[Senate Hearing 108-]
[From the U.S. Government Publishing Office]



 
AGRICULTURE, RURAL DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR 
                            FISCAL YEAR 2005

                              ----------                              


                        WEDNESDAY, APRIL 7, 2004

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 3:33 p.m., in room SD-192, Dirksen 
Senate Office Building, Hon. Robert F. Bennett (chairman) 
presiding.
    Present: Senators Bennett, Kohl, and Harkin.

                       DEPARTMENT OF AGRICULTURE

STATEMENTS OF:
        KEITH COLLINS, CHIEF ECONOMIST
        J.B. PENN, UNDER SECRETARY FOR FARM AND FOREIGN AGRICULTURAL 
            SERVICES
        MARK REY, UNDER SECRETARY FOR NATURAL RESOURCES AND ENVIRONMENT
        GILBERT G. GONZALEZ, ACTING UNDER SECRETARY FOR RURAL 
            DEVELOPMENT
        JOSEPH J. JEN, UNDER SECRETARY FOR RESEARCH, EDUCATION AND 
            ECONOMICS

             OPENING STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. The Subcommittee will come to order.
    Last week, we had a budget hearing with a number of Under 
Secretaries of the Department of Agriculture which was very 
informative, and this week, we are going to continue with the 
rest of the Under Secretaries as well as the Chief Economist. 
We welcome you all, thank you for your service, thank you for 
your willingness to work in a situation that sometimes is 
stimulating and exciting and rewarding and sometimes makes you 
the target of the slings and arrows of outrageous constituents 
or Congressmen, and we are trying not to do that here today.
    Since this will be the last hearing you will appear at in 
this Administration in this capacity, I want to take the 
occasion to thank each of you for your willingness to serve 
your country in this way. We look forward to hearing your 
testimony. Senator Kohl is tied up in another hearing and will 
be joining us as quickly as he can but has indicated that he 
would be comfortable with our proceeding with the testimony 
without him and will be brought up to date on what we have to 
say.
    So we will hear from the following witnesses in the 
following order: Keith Collins, who is the Chief Economist at 
USDA; J.B. Penn, who is the Under Secretary for Farm and 
Foreign Agricultural Services; Mark E. Rey, who is the Under 
Secretary for Natural Resources and Environment; Gilbert 
Gonzalez, who is acting as Under Secretary for Rural 
Development; and then Joseph Jen, who is the Under Secretary 
for Research, Education and Economics.
    I remember our previous conversations in last year's 
hearing with some pleasure and look forward to what each of you 
has to say here today. So, Dr. Collins, we will begin with you, 
and welcome to the Subcommittee.

                       STATEMENT OF KEITH COLLINS

    Dr. Collins. Thank you very much, Mr. Chairman, and thanks 
for the chance to start this hearing by providing a brief 
overview on the economic situation in agriculture, which I 
think will help set at least part of the context for the 
comments of our mission area leaders who will follow mine.

                       U.S. AGRICULTURAL ECONOMY

    The U.S. agricultural economy is showing remarkable 
strength after several years of weakness. Last week, you may 
know that we released the index of prices received by farmers 
for the month of March, and that was the highest price ever 
received for farmers for any month since we started keeping 
records in 1910. And that price occurred despite generally good 
harvests in 2003 and disease-caused disruptions in livestock 
and poultry trade.
    Consequently, as we look forward to this year, we expect 
that farm income will have another reasonably strong year. The 
improvement in agriculture is a result of some transitory 
factors on the supply side, such as last year's poor grain 
crops in Europe and in the former Soviet Union, but several 
demand factors, I think, will persist. First, we predict farm 
exports at $59 billion this year, and that nearly equals the 
all-time record high. And had it not been for the finding of 
BSE and the lost beef exports, total U.S. agricultural exports 
surely would have been or would be an all-time record by 
several billion dollars. The improving world economy, the 
weaker dollar and China's growing net imports are all factors.
    The second factor is domestic demand, which is very strong. 
If you consider sales by grocery stores and restaurants for the 
month of February, the most recent data, they were up 6 percent 
year over year. And for some foods such as meat and poultry, 
dietary changes seem clearly to be affecting demand trends.
    A third factor is the industrial uses of agricultural 
products are growing; in particular, ethanol production reached 
another record in January.
    If you look at the supply side, USDA's Planting Intention 
Survey released last week gives some indication of how farmers 
might respond to this year's tight markets compared with last 
year. Producers said they plan to plant 8 percent more rice, 7 
percent more cotton, 3 percent more soybeans but about the same 
level of corn. The wheat area, however, will be down because of 
poor fall weather and better prospects for these other crops.
    With average weather, we could have record high corn and 
soybean crops this year, good cotton and rice crops, but wheat 
would be down over 10 percent from last year's record high 
yield. But even with large U.S. production in prospect, and 
even with a rebound in production overseas, world markets are 
likely to remain firm. World grain demand is expected to exceed 
production for the fifth consecutive year this year. So by the 
end of this summer, we expect the grain stocks, global grain 
stocks as a percent of use, will be the lowest since 1981 for 
rice, the lowest since 1972 for wheat, and the lowest ever 
recorded for coarse grains. And stocks are also low for cotton 
and soybeans as well.
    Regarding animal agriculture, U.S. production of meat and 
poultry was down last year, and we think it will be flat this 
year. So if you combine that with stronger consumer demand, 
livestock prices remain above historical levels despite the 
discovery of BSE and the outbreaks of avian influenza in the 
United States. And we had stable milk production last year; we 
expect stable milk production this year, and with strong demand 
for dairy products, that has resulted in surging milk prices.
    With these kinds of markets, farm cash receipts are 
expected to be a record high $215 billion this year; however, 
with higher spending on energy-based inputs this year as well 
as lower government payments and the reduction in cattle 
revenue due to the BSE finding, net cash farm income is going 
to decline from the record high 2003 level, but it would still 
equal the average of the last 2 years.
    This reduction in earnings from farm sources will have a 
small effect on the majority of households that operate 
residential and intermediate-sized farms, because their incomes 
are mostly derived off the farm. The incomes of households that 
run commercial-sized operations will be somewhat lower in 2004, 
although their average incomes will remain well above the 
average of nonfarm households.

                           PREPARED STATEMENT

    With another sound income year in prospect, farm land 
values will likely rise again, which would continue the 
improvement in the farm sector balance sheet that we saw in 
2003. Finally, consumers will continue to have abundant and 
affordable food, although with the strong farm prices I 
mentioned, retail food prices are expected to be up 3 to 3.5 
percent this year compared with 2.2 percent in 2003 as dairy 
products, poultry and fats and oils prices increase.
    That completes my statement, Mr. Chairman.
    [The statement follows:]

                  Prepared Statement of Keith Collins

    Mr. Chairman and members of the Committee, I appreciate the 
opportunity to appear at this hearing to discuss the current situation 
and outlook for U.S. agriculture. The agricultural economy continues to 
show improvement after several years of low prices. Farm prices for 
major crops have reached levels unseen in several years and livestock 
prices generally remain well above levels of 2 years ago, despite the 
sharp reduction in beef exports following the discovery of a cow in 
Washington with Bovine Spongiform Encephalopathy (BSE) in December of 
last year. While cash receipts are expected to register another strong 
gain in 2004, rising prices for energy-related inputs and higher feed 
costs along with sharply lower government payments will likely cause 
net cash farm income to decline from last year's record, although it 
would equal the average of the past 2 years. Despite a pull back in 
farm income, cash flow and balance sheet prospects suggest the farm 
economy will remain on a solid footing in 2004.
Outlook for United States and World Economies and the Implications for 
        Agriculture
    After several years of a weak and variable global economy that 
constrained the demand for U.S. agricultural products, the U.S. economy 
and the world economy had a very positive year in 2003. Both the U.S. 
economy and the world economy are poised to experience another sound 
and prosperous year ahead, which will bolster the demand of U.S. 
agricultural products domestically and abroad.
    In 2003, we saw the U.S. economy grow 3.2 percent. Expansionary 
fiscal policy resulting from the budget deficit and the Jobs and Growth 
Act of 2001; the lowest interest rates since the 1950's leading to 
rising consumer confidence and spending; and, during the second half of 
the year, increasing business fixed investment all boosted growth. With 
these factors all in place again in 2004, combined with an expectation 
of even stronger business investment, a depreciating dollar, few signs 
of inflation and stronger foreign economic growth, macroeconomic 
forecasters foresee U.S. Gross Domestic Product (GDP) growth of 4.5 to 
5 percent.
    The improving domestic demand base may be seen in the demand for 
food, which also drives demand for animal feed. Monthly retail sales of 
grocery stores, food and beverage stores and food service 
establishments are usually higher than sales a year earlier. The U.S. 
economic slowdown in 2002 noticeably slowed sales. As the U.S. economic 
recovery took hold in 2003, sales moved up nicely and strong sales are 
again likely for 2004. Sales in February were 6 percent above a year 
earlier.
    In addition to rising food demand, domestic industrial demand for 
farm products is also increasing. As an example, monthly ethanol 
production is setting new record highs almost every month. In 2004, 
spurred by phase-outs of Methyl Tertiary Butyl Ether (MTBE) in 
California, New York and Connecticut, U.S. ethanol production from corn 
should reach 3.25 billion gallons and account for over 1.1 billion 
bushels of corn use.
    Foreign GDP is projected to grow about 3 percent this year, after 
averaging less than 2 percent annually over the past 3 years. Japan is 
finally growing, and Asia and Latin America are expected to propel 
developing country growth to the highest rate in 4 years. With the 
European economies lagging, foreign economic growth likely will not 
push over the 3 percent rate, which has often been a level associated 
with an upward surge in U.S. agricultural exports.
    Although the dollar remains relatively strong, it has depreciated 
against the euro, Canadian dollar and the yen. On a weighted-average 
basis, against the currencies of our major markets, the dollar has 
fallen steadily since early 2002. A further drop is anticipated in 2004 
reflecting the trade deficit and the continuation of low real interest 
rates in the United States.
    U.S. agricultural exports are forecast to reach $59 billion in 
fiscal year 2004, up $2.5 billion from the previous year. This forecast 
is $0.5 billion below USDA's forecast published prior to the finding of 
a cow with BSE at the end of last year. The new export forecast 
reflects, in part, the assumption that the markets that are now closed 
to U.S. beef exports will remain closed in 2004. This is not a forecast 
of what foreign countries will do. It simply reflects our standard 
forecasting procedure to assume the policies of foreign countries 
remain in place until they are changed.
    At $59 billion, U.S. farm exports would experience the 5th 
consecutive annual increase since hitting the cyclical low of $49 
billion in fiscal year 1999, following the onset of the Asian currency 
crisis. A strengthening world economy, the declining value of the 
dollar, low global commodity stocks, and expanding U.S. crop acreage 
will all support export growth in 2004. During the first three months 
of fiscal year 2004, U.S. agricultural exports were up $3 billion over 
a year earlier. Also notable is the upward trend we are beginning to 
see in bulk exports, which, since 1980, have been experiencing a long, 
slow downward trend.
    United States meat exports experienced explosive growth in the 
1990s but have faced slower growth over the past few years due to 
animal diseases and policy-driven import limitations in some countries. 
The United States finding of BSE has resulted in the closing of over 80 
percent of U.S. export markets for beef and related products, and U.S. 
poultry exports are expected to be flat in fiscal year 2004, as 
outbreaks of Avian Influenza in several States has resulted in a number 
of countries placing restrictions on poultry imports from the United 
States. However, this, stronger global incomes, and restrictions on 
poultry trade due to outbreaks of Avian Influenza abroad are expected 
to create additional export opportunities for pork.
Outlook for Major Crops
    For major crops, the supply-demand balances are favorable for 
strong markets again in 2004, even with normal yields and a rebound in 
global production. With relatively low world and U.S. stocks going into 
the 2004/2005 marketing year, crop prices could move higher if adverse 
weather lowers production prospects over the coming months.
    In 2003/2004, total use is generally exceeding total supplies of 
major crops, leading to higher prices and reduced world and United 
States carryover. Wheat is an exception, as a sharp increase in U.S. 
production is expected to lead to a slight increase in United States 
carryover. However, world wheat stocks are expected to decline from 166 
million tons at the end of the 2002/2003 marketing year to 125 million 
tons at the end of the 2003/2004 marketing year. At the end of this 
marketing year, world stocks of coarse grains are forecast to be 44 
million tons lower than 1 year ago, world stocks of oilseeds are 
forecast to fall from 43 million tons to 40 million tons and world 
cotton stocks are projected to decline from 36 to 32 million bales.
    For wheat, plantings in 2003 increased by 1.2 million acres to 61.7 
million acres. Reflecting the increase in acreage and a record yield, 
U.S. wheat production rose from 1.6 billion bushels in 2002 to 2.3 
billion bushels in 2003. Total wheat supplies increased by 430 million 
bushels, as lower beginning stocks partially offset the increase in 
production. Despite the sharp increase in wheat production and total 
supplies, U.S. wheat carryover is forecast to increase by only 53 
million bushels, as increases in domestic use and exports are expected 
to absorb nearly all of the increase in domestic supplies. U.S. wheat 
exports are forecast to increase by nearly 300 million bushels to 1.15 
billion bushels in 2003/2004. In 2003/2004, U.S. wheat exports expanded 
to fill production shortfalls created by a 38-million-ton drop in 
foreign wheat production. For the current marketing year, the farm 
price of wheat is projected to average $3.30-$3.40 per bushel compared 
with last season's $3.56 per bushel.
    U.S. rice acreage was off 7 percent in 2003, as rice producers 
responded to two consecutive years of very weak prices and returns. The 
decline in acreage and reduced beginning stocks lowered total supplies 
from 265 million cwt in 2002/2003 to 241 million cwt in 2003/2004. 
Ending stocks at the end of the current market year are forecast at 23 
million cwt, down from 27 million cwt at the end of the 2002/2003 
marketing year. The farm price of rice is forecast to average $7.45-
$7.75 per cwt this marketing year, compared with $4.49 per cwt during 
the 2002/03.
    In 2003, the corn crop was a record 10.1 billion bushels, causing 
total corn supplies to increase from 10.6 billion bushels in 2002/2003 
to 11.2 billion bushels this season. Despite the increase in total 
supplies, carryover stocks are projected to decline from 1.1 billion 
bushels at the end of the 2002/2003 marketing year to 0.9 billion 
bushels at the end of the current marketing year. U.S. corn exports are 
forecast to increase to 2.0 billion bushels, up 0.4 billion bushels in 
2002/2003, as reduced foreign supplies have increased export 
opportunities. Domestic use is also up this marketing year, reflecting 
increase feed and industrial use. This marketing year the farm price of 
corn is projected to average $2.35-$2.55 per bushel, compared with 
$2.32 per bushel last season.
    Hot, dry weather during pollination reduced soybean production to 
2.4 billion bushels in 2003, and total soybean supplies fell from 3.0 
billion bushels in 2002/2003 to 2.6 billion bushels in 2003/2004. The 
drop in soybean supplies has boosted U.S. farm prices and is lowering 
domestic use, exports and carryover stocks. U.S. carryover stocks are 
projected to fall to 125 million bushels, which would be the lowest 
carryover in 27 years. In recent weeks the Brazilian crop potential has 
been reduced, and that putting further demand pressure on the limited 
U.S. supplies, driving up recent cash prices to over $10.00 per bushel, 
the highest in over 15 years. Reflecting the expected decline in 
carryover stocks, the farm price of soybeans is projected to increase 
from last season's average of $5.53 per bushel to $7.15-$7.55 per 
bushel this marketing year.
    In 2003, the United States produced 18.2 million bales of cotton, 
compared with 17.2 million bales in 2002. Lower supplies coupled with 
increased exports have lowered projected carryover and pushed prices 
higher this season. Increased exports to China are projected to boost 
U.S. exports of cotton to a record-high 13.8 million bales, up 1.9 
million from last season's 11.9 million. Carryover stocks at the end of 
this season are projected to fall to 3.6 million bales, the lowest in 8 
years. During the first 6 months of the current marketing year, cotton 
prices have averaged 62.8 cents per pound, compared with last season's 
average of 44.5 cents per pound.
    As we look to the 2004-crop spring planting season, prices for 
corn, rice, soybeans and cotton will be the highest at planting time 
since 1998. Despite this, USDA's survey of spring planting intentions 
of producers that was taken in early March 2004, showed little 
prospective change in total acreage of principal crops. One reason is 
that fall seedings of winter wheat, combined with intended spring wheat 
planted area, indicate a 3.6-percent decline in total wheat planted 
area for the 2004 crop, compared with the 2003 crop. The survey 
indicated strong prices are expected to lead to record high soybean 
planted area of 75.4 million acres, up nearly 3 percent. Producers 
indicated little change in corn planted area, nearly a 7-percent 
increase in cotton area and an 8-percent increase in rice planted area. 
These acreages and trend yields would result in record high corn and 
soybean crops of 10.2 billion and 2.97 billion bushels, respectively, a 
cotton crop of 18.0 million bales, about the same as last year, and a 
rice crop of 218 million cwt, near last year's level. The wheat crop 
would be about 11 percent below 2003's level, which had a record-high 
yield.
    These production levels could cause corn farm prices to rise again 
for the 2004/2005 crop as demand remains at or above production, 
soybean prices to decline somewhat under some stock rebuilding, and 
wheat prices to remain about the same as this season, as foreign 
production rebounds, assuming trend yields. While we should expect 
production rebounds in 2004/2005 from poor weather in Europe, the 
former Soviet Union (SU) and Brazil, there are several reasons to think 
global markets will remain robust. First, there is a very strong 
foundation under global grain demand. For the 2003/2004 crop years, 
global grain demand is expected to exceed global grain production for 
the 5th consecutive year.
    Second, this gap means that by the end of the summer, global grain 
stocks as a percent of use will be at the lowest level since 1972 for 
wheat, 1981 for rice and the lowest on record for coarse grains. Stocks 
are also low compared with history for soybeans and cotton. With low 
stocks and the improving global economy, it is likely that even with a 
return to normal yields in the key producing countries, crop stocks 
will remain low and prices firm for most major commodities.
    A third factor has been China's production and trade changes. After 
emphasizing self-sufficiency in the early 1990s and building large 
grain stocks, China has sharply reduced their grain surpluses. China's 
role as a U.S. competitor in grain markets declined in 2003 and could 
drop further in 2004. In addition, their growing oilseed crushing and 
textile export industries have resulted in soaring soybean and cotton 
imports. China is likely to continue to be a positive factor for U.S. 
agriculture in 2004/2005. USDA forecasts U.S. farm exports to China in 
fiscal year 2004 of $5.4 billion, imports from China of $1.4 billion, 
for a trade surplus of $4 billion.
    United States producers will continue to face significant 
competition from a host of foreign producers. For example, Brazil has 
increased its soybean planted area by 25 million acres since the mid 
1990s. They have also increased production of beef, broilers, corn, 
cotton and pork by 25 to 75 percent since the late 1990s. Summing up 
the soybean exports of Brazil and Argentina, the coarse grain exports 
of China and the former SU, and the wheat exports of India and the 
former SU provides an indication of the recent increase in competition 
facing U.S. crop producers. Exports from these countries grew from less 
than 10 million tons in 1994 to about 85 million in 2002--from 2 
percent of world grain and soybean trade to 25 percent. This growth 
limited U.S. exports and market prices. However, in 2003, exports from 
these competitors has fallen back following lower production in the 
former SU, China and India, helping to boost U.S. exports and farm 
prices.
    Horticultural markets have become an important contributor to farm 
income for all size producers. For 2003, cash receipts from fruits, 
vegetables and greenhouse and nursery crops are forecast to be $45.3 
billion, up 2 percent from last year and 17 percent over 1998. In 2004, 
we look for larger crops of citrus and processing vegetables while 
prices for deciduous fruits are strong on tight world supplies. With 
average weather, farm receipts for fresh vegetables are expected to 
decline as prices retreat from the strong levels of the past couple of 
years. Exports for fiscal year 2004 are forecast at $12.8 billion, up 
substantially from last year's $11.9 billion.
Outlook for Livestock, Poultry and Dairy
    Reduced supplies of red meat and nearly stable production of 
poultry and milk combined with increasing demand led to higher 
livestock and milk prices in 2003. The livestock sector was poised for 
another boom year in 2004, as red meat production continued its 
cyclical decline and milk production continued to lag. While the 
discovery in Washington of BSE in late December has severely reduced 
beef exports and outbreaks of Avian Influenza have lowered poultry 
exports, livestock prices continue to remain well above 2 year ago 
levels and market fundamentals generally remain quite strong. Higher 
feed costs could also lower returns in 2004, especially if feed grain 
and soybean yields fall below trend.
    Beef supplies became progressively tighter throughout 2003 and 
markets were forced to adjust to these tight supplies by rationing 
product. Production for the year was down about 3 percent, with fourth-
quarter production down 12 percent. Beef prices rose through mid-
October and sharply higher prices encouraged cattle feeders to market 
cattle ahead of schedule. Fewer of these lighter weight animals graded 
Choice and Prime. Monthly fed cattle prices peaked in October at 
$105.50 per cwt, up nearly 62 percent from a year earlier. Over the 
entire year, the price of choice steers averaged a record $84.69 per 
cwt in 2003, compared with $67.04 per cwt one year earlier.
    Strong demand for meat protein by consumers; the improving global 
economy; the improving restaurant and hotel business, which uses 
higher-valued meat cuts such as Choice beef; and Japan's consumer 
recovery after its BSE issues, combined with a steadily declining U.S. 
cattle inventory, all pointed toward another year of record-high cattle 
prices in 2004. With the finding of BSE and subsequent loss in beef 
exports, which are currently projected to decline by 83 percent in 
2004, more beef will have to be consumed in the U.S. market, and that 
means a decline in prices must occur to absorb the higher domestic 
supplies. USDA has reduced its 2004 fed cattle price projection from 
$87.50 per cwt before BSE to its current forecast of $76.50 per cwt, 
down 13 percent. Despite the projected drop, fed cattle prices would 
still be the second highest on record.
    The fed cattle price forecast assumes that the countries that have 
bans on the importation of U.S. beef will continue to do so throughout 
2004. This is an assumption for forecast purposes and reflects the 
current policies of importing countries, which could change over the 
coming months. Mexico recently announced they are lifting the ban on 
boneless U.S. beef from animals under 30 months and, over the next 
several months, additional restrictions could be lifted allowing for 
increased exports that would lend further support to cattle prices in 
2004.
    In 2003, pork production increased 1.6 percent to a record 20 
billion pounds. Hog imports from Canada climbed to more than 7.4 
million head last year, up 30 percent from a year earlier. Two-thirds 
of these imported hogs were feeder pigs destined for finishing 
operations in the Midwest. Despite the increase in pork supplies, the 
price of slaughter hogs averaged $39.45 per cwt in 2003, up from $34.92 
in 2002, as tight supplies of beef boosted the demand for pork.
    Pork production is expected to reach a record 20.3 billion pounds 
in 2004, an increase of 1.3 percent. During the first quarter, hog 
prices averaged about 20 percent above a year ago, while pork 
production ran 3 percent ahead of last year. Consumer interest in high 
protein diets, relatively high prices for substitute animal proteins, 
and strong Asian demand for U.S. pork products are the major factors 
contributing to the increase in hog prices. For the entire year, the 
price of slaughter hogs is forecast to average about $1 per cwt higher 
than last year.
    In 2004, U.S. pork exports are forecast to increase 6 percent to 
1.8 billion pounds, which follows nearly a 7 percent increase in 2003. 
Major factors supporting the increase in pork exports are the lower 
valued U.S. dollar, global economic growth, and disease-related foreign 
market closures to beef and poultry.
    In 2003, broiler production increased 1.6 percent to 32.7 billion 
pounds. The production increase reflected higher average weight at 
slaughter as total broiler slaughter declined slightly. Relatively 
small growth in broiler production, higher prices for competing meat 
products and an improving domestic economy pushed broiler prices well 
above year-earlier levels. In 2003, whole-bird broiler prices averaged 
62 cents per pound, up from 55.6 cents per pound in 2002.
    Strong United States demand for chicken is expected to lead to 
record high broiler prices in 2004, despite a 3.6-percent increase in 
production and little growth in exports. In 2003, broiler exports grew 
2.6 percent and were expected to grow 7 percent in 2004 prior to the 
outbreaks of Avian Influenza in Delaware, New Jersey, Pennsylvania, 
Texas and Maryland. These outbreaks led several countries to restrict 
the importation of all U.S. poultry, causing USDA to lower its poultry 
export forecast. It is likely that the countries currently banning all 
U.S. poultry shipments will eventually allow exports of U.S. poultry 
from selected States, provided there are no further outbreaks. The 
timetable for this regionalization process will vary from country to 
country. For example, Mexico recently announced that it would allow 
broiler shipments from selected States.
    In 2003, milk production increased by just 0.1 percent, as cow 
numbers fell by 0.6 percent and milk production per cow rose by 0.8 
percent. Factors contributing to the sluggish growth in milk production 
per cow included low milk prices relative to concentrate feed prices, 
tight supplies of good quality hay, an unusually large share of first-
calf heifers, and somewhat conservative use of recombinant bovine 
somatotropin (rBST). Low milk prices, especially during the first half 
of 2003, probably made producers leery of using rBST on below-average 
producing cows.
    Milk cow numbers declined rapidly during the last three quarters of 
2003. During the first quarter, the number of milk cows averaged 0.3 
percent above a year earlier but averaged 1.4 percent below a year 
earlier during the final three quarters of 2003. Tightening milk 
supplies caused milk prices to average $13.80 per cwt during the second 
half of 2003, compared with $11.22 per cwt during the first half of 
2003. For the entire year, the all-milk price averaged $12.51 per cwt 
in 2003, up from $12.19 per cwt in 2002.
    The Commodity Credit Corporation (CCC) continues to purchase large 
quantities of nonfat dry milk under the price support program, and 
during most of 2003, made payments to producers under the Milk Income 
Loss Contract (MILC) program. In 2003, the CCC purchased 670 million 
pounds of nonfat dry milk, down slightly from the 680 million pounds 
purchased last year. In 2003, the payment rate under the MILC program 
averaged $1.09 per cwt.
    Milk production is expected to be about unchanged in 2004, as cow 
numbers continue to decline and the expansion in milk production per 
cow continues to be below trend. Monsanto has announced that it will 
accept no new rBST customers in 2004 and that established users will be 
allowed only half their normal purchases. Stagnant production combined 
with stronger demand for dairy products is expected to lead to much 
higher milk prices in 2004. The all-milk price is projected to average 
$14.30 per cwt in 2004, which would be the fifth highest on record. 
Still, USDA will probably again purchase in excess of 500 million 
pounds of nonfat dry milk, as that market continues in surplus.
Outlook for Farm Income
    For major commodities, the current USDA published forecasts for the 
2003/2004 marketing year for crops and the 2004 calendar year for 
livestock are all well above the previous 5-year average farm prices. 
The only commodity showing a decline is hogs.
    With trend production and a continuing close balance between supply 
and demand in most crop markets, we forecast the value of crop 
production will be record high in 2004. Also, despite the adverse 
effects of BSE and Avian Influenza on U.S. beef and poultry exports, 
the value of livestock and poultry production is expected to exceed 
$100 billion for only the third time in history. The drop in cattle and 
calf receipts, somewhat higher production expenses and lower government 
payments will reduce farm income from 2003's record high of $63 billion 
in 2002. Net cash farm income is forecast at about $56 billion, down 11 
percent from 2003. However, this income level would be the same as the 
average of the past two years.
    An indicator of the underlying fundamental strength of commodity 
markets is farm income excluding government payments. In 2000, net cash 
farm income excluding government payments hit a cyclical low of $34 
billion. This year, net cash farm income excluding government payments, 
is forecast at over $45 billion, up 35 percent since 2000. As markets 
have strengthened, payments based on prices have declined, so that more 
of net cash income is now coming from market sales. Government payments 
in 2004 are forecast at $10.3 billion, down from more than $17 billion 
in 2003, and the lowest level since 1997.
    Farm production expenses are expected to register another gain in 
2004. In 2003, total farm production expenses increased $11 billion to 
$204 billion. Higher prices for feed and feeder livestock accounted for 
about one-third and higher prices for energy-related inputs comprised 
about 40 percent of the increase in production expenses in 2003. In 
2004, total production expenses are forecast to reach a record $207.5 
billion, as prices of a variety of farm inputs are projected to 
register gains.
    The reduction in earnings from farm sources will have a small 
effect across the majority of households that operate residential and 
intermediate size farms, as their incomes are derived mostly off the 
farm. The incomes of households that run commercial-size operations 
will be lower in 2004, yet their average incomes will likely remain 
well above the average incomes of other farm households and all U.S. 
households.
    With another sound income year in prospect, farmland values may 
rise 3.5 percent in 2004, compared with 4 percent annual gains in the 
1990s and 5 percent in recent years. This increase would continue the 
improvement in the farm sector balance sheet that we saw in 2003. While 
this is a positive economic picture for U.S. production agriculture in 
2004, risks to the outlook include potential consequences of continued 
production growth in Brazil and other emerging competitors, tight oil 
supplies and high prices for energy-related inputs, the closure of 
export markets due to animal diseases and, as always, the weather here 
and abroad.
    That completes my statement, and I will be happy to respond to any 
questions.




    Senator Bennett. Thank you very much. Dr. Penn.

                         STATEMENT OF J.B. PENN

    Dr. Penn. Thank you, Mr. Chairman.
    It is a pleasure to be with you again this year and to 
present the budget for the Farm and Foreign Agricultural 
Services mission area of the Department. If you will recall, 
this mission area is comprised of the Farm Service Agency, the 
Risk Management Agency, and the Foreign Agricultural Service.
    I understand that you have already had an opportunity to 
review my prepared statement, so I will be very brief in my 
opening remarks.
    Senator Bennett. All of the prepared statements will be 
printed in the record.
    Dr. Penn. Thank you.
    Let me begin by mentioning the role of the Farm and Foreign 
Ag Services mission area within the entire Department. Our 
agencies provide a broad array of services that are the 
foundation for USDA's efforts to ensure the continued economic 
health and vitality of American agriculture. During the past 
year, the FFAS agencies continued to be heavily involved in 
these activities. We continued implementation of the far-
reaching and complex 2002 Farm Bill and the supplemental 
emergency disaster assistance that was included in the 2003 
Omnibus Appropriations Act.
    We maintained our strong commitment to keeping the Federal 
Crop Insurance Program a vital component of the overall safety 
net for our Nation's farmers and ranchers. The Risk Management 
Agency is currently renegotiating the Standard Reinsurance 
Agreement for delivering the risk management products through 
private companies. At the same time, we have actively supported 
the very ambitious trade agenda that will reduce trade barriers 
and open new markets overseas, and we have expanded our efforts 
to keep existing markets open.
    For the past three and a half months, we have been working 
very hard to reopen the markets that were closed due to the BSE 
and avian influenza incidents. The budget proposals that we are 
discussing today fully support continuation of these 
activities.

                          FARM SERVICE AGENCY

    I would first turn to the Farm Service Agency. This is our 
key agency for delivering farm assistance. This agency is 
located in about 2,400 offices throughout the country, and it 
is the one that farmers and ranchers deal with most frequently. 
The budget that we are proposing places a priority on 
maintaining FSA's ability to provide efficient, responsive 
services to our producers. It provides $1.3 billion for FSA 
salaries and expenses, which will support about 6,000 Federal 
staff years and approximately 10,300 county non-Federal staff 
years. The budget also provides an additional 100 Federal staff 
years to improve service to farm credit borrowers in our 
service centers.
    Implementing new technology is absolutely critical to our 
continued efficiency gains and to providing increasingly better 
services in the future. This includes new automation tools and 
the geospatial information system, GIS. The budget for the 
Office of the Chief Information Officer includes an $18 million 
increase that will provide for essential investments in the 
capability of FSA and the other service center agencies to 
improve services.

                         RISK MANAGEMENT AGENCY

    Turning now to the Risk Management Agency, the Federal Crop 
Insurance Program plays a very key role in helping producers 
manage their risk. The 2005 budget requests an appropriation of 
such sums as may be necessary for the mandatory costs of the 
program, and this will provide the necessary resources to meet 
program expenses at whatever level of coverage producers choose 
to purchase.
    The budget provides $92 million for RMA salaries and 
expenses. That is an increase of $21 million over 2004, and 
this net increase includes additional funding for information 
technology, increased staff years to improve monitoring of the 
insurance companies, and pay costs. About $16 million of the 
$21 million increase is for new information technology for RMA. 
The core information technology systems that RMA now uses are 
over 15 years old, and that is very ancient by IT standards. 
Over that time, the size and scope of the crop insurance 
program has increased dramatically, dramatically placing 
incredible strain on this aging system. So about $7 million of 
this increase will provide for the development of a new IT 
system, and $9 million will be for IT infrastructure 
improvements.

                      FOREIGN AGRICULTURAL SERVICE

    And finally, Mr. Chairman, turning to the Foreign 
Agricultural Service and our international activities, the 
importance of trade for American agriculture cannot be 
overstated, as Dr. Collins indicated in his remarks. If we are 
to ensure continued income growth for our producers, we must 
expand market opportunities overseas.
    Now, our budget proposals provide a program level of $148 
million for FAS activities in 2005. That is an increase of $12 
million over 2004. These increases include funding to meet 
higher overseas operating costs and improved telecommunications 
systems at FAS overseas offices. And as we have noted before, 
FAS carries out its activities through a network of 80 overseas 
offices and the headquarters here in Washington.
    Recent significant declines in the value of the dollar 
coupled with overseas inflation and rising wage rates have led 
to sharply higher costs that must be accommodated if FAS is to 
maintain its overseas presence. That presence is vital for FAS 
to represent the interests of American agriculture on a global 
basis and implement the Department's trade promotion programs 
effectively.
    Funding is also included for an FAS global computing 
environment initiative to modernize the agency's information 
technology systems. There is an urgent need for this additional 
funding. Our current systems are outdated; they have proven to 
be outdated, and they are inhibiting the ability of the agency 
to communicate effectively between Washington and the foreign 
posts.
    Also, this ancient system does not allow participation in 
the new e-government initiatives with other U.S. trade agencies 
that are designed to provide more efficient services to the 
public and help bolster our trade expansion efforts. So this 
proposed initiative would allow FAS to modernize its IT systems 
and improve its services to agricultural producers, exporters, 
and the various market development organizations.
    And I want to mention in closing, Mr. Chairman, that the 
United States continues to be a leader in global food aid 
efforts. We provide over one half of all of the food assistance 
that is provided in the world. That commitment is demonstrated 
by the fact that Public Law 480 program, the Food for Peace 
program, will observe its 50th anniversary in July of this 
year.
    Now, our 2005 budget proposal supports a program level of 
over $1.5 billion for U.S. foreign food assistance activities. 
This includes $1.3 billion for Public Law 480 credit and 
donation programs. The newest of the food assistance activities 
is the McGovern-Dole International Food for Education and Child 
Nutrition Program. This program was successfully implemented in 
2003. We had projects in 21 countries that fed 2.3 million 
women and children. The budget provides for a request of $75 
million for the program, which is an increase of 50 percent 
over 2004.

                          PREPARED STATEMENTS

    So in closing, Mr. Chairman, I would note that we think 
that these are very modest and very positive budget proposals 
that ensure we can continue to provide service to our 
producers. We appreciate the support of this Committee for our 
mission area in the past, and we look forward to working with 
you in the future on behalf of the agricultural sector.
    Thank you, sir.
    [The statements follow:]

                    Prepared Statement of J.B. Penn

    Mr. Chairman and Members of the Committee, I am pleased to appear 
before you this afternoon to present the 2005 budget and program 
proposals for the Farm and Foreign Agricultural Services (FFAS) mission 
area of the Department of Agriculture (USDA). The FFAS mission area is 
comprised of three agencies: the Farm Service Agency; Risk Management 
Agency; and Foreign Agricultural Service.
    Statements by the Administrators of the FFAS agencies, which 
provide details on their budget and program proposals for 2005, have 
already been submitted to the Committee. My statement will summarize 
those proposals, after which I will be pleased to respond to any 
questions you may have.
    Mr. Chairman, one of the five primary goals in the Department's 
strategic plan is to ``enhance economic opportunities for American 
agricultural producers.'' The programs and services of the FFAS mission 
area are at the heart of the Department's efforts to achieve that goal. 
Through the wide range of services provided by our agencies--price and 
income supports, farm credit assistance, risk management tools, 
conservation assistance, and trade expansion and export promotion 
programs--we provide the foundation for ensuring the future economic 
health and vitality of American agriculture.
    This past year, the FFAS agencies and programs were challenged by a 
number of significant developments to which they responded effectively. 
They continued to implement the far reaching and complex Farm Security 
and Rural Investment Act of 2002 (2002 Farm Bill), and they implemented 
the supplemental emergency disaster assistance provisions of the 2003 
omnibus appropriations act. At the same time, the workload associated 
with our trade negotiation and enforcement responsibilities has 
continued to grow, and 2004 will be a critical year for negotiations 
aimed at further reducing trade barriers and opening new markets 
overseas, as well as reestablishing export markets following the recent 
incidents of bovine spongiform encephalopathy (BSE) and avian 
influenza.
    The 2005 budget proposals we are discussing today fully support 
continuation of these activities and ensure our continued efforts on 
behalf of America's agricultural producers. In particular, the budget 
supports the operations of the domestic commodity and income support, 
conservation, trade, and related programs provided by the Farm Bill. It 
fully funds our risk management and crop insurance activities. It 
supports the Administration's export expansion goals by providing a 
program level of over $6 billion for the Department's international 
activities and programs. Also, it provides for the continued delivery 
of a large and complex set of farm and related assistance programs, 
while improving management and the delivery of those programs.

Farm Service Agency
    The Farm Service Agency (FSA) is our key agency for delivering farm 
assistance. It is the agency that the majority of farmers and ranchers 
interact with most frequently. Producers rely on FSA to access farm 
programs such as direct and countercyclical payments, commodity 
marketing assistance loans, loan deficiency payments, farm ownership 
and operating loans, disaster assistance, and certain conservation 
programs such as the Conservation Reserve Program (CRP). Because FSA is 
the primary delivery agency for most of the major farm assistance 
programs, the budget places a priority on maintaining and enhancing 
FSA's ability to provide efficient, responsive services to our 
producers.

Farm Program Delivery
    The 2002 Farm Bill required the FSA to undertake a massive task of 
implementing a complex set of new farm programs within a short time 
period. FSA has successfully put these programs in place in less than 2 
years since the Bill was enacted. Nearly two million producers were 
signed up quickly under the new direct and countercyclical payments 
program. Several billion dollars of direct and countercyclical payments 
have been paid out; a new Milk Income Loss Contract program was 
implemented and over $1.8 billion has been paid so far to eligible 
producers; and the peanut program has been radically transformed and 
$1.2 billion of peanut quota buyout payments have been made. At the 
same time as these and other new programs were being implemented, FSA 
successfully programmed over $3 billion in disaster assistance required 
by the Agricultural Assistance Act of 2003. These programs and 
improving markets combined to provide the Nation's farmers with a 
record level of net cash income in 2003.
    The massive workload associated with implementing these programs 
over the past 2 years is now moderating. As a consequence, FSA has 
begun to reduce the number of temporary, non-Federal county office 
staff years from the roughly 3,000 staff years in 2003, to about 1,000 
staff years provided for in the 2005 budget. The proposed 2005 level 
for FSA salaries and expenses of $1.3 billion will support about 6,000 
Federal staff years and nearly 10,300 county non-Federal staff years, 
including the 1,000 temporary staff years. Permanent non-Federal 
staffing will remain near the levels of 2003 and 2004 to accommodate 
the essential ongoing workload of the agency. The budget also will 
provide an additional 100 Federal staff years to improve service to 
farm credit borrowers in our Service Centers.
    High priority is being placed on enhancing services to FSA's 
clientele by improving agency operations and expanding diversity of the 
customer base and staff. Improvements in operations based on new 
automation tools and Geospatial Information Systems (GIS) are coming on 
line and promise increasingly better services in the future. The budget 
for the Office of the Chief Information Office includes an $18 million 
increase for Service Center Modernization that will provide for 
essential investments in the capability for FSA and the other Service 
Center agencies to improve services to producers.
    FSA has already utilized newly modernized systems for a recent 
sign-up for the CRP to reduce costs and improve timeliness. Work is 
underway to continue modernization improvements in other program areas, 
including farm loan servicing.

Conservation
    The 2002 Farm Bill provided for significant growth in the 
Department's conservation programs. The CRP, which is funded by the 
Commodity Credit Corporation (CCC) and administered by FSA, was among 
the programs that expanded. A general sign-up in 2003 added nearly 2 
million acres to the CRP. Also, 430,000 acres were added under 
continuous and Farmable Wetlands Program (FWP) sign-ups.
    The 2005 budget assumes a general sign-up in 2004 of about 800,000 
acres, and none in 2005. In addition, about 450,000 acres are projected 
to be enrolled under continuous sign-up and the Conservation Reserve 
Enhancement Program (CREP) in each of 2004 and 2005. The FWP is 
estimated to be expanded by about 50,000 acres in each of 2004 and 
2005. In total, CRP is projected to increase gradually from 34.1 
million acres at the end of 2003 to 39.2 million acres by 2008.

Commodity Credit Corporation
    Domestic farm commodity price and income support programs are 
financed through the CCC, a Government corporation for which FSA 
provides operating personnel. The CCC also provides funding for 
conservation programs including the CRP and certain programs 
administered by the Natural Resources Conservation Service. In 
addition, CCC funds many of the export programs administered by the 
Foreign Agricultural Service.
    CCC net expenditures were $17.4 billion in 2003. This level is 
expected to decline to an estimated $14.8 billion in 2004, and then 
increase slightly to $15.0 billion in 2005. However, these estimates 
are sensitive to changing supply and demand conditions for the 
supported farm commodities and may change as we move forward.
    Annual appropriations acts authorize CCC to replenish its borrowing 

authority as needed from the Treasury up to the amount of realized 
losses at the end of this preceding year.
Farm Loan Programs
    FSA plays a critical role for our Nation's agricultural producers 
by providing a variety of direct loans and loan guarantees to farm 
families who would otherwise be unable to obtain the credit they need 
to continue their farming operations. By law, a substantial portion of 
the direct loan funds are reserved each year for assistance to 
beginning, limited resource, and socially disadvantaged farmers and 
ranchers. For 2005, 70 percent of direct farm ownership loans are 
reserved for beginning farmers, and 20 percent are reserved for 
socially disadvantaged borrowers, who may also be beginning farmers.
    The 2005 budget includes funding for about $937 million in direct 
loans and $2.9 billion in guarantees. In recent years, the Department 
has used its authority to shift funding from guaranteed operating loans 
to meet excess demand in the direct loan programs. The levels requested 
for 2005 reflect those shifts and are expected to reflect actual 
program demand more accurately. The overall increase in loan levels is 
reflective of generally stable to lower subsidy rates for the farm loan 
programs, which make those programs less expensive to operate. We 
believe the proposed loan levels will be sufficient to meet the demand 
in 2005.
    The 2005 budget maintains funding of $2 million for the Indian Land 
Acquisition program. For the Boll Weevil Eradication loan program, the 
budget requests $60 million, a reduction of $40 million from 2004. This 
reduction is due to the successful completion of eradication efforts in 
several areas. The amount requested is expected to provide full funding 
for those eradication programs operating in 2005. For emergency 
disaster loans, the budget requests $25 million. No additional funding 
was requested for emergency loans in 2004 due to carryover funding from 
2003. About $191 million is currently available for use in 2004, and a 
portion of that is likely to carry over into 2005. The combined request 
and anticipated carryover are expected to provide sufficient credit in 
2005 to producers whose farming operations have been damaged by natural 
disasters.

                         RISK MANAGEMENT AGENCY

    The Federal crop insurance program represents one of the strongest 
safety net programs available to our Nation's agricultural producers. 
It reflects the principles contained in the Department's Food and 
Agricultural Policy report of 2001 by providing risk management tools 
that are compatible with international trade commitments, creates 
products and services that are market driven, harnesses the strengths 
of both the public and private sectors, and reflects the diversity of 
the agricultural sector.
    In 2003, the crop insurance program provided about $41 billion in 
protection on over 218 million acres, which is about one million acres 
more than were insured in 2002. Our current projection is that 
indemnity payments to producers on their 2003 crops will be about $3.3 
billion which is about $800 million less than in 2002.
    The crop insurance program has seen a significant shift in business 
over the past several years--producers have chosen to buy up to higher 
levels of coverage as a result of increased premium subsidies provided 
in the Agricultural Risk Protection Act of 2000 (ARPA). The number of 
policies, acres, liability, and premium all increased more than 40 
percent for coverage levels 70 percent and higher.
    Our current projection for 2005 shows a modest decrease in 
participation. This projection is based on USDA's latest estimates of 
planted acreage and expected market prices for the major agricultural 
crops, and assumes that producer participation remains essentially the 
same as it was in 2003.
    The 2005 budget requests an appropriation of ``such sums as may be 
necessary'' as mandatory spending for all costs associated with the 
program, except for Federal salaries and expenses. This level of 
funding will provide the necessary resources to meet program expenses 
at whatever level of coverage producers choose to purchase. For 
salaries and expenses of the Risk Management Agency (RMA), $92 million 
in discretionary spending is proposed, an increase of $21 million above 
the 2004 level of $71 million. This net increase includes additional 
funding for information technology (IT), increased staff years to 
improve monitoring of the insurance companies, and pay costs.
    Nearly every RMA function or activity is in some part dependent on 
IT. All of their databases, internal controls, payments to producers 
and companies are tied to IT. All of RMA's rates, prices, products, 
training and financial activity also depend on this technology.
    Because RMA core IT systems are 15 years old, they no longer meet 
the minimum requirements mandated by the Department for security, 
architecture, and e-Government initiatives. In addition, ARPA funds 
that were earmarked for data mining and other compliance activities 
will be depleted at the end of this fiscal year, and there are no 
alternative funding sources available.
    ARPA mandated and funded a substantial increase in the number and 
reach of risk management tools for America's producers and the RMA is 
meeting the challenge. Approximately 80 new risk management tools are 
in various stages of development and deployment. However, RMA's ability 
to maintain the integrity and effectiveness of the critical systems 
that support the growing portfolio of risk management tools that serve 
America's agricultural producers is being threatened due to an aging IT 
system. Unless the situation is corrected, RMA will be required to make 
some difficult resource choices that will unavoidably and negatively 
affect its ability to support safe and effective development, 
deployment and regulation of these important risk management tools.
    Several major changes have also occurred over that time in the way 
producers protect their operations from losses. In 1994, there were no 
plans of insurance which offered protection against changes in market 
prices. Today, over 50 percent of the covered acreage has revenue 
protection, and nearly 62 percent of the premium collected is for 
revenue based protection. In addition, ARPA authorized the development 
of insurance products to protect livestock. Because livestock 
production occurs year-round, these products must be priced and sold in 
a different manner than traditional crop insurance. The advent of new 
types of insurance, not contemplated when the IT system was designed, 
has placed tremendous strain on the aging system.
    ARPA also instituted new data reconciliation, data mining and other 
anti-fraud, waste and abuse activities that require the data to be used 
in a variety of new ways. The current IT system was not designed to 
handle these types of data operations. Consequently, the data must be 
stored in multiple databases which increases data storage costs and 
processing times and increases the risk of data errors.
    The development of the new IT system will result in some additional 
up-front costs to the Government. Until the new system is fully 
operational, we will be required to finance both the developmental 
costs as well as the increasingly expensive maintenance costs of the 
legacy system. However, once the new system is operational, the legacy 
system will be eliminated and a substantial reduction in maintenance 
costs is projected.
    Finally, I would note that this budget for the RMA includes a 
request for 30 additional staff years. The additional staff will 
provide needed support in employing advanced technology-based methods 
to detect and prosecute fraud, waste and abuse; following up on 
referrals from FSA, OIG and the public; making recommendations for 
formal fraud investigations to OIG; and supporting OIG and U.S. 
Attorneys' offices on fraud cases. They also will address outstanding 
OIG and GAO recommendations to improve oversight and internal controls 
over insurance providers; monitor and manage contractual agreements and 
partnerships with the public and private business sectors; and support 
the review and evaluation by the FCIC Board of Directors of the 
increasing number of new private product submissions received each 
year. All of these activities result in savings to the program far in 
excess of their cost through enhanced program oversight and avoidance, 
detection and remediation of program fraud, waste and abuse.

