urban areas unless
given an incentive to do otherwise. The labor pool is larger,
and the risks are lower. But we do need to create new jobs in
rural areas if we are to survive. This implies a population-
based criteria such as the business and industry programs
required that loans go to communities of 50,000 or less.
Targeting rural areas provides off-farm jobs, maintains the
local tax base, maintains population which can keep local
leadership in a skilled work force, and maintains the
infrastructure and services needed to sustain economic life.
Second, we should complement efforts of the private sector.
Rural bankers are keenly aware that the future of their locally
owned institutions are directly tied to the future of their
rural communities. With thousands of small banks in rural
areas, there is a vast network already available to act as
catalyst to bring together people and leverage resources to
attract new business opportunities.
Greater use of guaranteed loan programs would be one
obvious tool. Small bankers can also participate in larger
loans, especially if they have guarantees.
Third, let's not forget about individual entrepreneurs. For
example, one of my customers is a farmer who started a business
that uses flax straw to make 20-foot erosion control logs that
are shipped all over the country to minimize erosion after
flooding and forest fires. He is further expanding his business
to make hanging flower basket liners for horticultural use.
He bought a closed schoolhouse for $1 for the manufacturing
site, and our bank has helped to fund this value-added project
with the help of an SBA 7(a) guaranteed loan. My point is that
he began as just one individual entrepreneur.
Finally, we must maintain population and infrastructure.
The 2000 census revealed that in the 1990s, 676 counties,
primarily rural agricultural counties, lost population. Despite
the efforts in my county, we lost nearly 21 percent of our
population. At some point populations can fall below a critical
mass, meaning the community is headed for an irreversible
decline because they lack the human resources needed to remain
viable.
ICBA welcomes your legislative efforts to help producers
capture more from their raw products through value-added
processing. H.R. 1093 provides grants to create special
innovation centers to provide much needed technological
expertise to assist producers in forming their own value-added
business. H.R. 1094 provides a tax credit for investments by
farmers in value-added businesses. Farmers, like everyone else
in rural America, are limited in amounts that they can invest.
Such proposals have merit, especially if they are targeted to
the rural communities. Congress should consider combinations of
tax credits, grants and loan guarantees in ways that can ensure
community bank participation.
Mr. Chairman, there are other suggestions in my written
statement for tax incentives and real development initiatives
such as Subchapter (S) reform for community banks, greater use
of ethanol, increased deposit insurance and index it to
inflation. It is a source of funding for the community, but
hasn't been raised since 1980, eroding its real value in half.
Increase funding for USDA's Business and Industry
Guaranteed Loan Program. Last year almost 400 projects could
not be approved due to lack of funding.
Limit or eliminate fees on guaranteed loan programs in
rural areas. The administration's budget for both USDA's B&I
Guaranteed Loan Program and SBA loan programs recommend new
fees. To deal with some of these budgeting issues on a more
permanent basis, we suggest that Congress pass legislation
prohibiting USDA and SBA from raising loan fees without
Congress's approval, and establish a large pilot program that
would eliminate fees on small business loans in rural areas.
Eliminating fees would attract greater participation and
enhance the strength of the portfolio. If fees are too high,
only high-risk ventures will seek financing through SBA, thus
increasing SBA's potential for losses.
We need greater broadband access in rural areas. And again,
we also agree that we need to enhance the Aggie Bond Program.
And finally, Mr. Chairman, rural America has a critical
need for equity capital. The Center for the Study of Rural
America recently explored the issue of attracting equity
capital to rural areas. They concluded that few companies with
high growth potential are located in rural areas. Urban areas
can attract equity capital much more efficiently than rural
areas. Creating local wealth that is locally controlled should
be an essential goal, and a double bottom line is needed, both
a good rate of return, but also providing the rural communities
with a major economic boost, like jobs.
Any serious attempt to boost the supply of equity capital
has to include banks. The ICBA has worked with the Coalition on
Legislation to create a rural equity fund to help spur business
development in rural communities. The equity fund would
encourage private investments and value-added agricultural
enterprises and small business start-up and expansion. A
healthy rural community obviously needs many types of rural
businesses. Unfortunately, large venture capital funds are not
interested in focusing on rural America. There is plenty of
venture capital for Silicon Valley, but not much for the Red
River Valley.
Mr. Chairman, I thank you for the opportunity to
participate, and we look forward to working with this
Committee. I would be happy to answer any questions.
Chairman THUNE. Thank you, Ms. Jorde.
[Ms. Jorde's statement may be found in appendix.]
Chairman Thune. And we next will hear from Mr. David Reis,
who is the president-elect ofthe Illinois Pork Producers
Association. Mr. Reis farms and lives in Willow Hill, Illinois. Mr.
Reis.
STATEMENT OF DAVID REIS, PRESIDENT-ELECT, ILLINOIS PORK
PRODUCERS ASSOCIATION, WILLOW HILL, IL
Mr. Reis. Thank you.
Chairman Thune and members of the Committee, as you said,
my name is David Reis. I am a pork producer and a fifth-
generation family farmer from Ste. Marie. I am currently
serving as president-elect of the Illinois Pork Producers
Association, and it is an honor to appear here today before the
Subcommittee on behalf of the over 240 members who are
independent pork producers that make up our newly formed
cooperative to share with you some thoughts of what we were
trying to accomplish in this ever-changing agricultural
industry.
As has been said before, like many industries in this
country, agriculture is truly going through a period of
extensive change and consolidation. The result is the family
farm is giving way to a system of contracted and integrated
corporate operations. While some producers and organizational
groups have resorted to spending their time and resources
trying to stop this trend, we at American Premium Foods have
chosen to be proactive and engage in activities that will allow
us to not only control our own destinies, but also to create
more jobs and preserve rural economic activity as well.
In our industry, the only way for family farms to survive
this consolidation is for them to coordinate and capture the
profits from processing their current commodity, live hogs,
into value-added food products. We must stop selling hogs and
begin marketing pork.
American Premium Foods Co-op was organized in late 1999
after a year of business plan development and membership
recruitment. We plan to construct a pork packing and fresh
processing facility that is producer--wholly producer-owned.
The plant will be capable of handling 2,800 head per day on a
single-shift basis. Each carcass will be individually tracked
through the plant, and producer members will be paid for the
wholesale value of the primal cuts for their hogs. The profits
from additional processing will be paid to them, individual
members, according to the producer's percentage ownership in
the plant. Our $30 million facility will employ 210 people and
have an annual payroll of approximately $6 million.
