    [Senate Hearing 107-434]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 107-434

    NOMINATION HEARING FOR MARY KIRTLEY WATERS, LOU GALLEGOS, AND J.B. PENN

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

                                    HEARING

                                   before the

                           COMMITTEE ON AGRICULTURE,
                            NUTRITION, AND FORESTRY

                              UNITED STATES SENATE

                          ONE HUNDRED SEVENTH CONGRESS

                                 FIRST SESSION
                                   __________

                                  MAY 9, 2001
                                  __________

                           Printed for the use of the
               Committee on Agriculture, Nutrition, and Forestry

      Available via the World Wide Web: http://www.agriculture.senate.gov

                         U.S. GOVERNMENT PRINTING OFFICE
                                 WASHINGTON : 2002
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               COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

                      RICHARD G. LUGAR, Indiana, Chairman

    JESSE HELMS, North Carolina          TOM HARKIN, Iowa
    THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
    MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
    PAT ROBERTS, Kansas                  THOMAS A. DASCHLE, South Dakota
    PETER G. FITZGERALD, Illinois        MAX BAUCUS, Montana
    CRAIG THOMAS, Wyoming                BLANCHE L. LINCOLN, Arkansas
    WAYNE ALLARD, Colorado               ZELL MILLER, Georgia
    TIM HUTCHINSON, Arkansas             DEBBIE A. STABENOW, Michigan
    MICHEAL D. CRAPO, Idaho              BEN NELSON, Nebraska
                                         MARK DAYTON, Minnesota

                           Keith Luse, Staff Director
                        David L. Johnson, Chief Counsel
                          Robert E. Sturm, Chief Clerk
                Mark Halverson, Staff Director for the Minority

                                      (ii)

                                C O N T E N T S

                                  ----------
                                                                       Page

    Hearing(s):

    Nomination Hearing for Mary Kirtley Waters, Lou Gallegos, J.B.
      Penn...........................................................    01

                                  ----------

                             Wednesday, May 9, 2001
                        STATEMENTS PRESENTED BY SENATORS

    Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman,
      Committee on Agriculture, Nutrition, and Forestry..............    01
    Domenici, Hon. Pete V., a U.S. Senator from New Mexico...........    02
    Lincoln, Hon. Blanche L., a U.S. Senator from Arkansas...........    03
    Nelson, Hon. Ben, a U.S. Senator from Nebraska...................    15
                                  ----------

                                   WITNESSES
                               A Panel including:

    Gallegos, Lou, of Rio Rancho, New Mexico, Nominated for Assistant
      Secretary for Administration, U.S. Department of Agriculture...    05
    Penn, J.B., of Lynn, Arkansas, Nominated for Under Secretary for
      Farm and Foreign Agricultural Services, U.S. Department of
      Agriculture....................................................    06
    Waters, Mary Kirtley, of Champaign, Illinois, Nominated for
      Assistant
      Secretary for Congressional Relations, U.S. Department of
      Agriculture....................................................    04
                                  ----------

                                    APPENDIX

    Prepared Statements:
        Domenici, Hon. Pete V........................................    24
        Gallegos, Lou................................................    27
        Penn, J.B....................................................    29
        Waters, Mary Kirtley.........................................    26
    Document(s) Submitted for the Record:
        Gallegos, Lou, Biography.....................................    46
        Penn, J.B., Biography........................................    60
        Waters, Mary Kirtley, Biography..............................    32
    Questions and Answers:
        Harkin, Hon. Tom.............................................    92
        Lugar, Hon. Richard..........................................    99
        Cochran, Hon. Thad...........................................   107
        Daschle, Hon. Tom............................................   101
        Dayton, Hon. Mark............................................   108
        Roberts, Hon. Pat............................................   105

      NOMINATION HEARING: MARY KIRTLEY WATERS, LOU GALLEGOS AND J.B. PENN

                                  ----------

                             WEDNESDAY, MAY 9, 2001

                                           U.S. Senate,
             Committee on Agriculture, Nutrition, and Forestry,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 9:33 a.m., in
    room SR-328A, Russell Senate Office Building, Hon. Richard G.
    Lugar, [Chairman of the Committee], presiding.
        Present or submitting a statement: Senators Lugar, Lincoln,
    Nelson and Domenici.

        STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM
      INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND
                                FORESTRY

        The Chairman. This hearing of the Senate Agriculture
    Committee is called to order.
        Before I begin, let me just mention that it is anticipated
    that at 9:35, just minutes from now, we will have a roll call
    vote. I suspect that many of our colleagues are not present for
    the moment because they are on the floor, hoping to vote early
    and then to come back to join us. At the same time, I
    appreciate the fact that our nominees are here, and I will
    commence the hearing.
        There may be at various stages appearances by Senators who
    will wish to introduce you or to say some endorsing words about
    each of you as distinguished nominees; and at that point, I
    will break into the action, recognize the Senators, and try to
    accommodate both their schedules and your own.
        Let me simply mention at the beginning that we convene
    today to consider three very important nominees for positions
    at the United States Department of Agriculture. The Department
    is not an easy department to manage. A wide range of issues and
    diverse interests contribute to the difficulty of that task.
        The nominees before the committee today represent extensive
    work experience in the public and private sectors. All three
    have previously served in Government, and they are to be
    commended for their willingness to return to this service at
    the Federal level and at this time.
        Today we will hear from Mary Waters, nominee for Assistant
    Secretary for Congressional Relations; Lou Gallegos, nominee
    for Assistant Secretary for Administration; and J.B. Penn,
    nominee for Under Secretary for Farm and Foreign Agricultural
    Service.
        Next week, a week from today, on May 16, during the hearing
    on the credit title of the Farm bill, we will consider the
    nominations of Eric Bost to be Under Secretary for Food,
    Nutrition and Consumer Services, and William Hawkes to be Under
    Secretary for Marketing and Regulatory Programs.
        Let me mention for the record that I have visited with the
    FBI and read the background records of the three nominees
    today. This is a service that is afforded by the FBI, and the
    Chairman is strongly encouraged to do that, which I have done.
    Likewise, staff on both sides of the aisle have met with our
    nominees prior to this hearing so that they have been briefed
    and have been able to brief their Senators on the background of
    our nominees prior to the nomination.
        At this stage, before we begin the hearing and go further,
    let me ask you to take the oath which is required of all
    nominees.
        If you would all stand, please, and raise your right hand
    and repeat after me--do you swear or affirm that the testimony
    you are about to provide is the truth, the whole truth, and
    nothing but the truth, so help you, God?
        Ms. Waters. I do.
        Mr. Gallegos. I do.
        Mr. Penn. I do.
        The Chairman. Thank you very much.
        We are now joined in a timely way by my dear friend and
    distinguished Senator from New Mexico, Pete Domenici, who has a
    statement.