                      FOREIGN AGRICULTURAL SERVICE

    Trade is critically important for American agriculture, and the 
Department's work to expand overseas markets and promote trade is one 
the primary means we have to enhance economic opportunities for our 
farmers and ranchers. With gains in productive capacity continuing to 
outpace growth in demand here at home, the economic growth and future 
prosperity of America's farmers and ranchers will depend heavily upon 
our continued success in reducing trade barriers and expanding exports.
    The Department's efforts to expand trade are carried out on 
multiple fronts. At the center of these activities is the negotiation 
of trade agreements that will reduce barriers and improve access to 
overseas markets. We continue our efforts to reach a new agreement 
through the World Trade Organization (WTO) that will provide for 
further, significant liberalization of global agricultural trade. 
Although the Cancun Ministerial was a missed opportunity, the benefits 
of a successful negotiation for all trading partners remain clear and, 
on that basis, we continue our efforts to advance the negotiating 
process. Negotiations on agriculture resumed last month, and we are 
hopeful that a Ministerial meeting to set the stage for a conclusion to 
the negotiations can be held by the end of this year. Our objectives 
for the negotiations remain the elimination of export subsidies, 
improvement in market access through substantial reductions in tariffs, 
and reduction in trade-distorting domestic support.
    Regional and bilateral trade agreements also provide an important 
avenue for opening new markets, and the Department is an important 
participant in the ambitious agenda that has been established for 
negotiating such agreements. Recently, the United States concluded 
successful negotiations for a Central American Free Trade Area that 
will create new opportunities in this nearby and growing market of over 
35 million consumers. Negotiations also have been concluded recently 
with Australia and Morocco. Other negotiations currently underway will 
establish the Free Trade Area of the Americas and an agreement with the 
Southern African Customs Union. Negotiations expected to begin later 
this year will involve the Andean countries, as well as bilateral 
agreements with Bahrain, Panama, and Thailand.
    While these important efforts to negotiate market-opening 
agreements move forward, we also are increasing our activities to 
monitor compliance with existing agreements and ensure that U.S. trade 
rights are protected. During the past year, we have worked to solve a 
significant number of trade problems, including China's implementation 
of its WTO accession commitments on tariff-rate quota administration 
and export subsidy obligations, and Mexico's implementation of the 
provisions of the North American Free Trade Agreement.
    At the same time, we are addressing other technical barriers to 
trade that arise because the adoption of non-science based standards 
and resistance to the adoption of new technologies, such as 
biotechnology. In this regard, we were encouraged by China's 
announcement in February that it had completed its regulatory review 
and issued permanent safety certificates for Roundup Ready soybeans, as 
well as for two corn and two cotton products. This is extremely 
positive news as China is now the leading foreign customer for U.S. 
soybeans and cotton.
    At present, we are confronted with the challenge of reopening 
foreign markets that have been closed due to the discovery of the one 
case of BSE and the recent outbreaks of avian influenza in the United 
States. We understand the critical importance of reopening these 
markets as soon as possible, and we have committed, and will continue 
to commit, the resources and energy necessary to resolve these 
situations and resume normal trade. With that as our goal, we were very 
pleased with last month's announcement by Mexico of the reopening of 
their border to U.S. beef products.

FAS Salaries and Expenses
    The Foreign Agricultural Service (FAS) is the lead agency for the 
Department's international activities and is at the forefront of our 
efforts to expand and preserve overseas markets. Through its network of 
80 overseas offices and its headquarters staff here in Washington, FAS 
carries out a wide variety of activities that contribute to the goal of 
expanding overseas market opportunities.
    Our budget proposals provide a program level of $148 million for 
FAS activities in 2005. This is an increase above the 2004 level of 
nearly $12 million and is designed to ensure the agency's continued 
ability to conduct its activities effectively and provide important 
services to U.S. agriculture.
    The proposed increase includes funding to meet higher overseas 
operating costs and improve telecommunications systems at FAS' overseas 
offices. FAS is unique as a USDA agency because a sizeable component of 
the agency's operational costs are vulnerable to macroeconomic 
developments beyond its control. Recent significant declines in the 
value of the dollar, coupled with overseas inflation and rising wage 
rates, have led to sharply higher costs that must be accommodated if 
FAS is to maintain its overseas presence. That presence is critical for 
FAS to represent the interests of American agriculture on a global 
basis, for its continued reporting and analysis of agricultural 
developments around the world, and for effective implementation of 
USDA's trade promotion and market development programs.
    Funding also is included for an FAS Global Computing Environment 
initiative to modernize the agency's information technology systems and 
applications. There is an urgent need for additional funding because 
the current systems are outdated, have proven to be unreliable, and are 
inhibiting our ability to communicate effectively between Washington, 
D.C. and foreign posts. They also do not allow participation in e-
Government initiatives with other U.S. trade agencies that are designed 
to provide more efficient services to the public and help bolster U.S. 
trade expansion efforts. The proposed initiative will allow FAS to 
modernize and restructure its IT systems, and improve the services it 
provides to U.S. agricultural producers, exporters, and market 
development organizations.
    Finally, the budget also provides increased funding for FAS to meet 
the higher pay costs in 2005.

Export Promotion and Market Development Programs
    FAS administers the Department's export promotion and market 
development programs which play a key role in our efforts to assist 
American producers and exporters to take advantage of new market 
opportunities, including those created through market-opening trade 
agreements.
    The largest of these programs are the CCC export credit guarantees, 
which help to ensure that credit is available to finance commercial 
exports of U.S. agricultural products. As overseas markets for U.S. 
agricultural products continue to improve, that improvement will be 
reflected in export sales facilitated under the guarantee programs. For 
2005, the budget projects a program level of $4.5 billion for the 
guarantee programs, an increase of just over $250 million above the 
current estimate for 2004.
    For the Department's market development programs, including the 
Market Access Program and Foreign Market Development Cooperator 
Program, the budget provides funding of $173 million, unchanged from 
this year's level. The budget also includes $53 million for the Dairy 
Export Incentive Program and $28 million for the Export Enhancement 
Program.

Trade Adjustment Assistance for Farmers
    For the newly implemented Trade Adjustment Assistance (TAA) for 
Farmers Program, the budget includes a program level of $90 million, as 
authorized by the Trade Act of 2002. The TAA program provides 
assistance to producers of raw agricultural commodities who have 
suffered lower prices due to import competition, and to fisherman who 
compete with imported aquaculture producers. In order to qualify for 
assistance, the price received by producers of a specified commodity 
during the most recent marketing year must be less than 80 percent of 
the national average price during the previous 5 marketing years. Also, 
a determination must be made that increases in imports of like or 
competitive products ``contributed importantly'' to the decline in 
prices.
    Since the program was implemented last August, 12 petitions for 
assistance have been approved involving five different products--wild 
blueberries, salmon, shrimp, catfish, and lychee fruit. Once a petition 
is approved, producers have 90 days to apply for benefits. Eligible 
producers receive technical assistance and cash benefits of up to 
$10,000 per producer. We expect to begin making the first payments 
under the program within the next several months once the producer 
application periods have closed.

International Food Assistance
    The efficiency and productivity of our producers allows the United 
States to be a leader in global food aid efforts, and the United States 
continues to provide over one-half of the world food assistance. The 
commitment of the United States to these activities is demonstrated by 
the fact that the Public Law 480 program, our primary vehicle for 
providing food assistance overseas, will observe its 50th anniversary 
in July of this year.
    The 2005 budget supports a program level of over $1.5 billion for 
U.S. foreign food assistance activities. This includes $1.3 billion for 
the Public Law 480 Title I credit and Title II donation programs, which 
is expected to support the export of 3.2 million metric tons of 
commodity assistance.
    The newest of our food assistance activities is the McGovern-Dole 
International Food for Education and Child Nutrition Program, which was 
authorized in the 2002 Farm Bill. FAS successfully implemented the 
program in 2003, and projects were approved in 21 countries where 
nearly 2.3 million women and children will benefit. Beginning in 2004, 
the Farm Bill requires the McGovern-Dole program to be funded through 
discretionary appropriations, and the 2004 Omnibus Appropriations Act 
provides a program level of $50 million for the program. The 2005 
budget requests that program funding be increased by 50 percent to $75 
million.
    In addition, the budget includes an estimated program level of $149 
million for the CCC-funded Food for Progress program. This is expected 
to support 400,000 metric tons of assistance consistent the authorizing 
statute. The budget also assumes that donations of nonfat dry milk with 
continue under the authority of section 416(b) of the Agricultural Act 
of 1949. The total value of the commodity assistance and associated 
costs is projected to be $147 million.
    That concludes my statement, Mr. Chairman. I would be pleased to 
answer any questions that you and other Members of the Committee may 
have. Thank you.
                                 ______
                                 

  Prepared Statement of James R. Little, Administrator, Farm Service 
                                 Agency

    Mr. Chairman and Members of the Subcommittee, I appreciate the 
opportunity to present the fiscal year 2005 budget for the Farm Service 
Agency (FSA). Since we met last year, I am pleased to report that FSA 
successfully completed its implementation of the most complicated farm 
bill ever--the Farm Security and Rural Investment Act of 2002 (Farm 
Bill)--as well as the 2003 ad hoc disaster bill--the Disaster 
Assistance Act of 2003 (Disaster Bill). We signed up nearly 2 million 
producers in one of the most complex yet quickly implemented signups 
ever conducted and also began and completed the multi-faceted and 
extremely complicated Disaster Bill. In total, we have paid out over 
$19 billion--$11.1 billion in direct and countercyclical payments, over 
$1 billion in benefits to the livestock industry, over $1.8 billion in 
Milk Income Loss Contract payments, $1.2 billion in peanut quota buyout 
payments, and $2.4 billion in disaster assistance. These and other 
programs contributed significantly to record farm income in 2003.
    For the first time since 1997, FSA is not absorbed in 
simultaneously implementing multiple provisions of either ad hoc 
disaster legislation or a new farm bill, and our employees deserve 
considerable recognition for a job well done. As we look forward to 
fiscal year 2005 and beyond, we are taking stock and directing our 
attention to enhancing customer service. We have begun a number of 
projects and initiatives designed to achieve substantial and systemic 
improvements that will position us for more rapid implementation of the 
next farm bill or any ad hoc provisions that might come our way. Our 
fiscal year 2005 budget request supports these initiatives. Before 
discussing specifics of the budget, however, I would like to briefly 
highlight some of the efforts we already have under way which will be 
bolstered by our fiscal year 2005 request.
    With the ultimate goal of better serving our customers, FSA is 
focusing on four areas, all coupled with the President's Management 
Agenda: Budget and Performance Integration, eGovernment, Human Capital, 
and improving Financial Performance.

Budget and Performance Integration
    FSA is overhauling its existing 5-year Strategic Plan to create a 
much more effective tool for telling our story--the results FSA will 
deliver to the American public. The new plan will be used to guide the 
way we carry out our mission. The plan will better support and link to 
our budget in how we identify and justify the financial, personnel, and 
other resources necessary to best deliver our programs and measure 
results. For the fiscal year 2005 Budget process, we worked with OMB to 
identify four of FSA's programs--Commodity Credit Corporation (CCC) 
Direct Payments, CCC Marketing Loans, Guaranteed Farm Loans, and 
Bioenergy--to take part in OMB's Program Assessment Rating Tool (PART) 
evaluation process. On a rating scale ranging from a lowest of 
``Ineffective'' to the highest of ``Effective,'' the PART reviews rated 
CCC Marketing Loans and Guaranteed Farm Loan programs as ``Moderately 
Effective'' and our CCC Direct Payments and Bioenergy programs as 
``Adequate.'' These ratings indicate that we have to improve our 
integration of budget and performance to better demonstrate results. 
For example, the guaranteed farm loan PART evaluation found that while 
the program serves a clear need, improvements in performance 
measurement are needed to more fully understand program impact and the 
effectiveness of targeted assistance. As a result, FSA is conducting a 
performance-focused review of its loan portfolio, which could lead to 
development of additional measures of efficiency and effectiveness.
    To make FSA a more results-focused and customer-driven agency, we 
are refining our key goals designed to improve agency mission 
effectiveness; identifying workable strategies for accomplishing the 
goals; and establishing quantifiable measures, so we can effectively 
and convincingly gauge our progress. Through a process that started 
last fall, we expect by this summer to have a new 5-year Strategic Plan 
with a set of credible measures that will be used to support and 
justify FSA's fiscal year 2006 Budget and beyond.

eGovernment
    Most of the FSA information technology systems used to implement 
the Farm Bill and Disaster Bill are COBOL-based and date back to the 
1980's, and some of the processes we used date back as many as 40 or 50 
years. Through several years of effort, FSA has already begun migrating 
these legacy systems under the Service Center Common Computing 
Environment initiative. For example, our Geospatial Information System 
(GIS) initiative is progressing well. Currently, we have about 50 
percent of counties digitized and expect to have the entire Nation 
completed in fiscal year 2005. GIS technology will be the cornerstone 
of all future FSA system architecture, which I will speak to in a 
moment. Also, last year, we completely redesigned the way we conducted 
the Conservation Reserve Program general signup held in May and June. 
By applying new automation tools, utilizing GIS tools where available, 
and linking with Natural Resources Conservation Service databases, we 
were able to reduce:
  --signup-related technical assistance needs for an estimated savings 
        of $11.2 million.
  --the number of Environmental Benefits Index data entries by 90 
        percent and the time spent on each offer by 60-70 percent. In 
        offices with GIS, additional time was saved by outlining 
        eligible acreage boundaries and calculating acreage by soil map 
        unit symbol. The calculation of field boundaries saved 
        producers approximately $160 thousand in measurement service 
        fees.
  --the error rate and validation and cleanup processes by about 80 
        percent.
  --the time between the end of signup and the completion of data for 
        offer acceptance decision making by about 30 percent, from 10 
        weeks to 7 weeks.
    Last fall, we also purchased a new Farm Business Plan (FBP) that 
will completely change the way we interact with our credit customers, 
analyze and evaluate farm loan requests, and provide farm business 
planning and credit risk analysis for our farmers and ranchers. This 
new system, which will significantly improve our overall ability to 
provide improved customer service for our most needy customers, will be 
phased in Nationwide over the course of the spring and summer and will 
require a major training effort that begins the first week in April.
    As we continue to migrate all of our legacy systems, we are 
undergoing a self-evaluation and are engaged in a range of business 
process reengineering (BPR) initiatives to improve the way we operate 
in the 21st century, using GIS as the cornerstone. Throughout the 
agency, program managers are examining innovative ways to improve their 
processes and reduce duplication of effort through automation, web-
based systems, and collaboration.
    While BPR generally revolves around automation improvements, we are 
looking at processes. The Internet has created great opportunities to 
identify better ways to deliver services on-line, giving our farmers 
and ranchers more time to be in the field and less time in our Service 
Center offices. For example, our Electronic Loan Deficiency Payment 
(LDP) process will allow producers to apply for LDP's on-line from 
their home or place of business and receive their payments through 
electronic funds transfer. This year, FSA is conducting a top-to-bottom 
review of all of its business processes to ensure the services we 
deliver are the most effective and customer-centered, utilizing today's 
technology.

Financial Management
    In fiscal year 2003, CCC received, for the second year in a row, an 
unqualified audit opinion on its financial statements. We continue to 
improve our financial performance by developing system improvements and 
establishing controls that will not only maintain the clean opinion, 
but also resolve management control weaknesses identified through the 
annual financial audit process and other internal and external reviews. 
We are also aggressively addressing erroneous payments to ensure 
controls are in place to improve the financial integrity of all of 
FSA's program delivery and payment processes.

Human Capital
    Last year we aligned our human capital plan to support our 
strategic plan and the accomplishment of our programmatic goals. One of 
the major tasks included a basic analysis of our workforce. That 
analysis revealed that over the next 5 years, we are facing the 
potential of losing 34 percent of our workforce--a little over 5,100 
employees, many in leadership positions--due to retirements alone. 
Targeted investments and corrective measures must be implemented in the 
coming years to replace the skills, talents, and historical knowledge 
of departing employees. The results of our workforce analysis now drive 
the major human capital initiatives under way in leadership 
development, talent management, and performance management.
    For leadership development, we have implemented several management 
training programs and are developing others, including leadership 
succession programs. To ensure that our current and future employees 
have the right talent or skills, especially in mission critical 
occupations, we have re-tooled existing training programs and have 
begun to develop programs to sustain a better learning environment. In 
terms of managing talent, our new 5-year recruitment strategy calls for 
annual plans that target specific occupations, improvements in hiring 
processes and flexibilities, and steps to become an employer of choice. 
And, to ensure a results-driven performance workforce, we have launched 
a performance culture initiative to address specific areas where our 
managers can more effectively manage people and drive continuous 
improvement. In addition, we have begun aligning management performance 
plans to the agency's mission, goals and outcomes. This effort will 
cascade into the workforce over time. We are also enhancing our efforts 
to hold employees accountable for results and differentiate among 
levels of performance to improve overall program delivery.
    In conjunction with our Human Capital Plan, FSA is committed to 
equal employment opportunity in our workforce. Where minorities are 
underrepresented among our ranks, FSA is engaging in some aggressive 
initiatives to address this deficiency. We are utilizing regional 
recruitment teams that will:
  --capitalize on our recruitment flexibilities by ensuring that 
        managers are well versed in appointment authorities such as the 
        Career Intern Program and the Student Career Experience 
        Program.
  --locate a diversity of quality candidates by working with 
        institutions of higher education that serve minority 
        populations; the National Society for Minorities in Agriculture 
        and Natural Resources and Related Sciences (MANRRS), which is 
        dedicated to educating minorities about career opportunities in 
        agriculture; and various minority professional organizations 
        representing more experienced workers to fill higher level 
        positions.
  --advertise career opportunities through magazines, news 
        publications, and websites targeted to the relevant minority 
        audiences.
    Achieving a workforce that reflects the population it serves is not 
only the right thing to do in principle, it will improve FSA's 
reputation and foster an increased sense of trust that will enhance 
customer relations.

Civil Rights and Outreach
    Equal access to agency programs is fundamental to customer service. 
Where problems of disparate treatment exist, our civil rights staff is 
working to meet the issue head on. We have conducted reviews in 11 
States that had not been reviewed in the last few years. In eight of 
those States a corrective action plan is in place to address the 
problems discovered. We are continuing to monitor the remaining three, 
and we are determined to hold senior management in those States 
accountable for providing the leadership needed to eliminate problems 
of discrimination. FSA remains dedicated to ensuring that all 
employees, regardless of level, are held accountable for superior 
customer service, effective communications, and providing all 
participants equal access to all FSA programs.
    We have established an Office of Minority and Socially 
Disadvantaged Farmer Assistance to work with minority and socially 
disadvantaged farmers who have concerns and questions about loan 
applications they have filed in their Service Centers. Through a 
national toll-free telephone help line, we answer producer inquiries 
about loan programs and other FSA programs.
    To rectify instances where certain producer populations are 
underserved, our outreach staff is working to increase participation of 
minorities in FSA programs. The staff utilizes a network of State 
outreach coordinators and works in conjunction with community-based 
organizations, non-profit groups, educational institutions that serve 
minorities, and USDA's Cooperative State Research, Education, and 
Extension Service to reach small farm operators in local communities.
    Some of our activities for 2004 include continued participation in 
the highly successful American Indian Credit Outreach Initiative, 
refining our translation of FSA program forms into Spanish, and 
reaching out to underserved groups by participating in conferences such 
as the NAACP National Convention, the Hmong National Conference, the 
Asian Pacific American Federal Career Advancement Summit, and the 
National Hispanic Farmers and Ranchers Conference.

                            BUDGET REQUESTS

    Turning now to the specifics of the 2005 Budget, I would like to 
highlight our proposals for the commodity and conservation programs 
funded by the Commodity Credit Corporation the (CCC); farm loan 
programs of the Agricultural Credit Insurance Fund; our other 
appropriated programs; and administrative support.

                      COMMODITY CREDIT CORPORATION

    Domestic farm commodity price and income support programs are 
administered by FSA and financed through the CCC, a government 
corporation for which FSA provides operating personnel. Commodity 
support operations for corn, barley, oats, grain sorghum, wheat and 
wheat products, soybeans, minor oilseed crops, upland cotton and extra 
long staple cotton, rice, tobacco, milk and milk products, honey, 
peanuts, pulse crops, sugar, wool and mohair are facilitated primarily 
through loans, payment programs, and purchase programs.
    The 2002 Farm Bill authorizes CCC to transfer funds to various 
agencies for authorized programs in fiscal years 2002 through 2007. It 
is anticipated that in fiscal year 2004, $1.7 billion will be 
transferred to other agencies.
    The CCC is also the source of funding for the Conservation Reserve 
Program (CRP) administered by FSA, as well as many of the conservation 
programs administered by the Natural Resources Conservation Service. In 
addition, CCC funds many of the export programs administered by the 
Foreign Agricultural Service.

Program Outlays
    The fiscal year 2005 budget estimates largely reflect supply and 
demand assumptions for the 2004 crop, based on November 2003 data. CCC 
net expenditures for fiscal year 2005 are estimated at $15.0 billion, 
up about $0.2 billion from $14.8 billion in fiscal year 2004.
    This small net increase in projected expenditures is attributable 
to increases for the counter-cyclical and loan deficiency payment 
programs, as well as the Noninsured Assistance Program and CRP, all of 
which are mostly offset by decreases in other programs.

Reimbursement for Realized Losses
    CCC is authorized to replenish its borrowing authority, as needed, 
through annual appropriations up-to-the amount of realized losses 
recorded in CCC's financial statements at the end of the preceding 
fiscal year. For fiscal year 2003 losses, CCC was reimbursed $22.9 
billion.

Conservation Reserve Program
    The Conservation Reserve Program (CRP), administered by FSA, is 
currently USDA's largest conservation/environmental program. It is 
designed to cost-effectively assist farm owners and operators in 
conserving and improving soil, water, air, and wildlife resources by 
converting highly erodible and other environmentally sensitive acreage, 
normally devoted to the production of agricultural commodities, to a 
long-term resource-conserving cover. CRP participants enroll acreage 
for 10 to 15 years in exchange for annual rental payments as well as 
cost-share assistance and technical assistance to install approved 
conservation practices. The 2002 Farm Bill increased enrollment under 
this program from 36.4 million acres up to 39.2 million acres.
    The 2003 general signup I mentioned earlier brought nearly 2 
million acres into the CRP. Also in 2003, under continuous and Farmable 
Wetlands Program (FWP) signups, a combined total of 430,000 acres was 
enrolled. We issued incentive payments totaling approximately $104 
million under continuous signup, Conservation Reserve Enhancement 
Program (CREP), and FWP under the incentives program that began in May 
2000 to boost participation.
    The fiscal year 2005 budget assumes general signups in fiscal years 
2004 and 2006 to enroll approximately 800,000 acres and 2.5 million 
acres, respectively. No general signup is expected in 2005. However, in 
each of fiscal years 2004 and 2005, we anticipate enrolling 450,000 
acres under continuous signup and the CREP. About 50,000 acres are 
estimated to be enrolled in the FWP in fiscal years 2004 and 2005.
    Overall, CRP enrollment is assumed to gradually increase from 34.1 
million acres at the end of fiscal year 2003 to 39.2 million acres by 
fiscal year 2008, and to remain at 39.2 million acres through fiscal 
year 2014, maintaining a reserve sufficient to provide for enrollment 
of 4.2 million acres in continuous signup and CREP.

                           FARM LOAN PROGRAMS

    The loan programs funded through the Agricultural Credit Insurance 
Fund provide a variety of loans and loan guarantees to farm families 
who would otherwise be unable to obtain the credit they need to 
continue their farming operations.
    The fiscal year 2005 Budget proposes a total program level of about 
$3.8 billion. Of this total, approximately $0.9 billion is requested 
for direct loans and nearly $2.9 billion for guaranteed loans offered 
in cooperation with private lenders. These levels should be sufficient 
to provide adequate funding for our most needy farmers and ranchers 
throughout the year.
    For direct farm ownership loans we are requesting a loan level of 
$200 million. The proposed program level would enable FSA to extend 
credit to about 1,700 small and beginning farmers to purchase or 
maintain a family farm. In accordance with legislative authorities, FSA 
has established annual county-by-county participation targets for 
members of socially disadvantaged groups based on demographic data. 
Also, 70 percent of direct farm ownership loans are reserved for 
beginning farmers, and historically about 35 percent are made at a 
reduced interest rate to limited resource borrowers, who may also be 
beginning farmers. Recently, however, the reduced-rate provisions have 
not been utilized since regular interest rates are lower than the 
reduced rates provided by law. For direct farm operating loans we are 
requesting a program level of $650 million to provide nearly 14,000 
loans to family farmers.
    For guaranteed farm ownership loans in fiscal year 2005, we are 
requesting a loan level of $1.4 billion. This program level will 
provide about 4,800 farmers the opportunity to acquire their own farm 
or to preserve an existing one. One critical use of guaranteed farm 
ownership loans is to allow real estate equity to be used to 
restructure short-term debt into more favorable long-term rates. For 
guaranteed farm operating loans we propose an fiscal year 2005 program 
level of approximately $1.5 billion to assist over 8,000 producers in 
financing their farming operations. This program enables private 
lenders to extend credit to farm customers who otherwise would not 
qualify for commercial loans and ultimately be forced to seek direct 
loans from FSA.
    We are particularly proud of all of our loan programs. As a matter 
of fact, since fiscal year 2000, our direct and guaranteed loans to 
minorities and women have increased every year. And in fiscal year 
2003, there was an increase in direct loans to each minority group and 
we set a record for guaranteed farm ownership loans.
    In addition, our budget proposes program levels of $2 million for 
Indian tribal land acquisition loans and $60 million for boll weevil 
eradication loans. For emergency disaster loans, our budget proposes 
program levels of $25 million to provide sufficient credit to producers 
whose farming operations have been damaged by natural disasters.

                      OTHER APPROPRIATED PROGRAMS

State Mediation Grants
    State Mediation Grants assist States in developing programs to deal 
with disputes involving a variety of agricultural issues including 
distressed farm loans, wetland determinations, conservation compliance, 
pesticides, and others. Operated primarily by State universities or 
departments of agriculture, the program provides neutral mediators to 
assist producers--primarily small farmers--in resolving disputes before 
they culminate in litigation or bankruptcy. States with certified 
mediation programs may request grants of up to 70 percent of the cost 
of operating their programs. Authority for State Mediation Grants 
expires at the end of fiscal year 2005. The Department plans to propose 
extending the program through fiscal year 2010.
    For fiscal year 2004, grants have been issued to 30 States. With 
the requested $4 million for fiscal year 2005, we anticipate that 
between 30 and 33 States will receive mediation grants.
Emergency Conservation Program
    Since it is impossible to predict natural disasters, it is 
difficult to forecast an appropriate funding level for the Emergency 
Conservation Program. No funding was provided for the program in 2002 
or 2003; however, it continued to operate throughout the two fiscal 
years using unobligated funds carried forward together with recoveries 
of unused funds previously allocated to the States.
    For fiscal year 2004, the Consolidated Appropriations Act provides 
$11.9 million for use in southern California only. Emergency cost-
sharing for the nationwide program has continued into 2004 through 
recoveries from the States. As of March 26, we have issued allocations 
totaling about $8.1 million. No other funding is currently available to 
provide assistance nationally to producers who have suffered losses due 
to natural disasters. Unfunded pending requests from producers for 
damage from ice storms, drought, tornadoes, hurricane and other natural 
disasters total about $63.5 million. The fiscal year 2005 President's 
Budget does not request funding for this program.

Dairy Indemnity Program
    The Dairy Indemnity Program (DIP) compensates dairy farmers and 
manufacturers who, through no fault of their own, suffer income losses 
on milk or milk products removed from commercial markets due to 
residues of certain chemicals or other toxic substances. Payees are 
required to reimburse the Government if they recover their losses 
through other sources, such as litigation. As of March 26, we have paid 
fiscal year 2004 DIP claims totaling $309,000 in 12 States.
    The fiscal year 2005 appropriation request of $100 thousand, 
together with unobligated carryover funds expected to be available at 
the end of fiscal year 2004, would cover a higher than normal, but not 
catastrophic, level of claims. Extended through 2007 by the 2002 Farm 
Bill, DIP is a potentially important element in the financial safety 
net for dairy producers in the event of a serious contamination 
incident.

Tree Assistance Program
    The Tree Assistance Program (TAP) provides financial assistance to 
qualifying orchardists to replace eligible trees, bushes, and vines 
damaged by natural disasters.
    No TAP outlays were made during fiscal year 2003. The fiscal year 
1998 program expired at the end of fiscal year 2003, and all 
unobligated funds were returned to Treasury. The fiscal year 1999 
program will expire at the end of fiscal year 2004. The Consolidated 
Appropriations Act, 2004, provides $12.4 million in appropriated 
funding for southern California. Separate legislative provisions have 
also made available CCC funding of $5 million for New York and $9.7 
million for Michigan. No funding is requested for fiscal year 2005.

                         ADMINISTRATIVE SUPPORT

    The costs of administering all FSA activities are funded by a 
consolidated Salaries and Expenses account. The account comprises 
direct appropriations, transfers from loan programs under credit reform 
procedures, user fees, and advances and reimbursements from various 
sources.
    The fiscal year 2005 Budget requests $1.3 billion from appropriated 
sources including credit reform transfers. The request reflects 
decreases in non-Federal county staff-years and operating expenses, as 
well as increases in pay-related costs to sustain essential program 
delivery.
    The fiscal year 2005 request reflects a ceiling of 6,017 Federal 
staff years and 10,284 non-Federal staff years. Temporary non-Federal 
county staff years will be reduced to 1,000--from the fiscal year 2004 
level of 2,067--due to completion of initial farm bill implementation 
and disaster activities. Permanent non-Federal county staff years are 
estimated to remain at the 2004 level.
    Federal staff years will increase by 100 to enhance farm loan 
servicing in the field. The additional staff will be assigned to high 
volume county offices throughout the country. We anticipate that the 
additional staff will bring about decreased loan-processing times, 
improve servicing of existing loans, and help avert increases in direct 
loan delinquency and loss rates. The additional employees will also 
help meet the needs of minority applicants, who often require 
considerable technical assistance from FSA staff to complete financial 
documents and formulate business plans. The resources to furnish this 
assistance are critical in supporting FSA's outreach effort.
    Before closing I would like to note that support of FSA's 
modernization effort is provided through the Department's Common 
Computing Environment account. Funding made available to FSA under this 
account will provide needed telecommunications improvements and permit 
us to continue implementation of the GIS, which is so crucial to rapid 
and accurate program delivery.
    Mr. Chairman, this concludes my statement. I will be happy to 
answer your questions and those of the other Subcommittee Members.
                                 ______
                                 

    Prepared Statement of A. Ellen Terpstra, Administrator, Foreign 
                          Agricultural Service

    Mr. Chairman, members of the Subcommittee, I appreciate the 
opportunity to review the work of the Foreign Agricultural Service 
(FAS) and to present the President's budget request for FAS programs 
for fiscal year 2005. Our budget request reflects several initiatives 
needed to ensure FAS' continued ability to accomplish its mission and 
provide service to U.S. agriculture.
    Last year, FAS had much to celebrate--its 50th anniversary as an 
agency, implementation of the new McGovern-Dole International Food for 
Education and Child Nutrition Program, the Secretary's successful 
Ministerial Conference and Expo on Agricultural Science and Technology, 
a recovery in U.S. agricultural exports, and the conclusion of 
negotiations on a historic free trade agreement (FTA) with Central 
American countries. This year, FAS also has much to highlight--a near 
record export forecast, the 50th anniversary of Public Law 480, the 
conclusion of negotiations for free trade agreements with Australia and 
Morocco, and the anticipated conclusion of negotiations for a Free 
Trade Area of the Americas (FTAA) and FTAs with the Dominican Republic 
and five Southern African countries.
    These events demonstrate FAS' commitment to fulfilling its mission 
of expanding and maintaining export opportunities for U.S. 
agricultural, fish, and forest products and helping to alleviate world 
hunger and food insecurity. The agency's mission is critical to U.S. 
farmers as our agriculture sector is twice as dependent on exports as 
the rest of the U.S. economy.
    Last fiscal year, U.S. agricultural exports reached $56.2 billion, 
an increase of nearly $3 billion over 2002. USDA predicts near-record 
U.S. agricultural exports of $59 billion in fiscal year 2004, more than 
5 percent above exports in 2003 and nearly equal to the record $59.8 
billion set in fiscal year 1996. The Western Hemisphere remains the 
largest regional market for U.S. agricultural products, with exports 
projected at $22.6 billion. Canada is now the largest U.S. agricultural 
export market, with sales to Canada forecast at $9.9 billion. Exports 
of corn, wheat, soybeans, and horticultural products are expected to 
increase over fiscal year 2003.
    While the anticipated recovery in exports is good news for U.S. 
farmers and exporters, the U.S. beef and cattle industry lost export 
markets in late 2003 since a single case of Bovine Spongiform 
Encephalopathy (BSE) or mad cow disease was discovered in Washington 
state. More than 70 U.S. trade partners closed their markets to U.S. 
beef, cattle, sheep, and goats, and other products. Since late 
December, FAS has worked tirelessly to inform our trade partners about 
the steps we are taking to investigate the situation and the additional 
safeguards we have implemented. We have been successful in keeping a 
portion of the Canadian and Philippine markets open to U.S. beef and 
had productive discussions with Mexican officials, as evidenced by 
Mexico reopening its market to U.S. beef products earlier this month. 
We are working with our Canadian and Mexican counterparts to enhance 
and coordinate a consistent North American response to the animal 
health and trade issues that BSE raises. We have dispatched high-level 
officials and technical teams from USDA and the Food and Drug 
Administration to Japan, South Korea, Hong Kong, and the Philippines 
and have hosted technical teams from Japan and Mexico here. We will 
continue such efforts to exchange information in the hope of eventually 
resuming trade.
    Here in Washington and at U.S. embassies abroad FAS staff continues 
to inform foreign governments of actions taken and to reassure them of 
the safety of our beef. Our efforts to restore our foreign markets 
continue to be our top priority, and we urge our trading partners to 
resume trade based on sound scientific principles.
    An additional wrinkle was added to the U.S. broiler export outlook 
when an outbreak of Low Pathogenic Avian Influenza (LPAI) was reported 
in several U.S. States in early February, followed by the confirmation 
of a Highly Pathogenic Avian Influenza (HPAI) case in Texas on February 
23. U.S. trading partners immediately imposed bans on imports of U.S. 
chicken and turkey meat. The HPAI case was the first one in the United 
States in 20 years and it may keep us out of some of our larger markets 
for several months because this version of the disease is recognized 
internationally as highly contagious and import restrictions may be 
valid as long as they are limited to the state of Texas.

FAS Program Activities
    Last year, we continued to use our long-standing export programs 
vigorously and have implemented new initiatives mandated in the Farm 
Security and Rural Investment Act of 2002 (2002 Farm Act).
    The 2002 Farm Act established the Technical Assistance for 
Specialty Crops program and authorizes $2 million in Commodity Credit 
Corporation (CCC) funds for each fiscal year from 2002 to 2007. Last 
year, we allocated $2 million to 19 entities for projects to help 
address unique barriers that prohibit or threaten the export of U.S. 
specialty crops.
    The Farm Act also increased funding for the Market Access Program. 
For fiscal year 2003, we allocated $110 million to 65 trade 
organizations to promote their products overseas. The Farm Act also 
increased funds for the Foreign Market Development Program, and FAS 
approved marketing plans totaling $38.0 million for 23 trade 
organizations for fiscal year 2003.
    The Emerging Markets Program is authorized at $10 million each year 
and provides funds for technical assistance activities that will 
increase market access for U.S. commodities and products in emerging 
markets. A total of 75 projects were approved for fiscal year 2003. The 
Quality Samples Program provides funds so U.S. organizations can 
provide commodity samples to foreign buyers to help educate them about 
the characteristics and qualities of U.S. agricultural products. FAS 
allocated more than $1.7 million in fiscal year 2003 to 21 
organizations under this program.
    The GSM-102 short-term export credit guarantee program facilitated 
sales of more than $2.5 billion in U.S. agricultural products last year 
to 12 countries and five regions. At the same time, U.S. exporters 
continue to discover the benefits of the Supplier Credit Guarantee 
Program. We issued $670 million in credit guarantees under this program 
in 2003, a more than 33-percent increase over last year, demonstrating 
increased awareness of the usefulness of this program.
    With the aid of the Dairy Export Incentive Program, U.S. exporters 
sold more than 86,000 tons of dairy products in fiscal year 2003. The 
CCC awarded more than $31 million in bonuses to help U.S. dairy 
exporters meet prevailing world prices and develop foreign markets, 
primarily in Asia and Latin America.
    The 2002 Trade Act established a new program, which is being 
administered by FAS--Trade Adjustment Assistance (TAA) for Farmers. 
Under this program, USDA provides technical assistance and cash 
benefits to eligible U.S. producers of agricultural commodities if 
increased imports have contributed to a specific price decline over 
five preceding market years. Last fiscal year, we got the program up 
and running and began accepting petitions for evaluation of eligibility 
for the program. Trade Adjustment Assistance petitions for 12 producer 
groups have been approved: catfish producers in 18 states; shrimp 
producers in Alabama, Arizona, Florida (the 2nd Florida petition), 
Georgia, North Carolina, South Carolina, and Texas; wild blueberry 
producers in Maine; salmon fishermen in Alaska and Washington; and 
fresh lychee producers in Florida.
    On the trade policy front, we are working to open, expand, and 
maintain markets for U.S. agriculture. We are actively pursuing what 
U.S. Trade Representative (USTR) Robert Zoellick has called the 
competition for liberalization by seeking trade agreements in 
multilateral, regional, and bilateral contexts.
    Although the outcome of the World Trade Organization (WTO) 
negotiations in Cancun last September was a lost opportunity, the 
United States has not given up its efforts to achieve an international 
agreement that will liberalize agricultural trade. The United States 
and many other countries remain committed to eliminating trade 
distorting subsidies and tariffs, but we must do so together. The 
Cancun meetings resulted in a text that establishes a good basis for 
continuing negotiations. We will continue to work with all players, 
including countries that raised objections in Cancun, to seek common 
ground.
    In the meantime, we are pressing ahead with efforts to reach 
regional and bilateral trade agreements.
    In September, the President signed legislation to implement FTAs 
with Chile and Singapore. In December, we concluded negotiations on a 
historic and comprehensive Central American Free Trade Agreement 
(CAFTA) with El Salvador, Honduras, Guatemala, and Nicaragua. This 
agreement will strip away barriers to trade, eliminate tariffs, open 
markets, and promote investment, economic growth, and opportunity. 
Costa Rica joined CAFTA in January.
    While pursuing new negotiations, we have begun to see the benefits 
of earlier agreements. For example, on January 1, 2004, the United 
States, Canada, and Mexico celebrated the tenth anniversary of the 
implementation of the North American Free Trade Agreement (NAFTA). This 
groundbreaking agreement made North America the world's largest free 
trade area. The success of the agreement for agriculture has been quite 
remarkable. Since 1994, Canada and Mexico have been our two top 
agricultural growth markets in the world--by a wide margin. Exports to 
Canada rose by about $3.1 billion over those years, while sales to 
Mexico rose about $2.7 billion. U.S. exports to the rest of the world 
rose by only $1.1 billion. In 2002, U.S. consumer-oriented products 
made up the lion's share of all U.S. agricultural exports to Canada (70 
percent) and Mexico (39 percent). Demand in both Canada and Mexico 
continues to look promising. Real economic growth in Canada is 
projected at roughly 3 to 3.5 percent a year over the next 10 years, 
while the Mexican economy is expected to grow by 4 to 4.5 percent a 
year. As incomes grow, food demand will likely follow, making NAFTA 
beneficial to U.S. agricultural exporters for years to come.
    As with all trade agreements, however, progress is not always 
straightforward. FAS monitors and enforces trade agreements to ensure 
that the benefits gained through long, hard negotiations are realized. 
Last year, our monitoring of the Uruguay Round Agreement on Agriculture 
and the Sanitary and Phytosanitary Agreement preserved an estimated 
$1.6 billion in U.S. trade. We continue to work to ensure that China 
adheres to its WTO accession commitments to change its tariff-rate 
quota system. In 2003, China purchased U.S. cotton and soybean oil 
exports of $330 million and $48 million, respectively. We also worked 
to help win a WTO case against Japan's unscientific import restrictions 
on U.S. apples, thus saving a potential $30-million market; and are 
working to preserve almost $400 million in U.S. exports of animal by-
products to the European Union (EU).
    In addition, we helped resolve Russia's technical issues related to 
poultry plant inspections, thus saving a market worth more than $300 
million and restored access for U.S. dry beans to Mexico, resulting in 
the resumption of trade valued at $60 million last year.
    July 10, 2004, marks the 50th anniversary of Public Law (Public 
Law) 480, the Agricultural Trade Development and Assistance Act of 
1954. This landmark program is the U.S. Government's primary vehicle to 
meet humanitarian food needs; it also helps to spur economic and 
agricultural growth in developing countries, leading to expanded trade.
    Last year, we used this program to ship commodities from the United 
States to needy people around the world. Under numerous programs, FAS 
programmed nearly 575,000 metric tons of food assistance in fiscal year 
2003 under Public Law 480, Title I credit agreements and Title I--
funded Food for Progress donations. These products, valued at $122 
million, went to 15 countries. The U.S. Agency for International 
Development (USAID), which manages the Title II program of Public Law 
480, provided about 3.7 million metric tons (grain equivalent basis) of 
food to needy people.
    Also last year, FAS launched the McGovern-Dole International Food 
for Education and Child Nutrition Program allowing us to build on the 
success of the Global Food for Education (GFE) pilot program, which 
began in fiscal year 2001. It is designed to both encourage education 
and deliver food to improve nutrition for preschoolers, school 
children, mothers, and infants in impoverished regions. The 2002 Farm 
Act authorized the program through fiscal year 2007, providing $100 
million in CCC funding for fiscal year 2003. Under fiscal year 2003 
programming, Food for Education donations were announced for 21 
countries, totaling 131,000 metric tons valued at about $42 million.
    In addition to these food assistance programs, last year FAS 
employees were deployed to Afghanistan and Iraq to help rebuild those 
countries' agricultural sectors. The reconstruction challenges in these 
two countries are enormous, the security and logistical challenges 
tremendous, and the obstacles to progress great. However, we are 
committed, along with USAID, the Department of State (DOS), and the 
Department of Defense, to do all that we can in the reconstruction 
effort.
    In Afghanistan, we provided technical guidance to help establish an 
Afghan Conservation Corps. This corps will provide jobs to thousands of 
unemployed Afghans, putting them to work to grow and plant trees, 
collect and conserve water, and stop soil erosion. FAS led the 
Department's assistance efforts for the corps, sending three technical 
teams on short-term assignments last year. In addition, FAS placed 
three USDA staff employees in provincial reconstruction teams, with the 
goal of placing a total of eight, to work in rural agricultural areas 
rehabilitating Afghanistan's agricultural sector.
    In Iraq, USDA is playing a key role in the United States' overall 
efforts to create a democratic, market driven economy. With DOS and 
USAID, USDA is assessing food needs and providing expertise on 
restoring water, agriculture, forestry, and rangelands. Rebuilding 
Iraq's agricultural infrastructure continues to be a major priority. To 
that end, USDA continues to work on the revitalization of Iraq's 
agriculture ministry and is working with other U.S. Government agencies 
on reconstruction and development priorities, looking forward to 
commercial trade with Iraq. In recognition of Iraq's many needs, FAS 
sent a U.S. agricultural officer there in February 2004 to work as a 
senior advisor for food trade issues in the Ministry of Trade. This 
comes at a critical time, when Iraq begins to take more responsibility 
for its important agricultural and trade programs.
    Last year, the United States committed a total of $478 million for 
food assistance to Iraq, shipping a total of 255,320 tons of U.S. 
commodities including wheat, flour, rice, soybean oil, nonfat dry milk, 
and pulses (Great Northern beans, chickpeas, and black-eyed peas) under 
Public Law 480, Title II and Section 416(b) of the Agricultural Act of 
1949.
    Another example of our continuing efforts to help countries help 
themselves was Secretary Veneman's historic Ministerial Conference and 
Expo on Agricultural Science and Technology last June. The conference 
focused on how science and technology and a supportive policy 
environment can drive agricultural productivity and economic growth to 
alleviate world hunger and poverty.
    About 1,000 participants attended including 119 ministers of 
agriculture, science and technology, health, environment, and commerce. 
It was one of the largest, most diverse gatherings of decision-makers 
from around the world to address global hunger. One-hundred seventeen 
countries were represented. Other attendees came from the private 
sector, academia, research institutes, foundations, and non-
governmental and international organizations.
    The Ministerial provided an extraordinary opportunity for dialogue, 
knowledge sharing, and the creation of partnerships. It sparked 
tremendous enthusiasm among ministers and other developing-country 
representatives for science and technology to deliver solutions.
    Given the tremendous energy the event generated, many ministers 
from developing countries have agreed to partner with USDA to keep the 
momentum going in finding technology- and policy-based solutions to 
global food insecurity. For example, ministers from Africa and Latin 
America offered to host follow-up conferences for their regions. A 
Central American regional conference will be held in Costa Rica in May 
in partnership with the Inter-American Institute for Cooperation on 
Agriculture (IICA). A regional conference for West Africa will take 
place this summer in Ouagadougou, Burkina Faso. Other conferences and 
follow-up activities are planned throughout the coming years.
    As we work to organize and conduct follow-up activities, we are 
building invaluable relationships with developing countries that will 
help us work together in the future to resolve trade disputes and 
prepare developing countries for global trade. Our longstanding 
training program, the Cochran Fellowship Program was used to introduce 
853 Cochran Fellows from 82 countries to U.S. products and policies in 
2003. These Fellows met with U.S. agribusiness; attended trade shows, 
policy, and food safety seminars; and received technical training 
related to market development. The Cochran Fellowship Program provides 
USDA with a unique opportunity to educate foreign government and 
private sector representatives not only about U.S. products, but also 
about U.S. regulations and policies on critical issues such as food 
safety and biotechnology.
    During Secretary Veneman's visit to Afghanistan in November, she 
announced the first Cochran Fellowship Program with Afghanistan to 
provide short-term, U.S.-based training for eight Afghan women to study 
agricultural finance. They will learn about business plans, financial 
management, farmers' cooperatives, and micro-credit programs to promote 
food security and income-generating small businesses.
    We also collaborated with a diverse group of U.S. institutions in 
research partnerships with more than 50 countries to promote food 
security and trade. These research and exchange activities made 
practical use of biotechnology and other scientific techniques to help 
solve critical problems affecting food, agriculture, fisheries, 
forestry, and the environment. Activities also were conducted to 
evaluate the food, nutritional, and water needs of vulnerable 
populations in rural and urban areas to help expand the livelihoods of 
small and limited-resource farmers, ranchers, and communities.
    In the end, the technical assistance that we provide will help 
build the institutions needed for developing countries to attract 
investment and grow their economies. When our efforts are successful, 
our food and agricultural producers will benefit by access to more and 
better markets.