We have, during the course of this project, received a lot
of support from various State agencies and groups wanting us to
get up and go, and we really don't have a business model to
follow in the United States, producer-owned cooperative. There
are some smaller ones, but none of this size. Department of
Commerce and Community Affairs, Department of Ag, even the
State of Illinois issued us a $1.7 million grant to help us
with our start-up costs, and just a couple of weeks ago we
found out that we were awarded a $500,000 grant from the USDA
through their Value-Added Agricultural Product Market
Development Program that was new last year.
Our project, however, hasn't been without its fair share of
frustrations and attacks from the industry critics, because we
are the first venture of this size. We had no business plan to
model. We were deemed high-risk start-up. We were even told by
some people to be aware of snake oil salesmen; that this
project, a project of this size, just couldn't be put together
by farmers.
You have heard it mentioned here before that most of the
producers' equity and ability to invest in such a project was
wiped out with the 8-cent hogs in 1998.
As you can tell, it was easy for people to sit back and
give us reasons why we couldn't do this, but our group of
directors and the leadership has held its course for 2\1/2\
years now. We believe that what we are trying to do is worth
fighting for because we feel what is at stake is our
independent operations. And everyone from the local extension
office to the commodity groups to the halls of Congress are
promoting value-added. And I can tell you it is not that easy,
that these projects just don't happen overnight. But the longer
it takes to get these things up and going, the more
consolidation continues.
It was just announced a few weeks ago that Seaboard
Corporation was scrapping their plans to build a new plant in
Kansas, which further backs up our beliefs that the only way
that increased growth in the packing industry is being incurred
is by acquisitions and mergers. They are coming into the
smaller plants, the bigger packers, and buying them. So they
are really not increasing shackle space, they are just buying
up other plants. And we have all seen in recent weeks with the
high cost of gasoline and fuel what happens to an industry when
they quit investing in itself. And it is a major problem with
the shackle spaces that are available in the pork and beef
industry.
So what can Congress do to help? We need common-sense
solutions and assistance if more projects such as ours are
going to successfully maneuver through the critical period of
planning and start up. Whether it is beef or pork packing
plants, soybean crushing, ethanol, wheat, aquaculture or one of
the other value-added concepts being discussed, oftentimes the
difference between success and failure is the amount of time
and money spent doing the preliminary work. These ventures need
assistance in hiring the best firms to conduct the feasibility
studies, legal representation, engineering, marketing, business
plan development and so on.
We in the pork industry in America know how to raise pork
better and more efficiently than anyone in the world, but we
need a little boost when it comes to becoming better business
owners in a broader sense when it comes to a project this size.
That is why we are so excited about Congressman Thune's value-
added agricultural package. In fact, when I heard about it from
Brad, I almost leaped out of my chair because I testified a
month ago, and two of the things they suggested was a tax
credit bill and block grants to States. So this is common-sense
legislation, and I hope we can move it forward.
We feel that both 1093 and 1094 will address two major
hurdles that co-ops face as they develop from the initial
vision stages all the way to becoming profitable ventures for
their members. With 1093, I can't explain how many dead-end
roads we went down, programs we found out that were available
after the fact, just how many ideas and support from people we
could have got if there was a State-run co-op development
center in place. They need to be State-run because they need to
be relatively close. There is a couple in Missouri, but, you
know, we are all on shoestring budgets, and sometimes you have
got to visit these offices several times a month. And if every
State had one that was local, the producer could go there.
There are also a lot of rules and programs that are just
different in each State.
So in May of this year, the Illinois Legislature passed a
bill that creates the first AgriFirst Program, and its ultimate
goal is to become a DECA-like program that can help fund and do
things for agriculture. But up front it is just going to be a
program where it can be the incubator center for knowledge and
business plan development and so forth. So this would tie in
great with that. Illinois could apply for one of these grants,
and it would help them fund their program at a much higher
rate.
With regards to 1094, some say that the tax credits are
always a longshot. Sometimes I think that they don't work hard
enough on them. But this puts incentives where they do the most
good in established projects that have come to fruition and
will enable the participating members to recover more quickly
their initial capital investments, which in turn make the co-op
moreprofitable, which in turn allows the members to reinvest
their money back through their communities, and this is why we are here
today.
I really encourage Congress to push for these tax credits.
I know it has got to go through another Committee, Ways and
Means, but these are both excellent bills, and I think most of
the commodity groups, if not all of them, are going to be
behind them.
I am running short on time. But from the Small Business
Administration I think Terry pointed out a lot of things. The
fees and the application process makes a lot of these
unavailable to ag projects this size, a lot of $150,000 loans
and such, and we are doing a $30 million project. So perhaps
the Small Business Administration could do a better job of
cross-selling their programs. If we go in and ask for what is
available, maybe they could say, go to this one, or go to that
one. Sometimes I think they just say, well, this is what we
got, and that is it.
In closing, Mr. Chairman and members of the Committee, the
producers that are in our particular co-op have agreed to lay
their operations on the line and invest what little capital
they have left into this project. Two years of holding the
membership together, a project that hasn't been built yet
really says a lot about eight hogs. They have hung in there,
and they have hung in with the board of directors. We should be
finishing up financing this summer, and hopefully we will start
this fall. But the future of the independent pork producers are
hinging on our success. They are a key ingredient to the
sustainability of the landscape. They eat corn, they eat
soybeans. And our industry is changing rapidly. And if we can
work with Congress collectively, maybe we can come up with
ideas, common-sense ways to preserve the livelihood of the pork
producers throughout the Midwest.
Thank you, Mr. Chairman, and I would be happy to answer any
questions as well.
Chairman Thune. Thank you, Mr. Reis.
[Mr. Reis's statement may be found in the appendix.]
Chairman Thune. We will get to questions in just a moment,
but our final witness this morning is Mr. Jay Truitt, who is
executive director for legislative affairs for the National
Cattlemen's Beef Association.
Mr. Truitt, it is good to have you here this morning, and
please proceed.
STATEMENT OF JAY TRUITT, EXECUTIVE DIRECTOR FOR LEGISLATIVE
AFFAIRS, NATIONAL CATTLEMEN'S BEEF ASSOCIATION
Mr. Truitt. Thank you. And, again, Mr. Chairman and members
of the Committee, we thank you for the opportunity to be able
to speak to you today.