      STATEMENT OF HON. PETE V. DOMENICI, A U.S. SENATOR FROM NEW
                                 MEXICO

        Senator Domenici. Hi, Mr. Chairman. How are you?
        The Chairman. We are pleased to have you with us this
    morning.
        Senator Domenici. It is nice to be here. I am sorry I was
    late.
        I do not know all of the nominees, but I am here to speak
    in behalf of Mr. Lou Gallegos.
        The Chairman. Please proceed.
        Senator Domenici. Mr. Chairman and members of the
    committee, I guess I should start by saying that I first became
    acquainted with Lou Gallegos when he was working for the
    Department of Agriculture, and he was in charge of food stamps
    in very difficult areas--for example, he had to put a food
    stamp plan together for the Navajo Reservation for the
    Department.
        Somebody told me about him and that he spoke Spanish
    eloquently, that he was a New Mexican and was off in some other
    city, working for the Government. Without knowing him, I hired
    him over the telephone, and from some lesser jobs, he grew and
    became my chief of staff here in Washington--a long time ago.
    Then, after doing that in a marvelous way, he went back to New
    Mexico, where the last years of his life have been tough ones,
    because he has been chief of staff for the Governor of the
    State of New Mexico.
        When you add all of those things together plus the fact
    that he is a very practical man--and he had a little
    intervening time to acquaint himself with the Federal
    Government when Secretary Manuel Lujan from Interior asked him
    to be the chief of staff for the Secretary of Interior.
        I have a prepared statement that enumerates a few more of
    the exciting and relevant aspects of his life. I would just ask
    that you make it a part of the record.
        The Chairman. It will be made a part of the record in full.
        Senator Domenici. I am hopeful that, not only for his sake
    but for the sake of the Department of Agriculture, he will be
    confirmed and sent over there quickly. I note the job he has,
    and Mr. Chairman, I think the administration has picked the
    perfect person for that level in the Department, with those
    responsibilities; he will do them well.
        Thank you, Mr. Chairman.
        [The prepared statement of Senator Domenici can be found in
    the appendix on page 24.]
        The Chairman. Thank you very much, Senator Domenici, for
    coming today.
        Let me just mention that in that period 1977 to 1984, when
    Lou was serving you so well, Mitch Daniels was serving me, and
    I found out that the two had coffee together on many mornings,
    perhaps comparing their experiences and their difficulties in
    our offices. Nevertheless, both have survived to this important
    point.
        Thanks so much for coming, Senator.
        Senator Domenici. Thank you, Mr. Chairman.
        The Chairman. Now I would like to recognize our colleague,
    Senator Lincoln, who I know has a comment that she would like
    to make this morning.

       STATEMENT OF HON. BLANCHE L. LINCOLN, A U.S. SENATOR FROM
                                ARKANSAS

        Senator Lincoln. Absolutely, Mr. Chairman. Thank you very
    much.
        Mr. Chairman, I am certainly proud to be here today to
    introduce one of our own from Arkansas to the committee, Dr.
    J.B. Penn, but I would also like to welcome and recognize Mary
    Waters and Lou Gallegos, because these are two fine, remarkable
    people, and are excited and looking forward to working with you
    through the committee.
        President Bush and Secretary Veneman have made an excellent
    choice for Under Secretary for Farm and Foreign Agriculture
    Services, and I urge all of my Senate colleagues to support his
    nomination.
        Dr. Penn is originally from Lawrence County, Arkansas,
    where his father and mother still reside. His father is 96
    years old, so that certainly tells all of us that J.B. comes
    from great stock.
        Dr. Penn studied at LSU and Purdue, but he received his
    first degree from Arkansas State University, which is a great
    university located in the Mississippi Delta region of Arkansas
    in Jonesboro.
        His accomplishments are numerous, but I think what most
    qualifies J.B. for Under Secretary is his diverse background in
    both public and private sectors. J.B. previously served as an
    economist with USDA and has also worked in the real world, Mr.
    Chairman, serving as senior vice president and manager of
    Sparks Companies, Incorporated. I am sure that he will be able
    to bring a refreshing private sector efficiency to the Farm and
    Foreign Agricultural Services here in Washington.
        I am very proud that such a distinguished and great
    Arkansan has been nominated to serve at the Department of
    Agriculture, and we very much look forward to working with you,
    Dr. Penn. To all of you, good luck and congratulations.
        Thank you, Mr. Chairman.
        The Chairman. Thank you very much, Senator Lincoln.
        At this point, let me mention that there are folks
    accompanying our nominees.
        Ms. Waters, would you like to introduce those who have come
    to support you today from your family?
        Ms. Waters. Thank you, Mr. Chairman.
        I have with me my sister, Karen Brice, who has traveled
    here from Evanston, Illinois; my father-in-law, Terrell Waters;
    my eldest son, Joey; and my youngest son, Jimmy, is in school
    today, but I wanted to make sure that he got in the record.
    Most importantly, the chairman of ``Team Waters,'' my husband
    Vic, who has been just a terrific partner in these endeavors.
        The Chairman. Very good. Wonderful.
        Mr. Gallegos, would you like to introduce those
    accompanying you?
        Mr. Gallegos. Yes, Mr. Chairman. Senator Domenici does many
    things, and this morning, he married me. Ms. Rita Larson Nunez
    is my fiancee; she is the short person in the front row.
        The Chairman. Welcome. We are delighted that you are here.
        Mr. Penn.
        Mr. Penn. Mr. Chairman, I am pleased to introduce my wife,
    Kristin, who is here today.
        The Chairman. Thank you very much for coming.
        We are delighted that all of you are here.
        At this point, I think we will recess--the vote has
    commenced--and that way, we will have each of your opening
    statements in full when we return. Please be prepared to give
    your opening statements then; and then, Senators will assemble
    and ask questions of you.
        For the moment, we will recess the hearing.
        [Recess.]
        The Chairman. The hearing is reassembled, and we will now
    ask the witnesses, in the order I introduced them, to give
    their opening statements.
        First, Ms. Waters.

             STATEMENT OF MARY KIRTLEY WATERS, CHAMPAIGN,
     ILLINOIS, NOMINATED FOR ASSISTANT SECRETARY FOR CONGRESSIONAL
                     RELATIONS, U.S. DEPARTMENT OF
                              AGRICULTURE

        Ms. Waters. Thank you, Mr. Chairman.
        I am honored to appear before you today as President Bush's
    nominee for Assistant Secretary of Agriculture for
    Congressional Relations.
        I am grateful to President Bush and to Secretary Veneman
    for the trust they have placed in me by supporting my
    nomination for this position. I very much appreciated the
    opportunity to introduce my family members, and I would like to
    give you a little bit of background about my work in
    agriculture previous to this nomination.
        My background is extensive, beginning with my upbringing.
    My father was a professor of livestock marketing at the
    University of Illinois and moved to Washington, DC to take a
    sabbatical with USDA.
        More than 20 years ago, I had the distinct honor of working
    for my Congressman from Illinois, former Secretary Ed Madigan.
    His knowledge and passion for agriculture was instrumental in
    my own professional decisions to pursue this area.
        I worked as director of the Agriculture Task Force of the
    Republican Research Committee when the 1981 Farm bill was
    signed into law.
        The following year, my agricultural experience took on a
    decidedly Southern flavor when I work for Congressman Larry
    Hopkins from Kentucky and was on his staff during passage of
    the 1983 No Net Cost Tobacco Act and the 1985 Farm bill.
        Upon graduating from night law school in 1986, I left
    public service to work for ConAgra Foods, a diversified food
    company headquartered in Omaha, Nebraska. This experience
    helped me develop expertise on a wide range of agricultural
    issues, including commodity policy, trade, food safety, and
    changes in industry structure. More importantly, I developed
    valuable working relationships with government, industry, and
    consumer representatives who are intimately involved with
    agricultural issues and policymaking.
        Throughout my career, I have very much enjoyed working with
    the members and staff of this committee. I again thank you for
    this opportunity to appear before you today, and please know
    that if confirmed by the Senate, it would be an honor to serve
    in this administration.
        Thank you.
        The Chairman. Thank you very much, Ms. Waters.
        [The prepared statement of Ms. Waters can be found in the
    appendix on page 26.]
        Mr. Gallegos.