Challenges Ahead
    Faced with continued growth in our agricultural productivity, 
intense competition, and continued aggressive spending on market 
promotion by our competitors, we must redouble our efforts to improve 
the outlook for U.S. agricultural exports. I would like to discuss our 
top priorities for the year.

Continuing Trade Liberalization for Agriculture
    At the top of our list is moving forward in multilateral, regional, 
and bilateral trade negotiations on agriculture. Although getting the 
WTO negotiations restarted and on a positive path will not be easy, we 
must resume the long journey toward worldwide multilateral trade 
liberalization.
    The Doha Round will not likely meet its deadline of having an 
agreement completed by January 2005. However, all countries have much 
to gain from successful reform of the international trading system, and 
we must continue our efforts to resolve the issues that stalled the 
talks in Cancun.
    In January, Ambassador Zoellick sent a letter to his counterparts 
in the WTO suggesting a ``common sense'' approach to advance the 
negotiations in 2004. Ambassador Zoellick recommended that the 
negotiations focus on core market access topics of agriculture, goods, 
and services.
    In the area of agriculture, the letter suggests that WTO members 
agree to eliminate export subsidies by a date certain, agree to 
substantially decrease and harmonize levels of trade-distorting 
domestic support, and provide a substantial increase in market access 
opportunities. The letter notes that the United States stands by its 
2002 proposal to eliminate all trade distorting subsidies and barriers 
to market access.
    To hammer home the points he made in his letter, Ambassador 
Zoellick traveled extensively at the end of February, meeting with more 
than 30 countries in Asia, Africa, and Europe. He also attended the 
Cairns Group meeting, which gave him a good opportunity to talk with 
many Latin American countries. In addition, Secretary Veneman had a 
very fruitful meeting with EU Commissioner Franz Fischler during which 
she pressed for the resumption of the Doha Agenda talks. The response 
to Ambassador Zoellick's proposal has been very positive, and most 
countries appear to be genuinely interested in moving the negotiations 
forward. Serious, substantive discussions will resume in Geneva next 
week. We are optimistic that we will have a framework in place by July 
and possibly a Ministerial conference by the end of the year.
    In addition, we will continue to press ahead with our efforts to 
reach regional and bilateral trade agreements. During the last year, we 
implemented FTAs with Chile and Singapore and concluded negotiations 
with Central America. Earlier this year, we concluded free trade talks 
with Australia and Morocco. We also hope to bring the Dominican 
Republic into the CAFTA agreement, and we will continue to work towards 
establishing an FTA with the Southern African Customs Union--which 
includes the countries of Botswana, Lesotho, Namibia, South Africa, and 
Swaziland. We have recently launched negotiations with Bahrain and will 
soon begin discussions with Panama, Colombia, and Peru.
    Another major trade initiative is the FTAA. Launched in 1998, these 
negotiations could establish a free trade zone, covering 800 million 
people in 34 countries that stretch from the Arctic Circle to Tierra 
del Fuego. These negotiations have proven to be quite challenging 
because of the large number of participants, each with its own 
interests and external relationships. An important breakthrough was 
made at the Miami Ministerial meeting in November at which trade 
ministers established a new framework that will allow countries with 
greater ambition for trade liberalization to pursue those goals with 
like-minded partners within the FTAA, while ensuring that all 
participants will be covered by a common set of rights and obligations. 
Concluding these negotiations on schedule will be a challenge, but it 
can be done as long as we all remain committed to regional integration 
as a tool to stimulate economic growth in the hemisphere.
    We will continue to work with the countries that would like to join 
the WTO, such as Russia and Saudi Arabia. Although increasing the 
number of members in the WTO is a high priority, we will continue to 
insist that these accessions be made on commercially viable terms that 
provide trade and investment opportunities for U.S. agriculture. And 
when membership in the WTO is achieved, we must continue to monitor 
aggressively those countries' compliance with their commitments. We 
must ensure that acceding countries implement trade policies and 
regulations that are fully consistent with WTO rules and obligations.
    The effort to keep markets open in the face of unscientific or 
artificial trade barriers is inherent in the FAS mission. This is 
perhaps our most important task, yet it is the least visible. It is a 
measure of our success that so many issues are resolved so quickly, 
with so little public awareness. Virtually every day, our overseas and 
Washington staff work as a team on a variety of concerns--first to 
prevent crises from developing and then to resolve thorny issues should 
they arise. They coordinate efforts with a number of USDA agencies, as 
well as with private sector companies and associations. FAS' overseas 
officers work continuously to prevent trade problems from occurring or 
to resolve them as soon as they crop up.
    Every year, these activities preserve millions of dollars in trade 
that potentially could have been lost by countries imposing new 
barriers. Some problems may be resolved quickly with a phone call or a 
meeting; others are more complex, and involve multiple U.S. agencies. 
Our priority this year is reopening our major export markets for U.S. 
beef and poultry exports. As a result of the single BSE case in 
Washington state, most U.S. export markets have banned our cattle, 
beef, and beef product exports, including rendered products, pet foods, 
and cattle genetics. At the same time, most U.S. export markets have 
banned or partially banned U.S. poultry and poultry exports because of 
outbreaks of LPAI.
    Another priority is how we deal with the issues surrounding 
products produced through biotechnology. The increasing number of 
countries around the world that are issuing regulations relating to 
products of biotechnology present a particular challenge, both for our 
infrastructure and for our food and agricultural exports. We are using 
every available forum to ensure countries adopt science-based policies 
in this area.
    To focus our efforts, FAS formed a new office last year to work 
with a myriad of public and private, domestic and international 
organizations on a broad array of biotech issues. Activities this year 
include working to ensure that the Cartagena Protocol on Biosafety does 
not disrupt grain trade; participating in the third annual Asia Pacific 
Economic Cooperation policy dialogue on biotechnology; working with 
USTR on the U.S. case against the EU's moratorium on biotech products; 
and a host of other issues and activities too long to mention.
    As you see, we will be working on many fronts to continue to 
improve export opportunities for the American food and agriculture 
sector, but we cannot do it alone.

Strengthening Market Development Partnerships and Programs
    The challenges we face in multilateral, regional, and bilateral 
trade negotiations make it imperative that we work closely with our 
foreign market development cooperators to strengthen our partnership 
and keep the lines of communication open. This will help us become an 
even more potent force in improving the competitive position of U.S. 
agriculture in the global marketplace.
    We will continue to use our export assistance programs--Emerging 
Markets Program, Market Access Program, Quality Samples Program, 
Technical Assistance for Specialty Crops program, and Foreign Market 
Development Cooperator Program--to open and maintain export 
opportunities for U.S. farmers and exporters.
    We are working on a Global Broad-Based Initiative (GBI) to better 
utilize our marketing resources. GBI will allow FAS cooperator groups 
to address a broad range of issues that may be regional in scope. Under 
the GBI process, proposals for program funding from cooperator groups 
in concert with input from our overseas posts will address key 
priorities, such as market access and unfair competition; 
biotechnology, sanitary and phytosanitary issues, and food safety; best 
growth markets; high-value products; capacity building; and food 
security and trade financing.
    Proposals that cut across multiple product or industry lines--as 
well as multiple markets--will have greater impact than those that 
focus on one product or one market. Under GBI, FAS and cooperators have 
a unique opportunity to address common strategic challenges and 
opportunities.
    We will continue to encourage U.S. exporters to develop and refine 
their marketing strategies, look to new market opportunities, and fully 
use all the FAS tools at their disposal.

Building Trade Capacity
    Hand-in-hand with our negotiating efforts are our activities to 
help developing countries participate more fully in the trade arena. 
Our trade-capacity building efforts are aimed at helping countries take 
part in negotiations, implement agreements, and connect trade 
liberalization to a program for reform and growth. We will work closely 
with USTR and USAID in this effort.
    If we are to achieve success in the negotiating process, we must 
engage the developing world in the creation and implementation of 
appropriate trading rules and guidelines. This will take time, but it 
will be worth the investment. These countries represent our future 
growth markets. We must address the concerns of developing countries, a 
requirement made evident in Cancun. Without their support, there will 
be no new multilateral agreement.
    FAS provides technical expertise to enhance developing countries' 
abilities to engage in two-way trade. FAS recruits expertise from USDA 
agencies, universities, and the private sector. We have been 
particularly active in providing information about science-based animal 
and plant health and food safety rules and systems. We also are working 
with countries to help them build information systems that provide 
accurate agricultural production, trade, and price data. Providing 
technical advice on cold storage, handling, and transportation systems 
facilitates two-way trade in high-value, perishable foods. By helping 
countries understand the advantages of using efficient biotechnology 
tools, we help lower costs and improve the quality of farm products.
    Throughout the year, we will use all our available tools--the 
Cochran Fellowship Program, the Emerging Markets Program, and our 
involvement in international organizations such as IICA--to educate and 
assist countries seeking to reform and improve their economies so they 
can participate in the world marketplace.

Ensuring World Food Security
    During the past 2 years, the U.S. contribution of global food aid 
has reached about 60 percent of total world aid, and we remain 
committed to these efforts that address world food insecurity and help 
to alleviate hunger, malnutrition, and poverty.
    During 2004, we will be working closely with the World Food Program 
and our private voluntary organization partners to ensure that the new 
McGovern-Dole International Food for Education and Child Nutrition 
program builds on the success achieved by the Global Food for Education 
Initiative. USDA will donate approximately 66,000 metric tons of 
commodities to provide nutritious school meals to school and pre-school 
children, as well as nutritional assistance to mothers and infants. In 
addition, we estimate that the United States will be able to distribute 
about 3.8 million metric tons of commodities through Public Law 480, 
Food for Progress, and other programs in fiscal year 2004.
    But we know food aid is not the only tool to achieve world food 
security. Developing countries must strengthen their agricultural 
policies and institutions and increase their investments in 
agricultural productivity if they are to find their way out of the 
seemingly endless cycle of hunger, poverty, and economic stagnation. 
Agricultural science and technology transfer and extension along with 
supportive policy and regulatory frameworks are critical.

Budget Request
    Mr. Chairman, our fiscal year 2005 budget proposes a funding level 
of $147.6 million for FAS and 1,005 staff years. This represents an 
increase of $11.9 million above the fiscal year 2004 level and supports 
several initiatives needed to ensure the agency's continued ability to 
conduct its activities and provide services to U.S. agriculture.
    The budget proposes an increase of $4.8 million for support of FAS 
overseas offices. The FAS network of 80 overseas offices covering over 
130 countries is vulnerable to the vagaries of macro-economic events 
that are beyond the agency's control. The significantly weakened U.S. 
dollar and higher International Cooperative Administrative Support 
Services (ICASS) payments to DOS have caused overseas operating costs 
to increase sharply. Specifically, these increases include:
  --$2.0 million to replenish the Buying Power Maintenance Account 
        (BPMA). FAS has the authority to carry over up to $2.0 million 
        in exchange rate gains from current year appropriations in a 
        BPMA to offset future exchange rate losses. The account was 
        fully funded at the end of fiscal year 2002, but was depleted 
        by the end of fiscal year 2003 due to the weakness of the 
        dollar. Continued weakness of the dollar implies that future 
        exchange rate gains are unlikely.
  --$1.76 million to fund higher payments to DOS. DOS provides overseas 
        administrative support for U.S. foreign affairs agencies 
        through ICASS. FAS has no administrative staff overseas, and 
        thus relies entirely on DOS/ICASS for this support. Based on 
        current cost growth trends, we are estimating that our ICASS 
        assessment will increase by about 10 percent or $1,104,000. 
        Additionally, for security reasons, and as a precondition to 
        moving into the new embassy in Beijing, all agencies are 
        required to purchase new furniture through DOS. DOS has 
        assessed individual agency charges on a per-capita basis; the 
        FAS assessment is $655,000.
  --$581,000 to fund mandatory costs of participating in the Capital 
        Security Cost Sharing Program. Beginning in fiscal year 2005, 
        DOS will implement a program through which all agencies with an 
        overseas presence in U.S. diplomatic facilities will pay a 
        proportionate share for accelerated construction of new, 
        secure, safe, and functional diplomatic facilities. These costs 
        will be allocated annually based on the number of authorized 
        positions. This plan is designed to generate a total of $17.5 
        billion to fund 150 new facilities over a 14-year period. The 
        FAS assessment starts at $3.6 million in fiscal year 2005; 
        however, $3 million of this amount will be offset though a 
        credit for overseas rental costs currently incurred by FAS. The 
        FAS assessment is estimated to increase annually in roughly $3-
        million increments until fiscal year 2009, at which time the 
        annual assessed level will total an estimated $15 million. This 
        level is assumed to remain constant for the following 9 years.
  --$490,000 for the costs of overseas telecommunications improvements. 
        This increase will allow for the upgrade from 9.6 KBPS to 128 
        KBPS on the State Department's Diplomatic Telecommunications 
        Service (DTS) communication lines where DTS is the only option.
    A crosscutting departmental priority is expanding our eGov 
capability. Secretary Veneman recently announced that USDA would focus 
on eGovernment initiatives this year. This multi-faceted initiative 
will change the way we in FAS communicate with each other, with the 
rest of government, and most importantly, with the customers we serve 
here and around the world. In this regard, the budget proposes an 
increase of $5.3 million to implement an FAS Global Computing 
Environment initiative. The 4-year initiative will modernize FAS 
information technology systems and applications to ensure compliance 
with eGovernment objectives and standards for Federal agencies. Under 
the Global Computing Environment initiative, FAS will modernize 
existing systems, restructure its agricultural production and trade 
databases, and improve the timeliness and efficiency of its reporting 
systems. The FAS information technology system is aging and in danger 
of failing. As examples:
  --Of the 35 servers currently providing e-mail and network services 
        for FAS, 25 are 5 or more years old, operating well beyond 
        their normal life cycle.
  --Over 2/3's of FAS desktop PC's (about 900) are already 5-years old 
        and are only running at one-third the current industry standard 
        operating speed. (800 mh vs. 2.4 gh)
  --More than half of the agency's mission-critical information 
        systems--which are of highest interest to USDA customers--are 
        more than 7 years old.
    Our goal is to improve the services provided to U.S. agricultural 
producers and exporters by electronically sharing information, 
providing FAS program interfaces in real time, with no delays, and in 
easy to manipulate formats.
    As our information systems are modernized, FAS will move 
aggressively to integrate its information systems with those in Federal 
and State agencies involved in similar lines of business, i.e., 
international commerce and trade, international development, trade-
capacity building, food aid, trade negotiations, and participation in 
international organizations.
    This will include integration with other USDA agencies through 
USDA.gov, which will provide the Department's customers with the 
ability to customize the information they receive from the Department 
through a personalized web portal. FAS will also need to integrate with 
DOS' information management system for communications within U.S. 
embassies and between embassies and Washington. This will give USDA 
officials access to internal government communications and policy 
papers on relevant issues such as agricultural trade, food aid, and 
biotechnology.
    Finally, the budget includes an increase of $1.8 million to cover 
higher personnel compensation costs associated with the anticipated 
fiscal year 2005 pay raise and efforts to recognize employee 
performance. Pay cost increases are non-discretionary and must be 
funded. Absorption of these costs in fiscal year 2005 would primarily 
come from reductions in agency personnel levels, which would 
significantly affect FAS' ability to contribute to USDA's strategic 
goal of enhancing economic opportunities for agricultural producers.
Export Programs
    Mr. Chairman, the fiscal year 2005 budget includes over $6 billion 
for programs administered by FAS that are designed to promote U.S. 
agricultural exports, develop long-term markets overseas, and foster 
economic growth in developing countries.
Export Credit Guarantee Programs
    The budget includes a projected overall program level of $4.5 
billion for export credit guarantees in fiscal year 2005.
    Under these programs, the CCC provides payment guarantees for the 
commercial financing of U.S. agricultural exports. As in previous 
years, the budget estimates reflect actual levels of sales expected to 
be registered under the programs and include:
  --$3.4 billion for the GSM-102 short-term guarantees;
  --$5.0 million for the GSM-103 intermediate-term guarantees;
  --$1.1 billion for Supplier Credit guarantees, and
  --$10.0 million for Facility Financing guarantees.

Market Development Programs
    Funded by CCC, FAS administers a number of programs that promote 
the development, maintenance, and expansion of commercial export 
markets for U.S. agricultural commodities and products. For fiscal year 
2005, the CCC estimates include a total of $173.0 million for the 
market development programs, unchanged from fiscal year 2004 these 
include:
  --$125.0 million for the Market Access Program;
  --$34.5 million for the Foreign Market Development Cooperator 
        Program;
  --$10.0 million for the Emerging Markets Program;
  --$2.5 million for the Quality Samples Program; and
  --$2.0 million for the Technical Assistance for Specialty Crops 
        Program.

International Food Assistance
    The fiscal year 2005 budget continues the worldwide leadership of 
the United States in providing international food aid. The fiscal year 
2005 request for foreign food assistance totals more than $1.5 billion 
including $1.3 billion for Public Law 480 to provide approximately 3.2 
million metric tons of commodity assistance. For Title I, the budget 
provides for a program level of $123.0 million, which will support 
approximately 500,000 metric tons of commodity assistance. For Title II 
donations, the budget provides for a program level of $1.185 billion, 
which is expected to support 2.7 million metric tons of commodity 
donations
  --$149 million for CCC-funded Food for Progress. This level is 
        expected to meet the minimum level of 400,000 metric tons 
        established in the 2002 Farm Bill;
  --$147 million for Section 416(b) donations. Under this authority, 
        surplus commodities that are acquired by CCC in the normal 
        course of its domestic support operations are available for 
        donation. For fiscal year 2005, current CCC baseline estimates 
        project the availability of surplus nonfat dry milk that can be 
        made available for programming under section 416(b) authority; 
        and
  --$75.0 million for the McGovern-Dole International Food for 
        Education and Child Nutrition Program. This represents an 
        increase of $25 million over the fiscal year 2004 appropriation 
        and will assist an estimated 1.9 million participants.

Export Subsidy Programs
    FAS administers two export subsidy programs through which payments 
are made to exporters of U.S. agricultural commodities to enable them 
to be price competitive in overseas markets where competitor countries 
are subsidizing sales. These include:
  --$28 million for the Export Enhancement Program (EEP). World supply 
        and demand conditions have limited EEP programming in recent 
        years and, as such, the fiscal year 2005 budget assumes a 
        continuation of EEP at the fiscal year 2004 level. However, the 
        2002 Farm Bill does include the maximum annual EEP program 
        level of $478.0 million allowable under Uruguay Round 
        commitments that could be utilized should market conditions 
        warrant.
  --$53 million for the Dairy Export Incentive Program (DEIP), $31 
        million above the current fiscal year 2004 estimate of $22 
        million. This estimate reflects the level of subsidy currently 
        required to facilitate exports sales consistent with projected 
        United States and world market conditions and can change during 
        the programming year as market conditions warrant.

Trade Adjustment Assistance for Farmers
    Under the Trade Act of 2002, the TAA authorizes USDA to make 
payments up to $90.0 million annually to eligible producer groups when 
the current year's price of an eligible agricultural commodity is less 
than 80 percent of the national average price for the 5 marketing years 
preceding the most recent marketing year, and the Secretary determines 
that imports have contributed importantly to the decline in price. As 
of the beginning of March, petitions from eight producer groups had 
been certified as eligible for TAA and an additional 10 petitions were 
under review to determine eligibility. Payments under the program will 
begin later this year once the benefit application period has closed.
    This concludes my statement, Mr. Chairman. I will be glad to answer 
any questions.
                                 ______
                                 

   Prepared Statement of Ross J. Davidson, Jr., Administrator, Risk 
                           Management Agency

    Mr. Chairman and members of the Subcommittee, I am pleased to 
present the fiscal year 2005 budget for the Risk Management Agency 
(RMA). RMA continues to make rapid progress in meeting its legislative 
mandates to provide an actuarially sound crop insurance program to 
America's agricultural producers. Crop insurance is USDA's principal 
means of helping farmers survive a crop loss. In 2005, the program is 
expected to provide producers with more than $42 billion in protection 
on approximately 220 million acres through about 1.2 million policies.
    To improve service to our customers and stakeholders, in 2003, we 
began an evaluation of crop insurance business processes to integrate 
performance and create higher productivity, and to achieve key 
performance goals. To hear first-hand the challenges affecting 
producers in the crop insurance program, we have conducted listening 
sessions with producers and grower groups throughout the United States; 
over 26 listening sessions have been held to date. It is no coincidence 
that the top concerns expressed by our customers and stakeholders have 
become the foundation of our key performance objectives in support of 
the Agency's mission. These objectives are: (1) Provide widely 
available and effective risk management solutions; (2) Provide a fair 
and effective delivery system; (3) Ensure customers and stakeholders 
are well-informed; (4) Maintain program integrity; and (5) Provide 
excellent service.
    To effectively address the concerns and challenges within the crop 
insurance program, RMA's total fiscal year 2005 budget request is $3.09 
billion. The funding level proposed for the Federal Crop Insurance 
Corporation (FCIC) Fund is $3,000,443,000 and for the Administrative 
and Operating Expenses, the request is $91,582,000.

FCIC Fund
    The fiscal year 2005 budget proposes that ``such sums as may be 
necessary'' be appropriated to the FCIC Fund. This ensures the program 
is fully funded to meet producers' needs. The current estimate of 
funding requirements is based on USDA's latest projections of planted 
acreage and expected market prices. The budget request includes $2.1 
billion for Premium Subsidy, $782.4 million for Delivery Expenses, and 
$77.3 million for mandated Agricultural Risk Protection Act of 2000 
(ARPA) activities.

Administrative and Operating Expenses (A&O)
    RMA's fiscal year 2005 request of $91.6 million for Administrative 
and Operating Expenses represents an increase of about $20.6 million 
from fiscal year 2004. This budget supports increases for information 
technology (IT) initiatives of $15.5 million.
    These IT funds are targeted toward the infrastructure improvements 
and enhancement of the corporate operating systems necessary to support 
growth in the program as new products are developed and existing 
products are improved and offered for sale. Due to the rapid growth in 
the program, it has been difficult to maintain adequate funding for 
RMA's information technology system. The Agency's IT infrastructure 
supports the crop insurance program's business operations at the 
national and local levels, provides risk management products to 
producers nationwide and is the basis for payments to private companies 
reinsured by the FCIC. RMA is using system and database designs 
originally developed in 1994. There have been few hardware and software 
upgrades and business process analysis and re-engineering of the entire 
business delivery system are needed to support current and future 
program growth. The IT systems do not meet the minimum requirements 
mandated by the USDA Office of the Chief Information Officer due to 
advanced age and architecture. Without adequate funding of the IT 
requirements, the Agency will not be able to safely sustain additional 
changes required by new product development or changes in existing 
products. Future program expansion will increase the risk of system 
failure and possible inability to handle day-to-day processing of 
applications and indemnity payments.
    Also, included in the total request is $1.0 million to expand the 
monitoring and evaluation of reinsured companies. RMA is requesting 
funds to establish a systematic process of monitoring, evaluating, and 
auditing, on an annual basis, the performance of the product delivery 
system. These funds will be used to support insurance company expense 
audits, performance management audits and reinsurance portfolio 
evaluations to ensure internal and management controls are a basic part 
of reinsured companies' business operations.
    To support an increase of 30 staff years, $3.0 million is requested 
to raise RMA's employment ceiling from 568 to 598. Funding for 
additional staff years is necessary to strengthen the safety net for 
agricultural producers through sound risk management programs. The 
fiscal year 2005 budget request includes five additional staff years 
for the Research and Development Offices, to provide necessary support 
to evaluate, monitor and manage contractual agreements and partnerships 
with public and private business sectors. The additional staff years 
will aid in the review and evaluation of the increasing number of new 
private product submissions received by the Agency each year. They will 
also provide oversight of privately contracted product development 
needed to fulfill ARPA mandates that RMA provide risk management tools 
for producers of specialty crops, livestock, forage pasture, hay and 
other underserved commodities, areas and producers.
    To support the increased workload for the Compliance function, a 
request for 15 staff years is included. The additional staff years will 
provide the Compliance function the necessary support to address 
outstanding OIG and GAO recommendations to improve oversight and 
internal controls over insurance providers. In response to several OIG 
audit reports, RMA needs to establish a systematic process of auditing 
insurance providers to detect and correct vulnerabilities to 
proactively prevent improper payment of indemnities. RMA's studies 
suggest that additional resources in this area would provide a minimum 
of $4 in reduced fraud cost for every dollar spent. The additional 
staffing will provide the necessary oversight to ensure taxpayers' 
funds are expended as intended.
    In addition, 10 staff years are requested for the Insurance 
Services Offices, to implement good farming practice determinations, 
and to adequately evaluate claims based on questionable farming 
practices. ARPA requires RMA to establish a process to reconsider 
determinations of goods farming practices. The Regional Offices of 
Insurance Services are in a unique position by virtue of their 
education in production agriculture, agronomy and related fields, and 
knowledge of local crops and growing conditions to effectively carry 
out the important function of determining good farming practices. RMA 
data indicate that approved insurance providers rarely assess uninsured 
causes of loss against a producer for failure to follow good farming 
practices. With approved insurance providers operating in an 
environment of risk sharing, there is a tremendous need for support and 
incentives for tightening loss adjustment, particularly in the good 
farming practices area to ensure that payments for losses is consistent 
with the requirements of Federal Crop Insurance Act. For example in 
crop year 2002, of approximately 1.25 million policies earning premium, 
about .03 percent were assessed uninsured causes of loss. This small 
percentage appears to be inconsistent with data uncovered through 
various oversight activities. Based on 2002 indemnities of over $4 
billion, if RMA determinations and reconsiderations of good farming 
practices had prevented only 3 percent of indemnities from being paid 
improperly, the resulting savings would be an estimated $121 million.
    Lastly, an increase of $1.1 million is requested for pay cost. 
These funds are necessary to maintain required staffing to carry out 
RMA's mission and mandated requirements.
    The fiscal year 2005 budget request supports the President's 
Management Initiatives and is aligned with the Agency's five 
performance objectives.
    Provide Widely Available and Effective Risk Management Solutions.--
The FCIC Board of Directors (Board) will continue its work to maintain 
an aggressive agenda focused on addressing producer's issues and 
challenges in the crop insurance program. This agenda increases 
participation in the program, ensures outreach to small and limited 
resource farmers, expands programs where appropriate, affirms program 
compliance and integrity, and ensures equity in risk sharing.
    The Board is focusing on the overall FCIC portfolio of insurance 
products, with new strategies to provide the greatest amount of 
protection. We are actively working with the private sector to find new 
and better ways to provide risk protection for forage, rangeland, and 
pasture and to address the long term production declines that result 
from extended drought in many areas. Priority also is directed towards 
identifying opportunities to expand participation in current crop 
insurance programs in areas with below average participation.
    In addition, many of the new product development contracts, 
authorized by Section 508(h) of the Federal Corp Insurance Act, are 
coming to fruition. The Board will review these private product 
submissions and decide on the appropriateness of pilot testing the 
products.
    Beginning February of 2002, RMA initiated a series of listening 
sessions throughout the United States to gather market feedback on 
issues and concerns that affect the agricultural community. From this 
initiative, 26 listening sessions have been organized by the Regional 
Offices in various locations. The focus of the meetings was to obtain 
feedback from farmers on what is working well in our program, factors 
that impact product acceptance and market penetration, what program 
issues need to be addressed, and whether products were meeting the 
needs of the agricultural sector. To gather the widest possible 
representation, we focused on inviting the various regional Grower 
Associations and agricultural interest groups, both private and 
governmental. The feedback from the listening sessions identified a 
broad theme of issues such as requests to expand products such as 
Adjusted Gross Revenue (AGR/AGR-Lite) and Crop Revenue Coverage (CRC), 
simplify prevent planting regulations, and extend crop dates. In 
addition, irrigation issues and the knowledge and training of insurance 
agents were topics of discussion.
    RMA is already engaged in working toward solutions to resolve many 
of the issues identified at these listening sessions and, is evaluating 
the feasibility of many others with the legal limitations and 
parameters established in statute to operating an actuarially sound 
insurance program. In addition, the FCIC Board of Directors 
commissioned a Product Portfolio Review to assist in evaluating and 
developing a strategic product development plan. Our initial plan 
growing out of that review focuses on identifying and pursuing 
opportunities to more comprehensively provide risk coverage and other 
risk management solutions for producers, regions, commodities and 
risks. It gives priority to the development of new insurance products 
and other risk management solutions to fill identified gaps, including 
coverage for livestock, forage, rangeland, long-term drought and 
specialty crops; and simplifies and improves the effectiveness of 
revenue and other insurance products that will meet the needs of the 
agriculture sector.
    Provide a Fair and Effective Delivery System.--RMA relies on 
private sector insurance companies to deliver and service risk 
management tools to producers. The financial agreement that compensates 
insurers for their service and established standards for performance is 
the Standard Reinsurance Agreement (SRA). The current agreement has 
been in effect since 1998 and needs to be updated to reflect the 
changing nature and scope of the program as well as recent development 
of the delivery system.
    ARPA gave RMA the authority to renegotiate the current SRA once 
during the 2001 through 2005 reinsurance years. On December 31, 2003, 
RMA provided the required notice of cancellation of the current 
agreement effective July 1, 2004 and its intent to renegotiate the 
agreement for the 2005 reinsurance year, which begins on July 1, 2004. 
On December 30, 2003, RMA issued the draft of the proposed SRA to 
insurance providers. The first round of negotiations with insurance 
providers has been completed. A range of issues was identified and a 
second draft of the SRA addressing those issues is near completion for 
review and negotiation with the companies. We are working with all 
insurers to have a new and equitable SRA in place by the 2005 
reinsurance year.
    Through this private sector delivery system, in crop year 2003, RMA 
provided approximately $41 billion of protection to farmers, and 
expects indemnity payments for crop year losses of approximately $3.3 
billion. The participation rate for major program crops was 
approximately 82 percent. An important part of the delivery system is 
having effective and useable products. RMA continues to efficiently 
evaluate risk management products, review and approve private sector 
products to be reinsured by the FCIC, to promote new risk management 
strategies, and ensure effective delivery of these products to 
agricultural producers. RMA's education, outreach, and non-insurance 
risk management assistance initiatives, delivered through the public 
and private sector organizations, further contribute to the producer's 
ability, skill and willingness to access and effectively use RMA's 
growing portfolio of risk management tools to protect their financial 
stability.
    Under the Agricultural Management Assistance Program (AMA), Section 
524(b) of the Federal Crop Insurance Act, financial assistance is 
authorized for producers in 15 ``Targeted'' States. Under this 
authority, and in response to the need to improve crop insurance 
delivery and acceptance in these States, for fiscal year 2003 RMA 
offered a cost-share program for producers purchasing AGR, AGR-Lite, 
and spring policies with sales closing dates on or after February 21, 
2003. The States in which this program was offered were: Connecticut, 
Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, New 
Jersey, Nevada, Pennsylvania, Rhode Island, Utah, Vermont, West 
Virginia, and Wyoming. The primary goal of the program was to enable 
producers to buy-up to higher levels of insurance coverage, and to 
provide an incentive for new producers to purchase insurance. To meet 
this objective, RMA paid a portion of the producer premium remaining 
after the normal USDA subsidy was applied. Moreover, to encourage buy-
up, RMA paid a higher percentage of this premium for higher levels of 
coverage. USDA has received many positive letters from producers, 
producer groups and insurance agents in many States who are pleased 
with the program. RMA recently announced the availability of financial 
assistance for crop year 2004 spring crops for the same States, 
consistent with new statutory requirements for the application of these 
funds.
    In early 2004, RMA approved Occidental Fire & Casualty (OFC) and 
its Managing General Agent, Crop1 to sell and service crop insurance 
under a premium reduction plan as allowed by Federal statute, and in 
accordance with standards and procedures established and approved by 
the FCIC Board. The States for which OFC was approved are: Illinois, 
Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North 
Dakota, Ohio, South Dakota, Texas (State approval pending), and 
Wisconsin. OFC is required to offer Premium Discount Plan (PDP) on FCIC 
insurance covering all crops in these States. Farmers who purchase crop 
insurance under OFC's Premium Discount Plan (PDP) will receive a 
discount on their portion of the insurance premium of up to 10 percent 
or more depending on the level of coverage they purchase. The discount 
(equal to 3.5 percent of the total unsubsidized premium) results from 
OFC passing along the cost savings generated by its cost efficient 
approach to delivering crop insurance.
    We continue to work with the private sector to improve producers' 
ease of access to and awareness of risk management products; increase 
the emphasis on improving service coverage for underserved producers 
and regions; and expand the ability to reach underserved producers, 
areas and commodities through traditional channels and developing 
technologies.
    Ensure Customers and Stakeholders are Well-Informed.--RMA has 
implemented an extensive national outreach and education program, 
including several initiatives to increase awareness and service to 
small and limited resource farmers and ranchers and other underserved 
groups and areas.
    In 2003, RMA sponsored the second national outreach conference 
titled: Survival Strategies for Small and Limited Resource Farmers and 
Ranchers, in San Diego, California. Public and private professionals, 
who provide agricultural services to underserved groups, were the 
targeted audience. Over 300 professionals representing 45 States, 22 
universities and three foreign countries convened at this conference to 
share ideas and develop strategies to benefit the underserved 
communities. During 2004, regional and local workshops will be 
customized in several regions to deliver proven survival strategies 
directly to producers. RMA is also partnering with community-based 
organizations, 1890, 1994, 1862 land grant colleges and universities, 
and Hispanic Serving Institutions (HSIs) to provide program technical 
assistance and risk management education on managing farming risks 
associated with the many legal, production, marketing, human resources 
and labor aspects of farm operation. RMA funded 49 outreach projects in 
fiscal year 2003 totaling $4 million to provide outreach and assistance 
to women, small and limited resource farmers and ranchers.
    During fiscal year 2003, our education program focused on 
underserved States, specialty crop producers, and grants through the 
Cooperative State Research, Education, and Extension Service. RMA 
Regional Offices held 833 outreach and educational meetings during 
2003, which attracted 42,020 participants.
    In June 2003, RMA announced a Request for Applications for two 
programs. The first was to establish cooperative education agreements 
in States that have been historically underserved with respect to crop 
insurance. As a result of this announcement, 15 cooperative agreements 
were established totaling $4.5 million. These agreements were executed 
with State departments of agriculture, universities, and non-profit 
organizations to deliver crop insurance education to producers in 
Connecticut, Delaware, Maine, Pennsylvania, Rhode Island, Maryland, 
Massachusetts, Nevada, New Hampshire, New Jersey, New York, Utah, 
Vermont, West Virginia, and Wyoming. Specifically, these cooperative 
agreements will: expand the amount of risk management information 
available; promote risk management education opportunities; inform 
agribusiness leaders of increased emphasis on risk management; and 
deliver training on risk management to producers with an emphasis on 
reaching small farms.
    The second program was for commodity partnership agreements to 
reach producers of specialty crops. A total of 35 commodity partnership 
agreements were established at a cost of $4.6 million. These agreements 
were executed with State departments of agriculture, universities, 
grower groups, and non-profit organizations in Alabama, Arizona, 
Arkansas, California, Colorado, Florida, Georgia, Hawaii, Idaho, 
Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Minnesota, 
Mississippi, Missouri, Montana, Multi-state Area 1 (NV, UT, WY), Multi-
state Area 2 (ME, NH, VT, CT, RI, MA, NY), Multi-state Area 3 (PA, NJ, 
DE, MD, WV), Nebraska, North Carolina, North Dakota, Ohio, Oklahoma, 
Oregon, South Carolina, South Dakota, Tennessee, Texas, Virginia, 
Washington, and Wisconsin. These agreements will reach specialty crop 
producers with broad risk management education. In addition, efforts 
were continued with the Future Farmers of America organization to 
educate and encourage youths' participation in agriculture.
    Maintain Program Integrity.--Our Compliance function workload has 
increased substantially due to the expansion of the Crop Insurance 
Program and the implementation of ARPA. In order to deal with the 
increased referral activity and to fulfill the responsibilities of data 
reconciliation with Farm Service Agency (FSA), RMA has sought to manage 
the increase in workload by emphasizing the use of data mining, remote 
sensing, Geospatial Information technologies and other computer-based 
resources. During the 12-month period from January 2002 through 
December 2002, RMA projects more than $125 million was saved by 
deterring or preventing potentially fraudulent claims through data 
mining and other related activities. Similar savings were realized for 
2003 as we expanded data mining capabilities.
    In 2004, we continue to develop data management and integration 
tools to effectively evaluate, track, and improve program compliance, 
integrity and to reduce the potential for erroneous payments. The need 
for the authority to regulate certain insurance provider business 
activities associated with the Federal Crop Insurance Program and the 
ability to perform timely and effective reviews of insurance providers 
became apparent in 2002 with the failure of the American Growers 
Insurance Company. The fiscal year 2005 budget request includes $1.0 
million for monitoring and evaluating the reinsured companies. 
Improving RMA's ability to monitor the reinsured companies will provide 
the means to perform the necessary analysis and pursue any needed 
corrective actions to reduce the likelihood and cost of future 
failures.
    Recent progress in the Compliance area has been concentrated on the 
mission-critical tasks of evaluating and improving new processes 
established to prevent and deter waste, fraud and abuses. In addition, 
extensive progress has been made in building and adapting RMA's 
compliance investigation caseload reporting, tracking, and feedback 
systems to meet the requirements that were mandated by ARPA. RMA, the 
FSA, the Office of Inspector General, U.S. Attorneys' offices 
throughout the Nation, and the insurance providers continue to work 
together to improve program compliance and integrity of the Federal 
crop insurance program by: fine tuning the RMA/FSA data reconciliation 
and matching process; evaluating and amending the procedures for 
referring potential crop insurance errors or abuse between FSA and RMA; 
creating an anti-fraud and distance learning training package to 
complete the requirements of ARPA; and detecting, prosecuting and 
sanctioning perpetrators of crop insurance fraud. We also have 
dedicated additional efforts to integrating data mining analysis into 
all Agency functions to assist in proactive preemption of fraud through 
effective underwriting and product design; exploring ways to expedite 
increasing sanctions requests; and establishing a fraud investigation 
case management and issue tracking system.
    During fiscal year 2003, RMA published ARPA mandated revisions to 
the Common Crop Insurance Policy, also known as the Basic Provisions. 
RMA proposed many changes to the Basic Provisions, including changes 
mandated by ARPA or requested by OIG, as well as changes related to 
program integrity and administrative issues. Due to the large number of 
comments received, and in order to implement the changes mandated by 
ARPA for the 2004 crop year, RMA chose to implement the proposed 
changes in two separate regulations.
    The first final rule was published in the Federal Register on June 
25, 2003. It contained all of the proposed changes mandated by ARPA and 
a change requested by OIG for an earlier notice of loss for prevented 
planting.
    RMA is finalizing the second final rule that addresses all of the 
proposed changes that were not contained in the first final rule. RMA 
expects publication of this final rule in time to implement for the 
2005 crop year, provided all departmental and other necessary 
concurrences can be obtained.

American Growers Insurance Corporation
    In addition to accomplishing APRA mandated compliance regulations, 
RMA has maintained program integrity despite the fallout of the largest 
policy issuing company in the Federal crop insurance program. On 
November 22, 2002, L. Tim Wagner, Director of the Nebraska Department 
of Insurance, placed American Growers Insurance Company under 
supervision by issuing an Order of Supervision and List of Requirements 
to Abate Supervision and Notice of Hearing. RMA immediately, 
thereafter, entered into a memorandum of understanding with the State 
of Nebraska to insure that the interests of the government and the 
policyholders were protected.
    Senior RMA officials were placed on site with the State appointed 
rehabilitator to keep focus on the priorities. Despite an enormous 
claims caseload caused by the drought of 2002, the policyholders were 
paid in a timely manner. Only a handful of claims are pending, which is 
typical at this juncture for any operating company. The policies of 
American Growers (Am Ag) were also successfully transferred to other 
reinsured companies ensuring that coverage remained in force for the 
2003 crop year. This seamless transfer has provided confidence to all 
our customers, within the Federal crop insurance program, that their 
interest will be protected.
    And, I am happy to say, the interests of the taxpayers also have 
been protected. RMA's onsite presence and supervision of the claims 
processing has resulted in cost avoidance of several millions dollars. 
RMA continues to work with the State of Nebraska to bring finality to 
our work on Am Ag.
    Provide Excellent Service.--RMA continues to pursue initiatives to 
make higher levels of crop insurance protection more affordable and 
useful to producers, provide better protection to farmers experiencing 
multi-year losses, expand risk management education opportunities, fund 
and oversee development of new risk management products and improve 
program integrity.
    RMA's product portfolio includes coverage for 362 different 
commodities in over 3,060 counties covering all 50 States, and Puerto 
Rico. RMA will conduct regular market assessments to establish a 
baseline for customer satisfaction and to measure progress in achieving 
key elements of customer service to ensure the needs of our customers 
are being addressed. Also, we plan to address the needs and changes to 
products, programs and processes to improve service to customers as 
identified from our listening sessions and RMA's product portfolio 
evaluation.

                           PROGRAM HIGHLIGHTS

    Now, I would like to conclude with an update on some of our key 
products and initiatives:

Livestock Insurance Plans
    The FCIC approved two pilot insurance programs for Iowa swine 
producers to protect them from declines in hog prices. The new 
programs, which began in 2002, were authorized under the provisions of 
Section 132 of the Agricultural Risk Protection Act of 2000 (ARPA). 
Until ARPA, federally backed insurance plans providing livestock 
protection were prohibited by law. The livestock insurance programs 
provide livestock producers with risk management tools for reducing 
their price risks. Livestock revenue represents about one-half of the 
total farm cash receipts.
    The two programs approved are: The Livestock Gross Margin (LGM) 
pilot, submitted by Iowa Agricultural Insurance Innovations, and the 
Livestock Risk Protection (LRP) pilot for Swine submitted by the 
American Agri-Business Insurance Company. The LGM pilot provides 
coverage to swine producers from price risks for 6 months and up to 
15,000 hogs per period. The product protects the gross margin between 
the value of the hogs and the cost of corn and soybean meal. Prices are 
based on hog futures contracts and feed futures contracts. LGM protects 
producers if feed costs increase and/or hog prices decline, and depends 
on the coverage level selected by the producer. Coverage levels range 
from 85-100 percent.
    The LRP pilot protects producers against a decline in hog prices. 
Swine can be insured for 90, 120, 150, or 180 days, and up to a total 
of 32,000 animals per year. Unlike traditional crop insurance policies, 
which have a single sales closing date each year, LRP is priced daily 
and available for sale continuously throughout the year. The LRP policy 
protects producers against declining hog prices if the price index 
specified in the policy drops below the producer's selected coverage 
price. Coverage levels range from approximately 70-95 percent of the 
daily hog prices. LRP Swine and LGM Swine have been available to 
producers for over a year and have protected over 60,000 head of swine 
in Iowa. Both products are available from private insurance agents. The 
length of the pilot programs will be determined by farmer 
participation, and the financial performance of the programs. In crop 
year 2003, the FCIC Board did not approve any requests for expansion of 
the LRP Swine. Consideration for expansion is deferred until testing is 
completed and the program demonstrates that the premium rates are 
actuarially sufficient, the interests of the producers are protected, 
and that there are no adverse affects on program integrity.
    LRP was expanded to fed and feeder cattle for the 2003 crop year. 
LRP Fed Cattle protects producers in Illinois, Iowa, and Nebraska. LRP 
Feeder Cattle protects producers in Colorado, Iowa, Kansas, Nebraska, 
Nevada, Oklahoma, South Dakota, Texas, Utah and Wyoming. Both products 
use similar methodology to LRP Swine and protect producers against a 
decline in cattle prices.

Livestock Risk Program (LRP) and Livestock Gross Margin (LGM) 
        Suspensions
    Upon the discovery of Bovine Spongiform Encephalopathy (BSE) in the 
State of Washington, RMA determined it was prudent to suspend the sales 
of LRP cattle policies to new policyholders. When originally developed, 
the LRP premium structure was based on the relatively stable futures 
market prices, which existed prior to the discovery of BSE in 
Washington State. However, the discovery of BSE destabilized the 
futures market resulting in large price swings and increased the 
probability that a producer would receive an indemnity. The crop 
insurance program is statutorily required to operate on an actuarially 
sound basis. The volatility present in the market after the discovery 
of BSE caused the product to no longer be actuarially sound. Current 
policyholders are not affected by the suspension of sales. The FCIC 
Board believes RMA acted quickly and responsibly to protect the 
integrity of the crop insurance program. At present, RMA is actively 
evaluating the rating structure and other design components of the 
program that may be affected by the BSE development. Sales will be 
restored when it is determined by the FCIC Board that the LRP is 
operating an actuarially sound manner and will serve the best interests 
of the producers.
    On December 17, 2003, the FCIC Board discontinued new sales of the 
LGM Swine. The Board determined LGM Swine presented excess risk for the 
FCIC. Coverage price is determined two weeks prior to sales closing. 
Because LGM coverage prices are determined using the Chicago Mercantile 
Exchange and the Chicago Board of Trade, insureds may speculate as 
price on either exchange drops (hogs) or rises (corn and soybeans meal) 
and purchase LGM; RMA refers to this phenomena as stale pricing. While 
this strategy is sound, (buy low, sell high) for speculative purposes, 
LGM is a risk management tool and reinsured by FCIC; this strategy is 
not appropriate for insurance purposes. As directed by the Board, RMA 
will work with the submitter of the LGM to address the concerns 
regarding the program for subsequent insurance periods. Current 
policyholders of this plan of insurance are not affected by the 
discontinuance.