Again, I am here today on behalf of the National
Cattlemen's Beef Association, which is the trade association
that represents America's cattle farmers and ranchers and is
also the marketing organization for much of what takes place in
the beef industry. We are proud to be the leader in the
Nation's food and fiber system. Beef is the largest segment of
agriculture, and, again, we are proud of that. It is something
that we are pleased with.
We, too, have gone through dramatic changes. We feel that
our rule as an initial organization is to begin to lay the
groundwork so that the legislation, as it is before the
Committee today and has been before this Committee in the past,
has an opportunity really to work.
The beef industry, not unlike the pork industry, has seen a
dramatic shift and a dramatic change in the respect that I
would like to talk about this morning. And what has been of key
interest to us was our constant and ever-present decline in
market share that had gone on for about 20 years. We realized
that we were in trouble a number of years ago and began to do
some strategic planning and really get focused on where that
was going to change and how we could turn those numbers around.
A little bit later I think I can explain why we have turned
those numbers around, and we are beginning to see beef demand
increase and have continued to see that increase for the last
several months.
Seventy percent of the total U.S. Beef volume that moves
through the marketplace is moved through the retail outlet.
Over the past several years that has been a pretty consistent
number. We are beginning to see some changes there, though, and
how that beef moves through those retail outlets has taken some
dramatic changes.
We look at beef consumption numbers in the United States,
and not to slight my friends from the pork industry, but we are
still number 1. We are proud of that. We like to point that out
again, as I said earlier. But at 66.2 pounds per person per
year, we know that there is a huge marketplace out there now,
and, again, we hope that that number will continue to increase.
We started laying the groundwork in the mid-1980s and
really got focused late in the 1990s at NCBA in trying to
figure out ways that we could make products more usable for
consumption, and also that we could begin to develop some of
the technology and discover many, many technologies. That made
it possible for anyone, from producers that form together in a
small marketing organization all the way up to the largest
members of our industry, to be able to move into the next
generation of retail consumption, which we believe is beginning
to arrive.
Just 3 years ago, heat-and-serve entrees were something
that probably no one really thought about a whole lot. Today it
has become a huge business for us, and the convenience section
in the fresh meat case, which was zero again just a few years
ago, is now $117 million. That is something that we are very
proud of, and it has been a great success story.
When you look at some of those individual successes
involved in creating those products and developing those
products, what we find is that the incentives that were put in
place, in some part because of NCBA's use of check-off dollars,
to run contests and promotions that help reward people that
were creative and looked for solutions in the retail outlet,
but also producers that took the technology that we had found
through our research and development programs and were able to
apply them at whatever scale was appropriate and really become
extremely successful--and there are a number of cases where we
have seen heat-and-serve products now that are in the
marketplace that started in someone's kitchen, and we are as
proud of that as we can possibly be, and we think it is a huge
part of the future of the beef industry. And, again, we see our
role in making sure that they have some the basic technical and
physical tools that are needed in some cases to make sure that
we can move in that direction.
New products, again, are those promotion programs, and
those research projects have been funded by our check-off
dollars that producers across this Nation contribute in. NCBA
mentions those dollars for the Cattlemen's Beef Board, which is
a hundred-plus-member board designated by the Secretary to
administer that program, and we are very pleased with the
effect that that has had on our industry. We think that that is
one of the key reasons why now for eight quarters in a row beef
demand has been increasing, and in large part it is because of
these new product areas that have moved in and began to take up
space in the retail counter in a positive way, from our
perspective.
Category management tools and the mechanisms that will
allow us to actually move into the marketplace have become a
key component in the way that we have redesigned the marketing
of products that allow producers to find the space where they
fit in the retail outlet. We think that is essential.
Again, in closing, we would to say that--and I spent a
great deal of time working with Mr.Talent. I spent a lot of
years in Missouri and on the ground working with him on these programs.
I notice that all of you have been very focused on trying
to address the needs of producers, and in some respect probably
consumers as well, but rural communities around the country,
and I think we are on the right track. And I myself am a
participant in a couple of new-generation cooperatives. My
family has been in the cattle business for a couple of hundred
years or more now, and we see it as the way that we continue to
remain engaged and maintain some of the profitability.
I have a lot of respect for the gentleman to my right
because I realize after being one of the latecomers exactly how
much work goes into these projects, and any assistance that you
can provide to that process, whether it be in technical
information, expertise or just general aid, is obviously
helpful.
On the tax and credit issue related to the legislation,
obviously, it is a huge investment, and from a producer's
standpoint, it is an investment that probably means that there
will have to be sacrifices made. Any way to lessen the pain of
that investment is obviously a step in the right direction.
And again, we commend you, and, Mr. Chairman, thank you for
this opportunity to address the Subcommittee. We thank you very
much for all the hard work that you do, and I would be happy to
answer any questions as well. Thank you.
Chairman Thune. Thank you, Mr. Truitt.
[Mr. Truitt's statement may be found in appendix.]
Chairman Thune. And thank you to all the panelists for your
excellent testimony, and just a couple of things that--one
observation, and that is, Mr. Nelson, you refer in your
testimony to something that I think is important in this, too,
and that is that we have seen this increasing level of
concentration within the agribusiness sector, and, frankly, I
think we need some--a new look at antitrust legislation in that
area, the bill that you referenced, the bill that I introduced
changing the level of scrutiny that we apply to agriculture
mergers and really forces us for the first time to focus on the
impact on prices paid to producers, which is something it
hasn't been a part of.
And so I say that, realizing that that is probably a more
difficult thing to get done, but I also think that it is very
important for this Congress to begin to look with a higher
level of intensity at what is happening in the marketplace out
there and the impact it is having as you see this increasing
level of concentration. But that is something that obviously we
are going to have to build support for out here, and changing
antitrust law is no easy feat.
In the meantime, we do, I think, have to take as much
control of our destiny as we can in the industry of
agriculture, looking at ways that we can reach up the ag
marketing chain and capture more of the value of the products,
the commodities that we grow in rural areas. And, Mr. Reis, you
had mentioned that we have got to quit selling live hogs and
start marketing pork, and that really is--and, Mr. Truitt, you
alluded to that as well, that those are all things you have got
to start thinking about, what your market is out there, and how
do we come up with ways of meeting those demands in that
marketplace and processing and adding value to the things that
we grow in rural areas.
So it is a very timely subject, one which I think we,
again, need to look at as a Congress, as policymakers, as to
what we can do as policymakers to provide that kind of
activity.