     STATEMENT OF LOU GALLEGOS, RIO RANCHO, NEW MEXICO, NOMINATED
                      FOR ASSISTANT SECRETARY FOR
             ADMINISTRATION, U.S. DEPARTMENT OF AGRICULTURE

        Mr. Gallegos. Good morning, Mr. Chairman and members of the
    committee. I am honored and privileged to appear before you
    today.
        My name is Lou Gallegos, and I am the President's nominee
    for Assistant Secretary for Administration at the U.S.
    Department of Agriculture.
        As you know, Departmental Administration supports the
    Secretary and the Department's agencies through central
    management and administrative policies, programs, and services.
    Simply put, Departmental Administration's job is to help USDA
    fulfill its mission.
        I am no stranger to agriculture or to the U.S. Department
    of Agriculture. My service in the Food and Nutrition Service
    during the expansion of the Food Stamp Program and later as
    State Director of the Farmers Home Administration in New Mexico
    imbued me with an appreciation and understanding as to why it
    is more appropriate than ever today for the U.S. Department of
    Agriculture to be called ``the people's Department.''
        Agriculture means more to me than public service alone.
    Agriculture is part of what I am. I am the descendant of
    sheepherders who subsequently became migrant farm workers in
    the asparagus fields of California, the potato fields of the
    San Luis Valley of Colorado, and ultimately the sugarbeet,
    onion, tomato, and melon fields of the Arkansas Valley.
        At 11 years of age, I was proud to be counted as one-half
    an employee for hourly wage purposes, which gained me $2.50 per
    day in earnings.
        It is in that context that I grew up with agriculture--a
    hard row to hoe, you may say--but precisely why I am
    particularly grateful for your consideration today. For that
    11-year-old toiling in the fields to grow up, if confirmed, to
    become Assistant Secretary of Agriculture is a vivid symbol of
    America's promise.
        My pledge if confirmed is to discharge faithfully and
    diligently the duties and responsibilities of Assistant
    Secretary in keeping with the finest tradition of the U.S.
    Department of Agriculture.
        I am delighted at the prospect of working with Secretary
    Veneman and with this committee and the whole Senate and the
    whole of the Congress.
        Thank you very much, Mr. Chairman.
        The Chairman. Thank you very much, sir.
        I have to interject at this point, because nostalgia
    overtakes me, but your mention of your work in the fields as an
    11-year-old reminds me of my brother Tom and me in my dad's
    soybean field, where we had to pull out volunteer corn for 10
    cents an hour. It remains vividly in my experience--they were
    very large fields.
        [Laughter.]
        [The prepared statement of Mr. Gallegos can be found in the
    appendix on page 27.]
        The Chairman. Mr. Penn.

      STATEMENT OF J.B. PENN, LYNN, ARKANSAS, NOMINATED FOR UNDER
                    SECRETARY FOR FARM AND FOREIGN
               AGRICULTURAL SERVICES, U.S. DEPARTMENT OF
                              AGRICULTURE