Forage and Rangeland
    We recently solicited private sector participation in proposing and 
developing new products and changes to existing products and programs 
involving pasture, rangeland, forage and hay that are vital to 
livestock producers. The agency is providing $3 million in funding for 
these projects, and may provide more depending on the number and 
quality of submissions that meet program objectives.

Declining Yield
    For most FCIC insurance plans, an individual insured's yield 
guarantee (approved actual production history (APH) yield) is 
principally based on a simple average of 4 to 10 years of actual 
yields. Producers and others have argued that insureds are underserved 
when guarantees decline following successive years of poor growing 
conditions. The reduction in guarantee adversely affects the viability 
of future crop insurance coverage and discourages continued 
participation in the program. RMA's goal is to contract for: (1) 
research and development of new and innovative approaches to mitigating 
declines in yield guarantees following successive years of low yield, 
or provide improvements to existing procedures; and/or (2) research and 
development of new and innovative procedures for determination of 
approved APH yields. Through this approach, RMA will seek proposals for 
new or modified approaches to establishing approved APH yields that are 
less subject to decreases during successive years of low yields as 
compared to current procedures; and that are equitable across insureds 
with differing average yields; and broadly applicable to all crops and 
regions; affordable to insureds; feasible and cost-effective for RMA 
and reinsured companies; and is actuarially sound.

Extend Drought Coverage
    RMA is constantly evaluating the impact of consecutive years of 
drought or other natural disasters on declining yields, which affect 
available coverage, on producers in those States affected. RMA has held 
meetings in drought stricken States to explain RMA policy and has 
published a fact sheet regarding prevented planting provisions in FCIC 
insurance policies and to assist producers, insurance agents, and 
reinsured companies in understanding how that coverage addresses some 
of the challenges of drought. Prevented planting coverage is generally 
straightforward on its face, but it becomes very complex when applied 
to specific planting situations. RMA has sought producer and insurer 
input on this issue in a series of prevented planting forums held in 
2003. Recommendations from these sessions are being evaluated for 
possible inclusion in a proposed rule that will make constructive 
changes in the program. RMA is also preparing to seek private sector 
assistance in evaluating possible product modifications or new products 
to address declining yield experience caused by extended drought.

Adjusted Gross Revenue-Lite
    The FCIC approved the Adjusted Gross Revenue-Lite (AGR-Lite) 
insurance plan in late 2002 and began sales for 2003. This product was 
also submitted to FCIC through Section 508(h) of the Act and was 
authorized by ARPA. AGR-Lite is available in most of Pennsylvania and 
covers whole farm revenue up to $100,000, including revenue from 
animals and animal products. AGR-Lite covers the adjusted gross revenue 
from the whole farm based on 5 years of tax forms and a farm plan. AGR-
Lite was expanded for the 2004 crop year to include selected counties 
of Connecticut, Delaware, Maine, Maryland, Massachusetts, New 
Hampshire, New Jersey, New York, Rhode Island, Vermont, and West 
Virginia. Program changes were approved that will increase 
participation, qualify producers for higher coverage levels, increase 
insurable adjusted gross revenues, and allow for expansion of farms, 
beginning with the 2004 crop year.

Pilot Programs
    Currently, RMA has 31 pilot programs. The pilot programs are: 
Adjusted Gross Revenue (AGR/AGR-Lite), Apple Pilot Quality Option, 
avocado APH, avocado revenue, avocado/mango tree, cabbage, cherry, 
citrus dollar (navel oranges only), Coverage Enhancement Option, 
crambe, cultivated clams, cultivated wild rice, Florida fruit trees, 
forage seed, fresh market snap beans, Income Protection Plan of 
Insurance (IP), livestock (swine) gross margin, livestock risk 
protection (swine/cattle), mint, mustard, Onion Pilot Stage Removal 
Option, pecans, processing chile peppers, processing cucumbers, 
rangeland GRP, raspberry/blackberry, strawberries, sweet potatoes, and 
winter squash/pumpkins.
    The FCIC Board of Directors approved the expansion of the millet 
pilot program and conversion from a pilot program to permanent status 
for the 2003 crop year. The Board also approved expansion of the pecan-
revenue pilot program to be offered in eighty-two counties for the 2003 
crop year and subsequently approved the program to permanent status for 
the 2004 crop year. Additionally, the Board approved conversion of the 
blueberry pilot program to permanent status effective beginning the 
2004 crop year.

Revenue Insurance
    Revenue insurance programs include Group Revenue Insurance Policy 
(GRIP), Adjusted Gross Revenue (AGR), Crop Revenue Coverage (CRC), 
Revenue Assurance (RA), and Income Protection (IP). Under CRC, RA, and 
IP revenue insurance programs, indemnities are triggered by low 
revenues for an individual producer (caused either by low yields, or 
low prices, or both). Under AGR, indemnities are triggered by low 
revenue for an entire farm's operations, based on the producer's 
Schedule F Federal tax forms. Under GRIP contracts, indemnity payments 
are triggered by low county-wide crop revenues. Two of these 
alternatives, CRC and RA, allow producers the option of insuring 
separate areas of land either under separate insurance contracts or 
under the same insurance contract. Each of these alternate contracts 
requires that producers establish an approved Actual Production History 
(APH) yield for the crop to be insured.
    Effective for the 2003 crop year, changes to CRC and RA-High Price 
Option (HPO) rating methodologies were implemented for corn and 
soybeans to respond to dissimilar rates being charged for similar 
coverage protection. RMA is currently evaluating the feasibility of 
merging CRC, RA and IP into a master product with several options. This 
will reduce market confusion over these separate but similar products 
and should significantly reduce administrative costs associated with 
their sales, service and administration.

Research and Development
    During fiscal year 2003, over $24 million was obligated and 
approximately 45 contracts and partnership agreements were awarded to 
further program goals for expanding and improving risk management 
opportunities for producers. Examples include a contract to review 
RMA's product portfolio, fifteen research and development partnership 
agreements such as Organic Price Index, development of a Forage and 
Rangeland Decision Support System and a number of other program 
research, development, and evaluation projects to expand and improve 
the risk management tools for American producers.

                               CONCLUSION

    RMA provides agricultural producers with the opportunity to achieve 
financial stability through effective risk management tools. RMA 
strives to foster, at reasonable cost, an environment of financial 
stability, safety, and confidence, enabling the American agricultural 
producer to manage the perils associated with nature and markets. The 
private sector crop insurance industry markets, delivers, and services 
many USDA risk management products. RMA also provides the educational 
opportunities to help producers choose and employ effective risk 
management tools. RMA works with the Farm Service Agency, Commodity 
Futures Trading commission, and other private and public organizations 
to provide producers with an effective safety net.
    I ask that you approve this budget to enable RMA to continue 
providing an actuarially sound crop insurance program to America's 
agricultural producers. Thank you,
    Mr. Chairman and members of this committee. This concludes my 
statement. I will be happy to respond to any questions.

    Senator Bennett. Thank you, sir. Mr. Rey.

                         STATEMENT OF MARK REY

    Mr. Rey. Good afternoon, Mr. Chairman.
    Our prepared statement for the record highlights our 
funding request for fiscal year 2005, and in the interest of 
time, I will not go into great detail except to assure you that 
we are continuing to work diligently in accountability and 
results measurement for the funds provided by Congress. I am 
proud of the strong efforts that NRCS continues to make their 
programs more accessible to farmers, ranchers and the general 
public.

                     CONSERVATION SECURITY PROGRAM

    What I would like to do in the short time available today 
is focus my remarks on our continuing efforts to implement the 
Conservation Security Program as provided for in the fiscal 
year 2004 budget and as requested in the fiscal year 2005 
request. The Department is moving forward aggressively to 
implement the program, and we are enthusiastic about the 
prospects of the Conservation Security Program and look forward 
to making it available in farms and ranches across America.
    The proposed rule was published for public comment on 
January 2, 2004, with a comment period that closed in the 
beginning of March. The response from the public was 
extraordinary, with 14,010 comments plus one seed order and a 
misdirected check responding to a fundraising request from a 
group that was opposing the regulation. You will be happy to 
know that the seed order was returned, and the check was 
forwarded to the appropriate party.
    Mr. Rey. In addition to the comments we received, the 
agency conducted 10 national listening sessions around the 
country and many individual sessions in States on the proposed 
rule. Our staff has worked diligently to assemble the docket of 
comments and assure that each comment will receive fair 
consideration and review. We have made the comments available 
for public viewing and copying down in the Department of 
Agriculture. And while we are not in a position today to debate 
the contents of the proposed rule, I would like to put the 
contents of the proposed rule in a broad perspective in terms 
of our approach and rationale in discussing three areas which 
were highlighted in the comments that we received.
    The first is the budgetary aspects of the CSP program. When 
the President signed the 2002 Farm Bill into law, the 
Conservation Security Program was estimated to cost $2 billion 
over 10 years. Just as a matter of perspective, this would be 
400 times the amount originally authorized for the Wildlife 
Habitat Incentive Program and 571 times greater than the 
original funding for the Farm and Ranch Lands Protection 
Program.
    So as envisioned, it was a significant program. Congress 
has seen fit to amend the program three times since signing of 
the Farm Bill in the last 21 months; that would be an amendment 
on the average of every 7 months, making program implementation 
a somewhat difficult task as some of the direction was changed 
as we went. Under the most recent revised law, the Congress 
expected an expenditure of less than $7 billion on the program 
over a 10-year period, with a cap of only $41.4 million for 
fiscal year 2004.
    Through the work of the NRCS, we have been able to design 
the program in a way that provides funding obligations in a 
fashion similar to the way that the Conservation Reserve 
Program obligations are structured. For example, the 
President's budget request of $209 million for CSP in fiscal 
year 2005 will represent about a $2 billion total in funding 
provided for farmers and ranchers as the contracts signed in 
2005 play out. If unchanged by either us or the Congress, the 
proposed CSP would provide more than $13 billion in CSP 
assistance to farmers and ranchers over 7 years, which is an 
amount greater than proponents of an open-ended program have 
been discussing.

                      A WATERSHED APPROACH TO CSP

    A second area of considerable discussion in the public 
comments is our proposed approach to focusing on priority 
watersheds. Even though we have been able to maximize funding 
obligations, the dollars available will not even begin to 
satiate the immediate demand for the program. There is a 
potential applicant pool of 700,000 producers to sign up for 
CSP. The CSP statute, the Farm Bill language, prohibits ranking 
applications but would instead mandate that all applicants be 
accepted into the program and potentially receive a payment.
    Given the $41 million available for this fiscal year, and 
of course, unknown amounts for fiscal year 2005 and beyond, we 
have proposed a program that is flexible enough to match 
funding available for any given fiscal year by making the 
program available in watersheds and emphasizing enrollment 
categories. Our approach also deals with the constraint placed 
in statute on technical assistance at a maximum of 15 percent 
of the expended CSP funding.
    It is clear that we have proposed the best course of action 
in designing a staged program that can be expanded based upon 
available funding, and what you see in the map before you is a 
map of all of the watershed units in the United States. As the 
program is drafted now, it will start in the first year by 
identifying priority watersheds, the criteria for which will be 
published for public review shortly.
    If and as funding expands, more watersheds can be made 
available, and using the watershed-based approach, the program 
could be theoretically expanded to the entirety of the land 
area of the United States. So it is a staged program that can 
be made into--is intended to be made into--a national program 
commensurate with whatever funding support that this Congress 
and subsequent Congresses provide.

                            CSP BASE PAYMENT

    A third area which enjoyed considerable discussion in the 
comments regards the way the CSP base payment is structured 
under the proposed rule. In order to ensure defensible 
environmental results for the program, we have proposed placing 
increased emphasis on increased conservation. That is to say 
those farmers and ranchers who agree to do more, get more in 
the way of financial support from the program.
    It is our goal to design a program that is easy to 
understand for farmers, ranchers and those implementing the 
program. We also want to make sure that the program produces 
demonstrable conservation results that will show the American 
taxpayer the value of good conservation on working agricultural 
lands so that this program can be expanded and developed into 
the base program to affect working conservation in the future.

                          PREPARED STATEMENTS

    As I mentioned, our next step is to undertake a thorough 
review and consideration of comments from the public. It will 
be this input that assists us in finalizing the program design. 
The task will be massive, but we have dedicated appropriate 
staff expertise to tackle the job. Our goal is to publish a 
final rule with a sign-up period occurring in fiscal year 2004. 
USDA is ready to deliver the program to the public and begin to 
see results.
    We consider CSP to be a brand new day for conservation 
policy. With that, I would be happy to respond to your 
questions at the appropriate time.
    [The statements follow:]

                     Prepared Statement of Mark Rey

    Mr. Chairman and Members of the Committee, I am pleased to appear 
before you today to present the fiscal year 2005 budget and program 
proposals for the Natural Resources Conservation Service (NRCS) of the 
Department of Agriculture (USDA). I am grateful to the Chairman and 
members of this body for its ongoing support of private lands 
conservation and the protection of soil, water, and other natural 
resources.

Performance and Results
    Mr. Chairman, before I highlight our funding request for fiscal 
year 2005, let me assure you that we are continuing to work diligently 
in accountability and results measurement for the funds provided by 
Congress. I am proud of the strong efforts that NRCS has made on 
performance and making NRCS more accessible to farmers, ranchers and 
the general public. I believe we are offering value and accountability 
to both American taxpayers and to Congress. Our performance management 
system was recently featured in two publications that focus on 
government management and accountability.
    In past testimony before this Subcommittee, I have discussed the 
excellent score that NRCS received in a measure of customer 
satisfaction for conservation assistance. This year, I am proud to 
report that NRCS was ranked as one of the best places to work in the 
Federal Government, including the highest score for a natural resource 
agency. The scores in the report were derived from the Office of 
Personnel Management's government-wide 2002 Federal Human Capital 
Survey. Also, this year we have worked hard on the Program Assessment 
Rating Tool (PART) to evaluate and improve our performance measures 
with a focus on outcomes and results. As we move forward this fiscal 
year, and into fiscal year 2005, we will continue to improve operations 
and accountability systems so that we may best serve our customers and 
protect and improve natural resources.
    As you know, the NRCS is proposing a reorganization to improve its 
operational, technology support, and resource assessment functions to 
strengthen our ability to help America's farmers and ranchers reach 
their conservation goals and offer them the latest science-based 
technologies. We look forward to continue working with you to move 
forward with implementation.

Looking Ahead
    The 2002 Farm Bill contained many new conservation programs 
designed to protect and enhance the environment. The Department 
continues to focus efforts on implementing the conservation programs in 
the Farm Bill. The 2005 President's budget request in the conservation 
area recognizes the importance of this task, as well as the need to 
continue to support underlying programs to address the full range of 
conservation issues at the national, State, local and farm levels.
    The 2005 budget request for NRCS includes $908 million in 
appropriated funding, and $1.86 billion in mandatory CCC funding for 
the Farm Bill conservation programs, including $1 billion for the 
Environmental Quality Incentives Program. The appropriation request 
includes $604 million for Conservation Technical Assistance, the base 
program that supports the Department's conservation partnership with 
State and local entities and the conservation planning needed to 
successfully implement farm bill programs.
    The 2005 budget for NRCS will also enable the agency to maintain 
support for important ongoing activities such as addressing the 
problems associated with runoff from animal feeding operations and 
providing specialized technical assistance to land users on grazing 
lands.
    Another element in the NRCS account structure is a Farm Bill 
Technical Assistance Account that will fund all technical assistance 
costs associated with the implementation of two Farm Bill conservation 
programs--the Conservation Reserve Program and the Wetlands Reserve 
Program. In 2005, this new appropriation account is requested at $92 
million.

Technical Assistance
    Technical assistance funding for conservation programs has been the 
subject of ongoing discussion for several years and a topic of interest 
to this Subcommittee. We appreciate Congress taking steps to deal with 
the long-standing problem of technical assistance for Farm Bill 
conservation programs in the Consolidated Appropriations Act, 2003. The 
long term solution to the technical assistance issue is proposed in 
fiscal year 2005 with the establishment of a new Farm Bill Technical 
Assistance account for CRP and WRP and dedicating resources for this 
purpose. This will allow the agency to provide more financial 
assistance to farmers and ranchers in the other mandatory farm bill 
programs.
    Conservation Operations (CO).--The 2005 budget proposes $710 
million for CO which includes $582 million for Conservation Technical 
Assistance (CTA) and $21.5 million for technical assistance targeted 
specifically for the Grazing Lands Conservation Initiative. This will 
continue the agency's activities that support locally led, voluntary 
conservation through the unique partnership that has been developed 
over the years with each conservation district. This partnership 
provides the foundation on which the Department addresses many of the 
Nation's critical natural resource issues such as maintaining 
agricultural productivity and water quality and leverages additional 
investment from non-Federal sources. The CTA budget will enable NRCS to 
maintain funding for ongoing high priority work.
    Mr. Chairman, I believe that NRCS can continue and build upon this 
level of excellence, if they are provided the support and the resources 
as provided in the President's budget request.
    Given the challenges presented in the Farm Bill, I suggest the 
following highest priority areas of emphasis:
  --Provide adequate support for Conservation Reserve and Wetlands 
        Reserve programs implementation through a separate Technical 
        Assistance discretionary account.
  --Further leverage assistance through our conservation partners and 
        the new Technical Service Provider system. These new sources of 
        technical assistance will complement our existing delivery 
        system.
  --Provide the support in the President's budget for Conservation 
        Operations, with an emphasis on developing technical tools and 
        streamlining efforts to gain efficiencies where possible.

Conservation Security Program
    Mr. Chairman, I also want to take a few moments to highlight our 
work on the Conservation Security Program (CSP). A keystone of the 2002 
Farm Bill conservation title, the CSP has the potential to 
revolutionize the way we approach conservation assistance. We have been 
working hard to design a program that is farmer friendly, provides 
demonstrable environmental benefits, and matches the funding available 
to operate the program.
    There has been a lot of discussion here on Capitol Hill, and around 
farm production and conservation organizations about the amount of 
resources available for the program. Needless to say, this has been a 
moving target for those of us attempting to develop a program under 
ever-changing funding scenarios. At the time the President signed the 
Conservation Security Program into law, there was a Congressional 
Budget Office (CBO) estimate of $2 billion over ten years attached to 
the CSP. As such, our Department began implementation discussions with 
that funding figure in mind.
    Subsequently, the Omnibus Appropriations Act of 2003 (Public Law 
108-7) transformed the CSP into a capped entitlement at $3.773 billion 
over a 10-year period between fiscal year 2003-2013. This change in 
statute led to further revisions of the CBO score. Most recently, the 
Omnibus Appropriations Bill for fiscal year 2004 (Public Law 108-199) 
contains language that once again has impacted the funding authority 
for the Conservation Security Program. The fiscal year 2004 Omnibus 
removed the $3.773 Billion funding limitation for the program over 10 
years, while establishing funding for the CSP at $41.443 million for 
fiscal year 2004.
    Another challenge that the Department faced was how to implement 
CSP with a statutory cap on the amount NRCS could spend to pay for 
technical assistance. Language in the 2002 Farm Bill limits technical 
assistance spending to 15 percent. This statutory cap on technical 
assistance has driven NRCS to develop innovative information technology 
tools and technical assistance management techniques to help the agency 
implement CSP as widely, efficiently, and effectively as possible.
    We have attempted to meet these challenges in the CSP proposed 
rule, by designing a program that is flexible enough to match whatever 
funding that Congress might approve for the program. The President's 
budget request will provide assistance to a large number of producers 
across the country. The budget's proposal of $209 million represents 
the amount of assistance the Department will provide in one year to 
approximately 15,000 producers on millions of acres of crop and grazing 
land. We are proud of what we are accomplishing, and are looking 
forward to making CSP available to producers this year.
    Mr. Chairman, in summary, we all know that we are trying to plan 
for the future under an atmosphere of increasingly austere budgets and 
with a multitude of unknowns on the domestic and international fronts. 
But I believe that the Administration's fiscal year 2005 request 
reflects sound policy and provides stability to the vital mission of 
conservation on private lands. The budget request reflects sound 
business management practices and the best way to utilize valuable 
conservation dollars as we look forward to the future.
    I thank Members of the Subcommittee for the opportunity to appear, 
and would be happy to respond to any questions that Members might have.
                                 ______
                                 

    Prepared Statement of Bruce I. Knight, Chief, Natural Resources 
                          Conservation Service

    Thank you for the opportunity to appear before you today to discuss 
our fiscal year 2005 budget request.
    Last year, I focused much of my remarks on implementation of the 
Farm Bill and the challenges that we faced in carrying out that 
legislation. I am very proud of the performance of our agency in 
getting the work done. To date, NRCS has published rules for nine major 
programs, with the Conservation Security Program proposed rule comment 
period recently completed and the receipt of over 12,000 letters we are 
currently analyzing. In addition, we have three new rules soon to be 
released as well.
    We challenged NRCS staff throughout the Nation in fiscal year 2003. 
And when the year drew to a close it was clear that our field staff had 
answered the call. Roughly $2.3 billion in discretionary and mandatory 
conservation dollars successfully reached farmers, ranchers and other 
customers. This represents a half-billion dollar increase over last 
year. In turn, the streamlining and efficiencies NRCS has gained meant 
that even more conservation funding could be utilized for financial 
assistance to producers. But beyond the successes measured in terms of 
funds, the work NRCS completed this year will have a lasting impact on 
the nation's land, water, and air resources for generations to come. 
Along with the Farm Service Agency, NRCS successfully deployed the 
Grassland Reserve Program, with more than $1.7 billion in potential 
projects offered up by producers. All of these milestones were realized 
while the agency was developing and utilizing a nationwide cadre of 
technical service providers, and continuing to strive toward even 
greater efficiencies and organizational improvements. NRCS staff has 
worked tirelessly to meet the demands and opportunities presented by 
the Farm Bill legislation and we are proud of their accomplishments.
    These accomplishments have also come within the context of the 
challenges that we face on funding for technical assistance. As you are 
aware, the current situation has necessitated that we utilize funding 
from various Farm Bill program accounts to support other conservation 
programs including the Wetlands Reserve Program and Conservation 
Reserve Program. The President's budget request proposes to address 
that issue by establishing a discretionary account for technical 
assistance for CRP and WRP.
    Our focus remains to provide excellent service to our customers, 
and I am very proud of what we accomplished. Last year, NRCS and our 
partners:
  --Provided technical assistance on over 32.5 million acres of working 
        farm and ranch land to reduce erosion, sedimentation and 
        nutrient runoff, enhance water quality, restore and create 
        wetlands, and improve and establish wildlife habitat;
  --Developed and applied more than 8,000 comprehensive nutrient 
        management plans;
  --Served nearly 3.8 million customers around the country;
  --Completed or updated soil survey mapping on 22.5 million acres;
  --Logged over a million hours of Earth Team volunteer time for the 
        second year in a row;
  --Executed over 30,000 Environmental Quality Incentives Program 
        contracts with more than $483 million in financial assistance 
        provided to producers;
  --Funded more than 500 easements in the Farm and Ranch Lands 
        Protection Program, protecting 119,000 acres of prime farmland;
  --Funded over 2,100 Wildlife Habitat Incentives Program contracts; 
        and,
  --Helped land managers create, restore or enhance 334,000 acres of 
        wetlands;
  --Helped local sponsors complete construction of 60 flood protection 
        structures.
    Mr. Chairman, I also want to take a moment to highlight important 
work in Western states that NRCS has undertaken surrounding to the Sage 
Grouse habitat and population. NRCS is actively reviewing the 11 
primary habitat states (WA, CA, UT, CO, ND, SD, OR, NV, ID, WY, and 
MT). Private lands comprise 30 percent of the total acreage where 
existing habitat populations occur and this agency plays a critical 
role in the conservation of existing habitat through the Farm and 
Ranchland Protection, Wildlife Habitat Incentives Program (WHIP) and 
the Environmental Quality Incentives Program (EQIP) Program (FRPP) as 
well as our general conservation technical assistance. NRCS staff are 
currently reviewing all existing projects that have a primary or 
secondary benefit to sage grouse as well as quantifying the total acres 
and total dollars in support of this species. Some states are also 
giving more program focus for sage grouse projects under the EQIP 
program and the NRCS state technical committee.
    As we move forward in fiscal year 2005, there are many challenges 
and opportunities ahead, with NRCS playing a central role in meeting 
the Administration's conservation objectives. We will look to you to 
build upon the fine accomplishments achieved this year to reach an even 
brighter future.

Increasing Third-Party Technical Assistance
    With the historic increase in conservation funding made available 
by the 2002 Farm Bill, NRCS will look to non-Federal partners and 
private technical service providers to supply the technical assistance 
needed to plan and oversee the installation of conservation practices. 
I am proud to report that, as of the beginning of February 2004, NRCS 
has over 1,500 individuals certified as TSPs, with 1,100 more 
individuals pending. In terms of businesses, NRCS has certified 130, 
with over 200 more applications in process. In fiscal year 2003, NRCS 
set aside $20 million for utilization of TSPs, with that funding 
quickly utilized across the nation. For fiscal year 2004, we are 
goaling a figure of $40 million for TSPs. We are excited about the 
prospect of TSP expertise continuing to complement our ongoing work.

Streamlining and Cost Savings
    In 2003, NRCS devoted considerable effort to streamline our 
operations, becoming leaner and more efficient in delivering our core 
work. Last year, NRCS:
  --Updated nearly 70 conservation technical standards;
  --Deployed the NRCS Electronic Field Office Technical Guide;
  --Streamlined program delivery, resulting in reduced costs without 
        compromising quality;
  --Worked closely with FSA to implement Conservation Reserve Program 
        technical assistance cost savings that resulted in an 
        additional $38 million in allocations to Environmental Quality 
        Incentives Program, Wildlife Habitat Incentives Program, 
        Grassland Reserve Program and the Wetlands Reserve Program;
  --Developed new software called PROTRACTS to speed up and keep up 
        with the processing of the large increase in farm bill program 
        contracts to allow more time and dollars to be directed toward 
        planning and applying conservation on the land; and
  --Transitioned from an offset to a direct charge method of accounting 
        to be better able to identify and control costs.
    In 2005, we will continue working on many fronts. We will continue 
streamlining and getting more efficient in working with our partners as 
well.

                         DISCRETIONARY FUNDING

    The President's fiscal year 2005 Budget request for NRCS reflects 
our ever-changing environment by providing resources for the ongoing 
mission of NRCS and ensuring that new opportunities can be realized.

Conservation Operations
    The President's fiscal year 2005 Budget request for Conservation 
Operations proposes a funding level of $710 million which includes $604 
million for Conservation Technical Assistance (CTA). The CTA budget 
will enable NRCS to maintain funding for ongoing high priority work.
    High priority ongoing work that will be maintained includes 
addressing water pollution associated with animal agriculture. In 
addition to regular technical assistance support provided to grazing 
land customers, the budget proposes to provide funding for the Grazing 
Land Conservation Initiative (GLCI) at $21.5 million in 2005 which is 
included in the $604 million for CTA. The GLCI is a private coalition 
of producer groups and environmental organizations that supports 
voluntary technical assistance to private grazing land owners and 
managers.
    The Conservation Operations account funds the basic activities that 
make effective conservation of soil and water possible. It funds the 
assistance NRCS provides to conservation districts, enabling people at 
the local level to assess their needs, consider their options, and 
develop plans to conserve and use their resources. Conservation 
Operations supports the site-specific technical assistance NRCS 
provides to individual landowners to help them develop and implement 
plans that are tailored to their individual goals. It also includes 
developing and implementing the technology and standards that are used 
by everyone managing private lands natural resources. It includes our 
Soil Survey and Snow Survey Programs and other natural resources 
inventories, which provide the basic information about soil and water 
resources that is needed to use these resources wisely.
    We have made great strides in developing an effective 
accountability system with the support of Congress. This accountability 
system has allowed us to accurately track our accomplishments and 
costs.

Farm Bill Technical Assistance
    As I described earlier in my statement, technical assistance 
funding for farm bill programs continues to be a challenge as we look 
ahead to fiscal year 2005. Fully funding technical assistance for the 
Farm Bill programs is essential to ensure the environmental benefits 
that are expected from the significant increase in conservation 
spending. The 2005 Budget proposes to establish a Farm Bill Technical 
Assistance (FBTA) account at a level of $92 million and would provide 
technical assistance funding for two of the 2002 Farm Bill conservation 
programs, the Conservation Reserve Program and the Wetlands Reserve 
Program.
    This new account will be used to develop contracts, design, and 
oversee the installation of conservation practices and maximize the 
amount of dollars available to help farmers and ranchers install on-
the-ground conservation projects. Establishing a technical assistance 
account for these two programs will also increase the financial 
assistance dollars available to carry out other Farm Bill programs.
    Watershed and Flood Prevention Operations.--The 2005 Budget 
proposes funding for the Public Law 566 Watershed Program, but requests 
no funding for the Emergency Watershed Protection program. With 
emergency spending being so difficult to predict from year to year, the 
budget proposes instead to direct available resources to those projects 
that are underway and for which Federal support is critical to their 
successful implementation. The fiscal year 2005 budget proposes 
$40,173,000 for this program.
    Watershed Surveys and Planning.--NRCS works with local sponsoring 
organizations to develop plans on watersheds dealing with water 
quality, flooding, water and land management, and sedimentation 
problems. These plans then form the basis for installing needed 
improvements. The Agency also works cooperatively with State and local 
governments to develop river basin surveys and floodplain management 
studies to help identify water and related land resource problems and 
evaluate alternative solutions. The 2005 Budget requests $5.1 million 
to ensure that this important work is continued.
    Watershed Rehabilitation Program.--One of the agency's strategic 
goals is to reduce risks from drought and flooding to protect community 
health and safety. A key tool in meeting this goal is providing 
financial and technical assistance to communities to implement high 
priority watershed rehabilitation projects to address dam safety. The 
budget proposes $10.1 million to continue the work begun in 2002.
    Resource Conservation and Development (RC&D).--The purpose of the 
RC&D program is to encourage and improve the capability of State and 
local units of government and local nonprofit organizations in rural 
areas to plan, develop, and carry out programs for resource 
conservation. NRCS also helps coordinate available Federal, State, and 
local programs that blend natural resource use with local economic and 
social values. The 2005 Budget proposes a level of $50.7 million which 
will support the 375 RC&D areas now authorized.

                     FARM BILL AUTHORIZED PROGRAMS

    Environmental Quality Incentives Program (EQIP).--The purpose of 
EQIP is to provide flexible technical and financial assistance to 
landowners that face serious natural resources challenges that impact 
soil, water, and related natural resources, including grazing lands, 
wetlands, and wildlife habitat management. We have seen that producer 
demand continues to far outpace the available funding for EQIP. At the 
end of January 2003, we published revised resource concerns and program 
rules for EQIP resulting from the changes enacted in the new Farm Bill. 
We believe that the increased program flexibility and improved program 
features will continue to make EQIP one of the most popular and 
effective conservation efforts Federal Government-wide. The budget 
proposes a level of $1 billion for EQIP. Mr. Chairman, I would also 
note that NRCS recently announced nearly $20 million in EQIP assistance 
to support salinity control in the Colorado River Bain.
    Wetlands Reserve Program (WRP).--WRP is a voluntary program in 
which landowners are paid to retire cropland from agricultural 
production if those lands are restored to wetlands and protected, in 
most cases, with a long-term or permanent easement. Landowners receive 
fair market value for the land and are provided with cost-share 
assistance to cover the restoration expenses. The 2002 Farm Bill 
increased the program enrollment cap to 2,275,000 acres. In fiscal year 
2003, the administration apportioned a total of 213,280 acres for the 
year. The fiscal year 2005 Budget request estimates that about 200,000 
acres will be enrolled in 2005, an appropriate level to keep us on 
schedule to meet the total acreage authorization provided in the Farm 
Bill.
    Grassland Reserve Program (GRP).--The 2002 Farm Bill authorized the 
GRP to assist landowners in restoring and protecting grassland by 
enrolling up to 2 million acres under easement or long term rental 
agreements. The program participant would also enroll in a restoration 
agreement to restore the functions and values of the grassland. The 
2002 Farm Bill authorized $254 million for implementation of this 
program during the period 2003-2007. The fiscal year 2005 Budget 
proposes funding GRP at $84 million.
    Conservation Security Program (CSP).--CSP, as authorized by the 
2002 Farm Bill, is a voluntary program that provides financial and 
technical assistance for the conservation, protection, and improvement 
of natural resources on Tribal and private working lands. The program 
provides payments for producers who practice good stewardship on their 
agricultural lands and incentives for those who want to do more. While 
NRCS is currently in the rule making process, this program will round 
out the portfolio of conservation programs. The fiscal year 2005 Budget 
proposes funding the CSP at $209.4 million and would enroll nearly 
12,000 contracts. Although the cap of 15 percent on technical 
assistance funding established in statute continues to be a serious 
obstacle, through the hard work of the Administration in designing a 
flexible program, the President's budget request of $209 million will 
result in nearly $1.7 billion in obligations.
    Wildlife Habitat Incentives Program (WHIP).--WHIP is a voluntary 
program that provides cost-sharing for landowners to apply an array of 
wildlife practices to develop habitats that will support upland 
wildlife, wetland wildlife, threatened and endangered species, 
fisheries, and other types of wildlife. The budget proposes a funding 
level for WHIP of $60 million.
    Farm and Ranch Lands Protection Program (FRPP).--Through FRPP, the 
Federal Government establishes partnerships with State, local, or 
tribal government entities or nonprofit organizations to share the 
costs of acquiring conservation easements or other interests to limit 
conversion of agricultural lands to non-agricultural uses. FRPP 
acquires perpetual conservation easements on a voluntary basis on lands 
with prime, unique, or other productive soil that presents the most 
social, economic, and environmental benefits. FRPP provides matching 
funds of no more than 50 percent of the purchase price for the acquired 
easements. The budget proposes a level of $125 million for FRPP in 
fiscal year 2005.

Conclusion
    As we look ahead, it is clear that the challenge before us will 
require dedication of all available resources--the skills and expertise 
of the NRCS staff, the contributions of volunteers, and continued 
collaboration with partners. Conservation Districts, Resource 
Conservation and Development Councils, State and local agencies, and 
other valuable partners continue to make immeasurable contributions to 
the conservation movement. In fiscal year 2003, these organizations 
contributed over $1 billion to NRCS programs. It is this partnership at 
the local level that makes a real difference to farmers and ranchers. 
And as we move forward, we will accelerate the use of third-party 
sources of technical assistance as well. We recognize that the workload 
posed by future demand for conservation will far outstrip our capacity 
to deliver, and seek to complement our resources with an appropriate 
system of qualified expertise.
    But it will take a single-minded focus and resolve if we are to be 
successful. I am proud of the tenacity that our people exhibit day in 
and day out as they go about the work of getting conservation on the 
ground. I believe that we will be successful. But it will require the 
continued collaboration of all of us, especially Members of this 
Subcommittee because available resources will ultimately determine 
whether our people have the tools to get the job done. I look forward 
to working with you as we move ahead in this endeavor.
    This concludes my statement. I will be glad to answer any questions 
that Members of the Subcommittee might have.

    Senator Bennett. Thank you very much. Mr. Gonzalez.

                    STATEMENT OF GILBERT G. GONZALEZ

    Mr. Gonzalez. Good afternoon, Mr. Chairman.
    Mr. Chairman, thank you for the opportunity to come before 
you to discuss the fiscal year 2005 appropriation for Rural 
Development. I would like to submit for the record my written 
testimony and share a few highlights and indicate my focus on 
helping individuals, families and organizations within rural 
communities.
    We are all aware of the priorities of the war on terror, 
homeland security, and deficit reduction. I am committed to 
leveraging the precious USDA Rural Development assets to create 
economic opportunity and improve the quality of life of rural 
America. Since the beginning of the Bush Administration, USDA 
Rural Development has provided over $37 billion in investment 
financing and has assisted with the creation or saving of over 
500,000 jobs. We have expanded our investment from $9.6 billion 
in 2000 to $13 billion this past year.
    USDA Rural Development is one of the few Federal agencies 
that can essentially build a rural community from the ground up 
through its investment in infrastructure, housing and business 
programs. However, that is not always enough. I want to 
leverage the resources that you have provided to work with all 
agencies, organizations and the private sector in an effort to 
bring more economic opportunity to rural America.

                   RURAL DEVELOPMENT ACCOMPLISHMENTS

    I have implemented a major marketing effort to improve 
customer service while expanding our outreach to underserved 
and qualified individuals and organizations. I am putting 
especial emphasis on our efforts to increase minority 
participation in all of our programs. We talk a lot about 
numbers, but Rural Development is really about people: people 
who want to find better jobs, people who want better schools 
and hospitals, people who want to own a home and give their 
sons and daughters that first room of their own.
    I had the opportunity last April to meet with Matt and 
Riley Reed of Payson, Utah. They had been married 2 years and 
had one little girl with another baby on the way and no hope 
for qualifying for a home loan for several years. Matt was an 
electrician with little construction experience. Under the 
direction of a construction supervisor, the Reed family started 
building their own home in September of 2000. They moved into 
their new house in June of 2001.
    Imagine the pride these families must have felt when they 
walked into their home for the very first time. We are pleased 
to announce that the number of contracts offered under the 
self-help program almost doubled from 2002 to 2004.
    Through our utility programs, we invested nearly $18 
billion in the past 3 years for technology, water, wastewater 
treatment, and electric infrastructure through loans and 
grants. These investments have benefitted 2.7 million people in 
rural areas, providing nearly 2,000 rural educational 
facilities with expanded access to telecommunications 
technologies and over 800 health care institutions with 
enhanced medical care.
    We have helped numerous rural communities through value-
added grant awards. One interesting project is the United 
Wisconsin Grain Producers, which received a $450,000 grant for 
working capital startup costs for a 40 million gallon annual 
capacity corn ethanol production facility to be built in 
Freesden, Wisconsin.
    In total, there were 184 value-added grants, totaling 
nearly $29 million, helping stimulate economic opportunity and 
create jobs in rural America. In support of these local 
investment efforts, I am working towards the implementation of 
two key business programs: The Rural Business Investment 
Program and the Low Documentation Business and Industry 
Guarantee Program. Both will bring much-needed capital to rural 
communities to support the development of small businesses and 
to support the President's efforts to create jobs across rural 
areas.
    These two programs, along with our ongoing efforts to 
support value-added agriculture and the development of 
renewable energy will increase the opportunities for 
communities to thrive and to compete domestically and globally.

                          PREPARED STATEMENTS

    In summary, I would like to thank the members of this 
Subcommittee and you, Mr. Chairman, for the continued support 
to USDA Rural Development and the many important programs that 
we administer.
    Mr. Chairman, that concludes my remarks.
    [The statements follow:]

               Prepared Statement of Gilbert G. Gonzales

    Mr. Chairman, Members of the Committee, it is a pleasure to present 
to you the President's fiscal year 2005 Budget request for USDA, Rural 
Development.
    This is my first opportunity to appear before you as Acting Under 
Secretary of Agriculture for Rural Development. I am honored to serve 
in this position, and to have the opportunity to work with you to carry 
out Rural Development's fundamental mission to increase economic 
opportunity and improve the quality of life in rural America.
    Everyday, we bring people and resources together.
    As Secretary Veneman recently testified, a primary component in 
USDA's efforts to better serve rural Americans is through greater 
customer service and efficiency in the delivery of our programs. At 
Rural Development we are seeking to accomplish these objectives through 
better marketing of our programs to qualified applicants and through 
developing a consistent structure of operation that lends itself to 
better customer service and improved outreach.
    I believe that given the opportunity, Americans will create 
strength through investments in their own economic future. And I 
believe it is our role at Rural Development to support these efforts in 
ways that will maximize the benefits of rural economies.
    With the assistance of this subcommittee, the Bush Administration 
has established a proud legacy of accomplishments in rural areas.
    The Bush Administration has committed over $37 billion in rural 
development investments in the last 3 years to support rural Americans' 
pursuit of economic opportunities and an improved quality of life.
    Rural Development delivers over 40 different loan, loan guarantee, 
and grant programs enhancing business development, cooperative 
development, housing, community facilities, water supply, waste 
disposal, electric power, and telecommunications, including distance 
learning and telemedicine. Rural Development staff also provide 
technical assistance to rural families, and business and community 
leaders to ensure the success of those projects. In addition to loan-
making responsibilities, Rural Development is responsible for the 
servicing and collection of a loan portfolio that exceeds $86 billion.
    Rural Development is the only Federal organization that can 
essentially build a town from the ground up through investments in 
infrastructure, homeownership and job creation through business 
development programs. We help rural Americans achieve their part of the 
American Dream.
    To further support these efforts, we are working to build a 
collaborative group of Federal agencies that will act to strategically 
put Federal resources in place to serve as a catalyst for private 
investment. Partners in this effort include: Rural Development; Housing 
and Urban Development (HUD); the Small Business Administration; the 
Economic Development Administration; and the National Credit Union 
Association. In addition, we are working to increase the ability of 
faith-based organizations that partner with Rural Development to also 
support rural communities and their economic development efforts.
    Successful economic development in rural areas is driven by local 
strategies where communities take ownership and focus on developing 
leadership, technology, entrepreneurship, and higher education 
opportunities.
    This new direction of collaborative effort follows the model the 
President established with the successful minority homeownership 
initiative he unveiled 2 years ago. This initiative is yielding 
tangible positive results and creating achievements we all take pride 
in.

                            RESPONSIBILITIES

    Rural Development provides rural individuals, communities, 
businesses, associations, and other organizations with financial and 
technical assistance needed to increase economic opportunities and 
improve the quality of life in rural America. This financial and 
technical assistance may be provided solely by Rural Development or in 
collaboration with other public and private organizations promoting 
development in rural areas.

                                 VISION

    To achieve our dual mission of creating greater economic 
opportunities and improving the quality of life for rural citizens, we 
understand the need to structure the delivery of Rural Development 
programs so that those who are most qualified receive investment 
assistance. Reaching maximum efficiency and utilization also requires 
that Rural Development do a better job of outreach and education on the 
programs that are available. Last year, during our testimony before 
this Committee, we stated that the marketing of Rural Development 
programs is a critical component in better serving rural areas. Today, 
we have embarked upon an aggressive outreach and marketing effort 
focused on the programs receiving appropriations rather than on the 
names of individual agencies receiving the appropriations. This effort 
is a key priority and we believe it will help ensure greater 
utilization of program investment dollars by those who are most 
qualified.
    Over the last 3 years (fiscal year 2001-fiscal year 2003) with your 
assistance Rural Development has delivered over $37 billion in loans 
and grants to rural Americans. Through this infusion of infrastructure 
investment and local area income stimulus, many rural areas are primed 
to attract an increase in private sector investment. We expect to see 
these Federal investments returned many times over in the form of new 
private ventures, with their associated multiplier effects on household 
incomes and local quality of life.
    Other primary goals include:
    Homeownership.--The bedrock of this Administration's commitment to 
rural America is homeownership and you are key to fulfilling this 
commitment. A safe, secure home is the foundation for the family unit 
and owning a home is the oldest and best form of building equity. I am 
proud of the fact that Rural Development has invested over $10.2 
billion in the last 3 years in single family housing, which supports 
the President's minority homeownership goal.
    Entrepreneurship.--I believe there are two key economic drivers for 
building competitiveness in rural communities. One is our ability to 
grasp and utilize the power of technology. The Internet, and the 
technology that has flowed from it, has resulted in the free flow of 
capital and easy access to knowledge across borders. It has made it 
possible for competition to develop and build production and value-
added systems. The second economic driver is supporting the growth of 
small businesses in rural communities.
    That is why we are focusing our energies on implementing a new low-
documentation Business & Industry guarantee loan program, implementing 
the Rural Business Investment Program, underwriting broadband loans, 
and employing other new economic development tools to make the most of 
these key economic drivers.

                    RURAL DEVELOPMENT BUDGET REQUEST

    The President's commitment to rural America remains strong, and our 
request will support a total program level of $11.6 billion in loans 
and grants. This program level is very close to the fiscal year 2004 
budget request, in spite of elevated priorities in other areas and the 
increased interest costs of our credit programs.
    I will now discuss the requests for specific Rural Development 
programs.

                         RURAL UTILITY PROGRAMS

    Through the Rural Utilities Service, USDA Rural Development 
provides financing for electric, telecommunications, and water and 
waste disposal services that are essential for economic development in 
rural areas. The utilities program requests a total loan level of $4.9 
billion, which is comprised of $2.6 billion for electric loan programs, 
$495 million for rural telecommunication loans, $25 million for 
Distance Learning and Telemedicine grants, $331 million in loans for 
broadband transmission, over $1 billion for direct and guaranteed Water 
and Waste Disposal loans, $346 million for Water and Waste Disposal 
Grants, and $3.5 million for Solid Waste Management Grants.
    The Rural Telephone Bank (RTB) was established in 1972 to provide a 
supplemental source of credit to help establish rural telephone 
companies. This has proved to be remarkably successful, and efforts 
have been underway to privatize the bank. In 1996, the RTB began 
repurchasing Class ``A'' stock from the Federal Government, thereby 
beginning the process of transformation from a Federally funded 
organization to a fully privatized banking institution. The fiscal year 
2005 budget reflects the Administration's commitment to a fully 
privatized RTB that does not require Federal funds to finance the loans 
it makes.
    I would like to underscore two points in our Rural Utilities budget 
request. With the broadband program, we are building on over $2 billion 
in mandatory and discretionary loan funding that was provided over the 
last 2 years. To date, approximately 90 applications totaling $1.1 
billion have been received and are in the review pipeline. Of those 
received, $134 million in loans have been approved. Due to the 
uniqueness of this new program, from evaluating the pricing mechanism 
and ever-advancing technology component, to the ongoing subsidy debate 
associated with the prerequisite level of equity requirements, and the 
built-in commercial nature of the lending competition associated with 
this program, review of the applications has not been as swift as we 
would have hoped. However, we do believe that careful deliberation of 
these elements is required if we are to ensure the credit worthiness 
and soundness of the loans we make, especially since many of these 
companies are start-ups. This Administration is firmly committed to 
developing rural technology infrastructure and we are working hard to 
meet the expectations of the Congress and the public. For fiscal year 
2005, we are requesting $9.9 million in discretionary budget authority, 
which will sustain an additional $331 million of loans. This level of 
funding, coupled with the remaining balances from prior years, will 
provide ample support for the continued expansion of broadband services 
in rural areas.
    Second, we are able to support the funding of water and wastewater 
infrastructure through heavier reliance on loans rather than grants due 
to more affordable interest rates which allow rural communities to 
assume a greater portion of the infrastructure debt.