Just a couple of questions. One--I guess I think you
mentioned in your testimony--a couple of you did make reference
to the SBA loan programs. And I guess my question would be how
beneficial are the SBA loan programs to rural America? If they
are not, how can they be improved? And I think, Mr. Reis, you
had noted in your testimony that in some cases SBA loan
programs aren't designed for projects as large as yours, and
yet, Ms. Jorde, you had mentioned that some of these programs
need to be targeted to smaller-type operations and types of
projects. And so there is--I mean, there are kind of
conflicting points of view about how the SBA programs are
currently designed, how they work, and so if any of you would
care to comment on that, I would appreciate hearing that.
Mr. Reis. I think the program is designed for situations
that she gave examples of. If I want to market my meat, and
there is a particular individual doing this in Illinois, he
would qualify for loans such as that. So I think that the
language or the rules that are in the administration do work
for that. But when we come in and say, okay, we have got a $30
million project, and we have got 6, 8, 10 million of it is
investment capital from the producer, and we want to get a loan
guarantee or we want to get money for the rest of it, the Small
Business Administration just--it doesn't handle programs as
large as that, projects.
Chairman Thune. Ms. Jorde, would you care to comment?
Ms. Jorde. Yes, I would agree. And I understand the
importance of what he is talking about. My comments were
probably more related to some of the real development needs
that we have. In some cases we have been able to use small
business loans or Small Business Administration guaranteed
loans for value-added projects. In the case that I alluded to
with the one individual, that certainly worked. We are working
on a financing package with another cooperative that also is a
pasta plant where the dollar amounts aren't 30 million. They
are closer to a million or 2 million, and we are looking at the
SBA 504 program for that program.
So I think SBA does have a lot of use still in rural
America, but over the last several years we have seen
increasing fees not only up front, but also on an ongoing
basis. We pay a half a percent to the SBA on every loan that we
have every month, so that increases the cost of providing the
credit to the borrower. It increases their fees up front, and
ultimately what happens is that the borrower that is able to
get financed elsewhere without SBA will go there, and so you
end up with an SBA loan portfolio that has the higher-risk
loans in it, which defeats the purpose of the strong SBA
program. It is one of those things where if we can make it up
in volume and lower the fees, but have more participants, I
believe we would have a stronger program.
Chairman Thune. You mentioned, too--how does the USDA B&I
Program, Business and Industry Program, how has that been
beneficial in targeting rural areas? I mean, is that something
that, again, could be--is there room for improvement there?
Ms. Jorde. Well, I think there is. I think it is a
beneficial program. I think sometimes the USDA program isn't as
efficiently administered, at least in my neck of the woods, as
SBA is. I have heard that from other bankers. But also it
appears to be targeted more toward the large businesses; quite
a bit more paperwork, a longer processing time, and then
generally it runs short of money. As I indicated, I think there
were several hundred projects that weren't able to be funded
last year because it ran short of funding. But I definitely
feel that it is a very valuable program that needs to be
enhanced.
Chairman Thune. Are these--go ahead, Wayne. I am sorry.
Mr. Nelson. No. Quickly. I think that these ag innovation
centers in the States could act as a clearinghouse so, as was
said earlier, they could understand many of these programs, the
SBA, the B&I, and possibly some other ones that aren't even
known to farmers and to people starting these co-ops or joint
ventures. The ag innovation centers would help very much if the
State----
Chairman Thune. Does--and I should know the answer to this,
but does SBA--can you, with their guaranteed loan program, make
loans to cooperative-type ventures?
Ms. Jorde. Yes. I don't think there is any reason you
can't. The dollar limit is the problem you run into. I believe
a million dollar guarantee is the maximum on a 2 million dollar
loan. A million-dollar guarantee is the maximum level.
Chairman Thune. Okay. Let me just ask a little bit of a
different question, too, and this might--if you look more to
value-added ventures that are designed primarily for the U.S.
Market, how important are overseas markets, and how important
is the whole trade issue in trying to pursue additional types
of value-added opportunities? I mean, a lot of things that we
are talking about are sort of designed for the domestic market.
But how important is it that we have a--you know, a free trade
policy that enables us to reach some of those arguments? Would
anybody care to comment on that?
Mr. Truitt.
Mr. Truitt. I would comment from the perspective that,
number 1, the beef carcass just doesn't flow through the system
in the way that maybe that we would like for it to, and there
are certain pieces of that product that hit the retail channels
that don't find their way into the U.S. Market very easily.
Again, that--the reason for a lot of the innovation that we
have done has been to take the chuck and the round part of our
product and really find creative ways to move it into the
marketplace. But in that light, as you well know, Mr. Chairman,
we have continued to increase the total dollars in exports that
we have of beef out of this country for some time, and that
means that we send some of the higher-priced and higher-quality
and, frankly, in some cases, probably the higher-margin pieces
into other marketplaces that this market just won't bear. And
it allows us to do some of the innovation that we do.
It--for us it is essential, and the fact that we have to be
able to move certain products out of this marketplace to keep
from almost drowning in them here inside this country. If we
have had a primary drag on our overall profitability over the
20-year decline that I discussed earlier in our demand, it was
the fact that people around the country on Saturdays and
Sundays quit having pot roast. They just forgot how to cook
them. And my wife is great at accomplishing that task, but I
realize that she is in the vast minority, and my daughter
probably is in the generation that will not cook them at all
unless they come in a real easy-to-use container.
So we have changed some of those dynamics, but it is
essential for us to have a marketplace that can take the
products either that we don't use or that have a higher profit
margin somewhere else in order to keep our footing stable.
Mr. Nelson. Mr. Chairman, two things, I think. First of all
is that American producers are terribly productive, I mean just
enormously productive, and as much as we want value-added
success in the future, it is not going to be our total answer
to take care of all our production in the U.S. So trade is
essentially important with bulk commodities that are going to
have to continue to be exported.
Secondly, I think there are some very keen export markets
in the case of pork. I will give an example. Denmark has a
slaughter facility that only is for the Japanese market. They
have a different slaughter facility that is for the English
market. So they actually have different cuts of pork in
different facilities to go to the different export markets, and
I think that is something, just as an example, that we have a
great deal of opportunity in America to be able to use that
with exports with value-added products.