        Mr. Penn. Thank you, Mr. Chairman.
        It is a great honor for me to appear before you today as
    President Bush's nominee to be Under Secretary for Farm and
    Foreign Agricultural Services. I certainly appreciate the trust
    and confidence that the President and Secretary Veneman have
    shown in me.
        I also very much appreciate the kind introduction by my
    home State Senator, Senator Lincoln.
        I am both pleased and humbled to be here today. There are
    perhaps few times in our history when agriculture and the food
    industry have faced challenges quite as daunting and from so
    many different directions. Our industry today is grappling with
    assimilating a wide range of new and potentially very powerful
    technologies, ranging from biotechnology to e-commerce to
    precision agriculture. It is also confronting globalization and
    experiencing rapid restructuring in every, single segment. At
    the same time, far-reaching new policies must be developed that
    will importantly influence the industry throughout the decade
    and well beyond.
        Those new policies include new agricultural legislation to
    replace the expiring FAIR Act, and that deliberation must
    address some very fundamental philosophical issues concerning
    the direction our modern farm sector should take in the 21st
    century.
        Our window of opportunity for a successful new multi-
    national round of trade negotiations could soon close, and we
    must quickly buildupon the progress made in the historic
    Uruguay Round or lose the chance to do so for perhaps a decade
    or longer. Major policy initiatives are underway to create a
    Free Trade Area of the Americas and also to expand trade with
    the important Asian region under APEC.
        The next few years will prove extremely important in
    determining how successfully our industry will adjust to all
    these new forces and how it will fare economically in the new
    century. I would be very pleased to have an opportunity to
    participate in this most important process.
        As Senator Lincoln noted, I come to this position from 20
    years in the private sector, with much of that time closely
    monitoring and analyzing developments across the industry, and
    working with companies and organizations in all facets of the
    farm and food business. I also have been fortunate to have
    gained considerable direct experience in the international
    aspects of agricultural, both through work in many parts of the
    world and in analyzing trade flows and agreements.
        Before my private sector career, I served in Government,
    both in USDA and on the staff of the President's Council of
    Economic Advisers. I hasten to add that much has changed in the
    interim, but suggest that the understanding gained during that
    time will prove very useful in this new endeavor.
        My training is as an economist, and my entire professional
    career has focused on the economics of the agriculture and food
    industry. Thus, it is from the primary perspective of an
    economist that I approach the position rather than from a
    particular philosophical or political orientation. I am also
    proud to note that my background includes having been raised on
    a small family farm in northeastern Arkansas.
        I would highly value the opportunity to work with all the
    dedicated employees of USDA, especially those in the farm and
    foreign ag services mission area embracing the Foreign
    Agricultural Services, Farm Service Agency, and Risk Management
    Agency. In this capacity, I would welcome the chance to work to
    expand markets for all of our producers and effectively and
    efficiently implement agricultural policies and programs for
    farmers and all Americans.
        If confirmed, Mr. Chairman, I am committed to cooperate
    fully with this committee in helping to meet the unprecedented
    challenges facing American agriculture and the entire economy.
        Thank you.
        [The prepared statement of Mr. Penn can be found in the
    appendix on page 29.]
        The Chairman. Thank you very much, Mr. Penn.
        I will commence with questions for Ms. Waters, and I will
    ask you a question that I will ask each of the nominees to
    begin with. Do you agree that you will appear before any duly
    constituted committee of Congress if asked to appear?
        Ms. Waters. Yes, Mr. Chairman.
        The Chairman. Thank you for that response.
        In our legislative efforts and oversight function in this
    committee, we often seek information from the Department of
    Agriculture. Do you promise to respond quickly to letters or
    other requests from the committee?
        Ms. Waters. Yes, Mr. Chairman.
        The Chairman. We are aware that you have recently been
    employed by a large corporation with interest in the functions
    of most, if not all, of the agencies of USDA. What steps do you
    intend to take to avoid any conflict of interest or any
    appearance of conflict of interest?
        Ms. Waters. Mr. Chairman, I have sent a letter to the
    Office of Government Ethics, and I have been working closely
    with the Office of Ethics at the Department of Agriculture.
        I resigned from my position at ConAgra Foods on April 13,
    and I have committed to the Office of Government Ethics and to
    this committee that within 90 days of confirmation, I will sell
    all stock that I own along with that of my minor children.
        I also have some vested stock options which I will also
    exercise and sell. I also have a 401(k) retirement plan which
    contains ConAgra stock, and that is in the process of being
    rolled over to an outside account with a diversified stock
    portfolio that the Office of Government Ethics has cleared as
    being acceptable for someone in my position.
        The Chairman. It would appear from that recitation that you
    have taken very thorough steps to meet this obligation. Have
    you worked with counsel from the committee and from the
    Department of Agriculture and with others as they traced
    through your financial statements and assets to make certain
    that this was a complete situation?
        Ms. Waters. Yes, and I believe your staff may know my
    assets more thoroughly than my husband does at this time.
        The Chairman. Well, we do, in fact.
        [Laughter.]
        The Chairman. We have a very good background of you, Ms.
    Waters, as you would anticipate.
        How has your employment by one of the country's largest
    agricultural corporations affected your views of the
    appropriate structure for agriculture?
        Ms. Waters. Yes, Mr. Chairman. I have worked for a
    diversified food company in my most recent experience and have
    represented the views of those shareholders. I think that that
    experience has given me an opportunity to show the skills that
    I hold as far as problem-solving, addressing issues in a
    collaborative manner, trying to create coalitions to work on
    problems as they arise, and providing useful information in a
    timely manner.
        I am hoping that the skills that I used representing that
    organization would be helpful for this committee to consider
    when looking at my nomination.
        The Chairman. Have you visited with Secretary Veneman about
    your responsibilities in Congressional Relations? Do you have
    any format or any background that you can give to us as to what
    those activities might include?
        Ms. Waters. We have had an initial discussion of it, and
    she is very interested in the working of that office and is
    obviously very familiar with it from her previous tenure at
    USDA. She has met with all of the nominees for Under Secretary
    positions and has expressed an interest that once we are
    confirmed, we should sit down in a collaborative manner, as a
    team, and start addressing the specific issues that will be
    before Congress. I think the office will play a great role in
    that, and I am looking forward to talking to the Secretary once
    confirmed.
        The Chairman. In your work both as a staff member of a
    Member of Congress as well as your work in private industry,
    have you met or are you well aware of the members of the
    committee, both the House and the Senate committees, and feel
    comfortable working with them?
        Ms. Waters. Yes, very much so. Many of the Members of the
    Senate, I developed relationships with while they were still
    House Members in their previous lives. That was, frankly, one
    of the things that so interested me about this position, that I
    very much enjoy working with the members of this committee and
    their staffs, and I have been doing so for a long time.
        The Chairman. Well, we look forward to working with you if
    you are confirmed, and we very much appreciate your appearance
    before the committee this morning.
        Ms. Waters. Thank you, Mr. Chairman.
        The Chairman. Mr. Gallegos, let me ask you the mandatory
    question: Do you agree that you will appear before any duly
    constituted committee of Congress if asked to appear?
        Mr. Gallegos. Mr. Chairman, yes, sir.
        The Chairman. Thank you for that response.
        Let me just mention at the outset, because I want to
    approach this thoughtfully with you, that the United States
    Department of Agriculture has had longstanding problems in the
    area of civil rights, and this has been apparent in hearings