                  RURAL BUSINESS-COOPERATIVE PROGRAMS

    Since 2001, USDA Rural Development has provided over $3.3 billion 
for rural business development in the form of loans, grants and 
technical assistance.
    The Rural Development business and cooperative program budget 
request for fiscal year 2005 is about $738 million, the bulk of which 
is comprised of $600 million for the Business & Industry loan guarantee 
program.
    As I stated earlier in my testimony, creating economic 
opportunities is a primary pillar supporting the Rural Development 
mission. One of my priorities, which I have personally been working to 
implement, is the Rural Business Investment Program, authorized in the 
2002 Farm Bill. This program is being developed in partnership with the 
Small Business Administration and is critical to economic growth in 
rural areas. Further, we are working to create a low-documentation 
version of the business and industry guarantee loan program that has 
less reliance on paperwork and more flexibility in providing smaller 
loan amounts to help more smaller businesses access much needed 
capital.
    We are requesting $40 million for the Rural Business Enterprise 
Grant program, $3 million for the Rural Business Opportunity Grant 
program, over $34 million for the Intermediary Relending Program, $25 
million for Rural Economic Development loans, $5.5 million for Rural 
Cooperative Development grants, $10.8 million in discretionary budget 
authority for renewable energy loans and grants, and $15.5 million of 
discretionary funding for the Value-Added grant program.
    The $10.8 million of discretionary budget authority for renewable 
energy loans and grants will assist in fulfilling the President's 
Energy Policy that encourages a clean and diverse portfolio of domestic 
energy supplies to meet future energy demands. In addition to helping 
diversify our energy portfolio, the development of renewable energy 
supplies will be environmentally friendly and assist in stimulating the 
national rural economy through the jobs created and additional incomes 
to farmers, ranchers, and rural small businesses. The allocation of 
this budget authority among direct loans, guaranteed loans, and grants 
is not determined at this time. Once the subsidy rates for the loan 
programs are finalized we will determine the distribution of loans and 
grants. This is important for rural communities and our country's 
ability to rely less on imported energy. I am committed to this program 
and the benefits it holds for America.
    Rural Development has administered the value-added grant program 
since its inception as a pilot in fiscal year 2001. Over that time, we 
have concentrated on improving outreach to assist in stimulating the 
most effective projects, and improving the application review process 
to ensure an empirically based, evenhanded review. We instituted a 
contract effort with highly educated and experienced academicians to 
make certain the scoring was unbiased. Geographic dispersion was not 
included as an evaluation criterion. However, I am concerned that the 
distribution of the latest awards does not reflect the breadth of 
innovative talent that I know is spread across rural America. I am 
instituting a review of our outreach and technical assistance 
provisions, to determine if improvements are needed in Rural 
Development's assistance to potential applicants. I have also initiated 
a review of project results. We would like to identify the 
characteristics of successful projects, and what benefits are accruing 
to rural areas.
    As we stated during our testimony last year, one of our top 
priorities is to review the current cooperative service delivery 
structure. I am committed to completing this review and ensuring that 
we have a program that not only meets the current cooperative needs, 
but also focuses on helping new generations of cooperatives develop 
structures that will increase bottom lined profitability and allow them 
to be more competitive in domestic and global markets.

                         RURAL HOUSING PROGRAMS

    The budget request for USDA Rural Development's housing programs 
totals $5.3 billion in loan and grant funds. This funding commitment 
will improve housing conditions in rural areas, and continue to promote 
homeownership opportunities for minority populations. In support of the 
President's homeownership initiative, Rural Development's goal is to 
increase minority participation in housing programs by 10 percent over 
the next few years.
    The request for single-family direct and guaranteed homeownership 
loans exceeds $3.8 billion, which will assist almost 42,800 households, 
who are unable to obtain credit elsewhere.
    The housing program request maintains the program level for housing 
repair loans and grants, $35 million for housing repair loans and 
almost $32 million for housing repair grants, which will be used to 
improve 10,000 existing single-family houses, mostly occupied by low-
income elderly residents.
    This budget maintains Rural Development's commitment to focus on 
repair, rehabilitation, and preservation of multi-family housing 
projects. We have placed a very high priority on completing review and 
development of a comprehensive strategy for delivering this important 
program. I am committed to seeing this review completed as quickly as 
possible. Additionally, we are working to complete the promulgation of 
revised multi-family housing regulations that we believe will increase 
program efficiency. We are proposing a multi-family housing request of 
$60 million for direct loans, $100 million for guaranteed loans, $42 
million for farm labor housing loans, $17 million for farm labor 
housing grants, and $592 million in rental assistance. Rural 
Development has an existing multi-family housing portfolio of $12 
billion that includes 17,800 projects. Many of these projects are 20 
years old or older, and face rehabilitation needs. In the face of the 
demands for repair/rehabilitation and preservation of existing 
projects, and our ongoing study of program alternatives, we are 
deferring requesting new construction funding this year. I would add, 
however, that we are working with the secondary market to increase 
utilization of the guaranteed loan program, for which the 
Administration has requested $100 million for new construction needs.
    This budget sustains the farm labor-housing program at an aggregate 
level of $59 million--$42 million of loans and $17 million of grants. 
Maintaining this level is necessary to support agriculture's need for 
dependable labor to harvest the abundance produced by rural farms, and 
provide housing to the poorest housed workers of any sector in the 
economy.
    Rental Assistance payments are used to reduce the rent in multi-
family and farm labor housing projects to no more than 30 percent of 
the income of very low-income occupants (typically female heads of 
households and the elderly, with annual incomes averaging about 
$8,000). The budget includes $592 million for Rental Assistance, which 
will be delivered through 4-year agreements. This level of funding will 
provide rental assistance to over 42,000 households, most of which 
would be used for renewing expiring contracts in existing projects. 
With the fiscal year 2004 reduction in contract term to 4 years, the 
appropriations act allows Rural Development to utilize unliquidated 
balances at the end of that contract term for many other eligible 
multi-family housing purposes. For the history of this program, 
unliquidated balances remained with the contract, and continued to be 
expended on that contract until exhausted. This budget reflects a 
return to that arrangement. We are concerned that providing this extra 
program flexibility to Rural Development may, in fact, reduce the 
confidence of future Section 515 participants that necessary Rental 
Assistance will be provided in the future.
    The Community Facilities request totals $527 million, including 
$300 million for direct loans, $210 million for guaranteed loans, and 
$17 million for grants. A portion of the direct loan program will be 
directed to homeland security health and safety issues in rural areas. 
Community facilities programs finance rural health facilities, 
childcare facilities, fire and safety facilities, jails, education 
facilities, and almost any other type of essential community facility 
needed in rural America. We intend to target $100 million to homeland 
security uses, such as first responders.

                        ADMINISTRATIVE EXPENSES

    Delivering these programs to the remote, isolated, and low-income 
areas of rural America requires administrative expenses sufficient to 
the task. From fiscal year 1996 through fiscal year 2003 Rural 
Development's annual delivered program level increased by 89 percent. 
Over that same period Rural Development's Salaries and Expenses 
appropriation increased only 16 percent. Rural Development has the 
staff and the dispersed distribution mechanism to reach the ambitious 
program targets outlined above, but adequate administrative support 
must be made available.
    With an outstanding loan portfolio exceeding $86 billion, fiduciary 
responsibilities mandate that Rural Development maintain adequately 
trained staff, employ state of the art automated financial systems, and 
monitor borrowers' activities and loan security to ensure protection of 
the public's financial interests. Limited S&E funding could jeopardize 
our ability to provide adequate underwriting and loan servicing to 
safeguard the public's interests.
    For 2005, the budget proposes a total of $665.6 million for Rural 
Development S&E, or an increase of $38.9 million over fiscal year 2004. 
Of this increase, $11.6 million will fund pay costs and related 
expenses; and $13 million is for increasing Departmental charges 
(Greenbook and Working Capital Fund increases) and funding to continue 
to support the move of St. Louis staff to the Goodfellow facility. An 
additional $14 million will support Information Technology (IT) needs, 
including data warehousing, continued expansion and upgrading of 
systems supporting the multi-family housing program, enhancement of the 
Rural Utilities Loan Servicing system to meet rural utilities program 
needs, e-Gov requirements, and IT security needs.
    Mr. Chairman and Members of the Committee, this concludes my formal 
statement. We would be glad to answer any questions you may have. Thank 
you for the opportunity to appear before you to discuss the Rural 
Development budget request.
                                 ______
                                 

 Prepared Statement of Hilda Gay Legg, Administrator, Rural Utilities 
                                Service

    Mr. Chairman, Members of the Subcommittee, thank you for the 
opportunity to present the President's fiscal year 2005 budget for the 
USDA Rural Development, rural utilities program. We appreciate the work 
and support you and other members of this subcommittee have provided 
for a strong, dependable infrastructure in the rural United States.
    All aspects of a rural society are work together to make a strong 
Nation. Safe, affordable, modern utility infrastructure is an 
investment in economic competitiveness and serves as a fundamental 
building block of economic development. Changes in the landscape of 
rural America, along with developments in technology, and changes in 
the market structure are combined with an aging utility infrastructure. 
These changes are occurring in the electric, telecommunications, and 
water sectors. Without the help of USDA Rural Development rural 
utilities program, rural citizens face monumental challenges in 
participating in today's economy and improving their quality of life.
    The $42 billion rural utilities program loan portfolio includes 
investments in approximately 2,000 electric and telecommunications 
systems and 7,500 small community and rural water and waste disposal 
systems serving rural communities. This local and Federal partnership 
is an ongoing success story. Eighty percent of the Nation's landmass 
continues to be rural, encompassing 25 percent of the population. In a 
recovering economy, this infrastructure investment spurs economic 
growth, creates jobs, and improves the quality of life in rural 
America.

                            ELECTRIC PROGRAM

    The rural utilities program budget proposes $5 million in budget 
authority (BA) to support a program level of $2.6 billion. This 
includes $3.6 million in BA for a hardship program level of $120 
million, over $1 million in BA for a $100 million program level for 
direct municipal rates loans, $700 million program level for the direct 
Treasury rate loans, $60 thousand BA for $100 million program level for 
guaranteed electric loans, and $1.6 billion for Federal Financing Bank 
(FFB) direct loans. The Treasury loans are made at the cost of money to 
the Federal Government; therefore the FFB loans do not require BA. 
Because Congress has provided very generous loan levels over the past 3 
years, we have been able to eliminate most of the backlog in loan 
applications; and we feel the President's budget level will meet the 
demand during fiscal year 2005.
    To meet the demands of economic growth across our Nation, the need 
for transmission lines to deliver electric power where it is needed is 
placing new demands on cooperatives providing transmission service. To 
protect the quality of our environment while meeting growing power 
generation needs, the costs of maintaining and building power 
generation capacity is ever growing. We are seeing requests for large 
loan generation loans for the first time in almost 15 years.

              ADVANCED TELECOMMUNICATIONS IN RURAL AMERICA

    No aspect of the rural utilities infrastructure faces more changes 
than the area of telecommunications. Congress, with the leadership of 
this Committee, has shown great confidence in the rural utilities 
program Telecommunications Program's ability to empower rural America 
with the most modern telecommunication tools to participate in today's 
global, digital economy. Job growth, economic development, and 
continued quality of life in rural America is directly tied to access 
to today's high-speed telecommunications.
    I would like to take this opportunity to tell you where we stand 
with our Broadband Program in terms of (1) program delivery; (2) our 
drive to balance fiduciary responsibility with mission delivery; (3) 
our expertise in administering a very complex lending program; and (4) 
the administration's continued support for the deployment of Nation-
wide broadband service.
    The Broadband loan program is distinctive from all other lending 
programs within the agency's portfolio. Nearly half of the applicants 
are ``start-up'' companies with little, if any, history of doing 
business in this industry. In addition, two distinctly different 
characteristics are at play--competition (rather than a monopolistic 
environment) and multi-state businesses (rather than a single 
cooperative or independent company serving a single rural community). 
Very few of the applications are designed to serve a single rural 
community or even a small grouping of geographically close rural 
communities. Most are applications requesting to serve 50, 75, or in 
excess of 100 rural communities in multiple states. In these multiple 
community applications, the vast majority of the communities already 
have broadband service available in some of the proposed service area; 
in some instances, from more than one provider. Therefore, to determine 
financial feasibility, the agency must determine what portion, if any, 
of a competitive market the applicant will be able to penetrate. As you 
can imagine, these factors contribute to increased review and 
processing efforts.
    I am pleased to report that, as of today, the agency has made 12 
loans totaling $134 million which will serve 215 communities with more 
than 670,000 rural citizens. The agency has also completed its review 
of every application received in this program. It should be noted that 
nearly 70 percent of those applications were received within a one-
month timeframe between mid-July and mid-August of 2003.
    Our country is facing challenging domestic spending decisions. In 
order to balance fiduciary responsibility with mission delivery, USDA 
is focusing on ``quality loans'' that produce exponential benefits 
through reduced subsidy rates and greater lending levels and that 
strengthen not only rural economies, but our national economy and its 
role in the global economic system. A failed business plan translates 
not only into loss of taxpayer investment, but deprives millions of 
citizens living in rural communities of the technology needed to 
attract new businesses, create jobs, and deliver quality education and 
health care services.
    Building on USDA's experience and local presence in serving rural 
communities, we bring a unique lending expertise that includes the 
tools necessary to examine, and provide solutions for, the financial 
and the technical challenges facing entities dedicated to serving rural 
America. This model has resulted in a lending agency with unprecedented 
success in our other programs and we are dedicated to bringing that 
same level of success to this program.
    From the beginning, the President has recognized the importance of 
broadband technology to our rural communities. The President stated, 
``we must bring the promise of broadband technology to millions of 
Americans and broadband technology is going to be incredibly important 
for us to stay on the cutting edge of innovation here in America.'' The 
Bush Administration has been unwavering in its support for this and 
other programs that will revitalize and strengthen our rural 
communities.
    Let me assure you that we are on track, we remain focused, and we 
will complete our mission. We must continue to balance fiduciary 
responsibility with mission delivery everyday. Our unique lending 
expertise--the marriage of financial and technical analysis--helps to 
maximize the success rate of borrowers' business models. And we will 
strive to do our part for rural America in fulfilling the President's 
promise of bringing broadband service to millions of citizens. Making 
bad loans helps no one, making successful loans helps everyone.

                       TELECOMMUNICATIONS BUDGET

    This year's budget proposes approximately $35 million in budget 
authority for an overall broadband and distance learning and 
telemedicine telecommunications program level of $356 million. The 
fiscal year 2005 budget proposes a broadband loan program level of 
approximately $331 million. This level of funding, coupled with the 
remaining balances from prior years, will provide ample support for the 
continued expansion of broadband services in rural areas. Included in 
the broadband loans request is approximately $36 million in direct 4 
percent loans, $255 million in direct Treasury Rate Loans, and $40 
million in guaranteed loans.
    In the regular telecommunications program, the fiscal year 2005 
budget proposes a program level of $495 million. Included is $145 
million in direct 5 percent loans, $250 million in direct treasury rate 
Loans, and $100 million in Federal Financing Bank (FFB) direct loans 
guaranteed by the rural utilities program. All of this is driven by 
$100 thousand in budget authority.
    The budget also reflects the Administration's commitment to 
privatize the Rural Telephone Bank and does not request any budget 
authority or loan level for fiscal year 2005.
    Distance learning and telemedicine (DLT) technologies are having a 
profound impact on the lives of rural residents by assisting rural 
schools and learning centers in taking advantage of the information age 
and enabling rural hospitals and health care centers to have access to 
quality medical services only found in large hospitals. The distance 
learning and telemedicine program pulls together the best of Federal 
assistance and local leadership.
    The DLT grants are budgeted at $25 million, the same as Congress 
appropriated for fiscal year 2004. The Budget proposes to zero out the 
loan program, simply because loan repayment is out of reach for most 
applicants, which are schools and hospitals. Even with increased 
marketing efforts over the past 2 years, less than $21 million in loans 
were made in fiscal year 2003.

                    WATER AND ENVIRONMENTAL PROGRAMS

    The water and environmental programs provide two of the most basic 
of infrastructure needs for rural citizens which are clean, safe, and 
affordable drinking water and ecologically sound waste disposal. The 
Centers for Disease Control and Prevention in Atlanta, Georgia, reports 
there are still over 1,000 deaths each year from water borne diseases.
    The budget request seeks approximately $439 million in budget 
authority for a program level of $1.4 billion in water and waste 
disposal loans and grants. The program consists of $90 million in 
budget authority to support $1 billion in direct loans and $75 million 
in loan guarantees and nearly $346 million in water and waste disposal 
grants. In addition, the budget requests $3.5 million in solid waste 
management grants.

                                SUMMARY

    Rural utility infrastructure programs are interwoven in the fabric 
of USDA Rural Development programs. They are utilized to provide clean 
and safe water; modernize communications; create reliable electric 
power so that businesses can develop and homes can have lighting and 
heating, as well as open up access to information from the rest of the 
world.
                                 ______
                                 

 Prepared Statement of Arthur A. Garcia, Administrator, Rural Housing 
                                Service

    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to testify on the proposed fiscal year 2005 budget for the 
USDA Rural Development, rural housing program. As an integral part of 
Rural Development, rural housing program assists rural communities in 
many fundamental ways. We provide a variety of both single and multi-
family housing options to residents of rural communities. We also help 
to fund medical facilities, local government buildings, childcare 
centers, and other essential community facilities.
    Rural Development programs are delivered through a network of 47 
state offices and approximately 800 local offices. In addition, 
approximately 2,000 guaranteed lenders participate in the guaranteed 
single-family housing (SFH) program.
    The proposed budget for rural housing program in fiscal year 2005 
supports a program level of approximately $5.3 billion in loans, grants 
and technical assistance. The fiscal year 2005 budget for the rural 
housing program maintains the Administration's strong commitment to 
addressing the needs of rural America, including the needs of minority 
homeownership. We believe that our efforts, combined with the best of 
both the nonprofit and private sectors, will ensure that this budget 
makes a tremendous difference in rural communities. Let me share with 
you how we plan to continue improving the lives of rural residents 
under the President's fiscal year 2005 budget proposal for our rural 
housing programs.

                     SINGLE FAMILY HOUSING PROGRAMS

    The single-family homeownership programs provide several 
opportunities for rural Americans with very low-to moderate-incomes to 
obtain homes of their own. Of the $3.8 billion in program level 
requested for the SFH programs in fiscal year 2005, $2.5 billion will 
be available as loan guarantees of private sector loans. An additional 
$225 million in loan guarantees will be used to refinance more 
affordable loans for rural families.
    The 2005 budget reflects an increase in the fee on new SFH 
guaranteed loans from 1.5 to 1.75 percent. To offset this increase, the 
proposed legislation will not only allow the loan amount to exceed 100 
percent of approved value by the amount of the fee. This proposal will 
help ensure that families with limited resources are not prevented from 
participating in the program.
    Our commitment to serving those most in need in rural areas through 
our direct homeownership program remains strong. The fiscal year 2005 
budget includes $1.1 billion in loans to create housing opportunities 
for low and very low-income families.
self-help technical assistance and other single family housing programs
    The fiscal year 2005 proposed budget requests $76.7 million in 
budget authority to make over $120 million in program level funding 
available to assist up to 12,000 families with incomes below 50 percent 
of the area median income. This includes $35 million in program level 
for home repair loan funds for 5,800 very low-income families and $31.5 
million for grants to assist approximately 6,000 elderly homeowners. 
The fiscal year 2005 proposed budget for SFH programs also includes $34 
million to support the Section 523 mutual and self-help technical 
assistance grant program, $5 million in loan level for each of two site 
loan programs, and $10 million in loan level for sales of acquired 
properties, and $1 million for supervisory and technical assistance 
grants.

                     MULTI-FAMILY HOUSING PROGRAMS

    The Multi-Family Housing (MFH) budget preserves Rural Development's 
commitment to maintaining the availability of affordable housing for 
the many rural Americans who rent their homes.
    With a total request of $822.5 million program level, of this 
amount $592 million would be used for rental assistance payments. The 
majority of these funds will be used to renew more than 42,000 4-year 
RA contracts. Most of the remainder will be used to provide new rental 
assistance contract for farm labor housing programs. We estimate using 
$60 million for MFH direct loans to provide much needed repairs or 
rehabilitation to approximately 3,400 units of the 17,800 rental 
properties in the portfolio. These apartments provide decent, safe, 
sanitary, and affordable residences for more than 450,000 tenant 
households.
    The budget request will fund $100 million in guaranteed loans that 
may be used for new construction. In addition, the request funds $42 
million in loans and $17 million in grants for the Section 514/516 Farm 
Labor Housing program, $1.5 million in loans for MFH credit sales, and 
$10 million for housing preservation grants.
    Under the President's fiscal year 2005 budget, MFH guarantee loans 
will enable 2,500 rental units to be built. In the farm labor-housing 
program, about 3,000 units will be built or repaired. Both programs 
provide year-round homes to migrant and farm workers.

                           COMMUNITY PROGRAMS

    The Community Facilities budget will enable rural housing program 
to provide essential community facilities, such as educational 
facilities, fire, rescue and public safety facilities, health care 
facilities, and childcare centers in rural areas and towns of up to 
20,000 in population. The total requested program level of $527 million 
includes $300 million for direct loans, $210 million for loan 
guarantees, and $17 million for grants.
    In fiscal year 2003, we assisted 83 communities by investing over 
$66 million in educational and cultural facilities, over $54 million in 
public safety facilities in 359 rural communities, and over $162 
million in health care facilities in 124 rural communities. Funding for 
these types of facilities totaled $282 million. The remaining balance 
was used for other essential community facilities.
    In partnership with local governments, state governments, and 
Federally-recognized Indian Tribes, the fiscal year 2005 Community 
Facilities budget will support more than 375 new or improved public 
safety facilities, 140 new and improved health care facilities, and 
approximately 100 new and improved educational facilities.

                    PROGRAM HIGHLIGHTS & INITIATIVES

    I am pleased to provide you with an update on several highlights 
from our major programs, as well as key initiatives being undertaken.

                      SINGLE FAMILY HOUSING UPDATE
                SECTION 523 MUTUAL AND SELF-HELP HOUSING

    Funding for our mutual and self-help housing technical assistance 
(TA) program increased significantly in the 1990s from $13 million per 
year to $35 million per year. I am proud to report that fiscal year 
2003 was the best year ever for our mutual and self-help housing 
program. A total of $40 million was awarded in contracts and two-year 
grants to conduct self-help housing programs or assist sponsor groups.
    The demand for TA funding continues to grow rapidly. There were 46 
``pre-development'' grants awarded in fiscal year 2002-03, including 
many first-time sponsors and groups in states with no self-help housing 
programs. Pre-development funds may be used for market analysis, 
determining feasibility of potential sites and applicants, and as seed 
money to develop a full-fledged application. Groups in the pre-
development phase typically need 6 to 12 months before they are ready 
to apply for full funding. We expect a considerable portion of these 
groups to seek full funding in fiscal year 2005.

                     SECTION 502 GUARANTEED PROGRAM

    Demand for our section 502 guaranteed program continues to be 
strong based upon:
  --Aggressive outreach and customer service by Rural Development 
        staff;
  --Growing recognition and acceptance of the program by the mortgage 
        industry as an outstanding loan product for lower income rural 
        families. The program requires no down payment and no monthly 
        mortgage insurance premiums;
  --Historic low interest rates, which coupled with a Rural Development 
        guarantee, have helped moderate income families achieve 
        homeownership;
  --Rural Development's commitment to reducing barriers to 
        homeownership, especially for lower-income and minority 
        families;
  --Redirecting low-income families who can afford current low interest 
        rates from our Direct homeownership program to our Guaranteed 
        program;
  --The Secretary's Five-Star Commitment to increase homeownership, 
        including minority homeownership.
    We developed an Automated Underwriting System (AUS), which will 
allow lenders to input customer application data and determine 
immediately whether the Agency will issue a commitment. This system 
should be fully operational by next summer.
    Our Centralized Servicing Center in St. Louis, Missouri will soon 
begin centralizing loss claims submitted by lenders under our guarantee 
SFH program. This process is currently being done in State Offices. 
Centralization will improve efficiency, consistency, and provide better 
management data to program officials.
     usda's five star commitment to increase minority homeownership
    The rural housing program is committed to increasing homeownership 
for all Americans, including minorities. Approximately 13 percent of 
rural America is comprised of minorities. We are pleased to report that 
over 20 percent of our housing resources reach minority families. 
Several of our programs, most notably our mutual and self-help housing 
program, serve over 50 percent minorities. In response to the 
President's minority homeownership goals, USDA is committed to 
increasing its success. In October 2002, USDA issued a Five Star 
Commitment to expand homeownership opportunities for all Americans. We 
believe this plan will also expand minority homeownership by 10 percent 
by 2010. Our Five Star Commitment includes the following:
  --Doubling the number of self-help participants by 2010;
  --Increasing participation by minority lenders through outreach;
  --Lowering fees to reduce barriers to minority homeownership;
  --Promoting credit counseling and homeownership education; and
  --Monitoring lending activities to expand minority homeownership 
        opportunities.
    Since announcing the Five-Star Commitment, USDA has:
  --Awarded a total of $40 million in self-help housing grants in 
        fiscal year 2003, which was the best year ever for the program. 
        Demand for funding continues to grow. There were 46 ``pre-
        development'' grants awarded in fiscal year 2002-2003, 
        including many first-time sponsors and groups in states with no 
        self-help programs.
  --Entered into a memorandum of agreement with the Federal Deposit 
        Insurance Corporation (FDIC) to promote and utilize their 
        ``Money Smart'' training program. FDIC assisted us by providing 
        training to all of our State Offices on delivery of this 
        valuable financial literacy program.
  --Lowered the fee for the guaranteed SFH loan program from 2 percent 
        to 1.5 percent for purchase loans and 0.5 percent for refinance 
        transactions. This change, coupled with record low interest 
        rates, has increased demand for the program. Although the 
        Administration's fiscal year 2005 budget proposes a small 
        increase in the fee (25 basis points), this is coupled with 
        proposed legislation that will allow the Agency to include the 
        entire fee in the loan. This small increase (less than $500 per 
        loan) will help reduce government outlays and the accompanying 
        legislative proposal ensures that families will not be 
        adversely impacted.
  --Obtained commitment from Rural Development State Offices to 
        increase the number of American homeowners, including minority 
        homeowners, served through our direct and guaranteed programs. 
        All states have developed individual plans to increase 
        homeownership levels for all Americans, including minority 
        homeownership, and to expand the availability of the self-help 
        program. We met our overall objectives for fiscal year 2003 and 
        are on target for fiscal year 2004.

                          MULTI-FAMILY UPDATE
                    COMPREHENSIVE PROGRAM ASSESSMENT

    We are addressing concerns about our aging portfolio of multi-
family housing properties through a Comprehensive Program Assessment 
(CPA). The CPA was designed to evaluate the multi-family housing 
programs from several perspectives, including program delivery, 
organizational structure, effectiveness of programs and alternative 
financing tools, and a comprehensive analysis of the Section 515 
properties in our portfolio.
    We selected a statistically random sample of properties from the 
portfolio (333 of 17,800 or about 2 percent) and they are being 
evaluated for:
  --Assessment of a property's physical condition;
  --Assessment of a property's financial health;
  --Assessment of a property's position in the real estate rental 
        market;
  --Determination of continuing need for this rental housing;
  --Assessment of needed capital improvements and cost;
  --Assessment of future capital reserves needs;
  --Analysis of prepayment potential and;
  --Analysis of prepayment incentive costs to retain properties and use 
        restrictions.
    From this assessment and analysis, we will develop a model to apply 
to all portfolio properties. It will tell us the cost of capital needs, 
the current funds available in reserve accounts, and where 
revitalization efforts should be concentrated.
    The CPA review is on schedule. All sample properties were inspected 
last year. We expect a report on the physical and market analyses by 
this spring.
    The CPA is also evaluating the organizational structure of the MFH 
division and determining better ways of delivering our loan programs. 
Through discussions with stakeholders and HUD, the CPA will determine 
the best organizational method to address prepayment issues. The 
evaluations are being done by our contractor, ICF Consulting, in 
concert with Rural Development senior management and our MFH Advisory 
Board, consisting of National and State Office staff. As the 
comprehensive program assessment concludes, we will present results and 
recommendations to the Subcommittee.

                           RENTAL ASSISTANCE

    During the past year, the Agency undertook an initiative to 
automate the forecasting of the cost of renewals of Rental Assistance 
(RA) contracts. This automated system uses actual operating and rental 
data from each MFH property that receives RA and predicts the cost of 
RA needed for these very low and low-income tenants. The automation 
initiative started in March 2003 and is currently being tested. We 
expect the forecasting tool to be available by March of fiscal year 
2004.
    In other efforts to improve internal controls, we plan to add 
several staff members to the RA program and to develop an internal 
operating manual. This month, the Department will undertake a 
Management Control Review of the Section 521 Rental Assistance program, 
which entails auditing the performance of State Offices in program and 
funds delivery, and in compliance with program and National Office 
policy requirements.
    We will continue our efforts to more efficiently deliver RA. Last 
year, we reported on outstanding unliquidated obligations from prior 
years' RA contracts. The majority of the unliquidated obligations come 
from RA contracts entered into between 1978 and 1982. These contracts 
were vastly overestimated at the time by a methodology that 
incorporated the lowest social security payment, a 25 percent tenant 
contribution (since increased to 30 percent), and double-digit 
inflation. Additionally, over 50 percent of these contracts are 
concentrated in areas that continue to experience low rents, low tenant 
incomes, and out migration of the population. These factors combined to 
yield an extremely low rate of RA usage. In the end, the funds for 
those contracts between 1978 and 1982 have lasted much longer than 
originally planned. The funds remain in the form of unliquidated 
obligations on our books, and will continue to be drawn on until they 
have been exhausted. For those units, this alleviates having to renew 
the contract until they have exhausted all funds.
    The removal of the 20-year time frame for projections coupled with 
an improved and automated forecasting methodology over the last 4-5 
years has contributed to better accuracy in providing just the right 
amount of RA to last through the term of the contract. We believe that 
only a very small amount of the fiscal year 2005 funds, if any, will 
last longer than 4 years. Administratively, continuation of the 
original purpose of these funds is the most efficient way to handle any 
of these small and unanticipated surpluses.
    Concerning the unliquidated obligations for the old 20-year 
contracts, last year, the House Financial Services Committee--Oversight 
and Investigations Subcommittee asked us to investigate using these 
outstanding balances. When a rental assistance agreement is terminated 
because the project owner no longer needs units that are receiving RA 
or by means of a loan payoff or foreclosure, the unexpended funds are 
applied to other units in the MFH program. However, our Office of the 
General Counsel has advised that we do not have the authority to 
recapture obligated, but unexpended RA funds associated with a still 
active RA agreement. Even if we had that specific authority, there 
would be substantial litigative risks that affected project owners 
would be able to successfully bring breach of contract action against 
rural housing program under the agreement and the ability to use these 
funds would be the same as if the funds were appropriated from the 
General Fund.

                           PROPOSED RULE 3560

    Proposed Rule 3560 consolidates 13 regulations and a number of 
administrative notices affecting Sections 514, 515, 516, and 521 MFH 
programs. RHS received 3,000 comments on the proposed rule. We have 
completed our review and consideration of these comments and are 
working on drafting the final rule.

          SECTION 538 GUARANTEED RURAL RENTAL HOUSING PROGRAM

    Currently, the Section 538 Loan Guarantee Program has 16 properties 
containing 1,111 units that are built and occupied. There are 26 
properties containing 1,345 units under construction and another 65 
properties containing 3,610 units with the funds obligated. Also, there 
are applications representing 32 projects containing 2,569 units 
awaiting approval.
    In the built and occupied units, the average monthly rent is $481. 
This translates to a median income of about 17 percent of area median 
income. We also have Section 8 vouchers in about 10 percent of the 
units to serve low and very-low income residents.
    This program can be combined with several other funding sources, 
such as, Low Income Housing Tax Credits; HOME; and Federal Home Loan 
Bank Affordable Housing Program funds to provide affordable housing to 
rural residents presently not assisted.

                       MFH AUTOMATION INITIATIVES

    In addition to the automation of RA forecasting, rural housing 
program has continued to improve its management information systems. 
The Agency is developing a data warehouse for both its SFH and MFH 
loans, which will dramatically improve our reporting capabilities. The 
data warehouse is now functional and continues to be populated with 
data from several existing databases.
    Phase 4 of the Multi-Family Information System (MFIS), scheduled 
for implementation in May 2004, will provide for electronic debiting 
and crediting of borrowers' accounts, thereby eliminating funds 
handling in area offices. Phase 4 will also provide the public with a 
website to locate all the MFH properties, with pictures, property 
information, contact information, and links to property or management 
company websites.
    Another automation improvement is the Management Agent Interactive 
Network Connection, which allows property managers to transmit tenant 
and property data to RHS via the Internet. This data goes directly into 
the MFIS database and the data warehouse. This web-based system is now 
being used voluntarily, and is scheduled to become mandatory this 
summer with the publication of the MFH Final Rule 3560.

                               PREPAYMENT

    The efforts to preserve the Section 515 multifamily portfolio are a 
top priority of the rural housing program. These efforts are needed 
because of the increasing age of the portfolio and the need for 
existing owners to seek viable exit strategies. However, exceptional 
efforts are needed by existing owners, potential purchasers, non-rural 
housing program housing financiers, and rural housing program to make 
these efforts work. At stake is an irreplaceable affordable housing 
option in rural America that addresses a critical need for rural 
residents with few housing alternatives.
    Owners wishing to sell their Section 515 properties or their 
ownership interests in a borrower entity may do so at any time. If the 
property is sold to another owner who will keep their project in the 
program, we may make resources available or agree to allow third-party 
resources to be used to compensate the seller for its equity and make 
repairs to the buildings. If the owner seeks to sell the property to 
another owner outside the section 515 program, we offer incentives to 
the owners to stay in the program or provide a 100 percent equity loan 
to sell it to a non-profit or public body.
    Key factors that affect many owners when selling their property is 
the effect of exit taxes and expectations for equity. We continue to 
work with owners to develop realistic exit strategies within the 
limited resources available to affordable housing providers.
    In our efforts to preserve the portfolio, a ``revitalization tool 
kit'' is being developed that will enable us to offer several 
alternatives to rural housing program borrowers in financing, debt 
write-off and subordination, third party financing, and transfer 
approvals. Rural housing program is currently working to accelerate the 
loan approval process at the state level by reducing the number of 
exceptions and waivers, and streamlining the overall transfer approval 
process.
    We are continuing to work with lenders and nonprofits to leverage 
our subsidy dollars to the maximum extent. For example, we partnered 
with Fannie Mae to preserve a 44-unit apartment complex in Saranac 
Lake, NY by subordinating our debt. We eliminated underwriting 
duplication and established processes going forward that would permit 
acceptance of underwriting, appraisals, inspections, and reserve 
account requirements between partners. This is our first joint effort 
and it will establish a precedent that we intend to use with other 
partners in preserving the portfolio.
    We continue to work with industry partners to develop options for 
the preservation of the portfolio. Completion of the comprehensive 
program assessment and implementation of recommendations to improve 
program efficiency will enable us to better utilize existing resources 
such as Fannie Mae, HUD, the Federal Home Loan Bank Board, and others.

                             RURAL PARTNERS

    In our programming for fiscal year 2005, we are stretching the 
rural housing programs' resources and its ability to serve the housing 
needs of rural America through increased cooperation with the 
Department of Housing and Urban Development (HUD) and other partners. 
We are committed to working with these partners to leverage resources 
for rural communities. For example, we expect to adopt HUD's TOTAL 
scorecard for single-family loans. This cooperation between USDA and 
HUD will save time and money in system development.
    In our multi-family housing program, HUD has been extremely helpful 
in sharing data on their own rural portfolio. We were able to access 
this information to use in developing comparable properties to those in 
our section 515 portfolio for our comprehensive property assessment. 
Additionally, we have approximately 1,700 properties with a rural 
housing program mortgage and project-based Section 8 from HUD. On these 
properties, we have an established agreement with HUD that the rural 
housing program will review and approve operating budgets and rent 
increases. This eliminates duplicative work and ensures better 
consistency. In addition, last June USDA and HUD entered into a 
Memorandum of Agreement committing our mutual efforts and resources to 
improving the quality of life in the Southwest Border Region. USDA and 
HUD have also formed an Interagency Task Force that now includes other 
federal agencies to better direct limited resources to the region, 
address jurisdictional issues, and further enhance our collaborative 
efforts.

                               CONCLUSION

    Mr. Chairman and members of the Committee, we thank you for your 
support, and with your continued support, Rural Development looks 
forward to improving the quality of life in rural America by providing 
housing opportunities and building competitive, active rural 
communities.
    We recognize that we cannot address the homeownership and rural 
community facilities issues alone, and will continue to identify and 
work with partners who have joined with the President to improve the 
lives of rural residents. We will continue to reach out to and partner 
with lenders, the many non-profit organizations, as well as federal, 
state, local, and Indian Tribal governments to meet the housing and 
community needs of low-income families and individuals in rural 
America.
                                 ______
                                 

    Prepared Statement of John Rosso, Administrator, Rural Business-
                          Cooperative Service

    Mr. Chairman and Members of the Subcommittee, I am pleased to 
appear before you today to present the Administration's fiscal year 
2005 budget for Rural Development's rural business and cooperative 
programs.
    Mr. Chairman, the programs and services of Rural Development, in 
partnership with other public and private sector businesses, continue 
to improve the economic climate of rural areas through the creation or 
preservation of sustainable business opportunities and jobs. Rural 
Development continues to invest in rural America, especially in under-
served rural areas and populations. Rural Development programs help 
close the gap in opportunity for these under-served rural areas and 
populations, moving them toward improved economic growth by providing 
capital, technology and technical assistance. The budget requests $738 
million for Rural Business-Cooperative Service programs.

                          COOPERATIVE SERVICES

    The functions of our cooperative programs are authorized under both 
the Cooperative Marketing Act of 1926, and the Agricultural Marketing 
Act of 1946. Our programs serve as the focal point of national activity 
to help farmers and other rural residents help themselves by providing 
the necessary advice and assistance. We endeavor to enhance the quality 
of life for rural Americans by encouraging the use of cooperatively 
owned business as a self-help tool in the marketplace. Our programs of 
research, technical assistance, education and information, statistics, 
and assistance in starting new cooperatives are designed to establish 
viable business entities that help individual farm operators and other 
rural residents retain access to markets and sources of supplies and 
services in a sector that is becoming rapidly vertically coordinated 
and industrialized. Cooperatives are a means for helping to ensure that 
rural people are treated more fairly in the marketplace by providing 
structural strength in dealings with buyers and suppliers.
    Some of our State Office technical assistance efforts involve non-
agricultural cooperative development. For example, in Wisconsin, our 
cooperative development specialist was instrumental in developing an 
effective home health-care cooperative called Cooperative Care. 
Cooperative Care is a group of home and personal care providers in 
rural Wisconsin that joined forces with county officials, community 
leaders, a Federal agency, a technical college, and a community action 
agency. Together they organized a worker-owned cooperative where the 
members have a voice and share profits. This program addresses growing 
concerns about the care of elderly and disabled individuals and 
provides an efficient alternative to nursing home care.

              RURAL COOPERATIVE DEVELOPMENT GRANT PROGRAM

    For the Rural Cooperative Development Grant (RCDG) Program, the 
fiscal year 2005 budget requests $21 million. Of this amount, up to 
$1.5 million would be used for projects focusing on assistance to 
small, minority producers through their cooperative businesses. This 
program, along with our other Rural Cooperative Development grants, 
complements our national and state office technical assistance efforts 
by encouraging the establishment of centers for cooperative 
development. The centers provide expertise for conducting feasibility 
analysis, outreach, and other forms of technical assistance for new and 
existing cooperatives.
    One example is the Family Farm Opportunity Center in Missouri. The 
Center has helped form, through feasibility and market analysis, the 
Gateway Beef Cooperative, the Southwest Missouri Natural Dairy, and the 
Osage Independent Pork Producers. Several other cooperatives are 
receiving assistance from the Center, most involving the processing and 
marketing of value-added agricultural products. Among others, the 
Center targets Missouri counties with the highest percentage of poverty 
and unemployment.
    We are requesting $500,000 for cooperative research agreements to 
encourage research on critical issues vital to the development and 
sustainability of cooperatives as a means of improving the quality of 
life in America's rural communities. These will address the need for a 
solid information base on which to render judgments on critical 
cooperative operational and organizational issues, such as alternative 
ways of sourcing equity capital from within and outside the 
cooperative.
    The Farm Bill formalized the value-added grant program. Over the 
past 3 years, 478 grants have been awarded for approximately $86 
million. This program has four components including Value-Added 
Producer Grants (VAPG), Agriculture Innovation Centers (AIC), 
Agricultural Marketing Resource Center (AgMRC), and university research 
on the impact of value-added projects. Eligibility for this grant 
program was greatly expanded in the Farm Bill and the program 
encourages applications for grants less than the $500,000 maximum 
allowed to provide benefits to as many producers as possible.
    For fiscal year 2005, the budget requests $15.5 million for the 
value-added grant program. This amount will provide funding for the 
VAPG and the AgMRC. Funding is not needed in fiscal year 2005 for the 
AIC program or university research on the impact of value-added 
projects.
    One example of a successful VAPG venture is the Pacific Coast 
Producers cooperative of Lodi, California. This cooperative used grant 
funds to pay for the production and marketing of single-serving fruit 
bowls under the private labels of U.S. retailers. Initially, the 
cooperative produced single-serving fruit bowls for a national food 
company under that company's label. The company canceled the contract 
and began purchasing these items from a foreign company. Pacific Coast 
Producers viewed this lost contract as an opportunity to capture the 
emerging market in private label fruit bowls. They have since shipped 
fruit bowls to 40 customers under 32 different store brands. Those 40 
customers have ordered 2 million cases using over 70 tons of fruit. The 
cooperative has plans to add at least 10 more retail chains to its 
customer list over the next year.
    Another example is Missouri Food and Fiber (MOFF), the first new 
generation Identity-Preserved (IP) marketing cooperative organized 
across an entire State. MOFF delivers the highest quality soybeans, 
rice, corn, wheat, grain sorghum, and cotton to worldwide locations. It 
specializes in identifying the customer's product needs, matching input 
seed stock with premium growing environments and managing the IP 
product during planting, growing, harvesting, storing, transporting, 
processing, and distributing to the customer's global locations. While 
MOFF has been extremely successful in the premium IP business, the 
farmer-owned company is seeking entrance into one of the world's most 
exclusive and profitable agricultural markets: super-premium, identity-
preserved, food-grade tofu beans for the Asian market. MOFF recently 
received a grant award of approximately $82,000 from USDA Rural 
Development that will allow it to enter this lucrative market.

             BUSINESS AND INDUSTRY GUARANTEED LOAN PROGRAM

    For the Business and Industry (B&I) Program, the fiscal year 2005 
budget includes $30.2 million in budget authority to support $600 
million in guaranteed loans. We estimate that the funding requested for 
fiscal year 2005 would create or save about 15,020 jobs and provide 
financial assistance to 367 businesses. We anticipate continued strong 
demand for this program.
    The B&I program allows lenders to better meet the needs of rural 
businesses. Through the lender's reduced exposure on guaranteed loans, 
they are able to meet the needs of more businesses at rates and terms 
the businesses can afford. B&I guaranteed loans may also be used by 
individual farmers to purchase cooperative stock in a start-up or 
existing cooperative established for value-added processing.
    I would like to share a story to illustrate how this program, 
partnering with a local lender, allowed a locally owned and operated 
ethanol producing business in rural Wisconsin to expand, providing 
security for 35 existing jobs and creating 4 new jobs. ACE Ethanol, LLC 
received a $10 million B&I Loan guarantee that was used in conjunction 
with other funding to refinance existing debt and expand the capacity 
of the ethanol plant to 30 million gallons per year. This expanded 
plant will purchase 1.5 million bushels of corn from the local market 
and in effect increase the price of local corn by $0.20 per bushel. 
This plant provides an alternate market for the corn that historically 
has been marketed for the declining livestock operations.

                     INTERMEDIARY RELENDING PROGRAM

    The fiscal year 2005 budget also includes $15.9 million in budget 
authority to support $34.2 million in loans under the Intermediary 
Relending Program (IRP). We estimate the proposed level of funding will 
create or save about 26,175 jobs over the 30-year loan term.
    Participation by other private credit funding sources is encouraged 
in the IRP program, since this program requires the intermediary to 
provide, at a minimum, 25 percent in matching funds. The demand for 
this program continues to be strong. To illustrate the benefits IRP 
provides to rural America, I would like to share with you a success 
story from rural Louisiana. The Coordinating and Development 
Corporation (CDC) of Shreveport, Louisiana was awarded a $750,000 IRP 
Loan. Rural Development funds were used to recapitalize a revolving 
loan fund to be administered by CDC. CDC is a non-profit, private 
corporation that was organized in 1954 to administer a wide range of 
Federal, State, and loan development programs and initiatives. CDC's 
coverage area includes Bienville, Bossier, Caddo, Claiborne, DeSoto, 
Lincoln, Natchitoches, Red River, Sabine, and Webster Parishes in 
northeast Louisiana as well as peripheral counties in northeast Texas 
and southwest Arkansas.
    CDC's coverage area includes a special emphasis parish (Lincoln 
Parish) in the Lower Mississippi Delta Development Initiative and 
Persistent Poverty Area (Claiborne, DeSoto, Lincoln, Natchitoches, Red 
River, and Sabine Parishes). In addition, businesses and residents in 
this area experienced devastating agriculture losses due to Hurricane 
Isadore and Hurricane Lili in September and October of 2002.
    As a result of Rural Development funding, CDC was able to provide 
low-interest loan funds to area businesses--in turn growing, 
sustaining, and expanding businesses throughout their coverage area. 
Because of Rural Development funding, CDC was able to provide critical 
financial resources to area businesses resulting in 26 jobs created and 
205 jobs saved.