Ms. Jorde. Mr. Chairman, I think there are challenges on
the import side of the equation, too. One of the most
successful value-added cooperatives in North Dakota started
about 6, 7 years ago, Dakota Growers Pasta Company, and it is a
farmer-owned cooperative. Many of the farmers in my area
invested in this cooperative. The general manager is actually
on the board of my local community bank as is--another board
member on my bank board. They started out very strong, and they
made a promise to their farmer owners that they would only use
their durum, durum produced in North Dakota preferably, or in
the United States. But they found themselves at a competitive
disadvantage with other competitors in the U.S. because their
competitors were purchasing durum from outside the country,
from Canada, at lower costs than what our producers were able
to sell it for, and that created some very big challenges for
them.
So when you look at our markets, it is worldwide. Trade is
extremely important, and it still does come down to being able
to be competitive with the cost of that raw commodity as well.
Through a very controversial decision at their stockholders'
meeting--they are now allowing Canadian farmer investors to
purchase shares in their cooperative in order to try to be
competitive with other pasta producers in the country.
Chairman Thune. Well, as much as I appreciate all the
value-added products, I do yearn for the days of pot roast and
apple pie, too.
Mr. Udall.
Mr. Udall [presiding]. Thank you very much. Chairman Thune,
I also yearn for those days.
Let me just say at the outset that I think these two pieces
of legislation that we are having a hearing on here, the Value-
Added Development Act for American Agriculture, H.R. 1093, and
the Farmers Value-Added Agriculture Incentive Tax Credit Act,
H.R. 1094, I think are very good pieces of legislation, and I
would note that I have signed on, and I believe very much in
trying to do everything we can to move these along.
Ms. Jorde, you mentioned about the role of the SBA in terms
of possibly assisting--the administration has--and I sit on the
Small Business Committee--has proposed that we have a 43
percent cut in the SBA and then adding fees on top of many of
those programs. Could you or any of the other panelists comment
on the impact it might have in this area?
Ms. Jorde. Well, I think it would devastate the program. I
think that if you look at the numbers that the volume of SBA-
guaranteed loans declined when the fees were increased in the
last few years. And so I think increasing fees will just
contribute to a smaller SBA portfolio, and a higher-risk SBA
portfolio, because only those loans that can be funded with a
guarantee, those that are desperate for the loan and will pay
whatever it takes, will come into the program, and the other
loans will go elsewhere.
There is a very competitive banking market out there right
now, and, you know, I think we are better off, like I said
earlier, to have a larger SBA portfolio of guaranteed loans
with good, strong credits than limited to a few number that are
willing or can only get in the program with higher fees.
Mr. Udall. Any other comments from any of the other
panelists on that?
Mr. Nelson. There is a real lot of rural small business
people that use SBA loans that might not even be valued added,
and we see the same comments there. Especially concerning some
of the smaller loans in some of our smaller rural communities,
the fees can be very much detrimental and not allow them to
receive the funds.
Ms. Jorde. If I could just follow up, too, I had a
conversation a year or so ago with a woman who heads up our
regional area. I guess she is out of South Dakota, and I don't
recall her name, but she is with SBA, and at that time they
were looking into lowering some of the fees, which they did do
recently. She said that their evidence shows that the loss
ratio in rural areas is much lower than it is in the more urban
areas and that there is a very good case to be presented for
lowering fees for rural areas. So we think that this would be
an excellent pilot project to look at,to see if by lowering
fees, if we don't increase the volume in the portfolio, make it a
stronger program while enhancing rural development.
Mr. Udall. Mr. Truitt, you are nodding your head, so I want
to give you a chance to say something.
Mr. Truitt. I would be remiss if I didn't say we thought
that lowering fees was a very good idea, especially in rural
areas. And obviously there is a very real challenge for
producers to manage the different investment strategies that it
takes to stay in business today, with slim margins and, again,
trying to make additional investments elsewhere. It gets pretty
complicated. I would say that there are a number of State-based
programs in a number of States that are pretty creative, and
there probably are some good solutions out there to help us
address some of those needs. But, again, I guess I was nodding
my head to the fact we can reduce the fees associated with the
loan. I know my members support that.
Mr. Udall. Thank you. Chairman Thune mentioned the
concentration of the markets in the areas that you work in, and
I know in my home State of New Mexico, whenever I talk to
farmers or producers, they talk about the concentrated
markets--and they don't say it quite like that--but the
pressures on their prices and the fact that the producers
aren't getting the prices that they think they deserve. And he
mentioned antitrust as one way of dealing with that, and
possibly better enforcement of antitrust laws and changing
antitrust laws.
Can you think of any other ways to deal with this issue of
concentration of the markets and trying to get producers to get
a fairer share of the whole pie in terms of production?
Mr. Truitt. Yes, sir. I would comment from the perspective
of the beef industry, I mean, I think we have already begun to
answer some of those questions. And Mr. Thune had mentioned
that we have four processors in the United States that control
the vast majority of the livestock that go into the marketing
system. But the fact is that that number four processor, their
primary business is doing business with producer-owned
cooperatives and cooperative marketing agreements that move
through that plant or through their facilities. And at some
point in the future, I would expect that the producers will
wholly own that entity, and I think that is something we can
look forward to seeing more and more that will happen in the
future. When we look at the real growth that has taken place in
our industry--and, again, I don't mean to sideline the
concentration aspects of your question. But the real growth
that is taking place and tremendous growth that is taking place
is from some smaller and mid-range processors that have figured
out how to move into shelf-ready or case-ready or fully-cooked,
ready-to-serve products, or found niches within some of the
other entities or niches in our marketplace. And the growth in
those segments is tremendous.
I do believe that we should continually keep a close watch
on what happens with our industry and make sure that the right
things are happening to the right people and that everybody is
playing with as many of their cards above the table as we
possibly can. But we are seeing some changes take place in the
beef industry that I don't think any of us could have predicted
3 or 4 years ago. Maybe high prices are helping us make those
decisions, but we are in a bright spot right now and are proud
of what we have accomplished.
Mr. Udall. Mr. Reis.
Mr. Reis. With respect to the consolidation and the whole
industry, and you, too, have a big thing here to deal with, you
know; how do you regulate success? You look at catsup, you look
at chewing gum, the market share that the two big companies
have--and we are nowhere near that--but it is frustrating to
farmers because of regional concentration. I can't haul my
grain to Nebraska or South Dakota. The trucking costs prohibit
me from going more than 90 miles.