    that we have been conducting now, unfortunately, for several
    years.
        The problems plague both programs that deliver services as
    well as employment at the Department. In response to an inquiry
    made by distinguished ranking member Senator Harkin of Iowa and
    myself, it appears that in January, USDA had more than 500
    unresolved program complaints that averaged almost a year each
    to process.
        With respect to employment complaints, as of January, there
    were 1,870 unresolved complaints averaging more than 600 days
    to process.
        Are you aware of this problem, and how do you plan to
    resolve these civil rights difficulties at USDA?
        Mr. Gallegos. Mr. Chairman, members of the committee, this
    is a problem that Secretary Veneman herself acknowledged. I
    take it very seriously as a problem. I have looked into it in
    recent days.
        Mr. Chairman, I believe that the solution is not a
    mechanical one. It is a situation that is ripe for very strong
    leadership and attention in this particular area. Mere
    pronouncement of non-discrimination or non-tolerance are not
    enough to solve these problems.
        At the same time, I am satisfied that the fundamental
    structure to begin to deal with backlog problems at the
    Department is beginning to take shape, and I believe, after a
    preliminary discussion with Secretary Veneman, that this
    absolutely has to be a top priority of the Assistant Secretary
    for Administration, and it will be, sir, if confirmed.
        The Chairman. Well, I certainly appreciate that
    affirmation. I would just observe, and I think Senator Harkin
    would agree, that the civil rights record at the Department has
    really been so dismal that some have suggested placing it in
    receivership--namely, over in the Department of Justice--or
    trying to find some external alternative resolution.
        Obviously, it would not only be preferable but it would be
    appropriate for USDA to be able to resolve these cases and then
    to bring about a situation which we are unlikely to see so many
    cases, simply because things are done right from the beginning.
        You have mentioned that the Secretary has this right in
    front and center in terms of priority, and obviously, you do,
    given the position that you seek. This is an area in which the
    committee has tremendous interest, and I wanted to take the
    opportunity of this hearing simply to highlight that, because I
    know that we will be returning to it probably with you sitting
    where you are now and explaining at an appropriate time what
    happened and how things were resolved, how justice occurred, or
    whatever you have to say about the situation before we take
    action. We certainly wish you well and a running start in what
    has been daunting, at least for your predecessors.
        Let me ask as you approach this particular position--you
    have been serving the Governor of New Mexico for several years
    as chief of staff; you have served Senator Domenici, as he
    testified, for a period of eight years or so as his chief of
    staff--what similarities and what differences do you see? Do
    you have some idea of the scope of the Department at this
    point? Have you had a chance to discover all the far-flung
    empire that includes FDA and all of what are sometimes called
    the ``stovepipe'' division in which people find it difficult to
    communicate with each other, quite apart from even the
    Secretary or the Under Secretaries.
        Having analyzed all of this, what comment do you have to
    make about how you will proceed into your office?
        Mr. Gallegos. Mr. Chairman, there are significant
    similarities. The central element is that it is about
    management, it is about managing and integrating for a common
    purpose diverse interests within the organization, and
    admittedly, there are diverse interests in the Department of
    Agriculture as there are in a Cabinet-organized State. It is
    about getting results and getting them with the cooperation and
    the willingness of the players.
        The Chairman. Well, more power to you. I would just say, as
    we discussed this privately during a conference in my office--
    and I appreciated each one of you coming to visit before
    visiting with the staffs on both sides of the aisle on our
    committee--but over the course of time, one of my missions has
    been to encourage the Secretaries and the Under Secretaries to
    be that for all of the Department--not just as a closed group
    visiting with each other--because my own experience has been
    that frequently, there are large sections of staff at USDA that
    are off by themselves, or at least have had much of an isolated
    status, and this has made overall policy very difficult.
        As I related to some of you, during our hearings on the Y2K
    problem--although that, thank goodness, did not ultimately
    appear to be a problem for the Department--it did reveal the
    lack of communication, even among computers back and forth and
    personnel in various situations.
        We learned a lot about ourselves during that process, threw
    out a lot of computer systems prior to the fateful day or
    night, and have been trying to think through the presentation
    of the Department, both to the Congress and to the public and,
    most importantly, the people that we serve in all agencies.
        I thank you for that testimony and for your affirmation.
        Mr. Gallegos. Thank you, sir.
        The Chairman. Mr. Penn, let me ask you, do you agree to
    appear before any duly constituted committee of Congress if
    asked to appear?
        Mr. Penn. Yes, I do.
        The Chairman. I thank you for that affirmation.
        As you have testified in your opening statement, one of the
    primary functions in this Congress for this committee will be
    the drafting of a new Farm bill as we work with our colleagues
    in the House and as we work with the administration.
        If you are confirmed, obviously, your responsibility will
    be to oversee an important part of the USDA that deals with
    farm programs, trade programs, and other things that you have
    mentioned in your testimony. As you envision the situation now,
    what will be the USDA role in helping to shape the Farm bill,
    and will USDA provide bill language or an outline; and in what
    form is that leadership likely to come?
        Mr. Penn. Mr. Chairman, the Secretary has indicated that in
    this particular Farm bill round, she wants the Department to
    play a very significant role and a very cooperative role with
    congressional committees in developing the new legislation.
        If confirmed, one of my very first responsibilities will be
    to develop a process within the Department by which we can
    bring together all of the expertise, and we can make that
    cooperation and contribution to the process.
        This is a very important piece of legislation, and we hope
    that we can get all of the segments of the Department talking
    with each other--it involves more than just farm commodities--
    and we want to try to have a cooperative process within the
    Department, and then we would like for this to be a much more
    cooperative process with the committees than perhaps has been
    the case in the past.
        If confirmed, I am looking forward very much to working
    with this committee and the House committee in the development
    of new legislation.
        The Chairman. Once again, do you have any idea in what form
    this advice or counsel might come?
        Mr. Penn. Yes. Given the state of play with the
    considerable process that has already been made by the House
    committee and by this committee, I would expect that it is not
    practical for the Department to attempt to develop a full-blown
    proposal with detailed legislative language. It is probably
    more practical for us at this late date, assuming that we are
    confirmed and working in the next few days, to develop
    something on the order of a red book or a green book, or
    principles or guidance--something of the kind that has been
    done before.
        We would expect to treat all of the areas that are included
    in the Farm bill, but again, to advice ideas and suggestions
    for consideration by the committees.
        The Chairman. Let me just say on behalf of myself and
    Senator Harkin that clearly, we both recognize--because this is
    the first hearing that we have had with regard to nominees in
    the Department since the presence of the Secretary herself
    before the committee shortly before the Inaugural, and this is
    already May 9, and that you have had no control over nor have
    we--on the other hand, the Department is about to be formed, at
    least in terms of the top-level appointees and some of your
    subordinates who require confirmation.
        We have had in this committee, as you have observed, very
    good hearings on the research, conservation, and trade titles.
    These are important parts of any farm legislation. We have not
    commenced drafting those chapters yet or amending what we have
    done in the past, although staffs on both sides of the aisle
    have thought a lot about this. Many Senators have strong
    enthusiasm in these areas. I think we have tried to maintain at
    least a pace that gives some opportunity for the Department
    through the Secretary, through yourselves, through other gifted
    people over there, and maybe through others in the