                RURAL BUSINESS ENTERPRISE GRANT PROGRAM

    For the Rural Business Enterprise Grant (RBEG) program, the fiscal 
year 2005 budget includes $40 million. We anticipate that this level of 
funding will create or save about 17,200 jobs and impact over 7,900 
businesses. The demand for this grant program continues to be strong. 
The purpose of this program is to assist small and emerging businesses. 
It is estimated that for each dollar of investment of an RBEG, another 
$2.40 in private capital is generated.
    Among the many eligible grant purposes under this program is the 
renovation of existing facilities by the grantee to support small and 
emerging business development in rural areas. I would like to share 
with you an example of how these funds are being used to support small 
and emerging business opportunities in rural Idaho. A $59,752 RBEG was 
awarded to the NEZ Perce Tribe in Lapwai to fund a study on the 
feasibility of oil seed production as a substantial alternate crop for 
farming operations in North Central Idaho. Farmers in this highly 
productive dryland-farming region have demonstrated the land's capacity 
to grow a range of oil seed crops. The study will determine if it would 
be feasible to produce and process these crops into value added 
products such as bio-diesel, meal, edible oil, etc. If the results of 
this study are favorable, this would provide stabilization to the 
regions farming operations while creating employment opportunities.

           RURAL ECONOMIC DEVELOPMENT LOAN AND GRANT PROGRAMS

    The fiscal year 2005 budget includes $25 million in Rural Economic 
Development Loans (REDL) and $4 million in Rural Economic Development 
Grants (REDG). This program represents a unique partnership, since it 
directly involves the rural electric and telecommunications borrowers 
in community and economic development projects. It provides zero-
interest loans and grants to intermediaries, who invest the funds 
locally. In fiscal year 2003, each dollar invested through these 
programs attracted an estimated $6.00 in other capital.
    The return on our equity investment in rural America is strong. Two 
examples demonstrate the impact of REDL and REDG. In Missouri, the REDG 
program has been utilized by the Intercounty Electric Cooperative to 
provide improved health care and fire protection to rural residents by 
using a $200,000 REDG grant to provide a portion of the financial 
assistance needed by the Salem Memorial District Hospital to relocate 
and expand the emergency room and the Raymondville Fire Department to 
construct a new fire station. In Iowa, the REDL program assisted 
business development by enabling the Franklin County Rural Electric 
Cooperative to utilize a $450,000 loan to assist with financing the 
construction of a $3.2 million industrial facility in the Hampton Air 
Industrial Park, which was in turn leased to Northern Pipe Products. As 
a result of this business locating in the facility, there have been 11 
jobs initially created with a potential for a total of 50 jobs.

                RURAL BUSINESS OPPORTUNITY GRANT PROGRAM

    The fiscal year 2005 budget includes $3 million for Rural Business 
Opportunity Grants (RBOG) to provide much-needed technical assistance 
and capacity building in rural areas. The demand for this program 
continues to grow. We anticipate that this level of funding will create 
or staff over 8,500 jobs and impact 730 businesses. Many rural areas 
need to develop economic and community development strategies that will 
attract private investment capital and Federal and State assistance. 
Also, the vast majority of rural communities are served by part-time 
officials who do not have the time or training necessary to compete 
with large communities for funding that may be available to them. The 
funds requested under this program will provide invaluable assistance 
to communities as they take their first step toward overcoming these 
impediments. The following is an example of how this grant program has 
been utilized to assist the Qglala Oyate Woitancan Tribe in South 
Dakota with sustainable economic development on the reservation. The 
tribe used a $39,000 grant to provide technical assistance and training 
for tribal business development and planning activities identified in 
the Tribe's comprehensive strategic plan. The project goal is to start 
five businesses and create 15 job opportunities on the reservation.

                    RENEWABLE ENERGY GRANTS PROGRAM

    The Renewable Energy Systems and Energy Efficiency Improvements 
Program was authorized by the Farm Security and Rural Investment Act of 
2002. The program authorizes loans, loan guarantees, and grants to 
farmers, ranchers, and rural small businesses to (1) purchase renewable 
energy systems, and (2) make energy efficiency improvements. The fiscal 
year 2005 budget proposes $10.8 million in discretionary funds. The 
program supports the President's Energy Policy by helping to develop 
renewable energy supplies that are environmentally friendly. In 
addition, the program contributes to local rural economies through the 
jobs created and additional income to rural small businesses, farmers, 
and ranchers. In addition, we anticipate that 15,000 households will be 
served, and 156 million-kilowatt hours of energy will be generated, 
while greenhouse gasses will be reduced by 39,000 metric tons. The 
following is an example of how this program was utilized in fiscal year 
2003 to support renewable energy development in rural Illinois. The 
Illinois Rural Electric Cooperative was awarded a $438,544 renewable 
energy grant to construct a 1.65-megawatt wind turbine in rural Pike 
County. The energy that will be generated from this wind turbine, once 
constructed and operational, will be distributed to the cooperative 
members as part of the overall electric power supply to a six county 
area in west central Illinois served by the cooperative.
    Mr. Chairman, and Members of the Subcommittee, this concludes my 
testimony for the Rural Development fiscal year 2005 budget for rural 
business and cooperative programs. I look forward to working with you 
and other Committee members to administer our programs. I will be happy 
to answer any questions the Committee might have.

    Senator Bennett. Thank you, sir. Dr. Jen.

                       STATEMENT OF JOSEPH J. JEN

    Dr. Jen. Mr. Chairman, thank you for the opportunity to 
testify before you about important research efforts at the 
USDA.

                            GENOMIC SCIENCE

    I, too, have submitted written testimony for the record. 
Due to the limited time here, I will discuss briefly two areas 
of research: genomics and obesity prevention. Genomic science 
is the core of 21st Century biology. From the DNA sequencing of 
genomes to the functional genomic research to translation of 
genome research to applied biotechnology, genomic science holds 
the key to agriculture and food research now and for the next 
several decades.
    Genomic science has the potential to provide food to 
alleviate world hunger, to practice environmentally-friendly 
production, to create new, nutritious foods, to eliminate 
animal and plant disease and to conserve the limited resources 
on Earth, the water, air and land.
    I am happy to report that USDA has been very successful in 
leveraging limited funds to advance genomic research. For 
example, we launched the DNA sequencing of the bovine genome 
last December. USDA contributed $11 million toward a total cost 
of a $53 million project. USDA's contribution would not have 
been possible without your generous support of the fiscal year 
2003 National Research Initiative funding. We hope that you 
will continue to support more funding for genomic science and 
the NRI. In particular, we need funding for bioinformatics 
research, which includes interpreting the results of genomic 
science data.

                           OBESITY PREVENTION

    Obesity is now epidemic in our nation. USDA would like to 
be the leader of the Federal agencies in conducting obesity 
prevention research. We have asked for a modest increase in 
research funds for the six ARS human nutrition centers in the 
Presidential fiscal year 2005 budget. We will apply part of the 
NRI increases in the CSREES budget toward obesity prevention 
research as well. Most importantly, we are asking for $8.7 
million, Mr. Chairman, for ERS to establish a consumer 
consumption database. This database is essential for us to 
understand consumer behavior toward eating and consumption.
    Obesity prevention must be handled through integrated 
programs that involve medical, nutritional, and physical 
activity research, as well as behavioral science research. 
However, until we are able to have quality behavioral science 
research to complement the other fields of research, obesity 
prevention is unlikely to be successful.

                          PREPARED STATEMENTS

    Lastly, investment in agriculture and food research not 
only solves problems we face today, but it also builds the 
groundwork for solutions to problems our children, our 
grandchildren and our great-grandchildren will face in the 
future.
    Thank you for your attention, sir.
    [The statements follow:]

                Prepared Statement of Dr. Joseph J. Jen

    Mr. Chairman, members of the Committee, it is my pleasure to appear 
before you to discuss the fiscal year 2005 budgets for the Research, 
Education, and Economics (REE) mission area agencies of the USDA. I 
have with me today Deputy Under Secretary Brown, Acting Administrator 
of the Agricultural Research Service (ARS) Knipling, Administrator of 
the Cooperative State Research, Education, and Extension Service 
(CSREES) Hefferan, Administrator of the Economic Research Service (ERS) 
Offutt, Administrator of the National Agricultural Statistics Service 
(NASS) Bosecker and Office of Budget and Program Analysis Director 
Dewhurst. Each Administrator has submitted written testimony for the 
record.
    First of all, I appreciate the support received from Congress in 
our appropriations for fiscal year 2004. With the continuation of a 
tight domestic, non-homeland security budget, the President's fiscal 
year 2005 budget proposes $2.403 billion for the four REE agencies, 
about $66 million less than the level appropriated in fiscal year 2004. 
However, the agency budgets include important and valuable increases in 
Food and Agriculture Defense, Bovine Spongiform Encephalopathy or BSE 
related activities and Better Nutrition for a Healthy US, all strategic 
target areas within the entire Department.
    The budget that we are discussing today obviously relates to 
requested funds for the four agencies in the REE. In reality, the REE 
budget is a reflection of the Department budget. An important role for 
the REE agencies is to provide the science-based information and 
technology needed by the Department's regulatory and action agencies. 
To meet this mission, the REE agencies' programs are very broad and 
numerous. REE is the only mission area that contributes to all five 
goals and 17 objectives of the USDA strategic plan.
    We take our role as the science provider for policy and regulatory 
decisions very seriously and are proactive in making sure our research 
agendas are responsive to the needs of fellow agencies. For example, 
ARS has an annual meeting with Food Safety and Inspection Service 
(FSIS) to jointly identify research needs and set priorities. ARS and 
NASS are cooperating with the Natural Resources Conservation Service 
(NRCS) in an ambitious program to evaluate the effect of the 
conservation programs in the 2002 Farm Bill. CSREES is working closely 
with the Animal and Plant Health Inspection Service (APHIS) in 
developing a national diagnostic laboratory network. ERS routinely 
provides economic analyses for the Foreign Agricultural Service (FAS) 
and the Chief Economist, among others, and plays a major role in the 
analysis of our nutrition assistance programs and policies. The Risk 
Management Agency (RMA) and the Farm Service Agency (FSA) use NASS 
statistics heavily. The net effect is that the REE agency budgets not 
only influence the size and shape of our research, education, and 
statistical programs, but also our capacity to serve the rest of the 
Department. The public is calling on the government to provide the 
scientific evidence in decision-making and science-based solutions for 
specific production, nutrition, security, and environmental challenges. 
Secretary Veneman and other USDA officials repeatedly used REE-
generated information to guide USDA policy decisions.
    It is no news to this subcommittee that the success of the American 
food and agricultural system over many decades has been built on 
agricultural research and technology. Numerous studies have found that 
the return on investment in agriculture research is high. Whether 
measured in productivity, competitive strength in global markets, use 
of environmentally sustainable production practices, or new science-
based food safety technology, research and development underpins 
essentially all advances in the food and agriculture system. High 
quality, relevant research cannot guarantee a successful, competitive 
food and agricultural business. Natural events, markets conditions, and 
resistance to the adoption of new technologies can be barriers to the 
translation of new knowledge and technology into sector gains. At the 
same time, in the absence of such research, the food and agricultural 
sector runs the risk of losing its competitive edge in global markets.
    As scientific opportunities continue to expand and the agricultural 
and food system becomes even more scientifically and technologically 
dependent, the reliance on research to stay competitive is likely to be 
even greater. The advance of molecular biology and resulting remarkable 
manner in which plants and animals can be modified to enhance their 
nutritional value, resistance to disease, or ability to grow in adverse 
conditions hold amazing possibilities in the near future. In fact, we 
are already benefiting from such advances with Bt corn and cotton. But 
advances like these do not happen overnight. Studies show there is a 
lag of as much as 15 years for the payoffs from research to reach the 
marketplace. Wonderful advances are coming out of the research and 
development pipelines today, from programs in universities and colleges 
across the country and within USDA and other Federal laboratories. 
Often they are the product of investments started several years, if not 
decades ago. We must keep up our investment in agriculture now, so our 
children and grandchildren will benefit years from now. I hope you keep 
this fact in mind as you appropriate research funds budgets for this 
and future years.
    The REE agency fiscal year 2005 budgets include long-term 
investments, as well as others that will yield a return in the 
immediate or near future. Before turning to the specific agency 
budgets, I would like to highlight three programs.
    The Food and Agriculture Defense Initiative.--The fiscal year 2005 
budget provides a funding increase of $201 million for ARS and $27 
million for CSREES to participate in this interagency Food and 
Agriculture Defense Initiative, focused on strengthening the Federal 
Government's capacity to identify and characterize bioterriorist 
attacks. These increases represent investments that would result in 
strengthened homeland security.
    Under the Food Defense component of the initiative, ARS will 
conduct research to develop tests that rapidly detect and accurately 
identify pathogens, toxins and metal contaminants in foods. The actual 
tests should be available for adoption by APHIS and other agencies 
within a short time.
    The Animal Defense component includes $178 million for ARS to 
complete the largest facility construction project in USDA history, the 
modernization of the National Centers for Animal Health in Ames, Iowa 
by October 2007. This consolidated ARS/APHIS facility, including 
biosecurity level or BSL-2, BSL-3, and BSL-3 Ag space, will house and 
support an integrated, multidisciplinary scientific capability, 
combining animal disease research with the development of diagnostic 
tools and vaccines. It will produce benefits immediately by replacing 
inefficient and obsolete facilities.
    Other agricultural defense funds for ARS would support research on 
controlling exotic and emerging diseases and a new National Plant 
Disease Recovery System that would develop the capacity to help the 
agriculture sector recover from catastrophic outbreaks of plant 
diseases, whether naturally occurring or intentionally introduced.
    Working cooperatively with APHIS, the budget provides CSREES $30 
million, which is an increase of $22 million from last year's 
appropriation, to maintain and enhance the recently established, 
unified Federal-State network of public agricultural institutions that 
serves as a backup to APHIS diagnostic laboratories. The initiative 
also includes $5 million in CSREES' Higher Education Program for a new 
competitive program that would promote the training of food system 
defense professionals who will be critical national assets in the years 
to come.
    BSE Related Activities.--As you know, USDA is responding 
aggressively to the recent detection of BSE in a cow in Washington 
State. REE agencies and the knowledge and technology resulting from 
past research were important to the Department in its actions to deal 
with the positive BSE test results. ARS also supported APHIS in running 
several back-up tests to confirm the diagnosis, to validate that the 
tissue sample was bovine, and to establish the parentage of the index 
animal. Looking forward, the budget provides ARS an increase of $1 
million over last year's appropriation to discover genetic resistance 
to BSE that could be bred into cattle and other livestock.
    Better Nutrition for a Healthier US.--One need only read almost any 
newspaper in almost any week to be reminded of the epidemic of obesity 
in this Nation. The causes are many and complex, such as a reduction in 
physical exercise, greater reliance on the convenience of fast food and 
restaurants, and consumption of more calories. The consequences of 
obesity and overweight are well documented in the higher incidence of 
weight-associated diseases, greater health care costs, and billions of 
dollars in lost productivity. What is less clear is how to help 
individuals and families gain and maintain healthy weights with the 
right balance of nutritious diets and exercise. As a Nation, we spend 
billions of dollars on diets with little sustained success.
    USDA and its research agencies have a valuable role in addressing 
the obesity challenge. As part of the Department initiative, Better 
Nutrition for a Healthier US, and the White House ``Healthier US'' 
Initiative, the fiscal year 2005 budget proposes increases for ARS, 
CSREES, and ERS to address this major national health problem and 
associated issues. The increases will focus principally on gaining a 
better understanding of the factors influencing food consumption 
patterns and developing effective and culturally appropriate diet 
strategies and interventions.
    An ARS increase of $5 million will support research on the benefits 
of self-selected healthy diets in achieving healthy weight and 
preventing obesity as input to developing and evaluating culturally 
relevant behavioral strategies to promote healthy diets. The CSREES 
budget provides an increase of $7 million in the NRI to gain a better 
understanding of the factors influencing obesity and their interaction, 
including how they vary by gender, race, age, ethnicity and 
socioeconomic characteristics. Issues relating to the nutrition value 
of functional foods will also be addressed. Funding for the Expanded 
Food and Nutrition Education Program is also provided in the CSREES 
budget to increase the number of low-income individuals participating 
in this program, one that has a very impressive track record in 
achieving sustained, positive changes in behavior related to food and 
diets.
    The President's budget proposes $8.7 million for ERS to establish a 
new consumer information system designed to gain a better understanding 
of our increasingly consumer-driven food and agricultural system. An 
important component of the new system will be a survey on individuals' 
knowledge and attitudes about healthy diets and how those factors are 
associated with the quality of their diet and their health status. In 
collaboration with the Department of Health and Human Services and ARS, 
the survey will be conducted as part of the National Health and 
Nutrition Examination Survey or NHANES.
    Other survey data and analysis in the proposed information system 
will be used to identify, track and gain a better understanding of 
changes in food supply and consumption patterns, valuable input for 
making policy decisions in the food, consumer and health arenas. While 
the Department has a robust data system on the production agricultural 
system, far less is available for understanding the linkages between 
the farm gate and the consumer. The data and the analysis will be 
valuable to production agriculture and the processing industry in their 
adjustment to the growing emphasis on health and nutrition in the 
consumer-driven food and agricultural system of today.
    Before turning to the agency budgets, I would like to express my 
appreciation for your past support of genomics research. This research 
continues to be critical to our overall research portfolio, providing 
the base knowledge on which much of our problem solving research is 
built. The future of agriculture is in genomics and related fields such 
as proteomics and functional genomics. Sequencing the genome of 
important agricultural plants and animals and learning about the 
functions of different genes hold the promise of a whole new generation 
of agricultural and food products that are nutritionally enhanced, 
disease resistant, higher yield, less dependent on fertilizers and 
herbicides and facilitate better use of land. Genetic research is also 
central to the development of rapid diagnostic tests, such as the one 
used by APHIS to identify avian influenza and exotic Newcastle disease. 
Genomics is a prime example of research that takes years to carry out 
and realize many of the benefits, but we are well on the way.
    USDA has once again been very successful in leveraging our limited 
genomics research funds with funds from other Federal agencies, the 
private sector, State government, and foreign partners. Funding for the 
sequencing of the first large domestic animal, the bovine genome, was 
secured, with USDA providing $11 million of the total $53 million. The 
USDA contribution would not be possible without your generous 
appropriations for the NRI. The actual sequencing began at Baylor 
University last December. This revolutionary research project will be 
completed in 18 months. The resulting genome sequence will give animal 
science researchers new tools for decades to come. USDA also continues 
to work with the National Science Foundation on the National Plant 
Genome Initiative and the Microbial Genomics Project.
    Both the ARS and CSREES proposed budgets include increases in their 
genomics programs. The President's fiscal year 2005 budget proposes 
increases of $12 million in ARS and $9 million in the NRI of CSREES.

                  REE AGENCY FISCAL YEAR 2005 BUDGETS

    I would now like to turn briefly to the budgets of the four REE 
agencies.
    Agricultural Research Service.--The Agricultural Research Service 
fiscal year 2005 budget requests approximately $1.2 billion, or 
slightly more than in fiscal year 2004. Within this total $988 million 
is proposed for research and information programs, approximately $100 
million less than in fiscal year 2004. A total of $178 million for 
buildings and facilities is devoted entirely to the modernization of 
the ARS/APHIS facilities at Ames.
    The ARS budget proposes increases for high priority program 
initiatives of national and regional importance. In order to 
accommodate these high priority increases, including homeland security, 
the budget proposes redirection or termination of approximately $169 
million in current programs. As the principal intramural biological and 
physical science research agency in the Department, ARS continues to 
play a critical role for the Department and the larger agricultural 
community in conducting both basic and mission-oriented research. 
Results from ARS' basic research provide the foundation for applied 
research carried out by ARS, academic institutions and private 
industry. ARS' applied research and technology development address the 
research needs of other USDA agencies, as well as those of the broader 
producer and processor community.
    In addition to the increases previously described, the ARS budget 
proposes increases for climate change, invasive species research, and 
for the Abraham Lincoln National Agricultural Library (NAL). 
Independent of cause, agriculture is vulnerable to changes in climate, 
such as rising temperatures, changing amounts of precipitation, 
increased variability in weather, and increases in the frequency and 
intensity of extreme weather events. While agriculture is vulnerable to 
these environmental changes, it also offers significant opportunities 
to mitigate the increase in greenhouse gases in the atmosphere. An 
increase of $5.2 million in the President's budget for climate change 
will support research providing information on balancing carbon 
storage, emissions, and agricultural productivity in different 
agricultural systems across the Nation.
    Invasive species, including weeds, insects and pathogens, are 
responsible for losses in agricultural productivity, environmental 
quality and biodiversity. An ARS increase of $5 million will support 
research to develop new target specific bio-intensive approaches to 
control invasive weeds, such as purple loosestrife, and insects, such 
as the Asian longhorn beetle. The increase will also support research 
for developing highly specific, potent, and inexpensive synthetic 
agents for controlling the red invasive fire ant and the southern 
cattle tick.
    In the age of digital information, the NAL is providing national 
leadership through the development of the National Digital Library of 
Agriculture that will deliver pertinent agriculture-related information 
and knowledge to the American agricultural community. The requested 
increase of $2 million will enhance NAL's ability to offer integrated 
services for accessing, managing, and preserving agricultural 
information through the application of advanced network technologies.
    Advances in information technology, including the ability to share 
information instantaneously, are enabling agencies such as ARS to gain 
significant efficiencies and collaborative power in conducting research 
programs and projects. However, these advances have also made ARS more 
vulnerable to cyber security attacks. The safety of sensitive research 
information from unauthorized intruders is critical to the agency's 
research program. The fiscal year 2005 budget proposes $1.5 million to 
strengthen ARS' cyber security program.
    Cooperative State Research, Education, and Extension Service.--The 
President's fiscal year 2005 budget provides just over $1 billion for 
the Cooperative State Research, Education, and Extension Service. 
Compared to fiscal year 2004, the budget includes an increase of $62 
million in on-going programs and the elimination of $166 million in 
Congressional add-ons and project terminations. The Administration's 
request places a strong emphasis on increases in the REE mission area 
for Food and Agriculture Defense and peer-reviewed competitive grants. 
In providing critical funding for the research, education, and 
extension programs of the Land Grant system and other universities and 
organizations across the country, CSREES continues to play a central 
role in the generation of new knowledge and technology and the transfer 
of that knowledge and technology to stakeholders.
    As described above, the budget provides an increase of $16 million 
for genomics and nutrition research under the NRI, CSREES' flagship 
competitive research program. The NRI continues to be a very valuable 
avenue for supporting cutting-edge research conducted by the finest 
scientists across the country. In addition to the increases in the NRI 
and the higher education program under the Food and Agriculture Defense 
Initiative, the budget calls for an increase of $1.6 million in the 
CSREES Graduate Fellowship Grant Program. Despite recent gains in 
support of minority-serving institutions and programs encouraging 
diversity in higher education and the work force, the Nation faces 
chronic challenges in promoting human capital development that enables 
all citizens to realize their educational potential and promise of 
contributing to the food and agricultural system. The proposed increase 
will allow CSREES to further expand the number of fellowships offered 
at the Master of Science level essential for recruiting minority 
graduate students.
    Economic Research Service.--The Economic Research Service is 
provided $80 million in the President's fiscal year 2005 budget. As the 
Department's principal intramural economics and social science research 
agency, ERS conducts research and analysis on the efficiency, efficacy, 
and equity aspects of issues related to agriculture, food safety and 
human nutrition, the environment, and rural development.
    The Consumer Data Information System described above and supported 
with an increase of $8.7 million will provide the Department, for the 
first time ever, the data and analytical capacity to understand the 
quickly evolving consumer driven food and agricultural system. 
Knowledge about the dynamics of the system and its relationship to 
consumer behavior is critical for producers and processors to continue 
to compete effectively in domestic and global markets and for 
policymakers to identify and develop strategies addressing nutrition 
and obesity issues at different stages of the food system chain.
    National Agricultural Statistics Service.--The National 
Agricultural Statistics Service budget requests $138 million, an 
increase of $10 million over fiscal year 2004. NASS' comprehensive, 
reliable, and timely data are critical for policy decisions and stable 
agricultural markets, and to ensure a level playing field for all users 
of agricultural statistics. The budget includes a decrease of $2.6 
million for the Census of Agriculture, due to the cyclical basis of the 
Census. Preliminary results from the 2002 census were released early 
last month. Final results will be released in June.
    The budget provides $7 million for continuing a multiyear 
initiative begun in fiscal year 2004 to restore and modernize NASS' 
core estimates program to meet data users' needs with an improved level 
of precision. A second increase of $2.5 million will incrementally 
improve statistically defensible survey precision for small area 
statistics that are widely used by USDA agencies, such as RMA for 
indemnity calculations. An additional $.8 million increase will allow 
NASS to support Presidential, Departmental, and agency eGovernment 
initiatives.

                                SUMMARY

    In summary, I want to reiterate that, given an overall very tight 
but sensible fiscal year 2005 budget, the REE budget reflects a 
continuing commitment to investment in agricultural research, 
economics, statistics, education, and extension. It also reflects an 
understanding that research and education are critical for solving both 
the problems agriculture and its producers and consumers are facing 
today, as well as emerging problems and opportunities of the 21st 
century. With continued strong investment, we will be ready to meet 
future problems and take advantage of new opportunities presented by 
cutting-edge science. This concludes my statement. Thank you for your 
attention.
                                 ______
                                 

  Prepared Statement of Dr. Edward B. Knipling, Acting Administrator, 
                     Agricultural Research Service

    Mr. Chairman, and members of the Subcommittee, I appreciate this 
opportunity to present the Agricultural Research Service's (ARS) budget 
recommendations for fiscal year 2005. The President's fiscal year 2005 
budget request for ARS is $1.166 billion. This represents a net 
increase of $20 million from the fiscal year 2004 funding level. Within 
that total, there is a net reduction of $95 million for research 
projects and a net increase of $115 million for buildings and 
facilities. The fiscal year 2005 budget includes increases for new and 
expanded program initiatives and pay and operational costs. The fiscal 
year 2005 budget also proposes $178 million to finance the completion 
of the building and modernization of USDA's National Centers for Animal 
Health in Ames, Iowa.
    The proposed initiatives include research to maintain a viable U.S. 
food and fiber system and strengthen the Nation's Food and Agriculture 
Defense in the fight against terrorism. The budget proposes an increase 
of $23.4 million in support of the Food and Agriculture Defense 
Initiative for research in food safety, and exotic and emerging 
diseases of animals and plants, and initiates a National Plant Disease 
Recovery System. The President's budget also includes increased funding 
of $34.7 million for: animal and plant genomics; genetic resources; 
invasive species affecting livestock and crops; obesity prevention; 
climate change; information technology cyber security; and a National 
Digital Library for Agriculture.

                      PROPOSED PROGRAM INITIATIVES

    Food Safety ($14,375,000).--ARS research will assist other Federal 
agencies in providing the technical means to ensure that our food 
supply is safe for American consumers. Research will focus on the 
reduction of hazards, both introduced and naturally occurring toxicants 
in food and feed, including pathogenic bacteria, viruses and parasites, 
chemical contaminants, mycotoxins produced by fungi growing on plants, 
and naturally occurring toxins produced by plants. ARS will work with 
other USDA/Federal agencies to implement a comprehensive Food and 
Agriculture Defense Initiative.
    Exotic and Emerging Diseases of Animals and Plants ($10,722,000).--
The globalization of trade, increased international travel of people 
and movement of goods, changing weather patterns, genetic shifts in 
pathogen populations, and changes in crop management practices and 
animal management systems all provide opportunities for the emergence 
or reemergence and spread of animal and plant diseases. Porcine 
Reproductive Respiratory Syndrome (PRRS) in swine and virulent forms of 
Marek's Disease virus in chickens are two examples of diseases that 
have suddenly emerged. West Nile Virus and Monkey Pox are examples of 
exotic diseases which have been introduced from other countries. The 
methods for detecting, preventing, and suppressing animal and plant 
diseases, whether emergent, exotic, or intentionally introduced, are 
similar. ARS will use the proposed increase to develop vaccines for 
high priority threats, such as Foot and Mouth Disease, West Nile Virus, 
Rift Valley Fever, and Equine Encephalopathy, that could devastate the 
Nation's livestock. In addition, flexible and responsive surveillance 
systems that maximize rapid detection, and better methods to prevent 
and control plant and animal pathogens will be developed and tested. Of 
the proposed $10.722 million increase, $7.7 million will finance part 
of USDA's Homeland Security efforts.
    Genomics ($12,000,000).--Genetic improvements have been largely 
responsible for the productivity and quality of America's crops and 
livestock. Additional research is now needed to exploit the inherent 
potential in genomes. With the proposed increase, ARS will identify and 
characterize genes that influence important traits in plants (e.g., 
plant growth, disease resistance, and stress tolerance) and in animals 
(e.g., reproduction, feed efficiency, and well-being). ARS will also 
characterize available germplasm for traits of economic and behavioral 
importance in cattle, swine, and poultry (e.g., Marek's Disease Virus 
in poultry).
    Genetic Resources (4,000,000).--The prosperity of U.S. agriculture 
depends on the preservation of plant and animal germplasm collections. 
The current support of the germplasm program is inadequate to maintain 
animal and plant germplasm that is threatened or to prevent the loss of 
genetic diversity. With the availability of new genomic tools, genetic 
diversity is extremely valuable for improving plant and animal 
productivity and other important traits. ARS will use the proposed 
increase to collect, catalog, and preserve selected germplasm of 
cattle, swine, poultry, and fish. Also, it will collect, identify, 
characterize, and incorporate plant germplasm into centralized 
genebanks, and evaluate it for useful qualities (e.g., disease 
resistance). In addition, official insect and microbial germplasm 
repositories will be established.
    National Plant Disease Recovery System ($6,000,000).--In case of a 
national emergency involving a disease outbreak in a major economically 
important crop, a National Plant Disease Recovery System will provide 
the infrastructure and technology for recovery. With the proposed 
increase, ARS will establish and coordinate a network of the technology 
capabilities within Federal, State, and private sector organizations to 
prevent, slow, or stop the spread of a high consequence pathogen with 
resistant seed varieties and other pest control measures. This network 
will utilize the genetic resources contained in the U.S. National Plant 
Germplasm System which is administered by ARS. The proposed increase 
will also be used to identify and develop new sources of genetic 
resistance in crops to important disease pathogens.
    Invasive Species Affecting Animals and Plants ($5,000,000).--
Invasive weeds, insects, and other pests cost the Nation over $137 
billion per year. Weeds, including leafy spurge, melaleuca, salt cedar, 
water hyacinth, purple loosestrife, and jointed goat grass, infest over 
100 million acres in the United States. They reduce crop yields by 
approximately 12 percent and forage yields by 20 percent. The red 
invasive fire ant, whose venom can kill young animals, has steadily 
spread through all the Gulf States and is now reported in Southern 
California and New Mexico. The southern cattle tick and the disease it 
causes, once eradicated from the Nation, may reinvade the United States 
from Northern Mexico. The tick has become increasingly resistant to 
insecticides and there is no vaccine for the disease it carries. With 
the proposed increase, ARS will target its research on the southern 
cattle tick (by identifying the genes responsible for pesticide 
resistance) and the fire ant (by studying its genomics and developing 
more effective pesticides and pathogens). In addition, ARS will develop 
systematics for weeds and arthropods, and develop biologically-based 
integrated pest management components for pests.
    Obesity Prevention ($5,000,000).--Obesity is the Nation's fastest 
growing public health problem, which is affecting every segment of the 
American population. Obesity contributes to many diseases, such as 
heart disease, cancer, and diabetes, resulting in hundreds of thousands 
of deaths, as well as hundreds of billions of dollars in health care 
costs each year. The deterioration of American dietary habits has 
occurred with the increased consumption of low cost, convenient, fast 
foods that are typically nutrient diluted. ARS will use the proposed 
increase to assess the benefits from long-term consumption of self-
selected ``healthy'' diets to prevent obesity. Also, ARS will develop 
and evaluate culturally relevant behavioral strategies that promote the 
selection of healthy foods.
    Climate Change ($5,189,000).--Climate change encompasses global and 
regional changes in the earth's atmospheric, hydrological, and 
biological systems. Agriculture is vulnerable to these environmental 
changes. The objective of ARS' global change research is to develop the 
information and tools necessary for agriculture to mitigate or adapt to 
climate change. ARS has research programs on carbon cycle/storage, 
trace gases (methane and nitrous oxide), agricultural ecosystem 
impacts, and weather/water cycle changes. ARS will use the proposed 
increase to develop climate change mitigation technologies and 
practices for the agricultural sector. Specifically, ARS will: conduct 
interdisciplinary research leading to technologies and practices for 
sustaining or enhancing food and fiber production and carbon 
sequestration by agricultural systems exposed to multiple environmental 
and management conditions; expand the existing network of ARS sites 
conducting measurements of greenhouse gas fluxes between the atmosphere 
and the land; and identify ways to decrease methane emissions 
associated with livestock.
    National Digital Library for Agriculture ($2,000,000).--ARS will 
use the proposed increase to enhance the National Agricultural 
Library's (NAL) ability to offer integrated services for assessing, 
managing, and preserving agricultural information through the 
application of advanced network technologies. The volume, quality, and 
timelines of information available to NAL's customers will be 
increased. In 2001, a ``Blue Ribbon Panel'' concluded that NAL needed 
increased resources to take advantage of technological innovations.
    Information Technology Cyber Security ($1,507,000).--Information 
technology is critical for the delivery of ARS' research programs. The 
use of web-based technology commonly referred to as ``e-Government,'' 
offers ARS the opportunity to improve the way it conducts business and 
exchanges information in achieving its research mission and objectives. 
As technology has enhanced the ability to share information 
instantaneously, it has also made ARS more vulnerable to cyber security 
attacks. ARS' mission critical information systems and networks are 
increasingly exposed to an unprecedented level of risk. Of particular 
importance is the safety of pathogenic, genomic, and other sensitive 
research information from being acquired or destroyed by unauthorized 
intruders through unprotected or undetected cyber links. ARS will use 
the proposed increase to increase the number of cyber security 
officers, and to implement cyber security management plans and 
strategies.

                      PROPOSED OPERATING INCREASES

    In addition to the proposed program initiatives, ARS' budget 
provides funding to cover costs associated with pay raises and employee 
performance. These funds, $13,188,000 for pay costs and $1,013,000 for 
employee performance, are critically needed to avoid erosion of the 
agency's base resources. Absorption of these costs would reduce the 
number of scientists and staff who are essential for conducting viable 
research programs critical to the Nation's security.

                       PROPOSED PROGRAM DECREASES

    The President's budget for fiscal year 2005 addresses a number of 
national needs and priorities. Protecting the Nation's food and 
agricultural systems against terrorist attacks is a major concern. In 
order to finance these high priority initiatives related to Homeland 
Security and the Food and Agriculture Defense Initiative, the funding 
for important but lesser priority research must be reduced. Growing 
Federal deficits also dictate the need to generate savings by 
termination of unrequested research projects.
    The fiscal year 2005 budget proposes $169,472,000 in program 
reductions. This entire amount represents unrequested research projects 
added in fiscal years 2001, 2002, 2003 and 2004. The savings achieved 
will be redirected to finance the higher priority research initiatives 
related to Homeland Security and the Food and Agriculture Defense 
Initiative, and to reduce overall Federal spending.

             PROPOSED INCREASE FOR BUILDINGS AND FACILITIES

    The fiscal year 2005 budget recommends $178,000,000 for the ARS 
Buildings and Facilities account. In accordance with a previously 
documented and accepted master plan, the entire amount will be used to 
complete the modernization of the National Centers for Animal Health in 
Ames, Iowa. This $460 million construction project is already well 
underway. The program of work being carried out in the current 
inadequate facilities is internationally recognized for preventing and 
controlling animal diseases, and protecting the Nation's food supply 
and public health. The new facility is critical to supporting and 
sustaining the Administration's Homeland Security and Food and 
Agriculture Defense Initiative.
    The new facility combines ARS' National Animal Disease Center with 
two Animal and Plant Health Inspection Service facilities: the National 
Veterinary Services Laboratory and the Center for Veterinary Biologics. 
The new facility will provide an integrated, multidisciplinary 
scientific capability, combining animal disease research with the 
development of diagnostic tools and vaccines.
    Mr. Chairman, this concludes my statement. I will be happy to 
respond to any questions the Committee may have.
                                 ______
                                 

 Prepared Statement of Dr. Colien Hefferan, Administrator, Cooperative 
            State Research, Education, and Extension Service

    Mr. Chairman and Members of the Committee, I appreciate the 
opportunity to submit the proposed fiscal year 2005 budget for the 
Cooperative State Research, Education, and Extension Service (CSREES), 
one of the four agencies in the Research, Education, and Economics 
(REE) mission area of the United States Department of Agriculture 
(USDA).
    The CSREES fiscal year 2005 budget proposal is just over $1 
billion. CSREES, in concert with the Secretary of Agriculture and the 
intent of Congress, works in partnership with the land-grant university 
system, other colleges and universities, and public and private 
research and education organizations to initiate and develop 
agricultural research, extension, higher education, and related 
international activities. In addition, CSREES implements grants for 
organizations to better reach and assist disadvantaged farmers in 
accessing programs of USDA. These partnerships result in a breadth of 
expertise that is ready to deliver solutions to problems facing U.S. 
agriculture today.
    The broad portfolio of CSREES supports scientific discovery from 
idea to application. Formula and other base funds leverage dollars from 
other sources, provide the start-up funds needed for investigators to 
establish research programs and build the capacity to compete 
successfully in competitive programs, and allow for rapid responses to 
emerging problems. Competitively funded research from the National 
Research Initiative (NRI) supports individual investigators undertaking 
basic research aimed at generating new knowledge and supports 
integrated programs and activities focused on solutions to short- and 
intermediate-term problems. Research-based guidance is delivered 
through the Cooperative Extension System's educational efforts. Because 
these efforts occur primarily at universities, a very broad range of 
expertise is available to address increasing complex problems, and the 
research process contributes to an environment that prepares students 
to meet the ongoing needs of agriculture, the environment, human health 
and well-being, and communities. Funding for outreach and assistance 
for socially disadvantaged farmers encourages and assists those farmers 
by providing technical assistance and education for fuller 
participation in all USDA programs.
    The fiscal year 2005 CSREES budget request aligns funding and 
performance with the USDA strategic goals. CSREES manages its many 
budget elements in support of research, education, extension, and 
outreach programs as part of a cohesive whole supporting all five of 
the Department's strategic goals. Distinct performance criteria, 
including strategic objectives and key outcomes with identified annual 
targets, are defined for each program or activity. As part of an 
integrated budget and performance process, periodic portfolio reviews 
by external experts to monitor overall program progress, suggest 
alternative approaches, and propose management improvements are 
planned. Although the overall budget supports the breadth of USDA's 
goals and objectives, the funding increase requested in the CSREES 
fiscal year 2005 budget proposal emphasizes USDA Strategic Goal 3: 
Enhance Protection and Safety of the Nation's Agriculture and Food 
Supply, and Strategic Goal 4: Improve the Nation's Nutrition and 
Health.
    In continuing and expanding our efforts for agricultural security 
and in support of the President's Food and Agriculture Defense 
Initiative, CSREES, through cooperative efforts with the Animal and 
Plant Health Inspection Service, has established a unified Federal-
State network of public agricultural institutions to identify and 
respond to high risk biological pathogens in the food and agricultural 
system. The network is comprised of 13 State animal diagnostic 
laboratories and 6 plant diagnostic laboratories, dispersed 
strategically around the country. These 19 key laboratories are 
developing a two-way, secure communications network with other 
university and State Department of Agriculture diagnostic laboratories 
throughout their respective regions. The diagnostic laboratories are 
responsible for identifying, containing, and minimizing the impact of 
exotic and domestic pests and pathogens that are of concern to the 
security of our food and agricultural production systems. The budget 
proposal requests an increase of $22 million for a total of $30 million 
to maintain the national diagnostic laboratory network and increase the 
number of State plant diagnostic laboratories linked with the National 
Agricultural Pest Information System. The network will continue its 
link with the Extension Disaster Education Network (EDEN) to 
disseminate information to producers and professionals at the county 
level, and to expand these activities to provide more current and 
timely educational resources.
    As a benefit of the research and education information gained 
through the Animal and Plant Diagnostic networks in conjunction with 
dissemination efforts of EDEN, an influx of new knowledge will be used 
to fill gaps in addressing agrosecurity issues, and to educate students 
in increasing their risk assessment and mitigation skills in order to 
help manage large scale animal and plant disease outbreaks. CSREES 
proposes $5 million for the Agrosecurity Education Program that will 
support educational and professional development for personnel in 
securing the Nation's agricultural and food supply. The program will 
develop and promote curricula for undergraduate and graduate level 
higher education programs that support the protection of animals, 
plants, and public health. The program also is designed to support 
cross disciplinary degree programs that combine training in food 
sciences, agricultural sciences, medicine, veterinary medicine, 
epidemiology, microbiology, chemistry, engineering, and mathematics 
(statistical modeling) to prepare food system defense professionals.
    CSREES continues to provide new opportunities for discoveries and 
advances in knowledge through our programs such as the NRI and 
Integrated Research, Education, and Extension Competitive Grants. 
Funding for agricultural research, particularly for competitive or 
basic science programs, has lagged dramatically behind funding for 
other disciplines. The fiscal year 2005 budget request of $180 million 
for the NRI reflects the same underlying policy objectives of fiscal 
year 2004, but in a way that is consistent with increasing overall 
constraints on the Department's budget. The NRI will continue to 
support current high priority programs with an emphasis on critical 
areas. Expanded partnerships with other Federal agencies on research 
topics of mutual interest will be possible. For example, we may be able 
to expand working relationships with the National Institutes of Health 
and others on animal genomics. Current cooperation on the Bovine Genome 
Sequencing program will contribute to a working draft sequence 
(approximately 6-fold sequence coverage) of 90 percent of the bovine 
genome. Sequencing the bovine genome provides the gateway to studies of 
gene function and improved methods of selection of animals based on 
genotype. This knowledge will then be used to increase the efficiency 
and profitability of animal production systems by enhancing animal 
health and the quality and safety of food production. The goal of the 
NRI participation in the program is to assure the generation of high 
quality sequence data, that the assembly of the sequence reads into 
contiguous sequences, the annotation, and the deposition of all 
information into a publicly accessible, pre-existing database.
    We also will continue our partnership with the National Science 
Foundation on the Microbial Genome Sequencing program. The program 
supports high-throughput sequencing of the genomes of microorganisms 
that are of fundamental biological interest, and are important to the 
national interest, the productivity and sustainability of agriculture 
and forestry, or the safety and quality of the Nation's food supply. 
The fiscal year 2005 budget requests an increase of $9 million in the 
NRI to support genomics research. Support of animal genomics will 
increase fundamental knowledge of the composition, organization, and 
function of the genome and increase the ability to genetically improve 
the productivity, efficiency, and quality of agriculturally important 
animals, including horses and aquaculture species. Research also will 
contribute to reducing adverse environmental changes, preserving 
genetic diversity of wild stock, addressing new and re-emerging disease 
and pest threats, and providing new and renewable products to meet 
consumer needs.
    According to the President's Health and Fitness Initiative, 
Healthier US, too many Americans are overweight, have poor dietary 
habits, and do not exercise enough. Five chronic diseases associated 
with obesity--heart disease, cancer, stroke, chronic obstructive 
pulmonary disease (e.g. bronchitis, emphysema, asthma), and diabetes--
account for more than two-thirds of all deaths in the United States. In 
addition to claiming more than 1.7 million American lives each year, 
these diseases hinder daily living for more than one out of every ten 
Americans, or 25 million people. More than 100 million Americans live 
with chronic disease, and millions of new cases are diagnosed each 
year. Healthier US concluded that the health of Americans would improve 
with modest but regular better eating habits and physical activity. 
Under the NRI, an increase of $7 million in NRI funding is proposed in 
fiscal year 2005 to address nutrition, food choices, and the growing 
obesity epidemic. Research will focus specifically on investigating 
underlying causes of obesity, including physiological, environmental, 
cultural, social, and biological factors; factors controlling the onset 
of obesity; determining differences in obesity groups defined by race, 
age, gender, etc.; and developing and evaluating the weight loss 
potential of functional foods.
    Also within the fiscal year 2005 budget request is a proposed 
increase of $6 million for the Expanded Food and Nutrition Education 
Program (EFNEP). This would restore funding to approximately the fiscal 
year 2003 funding level. The EFNEP program reaches predominantly 
minority low-income youth and families with nutrition education that 
leads to sustainable behavior changes. EFNEP works with various 
partners in providing its services, which include collaborating with 
the National Institute of Health on the 5-A-Day program promoting 
increased consumption of fruits and vegetables, and the Centers for 
Disease Control and Prevention on their VERBtm program sharing 
curriculum material directed at teaching young people about the 
importance of nutrition and physical activity. Increased funding also 
will allow EFNEP to move forward with efforts to add a physical 
activity focus to help combat the rising problem of obesity in children 
and adults.
    CSREES continues to expand diversity and opportunity with 
activities under 1890 base and educational programs, and 1994 and 
Hispanic-Serving Institutions educational programs. Funding for our 
1890 base programs provides a stable level of support for the 
implementation of research and extension programming. Funding for the 
1994 Institutions strengthens the capacity of the Tribal Colleges to 
more firmly establish themselves as partners in the food and 
agricultural science and education system through expanding their 
linkages with 1862 and 1890 Institutions. Sustained funding for the 
Hispanic-Serving Institutions promotes the ability of the institutions 
to carry out educational training programs in the food and agricultural 
sciences. This proven path of research, extension, and educational 
program development rapidly delivers new technologies into the hands of 
all citizens, helping them solve problems important to their lives.
    CSREES also will more effectively reach underserved communities 
through sustained support for the Outreach and Assistance for Socially 
Disadvantaged Farmers and Ranchers Program (OASDFR). CSREES will award 
competitive multi-year projects to support outreach to disadvantaged 
farmers and ranchers. Funds for the OASDFR program will encourage and 
assist socially disadvantaged farmers and ranchers in their efforts to 
become or remain owners and operators by providing technical 
assistance, outreach, and education to promote fuller participation in 
all USDA programs.
    Sustained support through our base programs, including formula 
funding for research and extension, is providing the foundation for the 
Federal/State partnership that links science and technology development 
directly to the needs and interests of people. The formula and other 
base programs provide discretionary resources that foster regional and 
national joint planning, encourage multi-State planning and program 
execution, and minimize duplication of efforts. Formula and other base 
funding is the foundation from which a competitive grant funded program 
can be built by developing institutional infrastructure, supporting 
preliminary studies to strengthen competitive proposals, and bridging 
gaps related to the scope and continuity of grant supported programs. 
These funds, along with matching funds from the States, assure 
responsiveness to emerging issues such as foot-and-mouth disease, E. 
coli, Salmonella, Listeria, sorghum ergot, potato late blight, Russian 
wheat aphid, and swine waste. For example, leveraging funds from the 
Hatch Act with other sources, researchers at Ohio State University are 
continuing work with bacteriocins, naturally occurring substances in 
foods that inhibit pathogens. The researchers found that a type of 
``good'' bacteria in milk makes a bacteriocin that appears to inhibit 
E. coli and Salmonella. The researchers are working with a food 
packaging company to infuse bacteriocins into packaging material, 
making containers with a built-in, natural way to help keep food safe.
    The higher education programs contribute to the development of 
human capacity and respond to the need for a highly trained cadre of 
quality scientists, engineers, managers, and technical specialists in 
the food and fiber system. The fiscal year 2005 budget provides a $1.6 
million increase in the Food and Agricultural Sciences National Needs 
Graduate Fellowship program. This program will prepare graduates to 
deal with emerging challenges in such areas as agricultural biosecurity 
to ensure the safety and security of our agriculture and food supply, 
new issues in natural resources, and human health and nutrition 
including problems related to obesity, such as diabetes, cardiovascular 
health, and osteoporosis. The International Science and Education 
Grants program (ISEP) will support the land-grant community and other 
campuses in their efforts to prepare students and help American 
agriculture to maintain our global competitiveness by 
internationalizing their agricultural programs. ISEP is designed to 
assist land-grant and other campus faculty in bringing world issues and 
awareness into their agricultural teaching, research, and outreach 
programs. Other higher education programs will provide important and 
unique support to Tribal Colleges, the 1890 Land-Grant Colleges and 
Universities, and the 1862 Land-Grant Universities as they pilot 
important new approaches to expanding their programs.
    Peer-reviewed competitive programs that meet national needs are a 
much more effective use of taxpayer dollars than earmarks that are 
provided to a specific recipient for needs that may not be national. 
The scope of the NRI, and the Integrated Research, Education, and 
Extension Competitive Grants is broad enough to provide a peer-reviewed 
forum for seeking and assessing much of the work funded through 
earmarks. For example in the past 4 years, CSREES supported research in 
animal identification and/or animal tracking under earmarked projects 
which fit within the scope of the NRI. In addition, earmarked projects 
for human nutrition are within the program areas of the NRI, and 
earmarked food safety projects can be supported through the CSREES 
Integrated Food Safety program. In order to ensure the highest quality 
research for these national needs within available funding, the fiscal 
year 2005 budget has therefore proposed to eliminate earmarked 
projects.
    CSREES, in collaboration with university and other partners 
nationwide, continually meets the many challenges facing the food and 
fiber system. The programs administered by the agency reflect the 
commitment of the Administration to further strengthen the problem-
solving capacity of Federally-supported agricultural research, 
extension, higher education, and outreach and assistance programs. In 
addition, we continue to enhance our responsiveness and flexibility in 
addressing critical agricultural issues.
    Mr. Chairman, this concludes my statement. I will be glad to answer 
any questions the Committee may have.
                                 ______
                                 

Prepared Statement of Susan E. Offutt, Administrator, Economic Research 
                                Service

    Mr. Chairman and members of the Committee, I am pleased to have the 
opportunity to present the proposed fiscal year 2005 budget for the 
Economic Research Service (ERS).