So you have to look at who is commanding the most market in
these areas, and when you really break it down like that, there
is even more consolidation; so that is one thing. And you have
to look at consolidation, because we haven't made money for so
long, or the profits and margins have been dwindling, the
concentration in the equipment--the water, the building
equipment, the equipment to put out the crops. I mean, there
are less and less choices there. So the farmers give up because
the dealerships are closing and things like that.
So you have got a big thing here, and one of the things
that sparked us to do what we did and has kept our group
together is that we know that fighting concentrations is a slow
process and we want to go in there and find a niche.
You mentioned the international markets. While we are not
going to go after those right away, we feel that the strict
European standards are going to come to America, and we want
our plant to be there. We are not going to go up against
ConAgra or IBP or Smithfield. We want to find a niche that they
aren't filling and try to fill that up.
The last thing with concentration, what drives it is
regulations--the HACCP requirements on these plants. A lot of
these small plants are closing up. They have got HACCP
requirements for the killing of the animal and they have got
HACCP requirements for processing of the animal. They are
saying we are no longer going to kill this animal. We want to
buy boxed bones and combo'd meats so we can further process it.
American Premium Foods, will you kill our animals for us?
So I mean, the undue regulations put on the packing
industry, and I am sure other industries can talk about that,
is driving the consolidation as well.
Mr. Udall. Mr. Nelson.
Mr. Nelson. Thank you. I think that looking at the
Department of Justice, we have already made some inroads in
that we have a higher visibility now over the last 2 or 3 years
in the Department; but, as Chairman Thune said, it is very
difficult to enact legislation because the legislation on
antitrust affects not just agriculture but everything, and so
it becomes more difficult. But within the departments, within
USDA and the Department of Justice, I think we can continue to
try to raise the bar of understanding to show them what is
happening and how important it is to recognize that they might
have ways already on the books to be able to help us in the
concentration.
Secondly, the point that farmers need to share in this
vertical integration I think is so important, and what Jay and
David have said, is that in the beef and pork industry they are
doing that through cooperatives or joint ventures. And the way
they are doing that is by being able to have a product that the
American people or the whole-world consumer wants, having that
niche to where they have the product designed to what they
want. And I think that is something that has happened in the
past and it is continuing to happen in the future, and not just
in meat but also in grains, and I think that will help a great
deal with the concentration problem.
Mr. Udall. Terry.
Ms. Jorde. Concentration is an important issue and very
difficult to legislate. The Independent Community Bankers
Association was formed to help--not prevent concentration, but
allow community banks to stay independent and provide resources
so they could do that. I think with anything like this, though,
we have to be very careful on how we legislate. For example,
there is legislation in place that determines whether banks can
merge. There is a formula called the Herfindahl-Hirschman index
that is used to determine concentration ratios before and after
a merger of two banks, and in some cases what this has resulted
in is in a community, say, of maybe 500 people where there are
two community banks, when the one banktries to buy the other
bank because the town can no longer support two banks, it fails the
concentration test of this index, and therefore the merger is not
allowed; yet a large out-of-State holding bank can come in and buy up
that bank and, you know, ultimately they end up losing the community
ownership of that bank in that town.
So, with anything, I think we have to be careful on how we
legislate and look to all the ramifications that can come as a
result of legislation.
Mr. Udall. Thank you for your testimony.
Chairman Thune. Thank you, Mr. Udall. Mr. Shuster.
Mr. Shuster. Thank you, Mr. Chairman. As the Chairman said,
I am from Pennsylvania. Most people who think of Pennsylvania,
they think of Pittsburgh and Philadelphia. Well, I am from the
center of the State, which is very rural, and I have over 7,000
farmers in my district, most of them small; so I have a keen
interest in these two pieces of legislation because I think
they assist and encourage small farmers to go out into the
marketplace and be able to be more profitable.
And I want to thank all the panelists here today for their
testimony. We have talked about a couple of these ventures. How
many of them are out there? I know in Pennsylvania, I am
familiar with the dairy co-ops, but for the most part they deal
with shipping and distributing the milk, not taking it to the
end user. So how many of these ventures are out there? Are
there many or few? I don't have a sense of that.
Mr. Reis. I don't have a real sense of it either, but the
USDA program that I told you we got a $500,000 grant for had
210 applications for that $10 million, and a very, very short
application period. They gave us like 30 days to put this
together. So I am sure there are a lot more of them out there
that didn't apply.
Mr. Shuster. Go ahead.
Mr. Nelson. Regionally, there has been a lot happening over
the last 10 years. Like North Dakota has been one of the
leading States in developing these sorts of enterprises. I
think they probably have, for sure, the most per capita, and
probably have 30 or 40 different enterprises in the State of
North Dakota with only 650,000 people. So that is really
significant.
In South Dakota we are gaining, and in Minnesota. In
Minnesota, for instance, there are 14 ethanol plants and 12 of
them are operated by farmer-owned entities. So I would say
nationwide there are getting to be quite a few.
Mr. Shuster. Where would I go to find out what is happening
in Pennsylvania? The Farm Bureau, would they be the best source
for me? Would they be tuned into this type of thing?
Mr. Nelson. They could be, but through the USDA and the
Economic Research Service, in fact, if you go on the Web, you
could find out very quickly how many value-added operations
would be in Pennsylvania by going to their Web site.
Mr. Shuster. In South Dakota, how successful have these--
you said about 30 or 40 ventures. How successful are they, on
balance?
Mr. Nelson. In North Dakota. In South Dakota, ours have
been very successful. We haven't done as much as they have in
North Dakota and in Minnesota, but we are hopeful to catch up
with them very soon. But we have been cautious in developing
programs, and so far we have been fairly fortunate in having
operations that have been very successful.
The fact that these are high risk has to always be at the
forefront. There is no question that there is some risk
involved, and because there is this risk, there are going to be
some failures; but that shouldn't be reason not to do it, just
because there have been failures in the past or will be some in
the future. It is very important, we think, to move forward
with these operations. If everyone was successful, then we
probably aren't going fast enough or far enough.
Ms. Jorde. First of all, I was born in Bellfont,
Pennsylvania; but commenting on North Dakota, like you said,
there have been a number of them. Not all of them have been
successful. I would say, though, when they say only one out of
every ten new business start-ups makes it ultimately, I think
the batting average is much higher for value-added
cooperatives. There is a real commitment of leadership and a
real drive to succeed. The farmers are very much driven to make
this thing work, so they put in a tremendous amount of not only
financial resources, but time, into the boards in developing
the plan and attending meetings and getting out there and
talking to farmers. So the motivation is tremendous.