    administration who have some ideas about this, not only to be
    heard but to participate as vigorously as you wish. I think
    this is important, because ultimately, as my experience has
    been, we have both Houses passing farm bills, usually very
    difficult conferencing of those issues, but finally, at the end
    of the day, the President must sign that bill. This usually
    means that the Department or the White House counsel or whoever
    is interested in this have to have some enthusiasm or affinity
    for this.
        There are several players in this that we need to
    recognize, and this is why we have not rushed to justice, but
    on the other hand, we will need to pick up the pace of things.
    I hope that, as you wish and the Secretary may wish, you will
    begin to funnel to us these books of advice or guidelines or
    what-have-you, to give us some idea of where at least the
    administration is headed so that we are not surprised--or you
    are not surprised--by this, and that we can work with our House
    colleagues, hopefully, hand-in-hand so that we have at least as
    good an opportunity as possible.
        Without going into endless anecdotes, I recall the last
    Farm bill, and essentially, our conference resolved that
    sometime in February 1996. It was a very long and difficult
    conference. It occurred in this room. The final night and day
    and morning of it were continuous--as I recall, for the better
    part of 12 hours or so, with small groups dispersed in rooms
    that were close by as they tried to work out problems--and even
    then, it was not for sure that we would have a successful
    conference or that we could come together on these things.
        You have been through this process, all three of you, from
    different vantage points, watching it, but ultimately, Chairman
    Combest and I have some responsibility to try to pull all of
    our troops together and to keep talking about it and to keep in
    touch with you.
        I take this opportunity simply to spell all of this out as
    explicitly as I know how, because it is very important from the
    beginning that we take off.
        Now let me ask you, Mr. Penn, in your work with the Sparks
    Companies, you have worked with a large number of clients who
    have interests before USDA, and your wife works for a large
    agricultural concern.
        How do you plan to avoid the appearance of impropriety or
    conflict of interest with regard to all of these entities?
        Mr. Penn. Mr. Chairman, like my colleagues, I have spent
    quite a lot of time with the ethics lawyers and have developed
    an agreement, and in that agreement, I will recuse myself
    specifically from any matter pertaining to my former employer,
    and I will recuse myself from any matter pertaining to my
    wife's employer. Beyond that, if any event arises involving any
    of the numerous companies or organizations that I have had
    contact with in the past, I will consult the ethics personnel
    in the Department for guidance as to how best to proceed.
        The Chairman. Well, you have anticipated the second
    question I asked of Ms. Waters--namely, you have consulted
    carefully with counsel of the Department and the committee; you
    recognize not necessarily the problem, but likewise, the
    dilemma that these ethics issues bring as you fill out all of
    these forms, revealing your life history of financial dealings
    and that of your family. I appreciate the conscientiousness
    with which all of you have approached this. I raise it
    specifically in open hearing as a question because these
    confirmation hearings are supposed to explore the sensitivity
    of the nominees so that we are all on the same track.
        Mr. Penn, let me ask you this broader question. In the
    January 2001 Sparks document entitled ``Agricultural Policy
    Discussion Paper: A Categorization of the Farm Sector into
    Three Distinct Groups,'' which you found as commercial,
    transition, and non-farm farms, this work suggested that farm
    policy should not have a ``one-size-fits-all'' approach and
    that there should be more discussion of the focus of farm
    policy.
        The paper concluded--and I quote--by saying ``The
    commercial farm sector would be the focus of one component,
    treating issues and concerns such as risk management, trade
    expansion, et cetera. Another component could focus on the
    transition farms if desired, with programs appropriate to
    helping them become viable over the long run or assistance in
    more viable endeavors. Other components could address the rural
    policy aspects for the much larger number of places not
    connected to agriculture--conservation and the environment and
    other special concerns.''
        I read that paper in January and in fact have quoted from
    it in a number of speeches, because I think it makes an
    enormous contribution to the scholarships and the economics of
    agriculture.
        Let me ask you, as author of the paper or at least as one
    who brought it about, what was your idea in formulating this
    paper--and for those who have not read it, there are very
    interesting statistics about the numbers of farms--for example,
    157,000 as commercial farms and 189,417 as transition farms and
    1.57 million as non-farm farms, with the latter receiving on a
    net basis all of their income from off the farm, which means
    that some get some money on the farm, but others lose enough
    that, as a net basis for that group.
        This is a striking revelation about the structure of
    American agriculture. I want to give you this opportunity to
    elucidate more of what you had in mind and how this might
    affect your views with regard to the current Farm bill
    formulation.
        Mr. Penn. Mr. Chairman, our original intent was to explore
    the specific question as to why farmers were not responding to
    the low prices in the same way that they had earlier responded
    to the high prices. That is, when prices fell from the high
    levels they had reached in 1996, why did farmers continue to
    expand acreage and expand input use and expand outputs with
    what lots of people thought were exceedingly low prices. We
    thought there was some disconnect there, with all the concern
    about economic conditions in the farm sector, but at the same
    time, land prices were continuing to increase, cash rents were
    continuing to increase, and farmers were generally expanding
    output.
        The Department of Agriculture had just released the new
    1997 Census of Agriculture at that time, and we thought that
    perhaps the answer might lie somewhere in looking at the
    structure of the farm sector, and that is what we did. We
    explored the 1.9 million places that are counted as farms, and
    we discovered these three groupings that you mentioned.
        There are about 1.6 million farms that are much more
    connected to the non-farm economy through jobs and wages and
    employment opportunities in the rural areas generally than they
    are to the price of agricultural commodities.
        On the other end of the spectrum, we found what we call the
    commercial farm sector, which had 157,000 farms, and they were
    exceedingly efficient. They had a much lower cost per unit for
    producing commodities than did the other farms. They were much
    better at marketing. They were able to obtain a much higher
    price per unit than were the other farms.
        With the market environment that existed and with the
    benefits from the Government programs, we found that these
    farms were indeed profitable, that they were earning a
    competitive rate of return, and that they were able to continue
    to buy land and continue to produce. It was that production--
    these farms produce about 72 percent of all the output--that
    was keeping the downward pressure on prices.
        Then, of course, as you indicated, there are the 189,000 or
    so farms that are in the middle, that have sales between
    $100,000 and $250,000. They are the ones who are not so
    technically efficient; their costs are not nearly as low as the
    larger farms. They are not quite as good at marketing; they do
    not obtain as high a price as the other farms. Their margins
    are much less, much reduced from what the margins are for the
    large farms, so they are the ones who are struggling during
    this period.
        That led us to suggest not any particular policy
    prescriptions but to the conclusion that you mentioned, that
    maybe this ``one-size-fits-all'' approach that farm bills in
    the past have employed may not be the most appropriate way to
    proceed in this new, modern era; that perhaps there are other
    approaches that might try to develop policies and programs for
    the 1.6 million farms that comprise rural America and policies
    and programs for the commercial farms that produce most of the
    food and fiber and are most concerned with the export markets.
        That was the point of that exercise, and thank you for
    noticing it and for citing some of the statistics from time to
    time.
        The Chairman. Well, I think it was a remarkable paper, and
    I want to ask some more questions about it, but at this point,
    I want to recognize Senator Nelson, who has joined us. We
    appreciate your coming, Senator, and if you have either
    comments about the nominees or questions of them, please
    proceed at this point.