                                MISSION

    The Economic Research Service informs and enhances public and 
private decision making on economic and policy issues related to 
agriculture, food, the environment, and rural development.

                                 BUDGET

    The agency's request for 2005 is $80 million, which includes 
increases for one initiative and pay costs. The agency is requesting an 
$8.7 million increase to develop an integrated and comprehensive data 
and analysis framework of the food system beyond the farm-gate to 
provide a basis for understanding, monitoring, tracking, and 
identifying changes in food supply, consumer behavior and reactions, 
and consumption patterns.

                ERS CONTRIBUTIONS TO MISSION AREA GOALS

    ERS supports the five USDA strategic goals to: (1) enhance economic 
opportunities for agricultural producers; (2) support increased 
economic opportunities and improved quality of life in rural America; 
(3) enhance protection and safety of the Nation's agriculture and food 
supply; (4) improve the Nation's nutrition and health; and (5) protect 
and enhance the Nation's natural resource base and environment.
Goal 1: Enhanced Economic Opportunities for Agricultural Producers
    ERS helps the U.S. food and agriculture sector adapt to changing 
market structure in rapidly globalizing, consumer-driven markets by 
analyzing the linkages between domestic and global food and commodity 
markets and the implications of alternative domestic and international 
policies on competitiveness. ERS economists analyze factors that drive 
change in the structure and performance of domestic and global food and 
agriculture markets; provide economic assessments of structural change 
and competition in the agricultural sector; analyze the price impacts 
of evolving structural changes in food retailing; analyze how 
international trade agreements and foreign trade restrictions affect 
U.S. agricultural production, exports, imports, and income; and provide 
economic analyses that determine how fundamental commodity market 
relationships are adjusting to changing trade, domestic policy, and 
structural conditions. Policy makers and the food and agriculture 
industry benefit from research contained in reports such as 
International Evidence on Food Consumption Patterns released in October 
2003, that analyze forces shaping the demand for food in global 
markets, in this case in rapidly growing developing countries, and The 
Structure of Global Markets for Meat released in September 2003, that 
analyze the economic forces behind the emergence of specialized trade 
patterns and new food marketing chains.
    ERS will continue to work closely with the World Agricultural 
Outlook Board (WAOB) and USDA agencies to provide short- and long-term 
projections of United States and world agricultural production, 
consumption, and trade. In 2004, several initiatives will increase the 
accessibility, timeliness and breadth of the data and analysis. We are 
creating dynamic web pages that offer the latest outlook information, 
data, and links through a central location on the ERS website. In 
addition, USDA's agricultural baseline projections will be available on 
a timelier basis through the release of components as they are 
completed. ERS continues to work closely with the WAOB and other USDA 
agencies in developing a commodity market information system that would 
provide ``one-stop shopping'' for key USDA data. The breadth of data 
was expanded in 2002 when ERS launched a unique data series of average 
monthly retail prices for red meat and poultry based on electronic 
supermarket scanner data.
    ERS continues to expand research on how the dynamics of consumer 
demand, notably growing consumption and trade in high value products, 
are shaping global markets. In 2003, ERS organized workshops on global 
markets for high-value foods, such as meat, processed cereals, fruits, 
vegetables and specialized markets for grains. These workshops brought 
together international experts on the food system to discuss the 
economic implications of the growing importance of high value products 
and trade for the food and agricultural sector. A report analyzing the 
forces shaping trade in high value products was released in 2003. These 
activities enhance our analytic understanding of these fundamental 
market relationships and continue to improve the analytical base for 
USDA's foreign market analysis and projections activity.
    New appropriations received in 2004 allow ERS to explore in greater 
depth the market for organic products and other commodities and foods 
that are differentiated in the marketplace by virtue of how or where 
they are produced. This form of product differentiation accommodates 
consumers' preferences (or producers' beliefs about consumers' 
preferences) for products that guarantee that particular production 
practices are (or are not) undertaken, or that are assured to be 
produced in particular countries or regions. In 2004, we plan to 
document the evolution, structure and function of differentiated 
product markets, and derive the implications of alternative extents, 
forms, and timing of government intervention in markets for products 
that embody production process or location characteristics.
    Food price determination is increasingly important for 
understanding domestic and international market events and 
opportunities that promote the security of the U.S. food supply. ERS 
food markets research focuses on enhancing knowledge and understanding 
of food prices, both their objective measurement and how they are set 
by firms at different stages of the food system, and of the performance 
of the food system to most efficiently supply consumers' needs.
    ERS research examined whether produce markets' retail 
consolidation, technological change in production and marketing, and 
changing consumer demand have altered the traditional market 
relationships between producers, wholesalers, and retailers. As the 
market for retail food has changed over time, so has the dynamics of 
market competition. ERS has begun to use micro-level household and 
store scanner data to measure the impact of changing store formats on 
food prices to focus on the changing environment and how these changes 
could impact our view of how customers make economic decisions in 
retail food stores. ERS research continues on understanding why food 
prices change over time and forecasting how they will change in the 
future. ERS research on the linkage of food and agriculture to the 
general economy in terms of employment and income provides a 
statistical foundation for describing both the changing nature of the 
Food and Fiber System and the economy-wide effects of agriculture.
    ERS continues to conduct research to improve understanding among 
decision makers of changes in the agricultural sector structure (for 
example, the implications for producers of the increasing replacement 
of open markets by contractual arrangements and vertical integration). 
ERS is currently examining the potential efficiency-enhancing motives 
for the increasing use of contracts by food manufacturers and 
processors. Hog production, highlighted in Economic and Structural 
Relationships in U.S. Hog Production released in February 2003, 
provides a good example of how economic factors can change animal 
industry structure and practices, and how these changes might affect 
the environment. Following up on the 2001 reports, Concentration and 
Technology in Agricultural Input Industries and Public Sector Plant 
Breeding in a Privatizing World, ERS will publish The Seed Industry in 
U.S. Agriculture in 2004. This report reviews the factors affecting 
seed production, consumption, and seed markets, and summarizes the 
regulatory policy, including the intellectual property rights (IPR) 
relating to new plant varieties, the role of public and private R&D 
expenditures in plant breeding for U.S. agriculture, and the influence 
of concentration on market power and cost efficiency in the seed 
industry. At the farm level, the new Family Farm Report--Structural and 
Financial Characteristics of U.S. Farms, which will be published in 
2004, documents the ongoing changes in farms' structure, financial 
performance, and business relationships in response to consumer 
demands, competitive pressures, and changing opportunities for farm 
families.
    ERS analysis has supported implementation of the 2002 Farm Security 
and Rural Investment (FSRI) Act, and our ongoing research will provide 
objective analysis of the impacts of specific programs. Among the 
studies mandated by this Act is the report Characteristics and 
Production Costs for Dairy Operations to be released in 2004. This 
report examines how production costs vary among dairy producers and 
will indicate possible reasons for the cost variation of different 
commodities.
    In addition, ERS will continue to work closely with the Foreign 
Agricultural Service (FAS) and the Office of the U.S. Trade 
Representative to ensure that ongoing negotiations on the Doha 
Development Agenda under the auspices of the World Trade Organization 
(WTO) and regional trade agreements are successful and advantageous for 
U.S. agriculture. In the negotiations, the United States seeks to 
minimize farm trade distortions while maintaining some level of 
domestic support. Central to a successful agreement is domestic and 
international consensus on the trade distorting impacts of various 
types of domestic agricultural policies, and a recent ERS publication 
is the first output from ongoing research on the potential distortions 
caused by U.S. policies. The report, Decoupled Payments: Household 
Income Transfers in Contemporary U.S. Agriculture, released in February 
2003, analyzes the production and trade impacts of the Production 
Flexibility Contract (PFC) payments enacted under the 1996 Farm Act. 
Using the data on farm households from the Agricultural Resource 
Management Survey (ARMS), the report provides the first data-based 
analysis of direct payments, and finds little evidence that the PFC 
payments distorted markets.
    The Department's implementation of the final rule for organic 
production and marketing in October 2002 ensured that the goals of the 
Organic Foods Production Act of 1990 were met, including certification 
by a State or private agency accredited under the national program of 
all but the smallest organic farmers and processors. ERS had a large 
impact on the program through its research and data collection on pre-
existing State and private organic certifying organizations, organic 
production practices, and organic food marketing. Updating an initial 
report of organic production statistics in 2001 is the report U.S. 
Organic Farming in 2001: Adoption of Certified Systems, released in 
April 2003.
    ERS analyses can help guide and evaluate resource allocation and 
management of public sector agricultural research--a key to maintaining 
increases in productivity that underlie a strong competitive position 
for U.S. farmers. ERS continues to study the economics of adopting 
genetically modified seed, the role of patents and intellectual 
property rights in fostering innovation, and the potential for 
technology transfer to less developed countries.
    Seed genetically engineered to control insects and weeds, initially 
introduced in 1995, now accounts for nearly 70 percent of U.S. soybean 
plantings and nearly half of major crop acreage (corn, soybeans, and 
cotton). An ERS report, Size and Distribution of Market Benefits From 
Adopting Biotech Crops, released in November 2003, estimated the size 
and distribution of benefits to consumers and the agricultural sector 
from adopting Bacillus thuringiensis (Bt) cotton, herbicide-tolerant 
cotton, and herbicide-tolerant soybeans in 1997. A more comprehensive 
study of seed industry changes was reported in The Seed Industry in 
U.S. Agriculture, released in February 2004, which examined the 
composition of United States and international seed markets, 
regulations affecting agricultural seeds, the structure and evolution 
of the seed industry, and trends in private and public R&D in plant 
breeding. Particular emphasis was placed on seeds for the major field 
crops: corn, cotton, soybeans, and wheat.
    In the publication The Effect of Information on Consumer Demand for 
Biotech Foods: Evidence from Experimental Auctions, released in March 
2003, ERS examined consumer attitudes toward biotechnology and the role 
of consumer preferences in shaping market trends. Research anticipating 
the next wave of biotechnology products for crops modified to target 
consumer needs, such as food with altered nutritional qualities (such 
as canola with high beta-carotene content), crops with improved 
processing characteristics (such as naturally-colored cotton), or 
plants that produce specialty chemicals or pharmaceuticals (such as 
rabies vaccine in corn), is also being undertaken. This sound research 
base has been invaluable in tempering exaggerated claims of costs and 
benefits from both sides of the debate.
    Recent innovations in agricultural biotechnology have raised 
significant policy questions concerning potential research delays, the 
optimal intellectual property design for maximizing dynamic innovation 
when innovation is sequential, and the potential effects of 
concentration of research and market power in the agricultural inputs 
industry. In cooperation with researchers at Rutgers University and the 
U.S. Patent Office, ERS created in 2003 a classification system and on-
line searchable database of agricultural biotechnology patents and 
licensing arrangements. This project identifies who generates the 
innovations, who controls the innovations and, to the extent possible, 
who has access to the innovations.
    Data from the Agricultural Resource Management Survey (ARMS) 
underlie important estimates of farm income and well-being, and 
constitute an essential component in much of ERS' research. Reflecting 
the 2003 budget initiative, in 2003 the ARMS survey sample was expanded 
sufficiently to allow ERS, with the National Agricultural Statistics 
Service (NASS), to produce State level estimates for the largest 
fifteen States (as measured by value of farm output). Also in 2003, ERS 
collaborated with NASS to develop new survey instruments and data 
collection approaches that merge mail surveys with in-person surveys, 
thereby reducing respondent burden and improving the efficiency of data 
collection. In addition, ERS has developed a path breaking, web-based, 
secure ARMS data retrieval and summarization prototype tool that is 
attractive and easy to use despite the complex tasks it performs on 
this massive data set. When implemented in 2004, this system will 
retrieve ARMS data in formats customized to the customers' needs while 
assuring that sensitive data are not disclosed.

Goal 2: Support Increased Economic Opportunities and Improved Quality 
        of Life in Rural America
    ERS research explores how investments in rural people, businesses, 
and communities affect the capacity of rural economies to prosper in 
the new and changing global marketplace. The agency analyzes how 
demographic trends, employment opportunities, educational improvements, 
Federal policies, and public investment in infrastructure and 
technology enhance economic opportunity and quality of life for rural 
Americans. Equally important is our commitment to help enhance the 
quality of life for the Nation's small farmers who are increasingly 
dependent on these rural economies for their employment and economic 
support. The rural development process is complex and sensitive to a 
wide range of factors that, to a large extent, are unique to each rural 
community. Nonetheless, ERS assesses general approaches to development 
to determine when, where, and under what circumstances rural 
development strategies will be most successful.
    ERS analyzes changing economic and demographic trends in rural 
America, with particular attention to the implications of these changes 
for the employment, education, income, and housing patterns of low-
income rural populations. Data from the 2000 Census and other Federal 
information sources provide the most up-to-date information on the 
current conditions and trends affecting rural areas and provide the 
factual base for rural development program initiatives. In 2003, the 
agency continued its series of publications that report the most 
current indicators of social and economic conditions in rural areas for 
use in developing policies and programs to assist rural people and 
their communities. Rural America at a Glance and Rural Education at a 
Glance, designed for a policy audience, summarize the most current 
information on population and migration, labor and education, poverty, 
race and ethnicity, infrastructure, and rural development policy. The 
ERS website (www.ers.usda.gov) serves as a major repository of rural 
data, offering unique mapping utilities and comprehensive county-level 
data bases. In January 2004, ERS joined Cornell University in 
sponsoring a conference on ``Population Change and Rural Society''. 
This conference showcased an integrated set of demographic studies by 
leading social scientists that analyzed critical demographic trends 
from the 2000 Census and drew conclusions about their implications for 
economic and social life in rural America. The conference focused on 
the policy implications of changing demographic composition, economic 
restructuring, changing land use patterns, and geographic patterns of 
chronic disadvantage and emerging growth. This conference marked the 
first comprehensive look at rural America based on data from the 2000 
Census.
    ERS is at the forefront of analysis assessing the critical role of 
education in local, regional, and national economic development. Rural 
communities view increased educational investments as an important part 
of economic development, but are sensitive to the partial loss of their 
investment, in the form of youth outmigration to areas with better 
opportunities. ERS is partnering with land-grant universities in a 
research program designed to measure the relationship between education 
and economic outcomes, both for the individual worker and rural 
community, to help local communities better target their economic 
development and school improvement efforts.
    For over 30 years, ERS has captured aspects of the broad economic 
and social diversity among rural areas in various county 
classifications. These typologies have been widely used by policy 
analysts and public officials to determine eligibility for and the 
effectiveness of Federal programs to assist rural America. In 2003, ERS 
redesigned a county typology that maps out a geographic portrait of the 
rich diversity of rural America in ways that are meaningful for 
developing public policies and programs. ERS will now address how the 
economic, demographic, and policy themes identified in this typology 
translate into effective rural development strategies for enhancing 
rural economic opportunities and well being.
    ERS also continues its long tradition of economic research on the 
welfare of disadvantaged population groups in rural areas, including 
low-income families, children, the elderly, and racial/ethnic groups, 
as well as the Federal assistance programs that serve them. Through its 
research on the measurement and dimensions of rural poverty, ERS helps 
to better target and improve the effectiveness of Federal assistance 
programs. One ERS study, Comparisons of Metropolitan-Nonmetropolitan 
Poverty During the 1990s, documents the greater incidence of poverty in 
nonmetro relative to metro areas, but finds that metro-nonmetro 
differences in the depth and severity of poverty are less striking and 
more variable over time. These findings and differences in the 
characteristics of the metro and nonmetro poor, suggest that poverty-
reduction policies will be most effective when tailored to specific 
local areas. A second ERS study, published in ERS' new magazine, Amber 
Waves, assessed the effect of major demographic, economic, and Federal 
policy changes on the magnitude and dimensions of poverty during the 
1990s. Race and ethnicity, family structure, and the ability to work 
are critical determinants of poverty in rural areas. In 2004, ERS will 
publish findings from a study assessing the factors affecting 
geographic and racial/ethnic concentration of high poverty in rural 
areas. Characteristics such as education, employment, family structure, 
disability, and language proficiency differentiate these areas with 
poverty rates of over 20 percent.
    The agency focuses research on the implications of changing racial/
ethnic composition in rural areas. Hispanics were the fastest growing 
racial/ethnic group in rural America, and accounted for over 25 percent 
of the rural population growth during the 1990s. One ERS study on the 
impacts of Hispanic population growth on rural wages, found that the 
growth of Hispanics in rural areas has negatively affected the wages of 
local workers with a high school education and some college, due 
largely to changes in labor demand in specific industries. A second ERS 
study examined changing Hispanic settlement patterns over the last two 
decades, and found extensive Hispanic population dispersion into non-
traditional Hispanic settlement regions. These patterns reduced 
residential separation at the national level between Hispanics and non-
Hispanic Whites, but led to increased residential separation at the 
neighborhood level, especially in rapid-growth counties.
    ERS conducts ongoing research on the impact and effectiveness of 
Federal programs in rural areas. For example, ERS assists USDA's Rural 
Development mission area in efforts to improve the delivery and 
effectiveness of rural development programs. In 2003, ERS worked with 
Rural Development staff to help design measurable performance 
indicators for their rural development programs. ERS also conducted 
analyses to help Rural Development staff assess the economic impacts of 
proposed changes in their rural business loan programs. In addition, in 
2004, ERS will focus attention on the effects of Federal farm policy on 
rural areas and farm households by co-hosting a workshop with the 
National Center for Food and Agricultural Policy. This workshop will 
provide policymakers with a better understanding of the linkages 
between farm policy, farm households, and rural communities well in 
advance of the next farm bill.
    The farm typology developed by ERS researchers, coupled with a new 
accounting stance that views the farm household as a more relevant 
decision unit than just the farm business, have been keys to greater 
insight into the factors affecting the well-being of farmers. A 
condensed version of the farm typology was an important feature in 
Secretary Veneman's statement of principles for farm policy, and it 
continues to inform debates about the incidence of farm profits and 
government payments. In 2003, ERS researchers developed a new 
department-wide definition of limited resource farms that will lead to 
a change in the farm typology in 2004.

Goal 3: Enhance Protection and Safety of the Nation's Agriculture and 
        Food Supply
    ERS research is designed to support food safety decision-making in 
the public sector and to enhance the efficiency and effectiveness of 
public food safety policies and programs. The program focuses on 
valuing societal benefits of reducing and preventing illnesses caused 
by microbial pathogens; assessing the costs of alternative food safety 
policies; assessing industry incentives to enhance food safety through 
new technologies and supply chain linkages; evaluating regulatory 
options and change; and exploring linkages between food safety and 
international trade. ERS has worked closely with various USDA agencies 
and the Centers for Disease Control and Prevention (CDC) on various 
pathogen risk assessments and on analyzing the benefits and costs of 
implementing the Hazard Analysis and Critical Control Points (HACCP) 
rule. ERS and the Food Safety and Inspection Service (FSIS) work 
together to identify research projects and activities that address the 
needs of the Department.
    ERS, in cooperation with Washington State University, completed the 
first post-HACCP national survey of meat and poultry slaughter and 
processing plants. The survey finds that implementing the 1994 Pathogen 
Reduction (PR)/HACCP rule raised costs about 1 percent, or about $850 
million for the industry. Survey results will allow companies to assess 
their own adaptation performance vis-a-vis the industry average. While 
larger than pre-regulation estimates of PR/HACCP costs, the estimated 
costs are still considerably smaller than expected benefits. Results 
showed plants with branded products, strong customer requirements, and 
export orientation made the largest post-PR/HACCP investments in new 
food safety management processes or technologies, indicating market 
forces are at work to raise food safety above regulatory requirements 
in some cases. In 2003, ERS completed a study that summarizes the 
survey results and made the survey questions and summary results 
available on the ERS website.
    ERS has become well-known for its pioneering estimates of the 
societal costs associated with foodborne illnesses due to E. coli and 
other known pathogens. In Spring 2003, ERS launched its first 
interactive web-based data product, the foodborne illness cost 
calculator. The calculator allows users to choose a pathogen of 
interest, the number and severity of illnesses, and from among several 
alternative methodologies employed by economists for calculating 
societal costs.
    In 2003, ERS researchers completed a project that developed an 
economic framework for analyzing linkages between food safety and 
international trade. The project produced an ERS report, International 
Trade and Food Safety: Economic Theory and Cases Studies, which 
explores global trends in food safety regulation and food safety-trade 
policies, and analyzes food safety and trade conflicts and resolutions 
in various commodity sectors.
    In 2004, ERS will publish a study analyzing the private incentives 
for improving food safety in the U.S. Case studies include innovations 
the industry has developed and is using to produce safer beef, 
including new equipment, new testing technologies, and new management 
systems. Interviews with firms were used to determine the most 
significant factors contributing to the innovation. The collaborative 
and contractual relationships among firms in the meat, equipment, 
microbial testing, and restaurant industries are found to be key.
    Recently, policymakers have begun weighing the usefulness of 
mandatory traceability to address issues ranging from food safety and 
bioterrorism to the consumer right to know, as well as to inform 
consumers about food attributes including country of origin, animal 
welfare, and biotech content. Industry interviews, backed by industry-
level market studies, have been used to establish a description of the 
extent and type of traceability maintained by private sector firms. 
This information reveals that financial incentives are leading forms to 
develop a significant capability to trace. The findings indicate that 
mandatory traceability--possibly a one-size-fits-all regulation can be 
costly as firms already trace many product attributes. Further, other 
policies may be better targeted toward augmenting product 
differentiation or traceback for food safety.
    In response to increased risks to the Nation's agriculture and food 
supply due to bio-terrorism, ERS embarked on an ambitious new project 
in July of 2002. Security Analysis System for U.S. Agriculture (SAS-
USA) establishes a framework to systematically tie all food supply 
processes from farm production, food manufacturing, distribution of 
food products, to the food consumption in every region of the country. 
SAS-USA is capable of quickly distilling massive detailed regional 
information and displaying the information visually in user-friendly 
formats. These capabilities mean that emergencies can be managed 
efficiently and expeditiously by assessing vulnerabilities and 
predicting outcomes. SAS-USA is truly unique, filling a niche that 
previously required weeks and months of data assembly, analysis, and 
interpretation. In 2004, ERS will: continue to integrate agriculture, 
food, and transportation data to make the system more realistic in 
simulations; connect the U.S. agricultural/food supply chain to imports 
and exports; and continue to develop scenarios based on animal and 
plant diseases and food contamination.

Goal 4: Improve the Nation's Nutrition and Health
    ERS studies the relationships among the many factors that influence 
food choices and eating habits and their health outcomes. The roles of 
income, aging, race and ethnicity, household structure, knowledge of 
diet and health relationships, nutrition information and labeling, and 
economic incentives and policies that affect food prices and 
expenditures are of particular interest. Obesity--including 
understanding its costs to individuals and society, how income, diet 
and health knowledge affect obesity status, and considering private 
versus public roles in reducing obesity--is a priority for this 
Administration.
    ERS research has a major focus on the economic dimensions of 
obesity, including understanding the societal costs of obesity, 
explaining obesity trends among different demographic and income 
groups, and assessing the benefits and costs of alternative options for 
influencing Americans' food choices and dietary behaviors, including 
roles for nutrition education and Federal food and nutrition assistance 
programs. In April 2003, ERS organized the first national workshop on 
the economics of obesity. The workshop brought together leading health 
economists in the Nation and was attended by researchers from Federal 
agencies such as the CDC, Council of Economic Advisers, the Food and 
Drug Administration (FDA), the Federal Trade Commission (FTC), and the 
National Cancer Institute (NCI). Topics encompassed nearly all of the 
cutting-edge health economics research on the causes and consequences 
of the rise in U.S. obesity. A conference report has been drafted and 
is being edited for publication in 2004. Additionally, in 2004 studies 
will be completed on the effects of snack and fat taxes on food choices 
and diet quality; the demand for fruits and vegetables by consumers 
from different income groups; the effectiveness of labeling foods 
consumed away from home; and the link between obesity and awareness of 
Federal nutrition information programs.
    As part of our effort to improve the timeliness and quality of the 
Department's food consumption data, in 2003 ERS launched an interagency 
effort to develop a proposal for an external review of USDA's food 
consumption data needs and gaps. Enhancements to the food consumption 
data infrastructure are critical to understanding and addressing many 
market and policy issues in the Department. The interagency effort led 
to the funding of a review by the National Research Council's Committee 
on National Statistics. A panel of experts is being compiled, and the 
first stage of the data review will be a workshop to be held in spring 
2004.
    Through the Food Assistance and Nutrition Research Program (FANRP), 
ERS conducts studies and evaluations of the Nation's food and nutrition 
assistance programs. FANRP research is designed to meet the critical 
information needs of USDA, Congress, program managers, policy 
officials, clients, the research community, and the public at large. 
FANRP research is conducted through internal research at ERS and 
through a portfolio of external research. Through partnerships with 
other agencies and organizations, FANRP also enhances national surveys 
by adding a food and nutrition assistance dimension. FANRP's long-term 
research themes are dietary and nutritional outcomes, food program 
targeting and delivery, and program dynamics and administration.
    ERS completed a Congressionally mandated study of USDA's Fruit and 
Vegetable Pilot Program (FVPP). Section 4305 of the 2002 Farm Act 
provided $6 million to the FVPP for the 2002-2003 school year to 
improve fruit and vegetable consumption among the Nation's school 
children. The FVPP provided fresh and dried fruits and fresh vegetables 
free to children in 107 elementary and secondary schools--100 schools 
in 4 States (25 schools each in Indiana, Iowa, Michigan, and Ohio) and 
7 schools in the Zuni Indian Tribal Organization (ITO) in New Mexico. 
The intent of the pilot was to determine the feasibility of such a 
program and its success as assessed by the students' interest in 
participating. The ERS monograph, Evaluation of the USDA Fruit and 
Vegetable Pilot Program: Report to Congress (May 2003), provides an 
early review of the pilot.
    Food pantries and emergency kitchens play an important role in 
feeding America's low-income and needy populations. During a typical 
month in 2001, food pantries served about 12.5 million people, and 
emergency kitchens served about 1.1 million people. These organizations 
are part of the Emergency Food Assistance System (EFAS), a network run 
largely by private organizations with some Federal support. As part of 
the first comprehensive government study of EFAS, the ERS monograph, 
The Emergency Food Assistance System--Findings From the Client Survey 
(August, 2003), presents findings from a national study of EFAS clients 
who received emergency food assistance from selected food pantries and 
emergency kitchens.
    ERS has continued to fund a national survey of food security and 
hunger, conducted by the Census Bureau as a supplement to the Current 
Population Survey (CPS). The survey is designed to measure whether U.S. 
households always have access to enough food to meet basic needs. ERS 
focuses its efforts on improving the measurement of food security, 
promoting the use of the CPS 18-item food security index, and 
contributing to a better understanding of the determinants and 
consequences of food insecurity in the United States. ERS released the 
annual report, Household Food Insecurity in the United States, 2002, 
that provides statistics on the food security of U.S. households, as 
well as on how much they spent for food and the extent to which food-
insecure households participated in Federal and community food and 
nutrition assistance programs.
    ERS delivered the Congressionally mandated study, Assessment of WIC 
Cost-Containment Practices: A Final Report to Congress in February, 
2003. WIC State agencies adopt various cost-containment practices to 
reduce food costs, such as limiting food-item selection by WIC 
participants, limiting authorized food vendors, and negotiating rebates 
with food manufacturers or suppliers. The study found that cost-
containment practices can be relatively inexpensive to operate, reduce 
food package costs, and have few adverse impacts on WIC participants in 
terms of participant satisfaction, program participation, and product 
availability.

                  CONSUMER DATA AND INFORMATION SYSTEM

    The request for an increase of $8,676,000 will fund the development 
of an integrated and comprehensive data and analysis framework of the 
post-farm food system to identify, understand and track changes in food 
supply and consumption patterns and to explore the relationship between 
consumers' knowledge and attitudes and their consumption patterns. The 
centerpieces of this framework are nationally representative consumer 
and retail surveys of food prices, retail sales, consumption and 
purchases of food for at home and away-from-home eating, as well as 
data on consumer behavior, reactions, attitudes, knowledge, and 
awareness. This information system will provide market surveillance and 
insights into price changes, market demand, and consumer reactions to 
unforeseen events and disruptions such as the recent discovery of 
Bovine Spongiform Encephalopathy (BSE). In addition, the data and 
analysis framework will provide intelligence on diets, knowledge and 
awareness levels, helping policymakers respond to current events, such 
as the rise in obesity and overweight, and their interactions with the 
U.S. food and agriculture system. Such understanding will provide a 
basis for ensuring that consumers enjoy a low-cost, safe, secure, and 
nutritious food supply, as well as enhancing their health and 
productivity, and enabling farmers to prosper with new ways of doing 
business in diverse and ever-changing food markets by identifying 
changing consumer demand.
    The Consumer Data and Information System has four components 
providing intelligence across and within the food and agricultural 
complex. The first component, a Food Market Surveillance System, is an 
integrated set of surveys and supporting analysis concentrating on 
production and linkages in agriculture beyond the farm-gate. It would 
be the foundation of a research and monitoring program to: provide 
timely price, purchase, and sales data; identify food consumption 
patterns of consumers and how they change; provide consumers with 
improved information; quickly survey consumers about new issues or 
developments; and measure and identify strategies for managing food 
losses and waste. The second component, a new Rapid Consumer Response 
Module, would provide real-time information on consumer reactions to 
unforeseen events and disruptions, current market events, and 
government policies. This module would be integrated into several 
proprietary consumer data panels currently maintained by private 
vendors. The third component, a Flexible Consumer Behavior Survey 
Module (FCBSM), would complement data from the National Health and 
Nutrition Examination Survey (NHANES). The FCBSM would provide 
information needed to assess linkages between individuals' knowledge 
and attitudes about dietary guidance and food safety, their food-choice 
decisions, and their nutrient intakes. Combining the NHANES with this 
new module allows analysis of how individual attitudes and knowledge 
about healthful eating affect food choices, dietary status, and health 
outcomes. The last component is additional staff to ensure the 
successful design and implementation of the Consumer Data and 
Information System.
    As a Nation, we face challenges to our health, safety, and food 
arising from rapid changes in technology, social structure, and a 
globalizing economy. The cumulative effect of these issues and others 
is to strain and erode a general understanding of the role food and 
diet plays in our society. USDA's ability to assure nutritious foods 
and respond to these issues is grounded on investments in the creation 
of knowledge.

Goal 5: Protect and Enhance the Nation's Natural Resource Base and 
        Environment
    In this area, ERS research and analytical efforts, in cooperation 
with the Natural Resources Conservation Service (NRCS), support 
development of Federal farm, conservation, environmental, and rural 
policies and programs. These efforts require analyses of the 
profitability and environmental impacts of alternative production 
management systems in addition to the cost-effectiveness and farm 
income impacts of public sector conservation policies and programs.
    With passage of the 2002 Farm Bill, USDA looked to ERS to provide 
comprehensive and detailed, yet understandable, information to public 
and private users, including information on programs in the 
Conservation Title. In addition, ERS provided extensive support to 
other USDA agencies in developing rules for implementation of 2002 
conservation programs. ERS participated in Farm Service Agency (FSA) 
and NRCS working groups on the Conservation Reserve Program (CRP), the 
Environmental Quality Incentives Program (EQIP), the Conservation 
Security Program (CSP), and implementation of conservation technical 
assistance by third-party technical service providers. ERS contributed 
substantially to the NRCS benefit-cost assessments for EQIP, CSP and 
the third-party technical service provider rule. For instance, ERS 
participated in the EQIP Benefit-Cost Analysis Team and helped to 
prepare the NRCS report Environmental Quality Incentives Program: 
Benefit Cost Analysis released in May 2003. ERS assisted FSA with 
rulemaking for the CRP program by suggesting ways to decrease the 
complexity of the Environmental Benefits Index (EBI) used by USDA 
county office staff, as well as methods to expand the EBI to include 
program impacts on nutrient loadings in ground and surface waters.
    Since 1985, U.S. agricultural producers have been required to 
practice soil conservation on highly erodible cropland and conserve 
wetlands as a condition of farm program eligibility. Compliance 
mechanisms have been criticized, however, for low standards and lax 
enforcement. A report to be released in 2004, Environmental Compliance 
in U.S. Agricultural Policy: Past Performance and Future Potential, 
discusses the general characteristics of compliance mechanisms, their 
effectiveness in their current form, and the potential for expanding 
compliance to address nutrient runoff from crop production. This report 
will empirically assess the extent of erosion reduction that is likely 
to be the direct result of compliance. NRCS has indicated that the data 
and analysis developed for the report will be useful in carrying out 
the benefit-cost analysis of compliance that the agency has been 
ordered to undertake.
    The Congressionally-mandated study, The Conservation Reserve 
Program's Economic and Social Impacts on Rural Counties, transmitted to 
Congress in January 2004, addresses a number of concerns about the 
unintended consequences of high levels of enrollment in the CRP. Long 
run trends in rural employment and population are influenced by a 
variety of characteristics, and some have argued that high levels of 
CRP enrollment exacerbate the declines suffered by many rural 
communities. However, the report finds no statistically significant 
evidence that high enrollments in the CRP have had a systematic, 
adverse effect on population or community services in rural counties 
across the country. High CRP enrollments were associated with a 
negative effect on jobs in the years immediately following program 
introduction, but this effect generally was short-lived as communities 
adjusted to changing demands and new economic opportunities. In 
addition, CRP has improved hunting and fishing opportunities in rural 
areas. Changing the way CRP participants are compensated can affect the 
productivity profile of enrolled soils, but these changes would be 
small and represent a necessary cost of enrolling environmentally 
sensitive land.
    ERS researchers have actively assisted NRCS and the Environmental 
Protection Agency (EPA) in assessing the economic costs and benefits of 
changes to the rules governing Confined Animal Feeding Operations 
(CAFOs) under the Clean Water Act, signed on December 16, 2002, with 
revisions proposed to the Total Maximum Daily Load (TMDL) provisions. 
Following up on the report Confined Animal Production and Manure 
Nutrients, published in 2001, is a new report, Manure Management for 
Water Quality: Costs of Land Applying Nutrients from Animal Feeding 
Operations, released in June 2003, which analyzes the farm-, regional-, 
and national-level costs to the livestock and poultry sector of meeting 
manure management requirements similar to those in the December 2002 
rule. Results indicate that meeting a manure nutrient application 
standard increases the costs of managing manure. Costs are a function 
of farm size, acres of cropland on the farm, regional land use, 
willingness of landowners to substitute manure nutrients for commercial 
fertilizer, and whether a nitrogen or phosphorus standard is met.
    As rising populations and incomes increase pressure on land and 
other resources around the world, agricultural productivity plays an 
increasingly important role in improving food supplies and food 
security. The report, Linking Land Quality, Agricultural Productivity 
and Food Security, released in June 2003, explores the extent to which 
land quality and land degradation affect agricultural productivity, how 
farmers respond to land degradation, and whether land degradation poses 
a threat to productivity growth and food security in developing regions 
and around the world.
    In fiscal year 2003, ERS initiated the Program of Research on the 
Economics of Invasive Species Management (PREISM). PREISM promotes 
economic research and the development of decision support tools that 
have direct implications for USDA policies and programs for protection 
from, control/management of, regulation concerning, or trade policy 
relating to invasive species. Accomplishments in PREISM's first year 
included organizing the Economics of Invasive Species Workshop (May 12-
13) and conducting a competitive grants and cooperative agreements 
program. The workshop brought together invasive species experts from 
the USDA and other Federal agencies, State governments, universities, 
industry, and non-governmental organizations to identify research 
priorities that would inform USDA invasive species policy and program 
decisions. The competitive grants and cooperative agreements program 
funded 12 research projects in the areas of bioeconomic modeling and 
risk assessment, trade and invasive species, and the economics of 
alternative approaches to managing invasive species. When completed, 
these projects will provide insights, information, and practical 
decision tools to help USDA policy makers deal with the uncertainties 
and risks associated with invasive species outbreaks, jointly account 
for biological and economic factors in prioritizing invasive species 
threats, allocate resources between exclusion and control activities, 
and evaluate new approaches to addressing invasive species threats 
(including insurance schemes and producer purchased bonds).

                 CUSTOMERS, PARTNERS, AND STAKEHOLDERS

    The ultimate beneficiaries of ERS' program are the American people, 
whose well-being is improved by informed public and private 
decisionmaking, leading to more effective resource allocation. ERS 
shapes its program and products principally to serve key decision 
makers who routinely make or influence public policy and program 
decisions. This clientele includes White House and USDA policy 
officials and program administrators/managers; the U.S. Congress; other 
Federal agencies, and State and local government officials; and 
domestic and international environmental, consumer, and other public 
organizations, including farm and industry groups interested in public 
policy issues.
    ERS depends heavily on working relationships with other 
organizations and individuals to accomplish its mission. Key partners 
include: NASS for primary data collection; universities for research 
collaboration; the media as disseminators of ERS analyses; and other 
government agencies and departments for data information and services.

                            CLOSING REMARKS

    I appreciate the support that this Committee has given ERS in the 
past and look forward to continue working with you and your staff to 
ensure that ERS makes the most effective and appropriate use of public 
resources. Thank you.
                                 ______
                                 

   Prepared Statement of R. Ronald Bosecker, Administrator, National 
                    Agricultural Statistics Service

    Mr. Chairman and members of the Committee, I appreciate the 
opportunity to submit a statement for this Committee's consideration in 
support of the fiscal year 2005 budget request for the National 
Agricultural Statistics Service (NASS). This agency administers the 
U.S. agricultural statistics program, created in USDA in 1863, and, 
beginning in 1997, conducts the U.S. Census of Agriculture, first 
collected in 1840. Both programs support the basic mission of NASS to 
provide timely, accurate, and useful statistics in service to U.S. 
agriculture.
    The continual progression of American farms and ranches to make 
greater use of agricultural science and technology increases the need 
for more detailed information. The periodic surveys and censuses 
conducted by NASS contribute significantly to the overall information 
base for policy makers, agricultural producers, handlers, processors, 
wholesalers, retailers, and ultimately, consumers. Voids in relevant, 
timely, accurate data contribute to wasteful inefficiencies throughout 
the entire production and marketing system.
    Official data collected by NASS are used for a variety of purposes. 
Absence or shortage of these data may result in a segment of 
agriculture having to operate with insufficient information; therefore, 
NASS strives to continuously produce relevant and timely reports, while 
at the same time reviewing priorities in order to consider emerging 
data needs. The Farm Security and Rural Investment Act of 2002 created 
the need for several new data series. For example, NASS designed a new 
survey in cooperation with the Natural Resources Conservation Service 
(NRCS) and the Farm Service Agency (FSA) to collect information on land 
management and conservation practices. This assessment will be used by 
NRCS and FSA to report annual progress on the Farm Bill conservation 
program implementation. Additionally, the Act introduced several other 
new agricultural data needs and reinforced the importance of existing 
data series to ensure the continuation of farm security and rural 
investments. For example, counter-cyclical payments are determined in 
part by market year average prices determined by NASS. Each $0.01 
change in the average corn price can result in a change of more than 
$80 million in counter-cyclical payments. Similarly, large payment 
changes also apply for the other program crops. These are only a few 
specific data needs required by the Act, but they clearly highlight the 
importance of a strong, reliable agriculture statistics program.
    The NASS works cooperatively with each State Department of 
Agriculture throughout the year to provide commodity, environmental, 
economic, and demographic statistics for agriculture. This cooperative 
program, which began in 1917, has served the agricultural industry well 
and is often cited by others as an excellent model of successful State-
Federal cooperation. This joint State-Federal program helps meet State 
and national data needs while minimizing overall costs by consolidating 
both staff and resources, eliminating duplication of effort, and 
reducing the reporting burden on the Nation's farm and ranch operators. 
The success of this partnership was demonstrated by NASS, through its 
State-Federal cooperation, during the planning, collection, and 
preliminary release of the 2002 Census of Agriculture. Improved 
quality, an 88 percent response rate, and professional customer service 
through the use of a toll-free telephone number are direct results of 
the State-Federal partnership. NASS's 46 field offices, which cover all 
50 States and Puerto Rico, provide statistical information that serves 
national, State, and local data needs.
    NASS statistics contribute to providing fair markets where buyers 
and sellers alike have access to the same official statistics, at the 
same pre-announced time. This prevents markets from being unduly 
influenced by ``inside'' information which might unfairly affect market 
prices for the gain of an individual market participant. Empirical 
evidence indicates that an increase in information improves the 
efficiency of commodity markets. Information on the competitiveness of 
our Nation's agricultural industry has become increasingly important as 
producers rely more on the world market for their income.
    Through new technology, the products produced in the United States 
are changing rapidly as producers continue to become more efficient. 
This also means that the agricultural statistics program must be 
dynamic and able to respond to the demand for coverage of newly 
emerging products and changing industries. For example, during fiscal 
year 2003, NASS issued the U.S. Broiler Industry Structure report. This 
report provided a summary of the changes in the structure of the U.S. 
broiler industry from 1934 to present.
    Not only are NASS statistical reports important to assess the 
current supply of and demand for agricultural commodities, but they are 
also extremely valuable to producers, agribusinesses, farm 
organizations, commodity groups, economists, public officials, and 
others who use the data for decision making. For example, a special 
report titled Corn, Soybeans, and Wheat Sold Through Marketing 
Contracts 2001 Summary was released in February 2003. This report 
included information on marketing contracts at the United States and 
regional levels by Economic Sales Classes and by Farm Production Region 
and was developed to help identify changes in the structure of the 
Nation's grain and oilseed markets.
    All reports issued by NASS's Agricultural Statistics Board are made 
available to the public at previously announced release times to ensure 
that everyone is given equal access to the information. NASS has been a 
leader among Federal agencies in providing electronic access to 
information. All of NASS's national statistical reports and data 
products, including graphics, are available on the Internet, as well as 
in printed form. Customers are able to electronically subscribe to NASS 
reports and can download any of these reports in a format easily 
accessible by standard software. A summary of NASS and other USDA 
statistical data are produced annually in USDA's Agricultural 
Statistics, available on the Internet through the NASS Home Page, on 
CD-ROM disc, or in hard copy. All of NASS's 46 field offices have Home 
Pages on the Internet, which provide access to special statistical 
reports and information on current local commodity conditions and 
production.
    Beginning in fiscal year 1997, NASS received funding to conduct the 
Census of Agriculture on a 5-year cycle. The transfer of the 
responsibility for the Census of Agriculture to USDA streamlines 
Federal agricultural data collection activities and has improved the 
efficiency, timeliness, and quality of the census data. Preliminary 
results of the 2002 Census of Agriculture were released on February 3, 
2004. The preliminary release included selected demographic data at the 
National and State level and are available by request via CD-Rom, the 
NASS Website, or in paper copy. The final National, State, and county 
level data are scheduled to be released on June 3, 2004. The 2002 
Puerto Rico Census of Agriculture was also released on February 3, 
2004.
    Statistical research is conducted to improve methods and techniques 
used in collecting and processing agricultural data. This research is 
directed toward providing higher quality census and survey data with 
less burden to respondents, producing more accurate and timely 
statistics for data users, and increasing the efficiency of the entire 
process. For example, NASS has implemented statistical methodology to 
measure and adjust for the incompleteness of its list sampling frame. 
This allows for more complete coverage of farms traditionally difficult 
to identify during list building activities, mainly small and 
disadvantaged farm operations. The NASS statistical research program 
strives to improve methods and techniques for obtaining agricultural 
statistics with improved levels of accuracy. The growing diversity and 
specialization of the Nation's farm operations have greatly complicated 
procedures for producing accurate agricultural statistics. Developing 
new sampling and survey methodology, expanding modes of data collection 
including Internet contacts, and exploiting computer intensive 
processing technology enables NASS to keep pace with an increasingly 
complex agricultural industry. NASS is making considerable advancements 
in providing respondents the option of reporting via the Internet with 
the ultimate goal of giving the Nation's farmers and ranchers the 
opportunity to electronically respond to the 2007 Census of 
Agriculture.
    The fiscal year 2004 budget included $4.8 million for agricultural 
estimates restoration and modernization. These funds provided a much 
needed foundation for quality improvements in forecasts and estimates 
and are greatly appreciated. The 2004 funds are being used to improve 
the precision level from commodity surveys conducted by NASS. The 
majority of the funding is being allocated to increased sample sizes 
and the data collection activities of local interviewers throughout the 
Nation.
major activities of the national agricultural statistics service (nass)
    The primary activity of NASS is to provide reliable data for 
decision making based on unbiased surveys each year, and the Census of 
Agriculture every 5 years, to meet the current data needs of the 
agricultural industry. Farmers, ranchers, and agribusinesses 
voluntarily respond to a series of nationwide surveys about crops, 
livestock, prices, chemical use and other agricultural activities each 
year. Periodic surveys are conducted during the growing season to 
measure the impact of weather, pests, and other factors on crop 
production. Many crop surveys are supplemented by actual field 
observations in which various plant counts and measurements are made. 
Administrative data from other State and USDA agencies, as well as data 
on imports and exports, are thoroughly analyzed and utilized as 
appropriate. NASS prepares estimates for over 120 crops and 45 
livestock items which are published annually in over 400 separate 
reports.
    The Census of Agriculture provides national, State, and county data 
for the United States on the agricultural economy every 5 years. The 
Census of Agriculture is the only source for this information on a 
local level which is extremely important to the agricultural community. 
Detailed information at the county level helps agricultural 
organizations, suppliers, handlers, processors, and wholesalers and 
retailers better plan their operations. Important demographic 
information supplied by the Census of Agriculture also provides a very 
valuable data base for developing public policy for rural areas.
    Approximately 65 percent of NASS's staff are located in the 46 
field offices; 23 of these offices are collocated with State 
Departments of Agriculture or land-grant universities. NASS's State 
Statistical Offices issue approximately 9,000 different reports each 
year and maintain Internet Home Pages to electronically provide their 
State information to the public.
    NASS has developed a broad environmental statistics program under 
the Department's water quality and food safety programs. Until 1991, 
there was a serious void in the availability of reliable pesticide 
usage data. Therefore, beginning in 1991 NASS cooperated with other 
USDA agencies, the Environmental Protection Agency (EPA), and the Food 
and Drug Administration, to implement comprehensive chemical usage 
surveys that collect data on certain crops in specified States. NASS 
data allows EPA to use actual chemical data from scientific surveys, 
rather than worst case scenarios, in the quantitative usage analysis 
for a chemical product's risk assessment. Beginning in fiscal year 
1997, NASS also instituted survey programs to acquire more information 
on Integrated Pest Management (IPM), additional farm pesticide uses, 
and post-harvest application of pesticides and other chemicals applied 
to commodities after leaving the farm. These programs have resulted in 
significant new chemical use data, which are important additions to the 
data base. Surveys conducted in cooperation with the Economic Research 
Service (ERS) also collect detailed economic and farming practice 
information to analyze the productivity and the profitability of 
different levels of chemical use. American farms and ranches manage 
nearly half the land mass in the United States, underscoring the value 
of complete and accurate statistics on chemical use and farming 
practices to effectively address public concerns about the 
environmental effects of agricultural production. Through funding 
provided by this Committee in fiscal year 2003, data on the status of 
the farm economy will now be expanded to the State level for 15 major 
agricultural States.
    NASS conducts a number of special surveys as well as provides 
consulting services for many USDA agencies, other Federal or State 
agencies, universities, and agricultural organizations on a cost-
reimbursable basis. Consulting services include assistance with survey 
methodology, questionnaire and sample design, information resource 
management, and statistical analysis. NASS has been very active in 
assisting USDA agencies in programs that monitor nutrition, food 
safety, environmental quality, and customer satisfaction. In 
cooperation with State Departments of Agriculture, land-grant 
universities, and industry groups, NASS conducted 148 special surveys 
in fiscal year 2003 covering a wide range of issues such as farm 
injury, nursery and horticulture, farm finance, fruits and nuts, 
vegetables, and cropping practices. All results from these reimbursable 
efforts are publicly available to benefit all of agriculture.
    NASS provides technical assistance and training to improve 
agricultural survey programs in other countries in cooperation with 
other government agencies on a cost-reimbursable basis. NASS's 
international programs focus on developing and emerging market 
countries in Asia, Africa, Central and South America, and Eastern 
Europe. Accurate information is essential for the orderly marketing of 
farm products. NASS works directly with countries by assisting in the 
application of modern statistical methodology, including sample survey 
techniques. This past year, NASS provided assistance to Brazil, China, 
Ecuador, El Salvador, Ethiopia, Kazakhstan, Mexico, Russia, South 
Africa, and the Ukraine. In addition, NASS conducted training programs 
in the United States for 168 visitors representing 27 countries. These 
assistance and training activities promote better quality data and 
improved access to data from other countries.
    NASS annually seeks input on improvements and priorities from the 
public through the Secretary of Agriculture's Advisory Committee on 
Agriculture Statistics, displays at major commodity meetings, data user 
meetings with representatives from agribusinesses and commodity groups, 
special briefings for agricultural leaders during the release of major 
reports, and through numerous individual contacts. As a result of these 
activities, the agency has made adjustments to its agricultural 
statistics program, published reports, and expanded electronic access 
capabilities to better meet the statistical needs of customers and 
stakeholders.