Mr. Shuster. You said, Mr. Reis, there were 210 people that
applied. Do you find that across the board in the other States
that these----
Mr. Reis. That was nationwide.
Mr. Shuster. What, are you talking about the application--
--
Mr. Reis. For the USDA grant. I think a lot of them applied
for the full 500,000, so you are talking $50-some million was
applied for and only 10 was funded.
Mr. Shuster. And 210 nationwide doesn't seem to me to be a
large number. Are there interests in the farming community
nationwide? Again, 210 doesn't seem like a whole lot of
farmers.
Mr. Reis. That is not farmers. That is co-ops.
Mr. Shuster. So it could be thousands.
Mr. Reis. It could be thousands. And if you look at
Illinois, our co-op represents the whole State. That is one
pork-producing plant in the State, and a couple of ethanols.
Wheat is not as big a commodity as it is out West, but if you
get 500 or 750, that is a lot of cooperatives.
Mr. Shuster. Are these ventures, are they--I know you
talked about your hog-processing plant. That is from the
barnyard to the shelf. Are most of them doing that kind of
vertical integration, or are they just a portion of the
integration?
Ms. Jorde. Well, I think our experience has been that, you
know, whether it is sugar beets that come out of the field and
go directly into the crystal bag sugar packages out the front
door, or pasta that comes in the back door as durum wheat--it
is milled in semolina and processed into all kinds of, you
know, lasagnas and raviolis and everything else out the front
door--we have seen total vertical integration.
Mr. Reis. Some of them take it a step further and make
processed pizza dough. There is one in Oklahoma that just got
started, and we are looking at the leasing company that leased
their equipment to them. But they are taking the wheat from the
farm all the way to the pizza dough, so all you have got to do
is throw it in the oven.
Mr. Shuster. Are those cases limited where you are going to
go from cradle to grave, so to speak? It seems to me that would
make sense in the dairy industry. The dairy farmers aren't
getting the profits in the store when the consumer buys it,
so----
Mr. Nelson. The market is changing so much in the case of
dairy. What used to be a throwaway byproduct, now in a powdered
form used as a food additive, and other food additives as well,
are actually worth more than the fluid milk in some cases. So
it is a growth process, I think, of finding new ways, like Jay
said in beef and Dave with pork, finding new ways to prepare it
and market it.
I think in some of the existing value-added enterprises
like the soybean plant in South Dakota, right now they aren't
processing soybean oil to go right on the shelf, but they are
looking at adding certain identity preserve-types of soybeans
that could be used for the Japanese market orfor some other
European market, that then they would be able to do the processing and
have that special product for the end user. But first they start out as
kind of a bulk processing facility and then they will grow into that as
time goes on. So some started out but are getting into it over a period
of a few years.
Ms. Jorde. But I think the point we have to remember, and
really the point of the hearing also, is that investing in
value-added cooperatives is risky and it can take, many times,
a number of years before the farmer really starts to get a
return on his investment. And one farmer might have an
investment in two or three or four different cooperatives,
maybe smaller amounts. One or two of those may not work either,
so they end up losing all their investments.
So we have really been asking our farmers to put up all the
seed money and take all the risk in order to help rural
development in our communities, and obviously their goal is
that they want to be able to share in some of the profit from
producing the product into the finished product. But it is
still very risky, and farmers are tapped out, and they don't
have risk money left. They are the ones that have been
providing the equity capital to these projects, and there isn't
a lot left.
Mr. Shuster. Mr. Reis, your hog venture, did you say 240
farmers?
Mr. Reis. That's how I----
Mr. Shuster. What was the average investment?
Mr. Reis. We sell on shackle spaces, which allows a
producer to have one animal per week killed. That is how we set
up the shares. Anywhere from 20 to 75 to 80 is the average
purchase amount of shares. If they sell one semi-load a week,
that is 180 shackles, and if they sell two loads a week, you
know, you are getting up there to 360.
Mr. Shuster. What is the cost of a shackle?
Mr. Reis. We are going through the financing right now, but
anywhere from $500 to $1,000.
Mr. Shuster. You are not in operation at this point?
Mr. Reis. No.
Mr. Shuster. One final question to Mr. Truitt. What markets
are important to the beef industry internationally; or the most
important, I should say?
Mr. Truitt. Obviously, we would like to make sure that the
Asian market continues to be recovering. I guess it has long
been our number one and most important high-dollar or high-end
export market. Mexico and Canada. Mexico specifically is a very
important market for the United States as well, though. Japan
is number one. But when we look into some of the products that
we really don't use at all in this country or that fit easier
into someone else's marketplace, Mexico is an important place
for us.
The European Union as a market still has promise, but they
have forgotten to keep all the agreements that the WTO
required; so until we get that worked out that continues to be
a tough spot for us.
Mr. Shuster. Have we been able to sell any into China? I am
not familiar with what----
Mr. Truitt. No, sir. Really, we have just begun to do some
development in the marketplace there, but China obviously is a
beef-deficit country from its own production standards. So we
see it as one of those places over the horizon that we would
like to be--I would say in response to your earlier question
about the investments, I mean my investments range from $55 to
$75 per head, so some of them are pretty modest into those
cooperative agreements. And all of those investments have been
returned back to me now, so I feel pretty good about them. I am
glad to not be on the other end of that scenario.
Mr. Shuster. All right. Thank you very much.
Chairman Thune. Thank you, Mr. Shuster. We have some folks
in the room today from my State of South Dakota where
cooperatives have been very successful; rural electric
cooperatives in the room today. And that model is one that I
think that makes a lot of sense when it comes to value added.
And you all have referenced the fact that there is a
shortage of capital and equity and everything else, which is
something that the tax credit bill that I introduced would
attempt to at least provide some incentives for people. If it
is a question of sending your money to Uncle Sam or putting it
into something that might actually get you a return, I think
that would be fairly straightforward for most farmers.
The good news, and there is a hearing going on right now in
the Ag Committee--which I hope to make it over to--about the
new farm bill. And in that new farm bill there is over the next
10 years $370 million set aside for value-added type
opportunities, and I am hoping before it is all said and done
to get a portion of that carved out for my bill, House bill
1093 that creates the Ag Innovation Centers. And really a lot
of things you have talked about today, that you have testified
to, are technical barriers as well, and these are complex
things.