       STATEMENT OF HON. BEN NELSON, A U.S. SENATOR FROM NEBRASKA

        Senator Nelson. Thank you very much, Mr. Chairman.
        First of all, I would like to welcome the nominees here
    today. It is good to see Mary Waters again; from her
    association with a Nebraska-based company, we are very familiar
    with her good work. Mr. Penn and I spoke yesterday; and Lou, of
    course, having worked for Senator--or, for Governor Johnson--
    how quickly we forget our former titles--it is good to see you
    again. We appreciate your being here.
        J.B., as we were talking yesterday, a lot of changes are
    certainly going to be developed in the future and are going to
    occur because of what we do and sometimes will occur in spite
    of what we do.
        Can you lay out your vision for what a surviving operation
    might look like in the future? I have already suggested to the
    Chairman that I am a little nervous when he categorizes himself
    as ``in transition.'' I do not know if he is transitioning up
    or transitioning down.
        The Chairman. I am trying to find this out, too.
        [Laughter.]
        Senator Nelson. Exactly. It might help the Chairman, and it
    certainly would help me to have some idea of what you think the
    surviving operation in the future might look like. You have
    indicated how important it is to be able to have some economies
    of scale and certainly efficiency in operations, and what you
    have described seems to apply more to big than it does to
    medium and small.
        Maybe you could give us some idea of what you think it is
    going to look like when this is all settled out.
        Mr. Penn. That is a very interesting question, and in a lot
    of the analysis that I have been involved in in the past, we
    have taken a look at these very efficient, large, leading-edge
    farms, and we found that they did have some characteristics
    that were different than the medium-sized and smaller farms.
        As you indicated, they are technologically very efficient;
    they adopt all of the latest technology. They are always
    looking for any new way to reduce their unit cost.
        On the other side, they are very sophisticated in their
    marketing approaches. They use the futures markets, they use
    forward pricing, they use crop insurance and other risk
    management tools--and they are also very careful in their input
    purchasing. They try to buy in volume, and they try to jump
    over segments in the supply chain and go directly to the
    source.
        In short, Senator Nelson, they are operated much like any
    business would be operated. There is specialization in
    management. The larger farms have people who are focused on
    crops and people who specialize in livestock and in machinery
    and in finances. They are organized and operated much like any
    other business. I expect whether we think that is appropriate
    or whether we like it or not, that is probably what the
    surviving major commercial farms of the future are going to
    look like.
        There are opportunities for other-size farms as well. We
    are seeing more and more farms explore options dealing with
    biotechnology products where they can produce a value-enhanced
    product that does not require the same size and scale as the
    larger farms. We are seeing farms, even smaller farms, entering
    into niche markets such as for organic produce and things of
    that nature.
        I would expect that in the next 10 years or so, through
    biotechnology, we will see a lot of opportunities for
    industrial products, for maybe an entirely new market involving
    nutriceuticals or medicinal products as well as products that
    have involved nutrition for all these years.
        I think the future is probably evolving in some way along
    those lines.
        Senator Nelson. It is not inevitable then, that small goes
    out of business, medium becomes small, and only the large get
    larger?
        Mr. Penn. No, I do not think so. I think we have a mind-set
    in this country that is focused on commodities. We have focused
    on No. 2 soybeans, No. 2 yellow corn, and that does involve
    size, because the margins are small. I think that with the
    advent of biotechnology and value-added products in other
    areas, there now may be a focus on widening margins from the
    revenue side as well as the cost side, and that may not have to
    occur as it has in the past.
        Senator Nelson. Even in the case of the large and
    particularly in the case of the medium and the small, until you
    get a good market price for the product, even the bigger truck
    and the better technology and the better economies of scale
    don't get you into profitability--is that fair to say?
        Mr. Penn. I think that is fair to say. I cannot miss an
    opportunity to plug expanded trade and foreign markets. I think
    that is one of the biggest opportunities for improving the
    price of our products is to get our producers much greater
    access in foreign markets.
        As the Secretary has pointed out repeatedly in her
    statements, 96 percent of all the consumers in the world live
    outside the United States, and we have the capacity in this
    country to produce far more than we need to feed our own
    population, so we need those foreign markets and to continue to
    try to expand those markets.
        Senator Nelson. Will you be supportive of and pursue
    aggressively the expansion of the Export Enhancement Program
    and the Market Assistance Program and other pump-primers that
    will help us expand into many foreign markets? I have made a
    lot of foreign trade missions as Governor. Having had that
    experience, I know that even there, the strong dollar, with all
    of our efforts, unless we get into the pump-priming process
    even more aggressively, we can talk about expanding the trade
    opportunities, but it is economically very difficult to do so.
        Mr. Penn. The Department has a number of these pump-priming
    and market-opening tools, as you indicated, and if confirmed, I
    will certainly be trying to use those in the most effective way
    to expand markets for our producers.
        Senator Nelson. Of course, focused as well on what we can
    do with renewable resources in the area of growing our own fuel
    through ethanol, soy diesel, and the biomass and bio-fuels, I
    assume?
        Mr. Penn. Yes.
        Senator Nelson. Thank you very much. I appreciate it.
        Mr. Penn. Thank you.
        Senator Nelson. Thank you, Mr. Chairman.
        The Chairman. Thank you very much, Senator. I certainly
    share your enthusiasm for biomass, ethanol from every source
    that can come off of a farm. We tried to stress that with the
    Secretaries of Energy and others who also have some look-see
    into our situation.
        I appreciate that the Senator has obviously been listening
    to my comments about your paper and identifying my farm as one
    of these transition farms, as I have identified it that way. I
    have looked into your paper to see what happens to farms about
    the size of mine, and essentially, you point out that the large
    farms are more sophisticated in terms of their marketing, and
    as I recall, your paper showed they often get 20 cents more per
    bushel for wheat than do some of the other farms down in even
    more of a differential with the smaller farms, and likewise for
    corn and so forth.
        Essentially, these marketing tools, whether they be futures
    markets or sophistication of that sort, pay off for these
    folks, and in other planning ways.
        The point, however, that you made earlier is an intriguing
    one, and that is you tried to discover why, given low prices,
    we seem to be having decisions in American agriculture to
    produce more. This is sort of counterintuitive. As your paper
    points out, not counterintuitive, if you take a look at at
    least a couple of things--and you cited many more--but for
    example, even our loan deficiency payments, as low as they may
    seem to many corn farmers, say, if you are one of these very
    efficient farmers, you can make money because your costs are
    even less, in a marginal sense, than the loan deficiency
    payment. Even that may spur you on.
        This is very difficult, I think, for all of us to
    understand, but at some point, either you or someone else cited
    that we may have had as much as three percent more production
    spurred by even the floor or the safety net than we would have
    had otherwise. Or, take the crop insurance bill we passed last
    year--that may have spurred another three percent production.
        That here we have a situation in which we are all lamenting
    how low the price are, but adopting policies, for good
    reasons--safety nets or all risks and so forth--that may be
    incentives to produce more and thus create lower prices.
        You also point out in your paper that one effect, of our
    payments, AMTA payments or double AMTA payments or all the
    things we do, is to steadily increase the price of farm land in
    most States of the Union, and farm rents derivative from that,
    which is difficult, then, for the entering farmer or younger
    farmer situation, or even for those who do not own land but are
    renting from others; they have a cost there that is going to be
    higher, based really on many of the policies that we are
    adopting.
        Then, as Senator Nelson has pointed out, the trade problem
    has not worked out so well for us, in part because of Southeast
    Asia difficulties or trade protectionism or all of the reasons.
    Here we have a situation--and you are quit correct, if we can
    move the product, quite clearly, that would help price, but we
    have not been able to move the product. We are sort of stymied
    in our trade negotiations, and hopefully, we will do better.
        In the face of this, offering incentives to farmers either
    through crop insurance, through LDP, or through whatever we are
    doing, while having a much more constricted market
    domestically, without the push we had, of course, is likely to
    lead to even lower prices. It is a circular argument of many
    farmers coming to this committee, hoping for relief, for more
    payments in one form or another, and for a broader group of
    crops all the time.
        One of the ag newsletters yesterday reviewed all of the
    different kinds of specialty crops in which the Department is
    now involved in making payments or ascertaining and calculating
    how payments could be made. It was a list of four pages, and as
    I recall, 40 or 50 different programs, going through many
    fruits and vegetables and mohair, and honey is back, and a good
    number of things like that.
        We are attempting to fix almost every, single farm
    situation, regardless of size. In the midst of all of this, how
    do we address the problem, say, of these 1.57 million farmers.
    This is the huge majority--82 percent of farm entities who in
    fact, as you point out, are getting 100 percent of their money
    from off the farm but nevertheless are a part of the Farm bill,
    the farm picture. For these transition farms, you mentioned
    that perhaps some other programs might be more appropriate; and
    what about the incentives that we are giving to overproduce,
    even while we lament the overproduction and the lower prices
    and the constructed trade?
        Can you give us any views of the figure that bring some new
    focus in a farm bill that we might write?
        Mr. Penn. Mr. Chairman, it seems to me that you have
    developed a pretty good outline for a new farm policy there in
    your statement.
        As I indicated in my statement, I have approached these
    issues as an economist, focusing on the economic impacts that
    come from these very different policies. I have also been aware
    that politics plays a large element in developing these farm
    programs, and there is a little bit of a gap there between what
    economics would suggest and what the politics would dictate.
        I do think that we need to explore in the development of
    this next Farm bill the kinds of questions that you very
    clearly stated there. I do think there are problems in rural
    America that would be treated much more effectively outside the
    farm policy context. We have noted the economic well-being of
    not only these 1.6 million farms but of tens of millions of
    other people who reside in rural America. Their well-being is
