[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








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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

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                                                                   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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                              May 9, 2001



      
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                         QUESTIONS AND ANSWERS

                              May 9, 2001



      
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