And Wayne, you had mentioned, and I think this is really
true, that if we are not experiencing a certain number of
failures, we are probably not being aggressive enough, because
I think we are going to have to assume a certain amount of risk
and accept a certain amount of failure when it comes to these
types of ventures. But we cannot afford not to be investing; we
just have to for the future of the rural economy.
Just a couple of questions and then we will wrap up pretty
quick. Mr. Nelson, you had commented that your company,
Communicating for Agriculture and the Self-Employed, it would
seem to me to tie into sort of this question; and that is, how
do we do a better job of getting the message out and educating
people about the benefits and value of value-added agriculture?
We have, I think, this mentality that is over a period of time
in production agriculture, but how do we get more people in the
country to buy into the whole importance of investing in these
types of activities?
Mr. Nelson. Well, I think the first thing we have to do is
to convince ourselves, convince farmers, and sometimes, you
know, it seems like it should be a slam dunk, but it isn't
always all that easy--as Dave, I am sure, will say in trying to
get his project off the ground. There is a feeling that maybe
farmers don't have enough confidence in their own ability, I
guess would be the best way to say it. And I think that as
David has proven, and countless other operations that have
started and are successful have proven, that farmers do have
the ability to get together with the proper guidance to do
these projects. But there is a little bit of mistrust from the
farm communities and from people in the rural communities
thinking that are you really able to do this?
So I think, first of all, proving that you are able is the
place to start. And the second thing is just to have a public
hearing like this and do as much as possible to show that the
results of this value added can be very, very important not
only to the farmers themselves, which, of course, is of utmost
importance, but also to these rural communities. And I don't
think the impact on rural communities has been stressed enough.
And I think that if we continue to say, look, this can be of
help to Cando, North Dakota or to Murdo, South Dakota, to all
of these smaller communities, they could be helped by value-
added enterprises, and I think that is what we strive to do.
Chairman Thune. I just think from the standpoint of
economic development in rural areas, technology is a part of
that, and I think, as was referenced, investment in broadband
so that we have access to high-speed Internet service out in
those areas of the country is really important, too. But if you
look at what we have and do well, it is production agriculture.
It is always goingto be the number one industry in South
Dakota, at least in the foreseeable future. So how can we take that and
build upon it and make it something that can be profitable for
producers? I think that is the big question.
Ms. Jorde, I think the story that you talk about up there
is a fascinating one, and I love a town with a name of Cando.
Incidentally, where did that come from?
Ms. Jorde. Well, my understanding is that there was a
contest back when the town was named and the slogan ``You can
do better in Cando'' was the winner.
Chairman Thune. And you have done, I guess, when it comes
to the pastaplant there. But walk us through, and obviously we
don't have a lot of time to do this, but sort of the loan and
financing process that your bank did in making that operation
go.
Ms. Jorde. Well, this was over 20 years ago, in 1978, and
at that time and still to this day, that particular plant is
still privately owned by an individual that came out of the
Twin Cities. His wife was from Bisbee, North Dakota, which is
about 15 miles from Cando, and the owner had the dream of
building the first pasta plant where the raw product, durum
came in through the back door, was milled, into semolina,
processed into pasta and shipped out the front door in his own
brand name called Noodles by Leonardo. We worked with the
owner, the two local community banks in the community, along
with the Bank of North Dakota, which is our State-owned bank,
somewhat similar to a bankers bank but actually the only State-
owned bank in the country, and we put together a financing
package along with a CDBG grant. And we were able to build the
plant, and it has been operating now since 1978. And I really
think from that plant, that was where some of the ideas started
to continue the success that that plant realized, and farmers
decided at that point that they could be involved with it, too.
So other pasta plants in the area were built, and we have had
great success in those areas, too.
Since then, the Federal and State and local programs have
changed, but we have always found that there is never just one
loan program or that just one bank can finance it. It has
normally taken five or six or seven or eight different programs
to bring a project to fruition, and that is why it is so
important to bring in different players. And like you said, our
electric cooperative in our community is a very important part
of the financial packages that we put together, because of
access that they have to some of the programs. So we try to
work with as many local experts as we can.
Chairman Thune. With farm income declining, have you seen
like a drop-off in application rates for loans? How has that
impacted your----
Ms. Jorde. Well, as far as individual loans, we still have
farmers that need financing, in fact, more than ever. But we
have fewer farmers. With our county losing 21 percent of its
population in the last 10 years, obviously it is because we
have had a loss of farmers and they have left the county in
search of jobs in other areas. So our loan growth in the
agricultural area has not increased substantially.
I think that the farm loans that we have on the books now
are stronger than they have been in the past; but, you know,
again, a lot of that is because of the government programs and
disaster programs that have helped keep the farmers afloat. But
there is no vision right now for the future, other than in
value-added agriculture, and that is what has been so
disappointing and disillusioning to a lot of farmers. That is
why we don't have new farmers coming into the area, because
they can't predict success very far into the future.
Chairman Thune. Well, there is a quality of life in rural
areas that is worth fighting to preserve, and I just happen to
think that we have got to be at this level, the State level,
the local level, private industry, working together as much as
we can with this type of solution.
Obviously, as I said earlier, I have got some grave
concerns about what we are seeing in terms of concentration in
the agricultural marketplace and what that means to competitive
markets and everything else, but until that changes, we really
have to do what we can to take control of our own destiny.
So I appreciate your testimony. There are a number of
barriers which you have indicated that we are aware of:
capital, equity, the technical barriers some of you have
alluded to. What we want to do is tear those barriers down as
much as we can and provide incentives for our producers to form
cooperatives to invest in these types of operations for their
future.
So, Mr. Shuster, any other questions or comments?
I would welcome, as we continue in this dialogue and debate
and discussion, your input as to things that we can do better.
You are all out there in the real world dealing with these
issues on a daily basis, and I am just very committed and
dedicated to the whole notion of value-added agriculture and
the difference that it can make in trying to at least preserve
and save our rural economies. I think the family farming
structure and everything that is associated with it is so
important, not only from an economic standpoint but also from a
social and cultural standpoint and what it means to this
country and its future. So we definitely need to be coming up
with ways and solutions that make sense and that will further
the cause, I believe, of value-added agriculture in America.
So thank you all for your testimony. It has been very
helpful, and, as I said earlier, we welcome your ongoing input
in this process. With that, this hearing is adjourned.
[Whereupon, at 11:44 a.m., the Subcommittee was adjourned.]
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