    much more dependent on macroeconomic conditions, on the
    development and creation of new jobs, on wage rates, on having
    appropriate infrastructure in order to be gainfully employed,
    such as access to the internet and all of these sorts of
    things. My colleagues at the Department in the rural services
    area I know are going to be exploring some of those options. I
    think that is one possibility.
        For the middle-sized farms, the 189,000, I think there is
    some part of those that really belong with the 1.6 million.
    They are going to continue to exist regardless, and what
    happens to the price of corn and soybeans and wheat will not be
    of material significance to their overall well-being.
        Then, that leaves us with the difficult questions, as you
    note, of what to do about the commercial farm sector, and I do
    not have any particular policies to advocate, but as an
    economist, I know that I share your concern that we may be
    unwittingly doing things that are going to cause us some
    considerable misery at some point in the future. If most of the
    benefits of these programs continue to be bid into land prices,
    that creates an artificial market for land, and at some point,
    there would be a day of reckoning which would involve not only
    the farmer but the lender, the rural businesses, and others.
        There is also another side to this--to the extent that cash
    rents continue to be bid up, reflecting the increase in the
    asset value, that reduces our competitiveness in the foreign
    markets. We are already in a position in which we are losing
    market share, and it seems to me we need to be focusing on a
    more efficient and increasing market share rather than doing
    things--certainly self-defeating things--that preclude us from
    a greater market share.
        Those are the kinds of discussions that I certainly hope we
    can have in the development of the next Farm bill.
        The Chairman. I thank you for that comment, and I don't
    want to belabor the issue, but just making your point again, I
    think the tables in the USDA reports that we consult in trying
    to think, for example, as we did last year about doubling the
    AMTA payment--we looked at the net farm income for all farms in
    America, and roughly, we were heading toward a target of about
    $45 billion, which had been the net farm income a couple of
    years back. I think the prediction was 41 or 40 or thereabouts,
    and we plugged in 45, to get it back up to 45. Once again this
    year, it looked as if, without there being more payments, it
    might slip to 41, and maybe in a second year down to 38.
        It is not surprising that we have plugged in some more
    money to get it back up to 45. This is a net farm income--this
    is income, not loss--for all the farms in America--$45 billion.
    There is no other business in our society in which anyone is
    overseeing it in this way--machine shops or drugstores or dot-
    coms that are going out of business or what-have-you. We have
    made a deliberate attempt as a Congress and as an
    administration, with the last administration, to do this kind
    of work.
        One of the other results in the tables and one not often
    noted is that the net worth of American farmers as a group has
    been going up each year. The public asks how in the world could
    this be given low prices, rock-bottom prices, historically low,
    as is often mentioned around this table, and the potential for
    farmers going out of business wholesale in every direction. How
    in the world could net worth for the whole group be going up?
        This is why work such as you are doing is very important.
    You do ont offer all the answers to this--but one reason, of
    course, is that land values have been going up. We have been
    plugging in money, putting money into the country, and the
    values of those basic assets go up. What is happening on that
    land may not be doing so well given trade policy or whatever
    else, but certainly the net worth is doing well--if you are in
    the game now and if you are in it big. If not, you have got
    some problems.
        What I hope--without your trying to illuminate this today,
    because these are very big subjects--is that as money has been
    set aside by the Budget Committee--and we will be voting on
    that budget probably sometime today or tomorrow and then
    working from that--but some of that money, perhaps, should go
    for conservation; some of that money may very well want to go
    to rural America in terms of trying to develop a basis for
    income for people who are on these farms now, the 1.6 or 1.7
    million who are not doing very well.
        That will take some creativity, but that could be a part of
    a farm bill. I think that we probably need to give a lot of
    thought to that if we are humane about this process, because we
    have noted in this committee only 300-some counties of America
    have even 10 to 20 percent of their income coming from
    farming--and that is the high water mark out of 3,000. Another
    300 have, say, 5 to 10 percent, as I recall; about 2,400 have
    virtually no impact, whether they are rural or not; 1,800 are
    rural, and farming does not make a whole lot of difference
    right now in terms of their incomes, although we often talk as
    if it did, that we are preserving the infrastructure.
        I hope that in your creativity in your shop of economists,
    you will really take a look at the actual realities of what is
    happening in rural counties in America, what the impact is of
    our policies and what it might be in the best of all worlds, to
    help rural people, all of the rural people, of the country, and
    in addition to the very special producers who are doing a great
    job.
        When 8 percent of American farms produce 72 percent of all
    that we are doing, that is a remarkable feat, and we want to
    encourage those farms. At the same time, I think you and your
    associates have revealed a landscape that is something
    different than the 8 percent, the other 92. Life for them is
    right now very different.
        Let me just ask one more question, because this has been
    raised, and I want you to clear the air. In August 3, 1999
    testimony to this committee, you commented that ``The average
    variable cost of producing corn in the corn belt area was
    probably 95 cents to $1 a bushel.'' As I understand it,
    variable cost is a concept used by economists to categorize
    some but not all the costs of production.
        Can you describe for us the difference between variable and
    fixed cost, and what is the Department of Agriculture's current
    estimate of the average variable cost of producing corn in the
    corn belt area?
        Mr. Penn. Well, I think you explained it very well, Mr.
    Chairman. In that testimony, I did talk about ``average
    variable cost,'' and that is an economist's term. As you may
    know, that was misinterpreted by some to mean total cost of
    production, and I did hear from a few producers who said, ``I
    cannot grow corn for anywhere near $1 a bushel or whatever
    number you cited.''
        Of course, I was only referring to cash cost or out-of-
    pocket cost. As you indicate, total cost of production includes
    the very considerable land cost, depreciation, and some other
    overhead costs.
        The comparison I was trying to make is the one that we have
    discussed earlier this morning, in that when farmers go to make
    a planting decision each year, they look at their cash cost
    versus the guaranteed price, which is the loan rate. If you
    have a cost of production of $1 a bushel for corn, and the loan
    rate is $1.89, you have covered your cash cost, and you are
    likely to continue to produce.
        It is this Marketing Loan Program which explains a lot of
    what we would at first glance think is a lack of response to
    the lower prices.
        Thank you for allowing me to clarify that.
        The Chairman. Well, it is a very important point, and it
    illustrates one of the thoughts that I had earlier on. One
    reason for over-production on my farm or any other--if we have
    a variable cost of $1 a bushel--is it pays us to produce as
    much as we can. We are going to get $1.89 for every bushel we
    can get down there to the elevator.
        That is why all of this is sort of counterintuitive--low
    prices do not necessarily mean lower production or some
    adjustment if in fact your cost structure is such that you make
    money on the thing. I appreciate your illuminating that
    further.
        Senator Nelson, do you have more questions of the nominees?
        Senator Nelson. If there is one thing that would be the
    most important thing that you could do that would have the
    greatest positive impact on farms as part of a farm bill, what
    would it be--one thing that would be the most important; the
    biggest idea that we could come up with that would have the
    greatest impact--maybe not do it all; it certainly has to be
    part of an overall package; it is multifaceted--but so we do
    not worry that Senator Lugar is going to put a ``for sale''
    sign out if he reads another paper you write.
        Mr. Penn. We certainly want him to transition up.
        [Laughter.]
        Mr. Penn. Senator, that is a very, very difficult question.
    My answer would be that I think the most important thing that
    public policy can do for the long-term health of the farming
    industry is to expand the foreign market. Now, that is not
    exactly a component of the traditional farm bill, but as I
    indicated before, we have a vast wealth of natural resources,
    we have an accommodating climate, we have made huge capital
    investments in our farming system, we have the latest
    technology, and we can produce food rather cheaply, and we can
    feed a lot more people than just the 275 or 280 million people
    in this country.
        Senator Nelson. Even with high land costs and everything
    factored in, both the variable and fixed costs.
        Mr. Penn. Not in every commodity. We are not competitive in
    every commodity. In the mainstream staples--corn, soybeans, and
    some of the other major crops--we are very competitive, and we
    can be very competitive, and that is why it does pain me a bit
    to see us reduce our own competitiveness. I mean, we have
    enough other problems with relative currency values and demand
    and growth in other markets. I think if there is one thing that
    is going to influence the overall economic vitality and
    viability of our industry, it is going to be continued access,
    expanding access, to these foreign markets.
        Senator Nelson. Thank you.
        The Chairman. Thank you very much, Senator.
        We thank each one of you for your opening statements and
    for your forthcoming responses to our questions.
        I just want to announce that I hope staff will inform all
    members that they may wish to ask further questions of the
    nominees, but please do so, if you will, by the end of business
    today. In the event questions are raised by committee members,
    please respond as rapidly as possible. Then I will count on
    staff to inform me when it is useful that we might have a
    meeting of Senators, perhaps off the floor, in the event we do
    not have another meeting, and we do not have one scheduled for
    this week, in which we would come together, in which we might
    take action on the nominees and try to make certain our
    Department is better staffed--namely, the three of you, in
    addition to the Secretary.
        We will ask all Senators to cooperate with the questions
    and you to cooperate with the responses and attempt to resolve
    the issue of your confirmation as rapidly as possible, and
    leave that then to floor action for final confirmation.
        The Chairman. We thank you all. The hearing is adjourned.
        [Whereupon, at 11:02 a.m., the committee was adjourned.]

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                                A P P E N D I X

                                  May 9, 2001

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                       DOCUMENTS SUBMITTED FOR THE RECORD

                                  May 9, 2001

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                             QUESTIONS AND ANSWERS

                                  May 9, 2001

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