                         FISCAL YEAR 2005 PLANS

    The fiscal year 2005 budget request is for $137,594,000. This is a 
net increase of $9,433,000 from fiscal year 2004.
    The fiscal year 2005 request includes increases for the 
continuation of restoration and modernization of NASS's core survey and 
estimation program ($7,045,000); improvement in the statistical 
integrity and standardization of the data collection and processing 
activities of the Locality Based Agricultural County Estimates/Small 
Area estimation program ($2,500,000); collaborative Presidential and 
Departmental eGovernment initiatives ($785,000); funding for increased 
pay costs ($1,812,000) and funding to recognize employee performance 
($465,000). The request also includes a decrease due to the cyclical 
activities associated with the Census of Agriculture program 
(-$3,174,000).
    An increase of $7,045,000 and 10 staff years are requested to fund 
phase II of the restoration and modernization of NASS's core survey and 
estimation program. This increase will be directed at continuing to 
restore and modernize the core survey and estimation program for NASS 
to meet the needs of data users at an improved level of precision for 
State, regional, and national estimates. The program covers most 
agricultural commodities produced in the United States, as well as 
economic, environmental, and demographic data. Funding in fiscal year 
2004 is primarily being used to restore sample sizes for greater 
statistical defensibility. These changes are designed to increase 
precision at the State and regional levels to promote the NASS goal for 
fiscal year 2004 of reaching precision target levels at least 60 
percent of the time for major survey indications. The additional 
funding requested in fiscal year 2005 will allow continued improvements 
and provide the necessary resources to reach precision target levels an 
estimated 77 percent of time.
    An increase of $2,500,000 and 4 staff years are requested to 
provide for data acquisition for the annual integrated Locality Based 
Agricultural County Estimates/Small Area estimation program. Local area 
statistics are one of the most requested NASS data sets, and are widely 
used by private industry, Federal, State and local governments and 
universities. This funding supports the NASS goal to incrementally 
improve survey precision for small area statistics. Proper follow-up 
data collection activities and redesign of survey systems will improve 
the critical annual county-level data. The Risk Management Agency (RMA) 
uses these statistics in indemnity calculations for Group Risk Plans 
and the Group Risk Revenue Plans as part of the risk rating process. 
This affects premium levels paid by producers. The FSA uses county 
estimates to weight posted county prices to national loan deficiency 
payments, and as an input to assist producers to update their base 
acreage and yields as directed by the 2002 Farm Bill. In addition, 
financial institutions, agriculture input suppliers, agricultural 
marketing firms, and transportation utilize county level data to make 
informed business decisions.
    An increase of $785,000 for collaborative eGovernment efforts is 
requested to support Presidential and Departmental eGovernment 
initiatives. Specifically, the funding will support NASS's share of the 
USDA Presidential initiatives, the continued development of the USDA 
Enterprise Architecture, and the USDA Enablers initiative. Without this 
funding, NASS's efforts to increase the percentage of questionnaires 
available via the Internet will be negatively impacted.
    A net decrease of $2,610,000 and 7 staff-years is requested for the 
Census of Agriculture. The Census of Agriculture budget request is for 
$22,520,000. This includes a cyclical program cost decrease of 
$3,174,000, partially offset by $564,000 for employee compensation. The 
available funding includes monies to finalize analysis, summary, and 
dissemination of the 2002 Census of Agriculture. The reduction reflects 
the decrease in staffing and activity levels to be realized due to the 
cyclical nature of the 5-year census program and the postponement of 
the Census of Horticultural Specialties. Historically the Census of 
Horticultural Specialties has been conducted every 10 years, but due to 
the dynamic growth of this industry, NASS was planning to measure this 
component of agriculture every 5 years. Competing funding priorities 
have precluded this accelerated schedule. The annual program covering 
selected horticultural commodities will continue to be available.
    This concludes my statement, Mr. Chairman. Thank you for the 
opportunity to submit this for the record.

    Senator Bennett. Thank you all for your testimony.

                      FACILITY FEASIBILITY STUDIES

    Dr. Jen, in the Senate report that accompanied our bill 
last year and the narrative that accompanied the conference 
report, we both included direction to ARS to provide 
feasibility reports on various buildings and facilities 
projects. Took a little heat on that from some of my colleagues 
who said we want our building money right now without having to 
go through a feasibility report.
    But the House and Senate Committees both agreed that 
funding requests for construction projects would not be 
considered until a feasibility study and forwarded to the 
Committee by March 1, and we requested that FAS prioritize 
these projects. To date, we have not received your reports. I 
do not think that that means that there are not going to be any 
ARS appropriations, but I would like to know what the status of 
the preparation of these reports are and why they have not been 
forwarded to the Committee.
    Dr. Jen. Mr. Chairman, it is my understanding that those 
feasibility study reports have been delivered already to the 
Committee members. Is that correct?
    Senator Bennett. They came up by courier last Friday? Okay; 
has the courier reached us?
    Well, the report is in the mail.
    I think we better find out where it is, because obviously, 
if we are going to act on that basis, we need the reports, so I 
assume you kept a copy.
    Dr. Jen. We did. We will check on the courier.
    Senator Bennett. Send us another one.
    Dr. Jen. Yes.
    Senator Bennett. And when the courier shows up, wherever he 
or she may have wandered, why, then, we will have two, but we 
would appreciate getting those as quickly as we possibly could.
    Dr. Jen. We will make sure that you have them, Mr. 
Chairman.

                         CONGRESSIONAL ADD-ONS

    Senator Bennett. Okay; now, while I have you, let us 
concentrate on the impact on ARS. The fiscal year 2005 budget 
request assumes the termination of all additional funding 
provided by Congress during the last four appropriations 
cycles; that is, where the initiative came from the Congress. 
We are talking about $170 million roughly. Setting aside for 
the moment the debate about whether members of Congress have a 
better idea of the needs of their particular areas than the 
Department does, let us concentrate on the impact on ARS.
    If Congress were to agree to these terminations, we 
calculate 312 ARS scientists, researchers and support staff in 
42 States would lose their jobs, which is roughly 3 percent of 
the total ARS staffing. That is not a huge amount of people 
unless you happen to be one of the 312, but that does not count 
the people that ARS is currently in the process of hiring with 
fiscal year 2004 monies, nor does it include the impact on 
cooperative agreements with the various universities.
    I have been out and visited the universities and found the 
ARS to be probably the most popular single program at various 
agricultural schools, because of the synergy that they feel 
between their faculty and ARS people. When universities say we 
really do not know or care whether a researcher is an ARS type 
or a member of our faculty, the cooperation is so close.
    So this would be a very serious reduction, and how would 
you plan to go about conducting a reduction in force of this 
size, and do you have any ideas what it would cost?
    Dr. Jen. Mr. Chairman, I think I appreciate particularly 
your comments about the fact that ARS scientists are very well 
respected in the university campuses. In my travels, I have 
found it to be the same. Many universities would prefer that 
ARS scientists would never be relocated or change direction, 
and many of them wish ARS scientists would become university 
faculty members.
    Senator Bennett. Is that how we are going to do the RIF is 
get them all hired by the universities?
    Dr. Jen. No, I do not believe so, sir. Some of them 
probably will have that opportunity. Other ARS scientists would 
be offered reassignment in funded vacant positions either at 
the location or at other ARS locations throughout the country.
    We are under a very difficult budget situation. Personally, 
I recognize that this is a very difficult situation.
    Senator Bennett. Well, does that mean we no longer need to 
provide funding for diet, nutrition and obesity research at the 
Pennington Biomedical Research Center or Pierce's Disease 
research in California or Sudden Oak Disease research in 
Maryland? These are all projects that are terminated apparently 
because Congress thought of them rather than the 
Administration. Do we consider that these projects are now 
complete?
    Dr. Jen. Yes and no, sir. Some of the projects are being 
carried out in more than one location, so some of the slack 
will be picked up by the other research locations.
    ARS has over 1,100 projects. Some of the projects will have 
to be terminated after the job has been completed. However, if 
you allow researchers to determine when projects have been 
completed, they will never be done.
    Senator Bennett. I understand that.
    Dr. Jen. And so, sometimes, you know we have to make that 
hard choice.
    Senator Bennett. I understand that. I would just hope, and 
it does not appear, that the controlling factor as to which 
projects get terminated and which ones do not is which ones 
came from the Congress and which ones did not. I would like to 
think maybe Congress knows a little bit about some of these 
things and has a role to play as to who gets funded and who 
does not. There is an uncertainty here if, in every instance, 
and your Administration is not the first, in every instance 
where they request termination of every Congressionally-
originated project, Congress somehow finds the money to fund 
them anyway, but this is a year-to-year funding situation 
without the stability that comes elsewhere, and I would think 
it would have an unfortunate impact on the efficiency and 
continuity of some of these programs. Do you have any sense 
that the Congressionally-sponsored programs are, by definition, 
inferior to the others?
    Dr. Jen. I do not believe so, sir. In fact, we make a very 
conscious effort to coordinate the projects that were initiated 
by Congress with the base programs.
    Senator Bennett. Well, we will look at this closely. I note 
that the budget requests termination of the diet research and 
obesity research program at Pennington Biomedical Research 
Center at ARS headquarters and then requests funding for an 
Administration initiative to do similar research at the same 
facility. I am not sure we are going to do that. We will have 
this discussion as we go forward, and I appreciate your candor 
and your sensitivity to this issue.

                     CONSERVATION SECURITY PROGRAM

    Mr. Rey, you have estimated the cost for the CSP at $13.4 
billion. Did I get that number right?
    Mr. Rey. That would be our computation of the cost of the 
proposed rule projected forward through the life of the 
program. That is a theoretical estimate, obviously.
    Senator Bennett. That is a theoretical estimate.
    Mr. Rey. Right.
    Senator Bennett. All right; never mind. I had another name 
for it, but I will not put it on the record.
    Mr. Rey. Theoretical works better in a public hearing.
    Senator Bennett. Yes, yes; well, okay, if the program 
becomes an open-ended entitlement, as some have suggested, do 
you have any estimate of the cost?
    Mr. Rey. That is somewhat difficult to anticipate. I do not 
think anyone really knows what the total cost would be at that 
point. One of the limitations would be the limitation of a 15 
percent cap on the use of technical assistance in delivering 
the program. That will limit how many NRCS employees and hours 
could be spent delivering it, because there are, as I said in 
my remarks, 700,000 farmers and ranchers that would be 
eligible.
    So I think it is conceivable that there would be an excess 
of what we have projected the proposed rule forward to cost. 
But that would be hard to predict based on what we know today.
    Senator Bennett. All right. Senator Kohl has joined us, so 
I will stop in this round and turn it over to Senator Kohl, 
reserving the option of a second or third round.
    Senator Kohl. Thank you, Senator Bennett.

                        DAIRY FORWARD CONTACTING

    Dr. Collins, in 1999, Congress passed legislation to set up 
a dairy forward contracting pilot program, which is set to 
expire at the end of this year. Dairy forward contracting, as 
you know, allows buyers and sellers to voluntarily agree upon 
delivery of a specific amount of milk for a set price over a 
specified period. About 655 of Wisconsin's dairy farmers have 
participated in the pilot program. Many of them recommend 
making this voluntary program permanent because it gives them a 
new way to manage their risk.
    Can you tell us the Administration's position on this 
program? Do they support legislation that would make the dairy 
forward contracting program permanent?
    Dr. Collins. Senator Kohl, to answer that directly, I think 
I would have to see the legislation and get the Secretary's 
view on that. I would say that, however, we have looked at this 
program a couple of times. We did a mandated study of the 
program in 2001. We followed that up with a supplement to the 
report based on the experience of 2002. And in those cases we 
found that the forward contracting program worked perfectly 
fine. In 2001, producers actually were slightly worse off than 
they would have been had they not participated in forward 
contracting. In 2002, we found just the opposite, that 
producers were slightly better off than had they not 
participated in forward contracting.
    The only issue that the Department has raised with respect 
to this is, while it sees no problem with continuing a forward 
contracting program for milk used for Class III and Class IV 
purposes, it has been concerned about legislative proposals 
that would allow forward contracting for milk used for Class I 
purposes. So that would be the one reservation that I would 
raise on legislation on this issue.

             REOPENING EXPORT MARKETS FOR BEEF AND POULTRY

    Senator Kohl. All right. Secretary Penn, following the BSE 
discovery in Washington State last December, our beef export 
markets, as you know, were badly shaken. Similarly, we have 
seen problems with certain poultry export markets due to avian 
influenza. In both these cases, the problem originated in 
another country and was imported to the United States. Open 
markets are a two-way street. They allow our products to move 
in foreign commerce, but they also raise the possibility that 
we are importing serious problems.
    Could you update us on what USDA is doing to reopen export 
markets for our beef and poultry products? And can you please 
comment on how we protect our export markets from problems 
which are themselves foreign in origin?
    Dr. Penn. Well, thank you for the question, Senator. I 
think you characterized the situation very aptly. Since the 
discovery of this one cow on December 23rd in Washington State, 
and since early-year outbreaks of avian influenza on the east 
coast and the hi-path avian influenza case in Texas, we have 
seen our export markets summarily closed for beef and a large 
amount of our poultry products.
    Before the BSE outbreak, we had anticipated exporting $3.8 
billion worth of beef and beef products this year, and we had 
anticipated our poultry products to be $2.3 billion. Together, 
that is about 10 percent of the total amount of exports that we 
had forecast for the year.
    So this is very important to us, and we have set about 
immediately trying to engage our customers, our trading 
partners, and to try to get the markets reopened.
    In every case, we have tried to make sure that we do this 
on the basis of sound science, that is, that we try to make 
sure that we have taken all of the amelioration measures that 
are warranted, and then we have gone to great lengths to 
explain to our trading partners what we have done and why that 
ensures the safety of the product that we are trying to sell to 
them and the safety of the product for our own consumers.
    We have provided a large amount of technical information to 
all of these markets. We have sent technical teams to several 
of these countries to more fully explain what we have done and 
why our products are safe. And in several cases, we have 
invited technical teams from various countries to come and 
review our procedures and visit our plants and facilities. This 
has certainly been the case with Japan and Mexico. We 
anticipate a technical team to come from Korea in the very near 
future.
    Again, the international standards that govern trade in 
both of these products indicate that once certain measures have 
been taken, then it is okay for trade to resume. We think that 
we have taken all of the measures that are appropriate to take, 
all the measures that are based upon science, and we are now in 
the process of encouraging these countries to resume trade as 
quickly as possible.
    I am pleased to say that in the case of Canada, much of 
that market for beef has reopened. In the case of Mexico, we 
have restored about 65 percent of what we were formerly 
exporting to Mexico. And in the case of poultry, we have 
managed to get most of the pipeline shipments--those shipments 
that were caught on the water between the export point and the 
delivery point moved into the country. And we have managed to 
get many of those markets to regionalize, to only ban products 
from States in which we have had actual outbreaks of avian 
influenza, rather than banning all exports from the United 
States.
    So we are continuing to work diligently on this, and I hope 
that we get a substantial portion of these markets restored in 
the very near future.
    Senator Kohl. You said at the outset of your statement that 
we were predicting exports of beef products--did you say three-
point----
    Dr. Penn. $3.8 billion for beef.
    Senator Kohl. And poultry at?
    Dr. Penn. $2.3 billion.
    Senator Kohl. Yes. So what is your anticipation now for the 
year? Are you prepared to make some estimate?
    Dr. Penn. I have not done a new rack-up in a while, but we 
think that for beef, out of the $3.8 billion, we have about $1 
billion restored at the moment. We are hoping to get more of 
that restored, of course, with our big markets like Japan and 
Korea and Hong Kong, in the very near future.
    For poultry, the situation is much better. I don't know the 
percentages, but of the $2.3 billion, we now have trade flowing 
for a substantial part of that. We are not exporting from the 
State of Texas, where we had hi-path avian influenza, and a few 
other States. But we are doing much better for poultry than we 
are for beef at the current moment.

            TRADE IMPLICATIONS OF GENETICALLY MODIFIED CROPS

    Senator Kohl. Dr. Penn, given the fact that there has been 
a tremendous increase in U.S. production of genetically 
modified crops, and given the trade implications, do you think 
that we have allowed for too much production of biotech crops 
before we had the knowledge and the tools in hand to make sure 
contamination would not occur? If we have moved so quickly on 
biotech crops that we placed some of our export markets at 
risk, what steps are you taking to meet concerns of some 
countries that will not even accept those genetically modified 
crops as food aid?
    Dr. Penn. Well, this question has a connection to the 
previous question, and that is, we are increasing our exports 
of agricultural products almost every year, and more and more 
of our agricultural products involve genetically modified 
products. These are products that have gone through the 
regulatory system in this country, and we think that we have 
got one of the best, strictest regulatory systems anywhere in 
the world.
    We continue to insist that these trading rules must be 
based on solid scientific underpinnings, and there are 
international organizations that are involved more and more in 
helping to establish these trading rules--the OIE or the 
International Organization for Animal Products, the IPPC, which 
relates to plants, CODEX, which relates to food products--and I 
think more and more we are going to have to rely on these 
international standard-setting bodies to be the ones that 
govern rules for trading in various kinds of products.
    Now, with respect to biotech products, as you correctly 
note, biotechnology in a very substantial way burst upon U.S. 
agriculture in 1996, sort of all of a sudden, with Roundup 
Ready soybeans. In our most recent crop report, the acreages 
for corn, cotton, and soybeans, the proportion of the acreage 
that is biotech has substantially increased: 46 percent of the 
corn acreage for the coming year, farmers are indicating, will 
be biotech, and about three-quarters of our soybean and cotton 
acreage will be biotech.
    Now, these products have been approved by our regulatory 
authorities. They are as safe as other products. And we see no 
reason why there should be any restraint of trade in those 
products. We continue to have problems with some markets, most 
notably the European Union, of course, but we are continuing to 
try to educate and persuade in that case.
    You mentioned specifically food aid. I think that is very, 
very unfortunate that we have people who are literally starving 
and who are being denied perfectly safe food simply because 
their authorities are insisting that for various reasons no 
genetically modified food aid be allowed.
    Now, I am aware of the case, the most recent case in Angola 
that you mentioned, and our USDA authorities are working with 
the World Food Program and with the nongovernmental 
organizations that are supplying food in Angola. And we are 
trying to work around this problem because literally people's 
lives are at stake in this case. So we are trying to work 
through this, and then we are also trying to educate other 
countries about the safety of genetically modified food so that 
we don't have these kinds of disruptions of food aid in the 
future.

                     GEOSPATIAL INFORMATION SYSTEM

    Senator Kohl. All right. Finally, Dr. Penn, in the Common 
Computing Environment account, there is a request for $9 
million for FSA to complete digital data maps for rural farm 
communities across the country. These maps are an important 
tool to the farmer and for the agency to effectively administer 
farm, conservation and disaster programs and also to provide 
critical information with animal or plant disease outbreaks.
    It is my understanding that the data must be digitized and 
as a last step certified before this information can be of any 
use to the farmer or agency. In my own State of Wisconsin, not 
a single county has been certified.
    Can you tell us how many of the 3,051 counties in the 
United States targeted by FSA have been digitized and 
certified? When do you expect to finish this work?
    Dr. Penn. I cannot tell you that right now off the top of 
my head, but I will certainly be happy to get that information 
and we will provide it to you. We won't use Dr. Jen's courier.
    We will try to make sure that we hand-carry that 
information so that you have it in a short period of time.
    But I can say that this is, as you note, a very important 
step forward, being able to have these maps. They are important 
not only for FSA, but they have benefits for our colleagues in 
the natural resources conservation area and in the crop 
insurance area. It is very important that we complete this 
project, which is a multi-year task. We not only have money in 
the FSA budget, but there is also a request for support of the 
Geospatial Information System within the $18 million increase 
in the budget of the Office of the Chief Information Officer 
for USDA, which funds our common computing environment. And we 
very desperately need to get that funding because our 
efficiency gains in the future very much depend on being able 
to implement a lot of this new technology. Our budget does not 
support additional numbers of people, so we really do need the 
new technology.
    Senator Kohl. I do appreciate your willingness to supply a 
progress report on where we are.
    Dr. Penn. We will do that.
    [The information follows:]

              Geospatial Information System (GIS) Progress

    As of April 7, 2004, 1,767 counties have digitized common 
land units (CLU's) and 381 of these counties have been 
certified. Of the 72 counties in Wisconsin, 20 counties have 
digitized CLU's. While no counties in Wisconsin are currently 
certified, about 10 counties are planned for certification by 
the end of fiscal year 2004.
    Approximately 2,100 to 2,200 counties should be digitized 
by the end of the fiscal year. At the current rate, we would 
expect to have as many as 700 to 800 counties certified by the 
end of the fiscal year.

    Senator Kohl. Thank you so much, and thank you, Mr. 
Chairman.
    Senator Bennett. Thank you, sir.
    Senator Harkin.
    Senator Harkin. Thank you very much, Mr. Chairman.

                   NATURAL RESOURCES AND ENVIRONMENT

    First, I would like to start, if I could, with Under 
Secretary Rey. Mr. Rey, you are obviously the top official at 
the Department of Agriculture in the area of conservation and 
natural resources and environment. Dr. Penn sitting next to you 
there, he is the lead when it comes to commodities, like corn 
and wheat and beans and other products that are important to 
society.
    Mr. Rey, your responsibilities, I believe, also involve 
products or commodities that farmers and ranchers produce and 
which are very important to society and for which society has 
said that it is willing to pay. Those products or commodities 
include, of course, clean water and air, productive soil, 
wildlife habitat, and so forth.
    This idea of conservation and environmental benefits as 
commodities or products was part of our thinking in the Farm 
Bill. And as you know, it has further evolved, for example, 
when we envisioned carbon credit trading.

                           CSP PROPOSED RULE

    So, Mr. Rey, with that in mind, I want to convey my thanks 
to the Secretary, to you, to Mr. Knight, for providing public 
access to the comments on the CSP proposed rule. Farmers, 
ranchers, and the general public have sent more than 14,000 
comments, as I understand it, and I understand virtually all 
expressing disappointment in the proposed rule. I also know 
that you attended the listening session on the proposed rule in 
Des Moines in February, where over 250 people attended, again, 
which I understand most of whom opposed the proposed rule and 
everybody who spoke was against the proposed rule.
    So I guess I would just start off by saying that I am sure 
you acknowledge that there is a very high level of interest in 
the CSP and that there is a widespread disagreement with the 
proposed rule and that these are serious and substantive 
concerns. And I would just ask, you know, again, for any 
comments you have on what I have just said and what is 
happening to the proposed rules and when we can expect to see a 
final rule.
    Mr. Rey. First of all, I don't disagree with your 
characterization of how the comments were transmitted to us. As 
I said before you arrived, I think many of the comments 
expressed concerns which we have an obligation to address in 
clarifying our intent about how the rule is drafted and how it 
will work in practice. Other comments are concerns that are 
going to drive changes to the proposed rule, and that is why we 
have comment periods, to get those kinds of comments.
    We are trying to bring forward a final rule in time for 
there to be a CSP sign-up this year so that we can use the 
money that you and other Members of Congress appropriated in 
the fiscal year 2004 Agriculture and Related Agencies 
Appropriations bill. And I would be happy to share with the 
Committee for the record our current schedule, which we think 
will get us there in time to start a sign-up this year.
    [The information follows:]

                      TIMELINE TO FIRST CSP SIGN-UP
------------------------------------------------------------------------

------------------------------------------------------------------------
Mid May...................................  Complete analysis of the
                                             Public Comments on CSP
                                             proposed Rule
Mid June..................................  Clear and Publish CSP Final
                                             Rule
Early July................................  Conduct First CSP Signup
End of July...............................  Complete Signup
August....................................  Begin enrolling CSP
                                             contracts
September.................................  Complete full obligation of
                                             fiscal year 2004 CSP
                                             funding
------------------------------------------------------------------------


    Mr. Rey. I won't repeat my summary of some of the basic 
concerns and where we think we can either clarify our intent to 
address those concerns or make some changes to address those 
concerns. But I will share them with your staff today and later 
as we move forward in the rulemaking process.
    I will say that the Des Moines hearing was, I thought, a 
good one. I remarked to all of the assembled commentors that, 
because of their numbers, we had asked them to be very brief in 
their comments. And I told them that I was pleased that they 
were respectful of the time limits that we imposed on them, if 
not the regulatory proposal on which they were commenting. But 
we got a lot of good comments. I took somewhere in the 
neighborhood of eight or nine pages of notes from the session.
    Senator Harkin. I appreciate that, and I have heard from 
other States where you have had the forums, and I understand 
they were also well attended in other States and that the 
general consensus was that most of the farmers were very upset, 
ranchers that came in were very upset with the proposed rules, 
thinking that it really was going to cut a lot of them out of 
the program. That seems to be the general consensus, at least 
as I have heard from the input that I got.

                            CSP FUNDING CAP

    Now, again, in the proposed rule, USDA complains about the 
difficulties that come from running a program open to all 
producers but with a strict funding limit. The proposed rule 
says, ``The greatest challenge was to design a new conservation 
entitlement program with a cap.'' Well, as we both know, CSP 
does not have a set funding limit starting October 1st of this 
year.
    Mr. Rey. Right. At the time that the rule----
    Senator Harkin. And you talked about that in your 
statement. I read that. I read that. But the President's budget 
proposes one.
    Mr. Rey. We propose a cap for fiscal year 2004 and--well, 
Congress provided one for 2004.
    Senator Harkin. Yes.
    Mr. Rey. We are proposing an amount of money for 2005.
    Senator Harkin. Well, do you see the irony that I have 
just--the irony that USDA is complaining about the difficulty 
of implementing a rule that is open to all with a cap, okay? 
But we took off the cap. Then the Administration turns around 
and requests a cap for next year.
    Mr. Rey. But I think the order of sequence was that the cap 
was taken off after our budget was sent forward. It was taken 
off in the Omnibus Appropriations Bill for fiscal year 2004.
    Senator Harkin. Well, that is true. That is true. I don't 
know the sequence of events, but that is true. It was taken off 
in the Omnibus Appropriation before the budget.
    Mr. Rey. So, I mean, I think that is an issue----
    Senator Harkin. So is the Administration requesting a 
change then in their budget proposal to reflect what we did?
    Mr. Rey. Well, I don't think we have to. That is now before 
you, and I assume that Congress will continue to give us clear 
direction.

                    FISCAL YEAR 2005 FUNDING REQUEST

    Senator Harkin. Well, I mean, the Administration could come 
back and say look, you know, we do not need a cap now since 
Congress has taken it off, that--what, $205 million, I think it 
was, if I am not mistaken.
    Mr. Rey. $209 million for fiscal year 2005.
    Senator Harkin. For next year, yes, right.
    Mr. Rey. I think the more useful thing for us to provide to 
the Congress at this juncture as you consider the 2005 bill is 
our best estimate of what the different program options would 
cost.
    Senator Harkin. So you are no longer requesting a cap?
    Mr. Rey. We are going to abide by whatever Congress 
eventually tells us to do, which we should do.
    Senator Harkin. Which we said no cap.
    Mr. Rey. Right.
    Senator Harkin. I appreciate that. So, again, to continue 
this, the full funding was restored, as you pointed out, in the 
Omnibus Appropriations Bill. But the proposed CSP rule--I am 
getting back to that proposed rule again--would bar the vast 
majority of producers from participating.
    I wanted to do an analogy of what it would be like if we 
took the commodity program, which is an uncapped entitlement 
program. And I said, What would be the equivalent? In Iowa, 
with the proposed rule, if we did this on the commodity 
program, it would be like USDA arbitrarily limiting commodity 
payments only to those Iowa farmers who produce more than 200 
bushels an acre of corn and only if they live in one of 12 of 
our 99 counties chosen here in D.C. And, further, these farmers 
would receive no payments for their soybeans. To top it off, 
the payments would only be one-tenth of what is in the Farm 
Bill. And any farmer who does not qualify for the commodity 
program 1 year has to wait another 8 years to apply again.
    So I am just saying, if we think about conservation as a 
commodity, compared to the commodity programs, and one for 
which society has said it is willing to pay, then it would seem 
that we need some kind of equivalency. We need to start looking 
at this a little bit differently than what we have in the past.

                       ACCESS TO CSP BY PRODUCERS

    USDA says only 14,000 producers will get into CSP a year. 
Is that not your--you are looking at me quizzically. Did I 
misstate myself?
    Mr. Rey. No, that is----
    Senator Harkin. 14,000 a year. Again, in Iowa, with this 
percentage only 700 Iowa farmers out of 93,000 would get into 
the CSP a year.
    Now, I have tried to figure that out, and I figure it would 
take about a little over 100 years for them to get into the 
program if that is what we are going to do. My point is it 
would not be acceptable for a commodity program to do that, and 
it should not be acceptable for this kind of commodity program.

                          TECHNICAL ASSISTANCE

    Mr. Rey. But, again, to talk about terms of equivalency, 
one of the key limitations to the rate of entry of the program 
is how we provide NRCS technical assistance to producers who 
want to come into the program. That 14,000-producer limit is as 
much a reflection of the cap on the use of technical assistance 
funding in implementing the program as it is anything else. And 
with the commodity programs, we do not have such a limit on how 
the agency brings people into the program. That is something we 
can obviously work on and fix.
    Senator Harkin. I heard about that, and I read it in your 
testimony, and I heard you mentioned it earlier, too, I think, 
in answer to a question here. I thought about that. And so I 
asked my staff, I said, What do we provide, what is the 
technical assistance under EQIP? I think it is 19 percent.
    Mr. Rey. Yes, it is a little higher.
    Senator Harkin. Nineteen, but I am told that it has been 
much less than 19 percent.
    Mr. Rey. In the past, we have had the latitude to use 
conservation assistance funds to provide part of the support 
for EQIP, which is something that we have separately argued 
about over the last couple of appropriations cycles.
    Senator Harkin. My staff informs me that it was capped at 
19 percent in the past, the EQIP funding, my point being that 
if you can implement EQIP at that rate--I just want to take 
issue with you on the 15 percent being some kind of a problem 
for you. For the life of me, I do not understand that. I mean, 
15 percent is, I think, a considerable amount of money to 
implement a program. And keep in mind, this is a program, 
albeit a new one, but relying upon a lot of things that you 
have already developed in the past, Bruce, and all of you. You 
have got these things. You know what they are. It is not like 
it is making something out of whole cloth. I mean, this is 
something that you have all done in the past.
    So I cannot believe that a 15 percent limitation is any 
kind of a real onerous limit.
    Mr. Rey. Well, it is based on things that NRCS has done in 
the past.
    Senator Harkin. Sure.
    Mr. Rey. But it is clearly a new program that farmers are 
going to be facing for the first time, including, if the 
program works as Congress has intended, and we would like it to 
work, farmers that have not participated in some of the basic 
conservation programs like EQIP.
    Last year, I am told that we used 24 percent, which was the 
level for technical services in EQIP. I think, for a new 
program, it is not a reasonable assumption to assume that you 
can do it for 10 percent less. Much of the cost of technical 
assistance that is going to be provided for a new program is 
not going to be things that NRCS does by itself in developing 
the program, but rather the time NRCS field agents spend with 
farmers explaining how a new program works, particularly 
farmers who have not participated in EQIP or any of the other 
basic conservation programs in the past. So this is a problem 
we can fix working together, but I think it is a problem.

                      TECHNICAL SERVICE PROVIDERS

    Senator Harkin. And we also provided, if I am not mistaken, 
and I am reaching back now, we also provided in the Farm Bill 
that in this regard I believe you can use people outside of 
NRCS for the technical--what is the word I am looking for?
    Mr. Rey. Technical service providers.
    Senator Harkin. Technical service providers can be used for 
that that also have this knowledge and can assist in doing 
that. So, again, I just have a hard time thinking that 15 
percent is going to be a real onerous limitation on providing 
this because a lot of the practices that we are talking about 
are already being done by some farmers, not by others, but by 
some. So, therefore, since NRCS has got this history, they know 
the practices, it just does not seem to me to be a problem to 
transfer this over to others besides using the availability of 
outside people that we allowed you to use in the Farm Bill.
    Mr. Rey. The Technical Service Providers program is going 
to be instrumental in helping us deliver conservation programs, 
but that program itself has a ramp-up period to get technical 
service providers certified. And, moreover, they are going to 
be most useful in helping us apply specific conservation 
practices in existing programs. Now, that will help because 
that means that we can transfer some of our staff time out of 
EQIP, out of the Wetlands Reserve Program, out of the programs 
that are better established and use that time and effort to 
work on CSP, but that is going to be a ramp-up period as well.
    I think this is an issue that we should continue to 
discuss. It is not going to be a problem in fiscal year 2004. 
We will begin to see the effect of the limitation on technical 
services in 2005 and beyond, and I think we will have time to 
adjust, if we need to.
    But, at this point, I think I would say there is, if not 
the reality, then a high potential for a disconnect between the 
desire to bring as many producers into the program as quickly 
as possible and a limitation on how much NRSC staff time we can 
devote to going out and educating people about a new program 
and what their interests in it are and why they should be 
participants. That is a very resource-intensive process.

             TIME LAG ON CSP IMPLEMENTATION AND RULEMAKING

    Senator Harkin. I appreciate that, and I have not--Mr. 
Chairman, I thank you for your indulgence--I have not been too 
hard on this in the past. I have worked with the Secretary and 
others. But when we passed the Farm Bill, we put in a 270-day 
requirement to get the rule out. That did not happen. Then, 
they said, ``Well, we will get it out in a year.'' That did not 
happen. And they said, well, they had a lot of other things to 
do. And I understand that. They had new commodity programs and 
everything like that. So I think we have been fairly indulgent 
on this.
    We are now coming up on 2 years since the Farm Bill was 
passed--2 years--and not one farmer has been signed up in the 
CSP program. Now, you can understand why I am a little 
quizzical about the pace at which this is proceeding and 
whether or not--and I said this to the Secretary when she was 
here. Is there an attempt by some to kill the suborning--to 
kill it before it even gets off the ground?
    Mr. Rey. No such attempt.
    Senator Harkin. Well, it looks like that. I am just telling 
you. It is 2 years and not one farmer.
    Mr. Rey. Senator Harkin, you can usually explain most 
things by malfeasance rather than conspiracies. There is no 
conspiracy to do away with this program. It is a difficult 
program to implement. It is essential that we get it right 
because I believe we agree that it is the future of 
conservation on working lands. My testimony has said that. That 
is not a hollow commitment.
    We are grateful for the Committee's indulgence. You could 
do just one more thing to help us, and that is not help us 
again by changing it one more time between now and when we get 
the final program out.
    Senator Harkin. There are few things that I can assure you 
of. But because of what happened last year and the assurances I 
have from the Chairman of the Appropriations Committee, it will 
not happen again until the Farm Bill is up.
    Mr. Rey. Excellent.
    Senator Harkin. Take it to the bank--as long as I am here. 
I mean, you know----
    And as long as the Chairman is here. The Chairman has been 
very, very helpful on this, and I would not let this 
opportunity pass without thanking Chairman Bennett for his 
strong support of conservation programs, and I appreciate it 
very much.
    Mr. Chairman, I spent all of my time on this. Are you going 
to have a second round?
    Senator Bennett. Well, I was going to, but I find most of 
the burning questions that I had Senator Kohl has asked. If you 
want to pursue another issue, we can do that.
    Senator Harkin. Just a little bit, I would appreciate it.
    Senator Bennett. Yes.
    Senator Harkin. Thank you, Mr. Chairman.

                     STANDARD REINSURANCE AGREEMENT

    J.B., late last year, USDA cancelled the Standard 
Reinsurance Agreement--and I am sorry I am late. Has this been 
talked about? They cancelled the Standard Reinsurance Agreement 
with the crop insurance industry. I understand you are now in 
the process of negotiating a new one. I have heard a second 
draft of the SRA would impose $40 million in cuts annually from 
the delivery system.
    We have lost five companies in the last few years--five 
companies, the largest writer, American Growers, Fireman's Fund 
is now a reinsurer. Anyway, we have lost all of these 
companies. Two major reinsurers left the reinsurance market, 
and I understand there are a number of areas that are just 
served by only one company. So I am concerned about the 
proposed $40-million cut and what will that do to any 
competition that we might even have left in the crop insurance 
industry.
    Dr. Penn. Well, Senator Harkin, as you know, this is a 
process. It is a negotiation. And as you go through the 
negotiation, everybody makes their case, and everybody puts 
their most compelling arguments forward. And these are some of 
the arguments that are being put forward by some of the 
companies as we go through the negotiation.
    Since the passage of ARPA in 2000, the risk management area 
or crop insurance area has changed substantially. We have had a 
large expansion in the crop insurance program. Last year we 
covered about 218 million acres. The liability insured was 
about $40 billion. We have tremendously expanded the number of 
products that are available. There is continued expansion 
underway as the board reviews and approves new products, and 
the overall operating environment has changed.
    So we thought it was prudent to review and renegotiate the 
insurance agreement. This is the agreement by which we deliver 
all of the services to the producers in this very unique 
public-private partnership. I mean, this is a public program 
that is delivered through the private sector. And we thought 
that it was time that we reviewed that contract, and we take 
account of all of these changes that have occurred.
    As you said, it is a dynamic industry. There are companies 
that leave the industry. There are companies that come back 
into the industry. There are reinsurers that leave, reinsurers 
that come back. But we had one chance in the legislation and a 
5-year period to revise this standard reinsurance agreement. 
This is the last opportunity that we had. So we thought we 
should do it.
    RMA prepared a first draft to begin the process. And I have 
to say that first draft was pretty roundly criticized. We spent 
a lot of time with the companies, we listened to their 
concerns, and we have now prepared a second draft. That draft 
was made available last week to the companies, and they are 
beginning to review and to go through that now, and we are 
starting the process of having individual sessions with them to 
go through the second round.
    We have proposed some $40 million in savings. We think that 
we have a good basis for doing that, of course, or we would not 
have done it. Of course, it will be resisted. But there is more 
to it than just savings. There are some regulatory aspects of 
the agreement that we think need to be reviewed and revised, 
and a lot of the companies have said that they think it is good 
for the industry, that it is time that we try to achieve some 
new efficiencies, that we try to tighten up the possibilities 
for fraud, waste and abuse, and that we also try to give RMA a 
better opportunity to monitor the financial health of the 
companies.
    As you said last year, the largest insurer in the business 
left the business, and the American taxpayer had to step up and 
sweep up after that----
    Senator Harkin. I know.
    Dr. Penn [continuing]. It cost some $35 million of taxpayer 
money to do that. And we think that, by rights, RMA ought to 
have a little more authority to anticipate that kind of 
situation and to avoid that happening in the future. So we have 
tried to make some changes in the SRA to account for that.
    So we are in the middle of this process, and it is a 
negotiation. In a negotiation everybody wants to paint the 
situation in the most compelling way they can that would be to 
the greatest advantage to them. And so I think that is what you 
are hearing, but we are in the middle of a process. All we are 
asking now is to give us a little more time and let us work 
through this draft, and then we will come forward with a third, 
and we hope final, version of this.

                 RURAL BUSINESS INVESTMENT CORPORATION

    Senator Harkin. Thank you very much, Dr. Penn.
    Two quick ones. Mr. Gonzalez, will you have the final rules 
out on the RBIC Program this summer, the Rural Business 
Investment Corporation?
    Mr. Gonzalez. Yes, Senator Harkin. We will have that 
application window open in the summer or at least the fall of 
2004.
    Senator Harkin. Summer or early fall. How about summer?
    Mr. Gonzalez. Well, we are trying our hardest. We are 
looking at the fall of 2004 to have the application window for 
that program.
    Senator Harkin. So the first applications would be 
available this fall.
    Mr. Gonzalez. Yes, sir.
    Senator Harkin. Well, okay. I wish it was earlier.
    Dr. Jen, are you working with HHS and with maybe FDA--well, 
that is in HHS--maybe NIH to revise the food pyramid? Is that 
underway now?
    Dr. Jen. Senator Harkin, the USDA is responsible for the 
Food Guide Pyramid. It is Under Secretary Eric Bost's group, 
CNPP.
    Senator Bennett. We discussed that at the last hearing.
    Dr. Jen. Yes, last week.
    Senator Harkin. What is that, Mr. Chairman?
    Senator Bennett. We discussed that at the last hearing with 
the other Under Secretary.
    Senator Harkin. It is being done.
    Dr. Jen. Yes.
    Senator Bennett. Yes, we are monitoring that.
    Senator Harkin. Thank you, Mr. Chairman. I appreciate that. 
With that affirmation, I do not have any more questions.
    Thank you, Mr. Chairman.
    Senator Bennett. Having gotten the attention of all of the 
fat doctors in the world----
    I raised that a year ago, why we have to keep on top of it.
    Senator Harkin. So it is being--I mean, it is actually 
under review.
    Senator Bennett. Yes.
    Senator Harkin. That is good. Thank you.
    Senator Bennett. Are you through, sir?
    Senator Harkin. Yes, I am. Thank you.

                        SUPERCOMPUTER RESOURCES

    Senator Bennett. Dr. Jen, I have one last question. I was 
recently contacted about USDA's access to supercomputing 
resources, and I would appreciate it if you would furnish to 
the Committee information about the supercomputing resources 
that you currently have access to, I assume, in conjunction 
with universities, and how frequently you need this kind of 
power. And do you believe that you would benefit from a 
dedicated supercomputer facility?
    If you can answer that quickly, why we can do that now or 
you can furnish it.
    Dr. Jen. Genomic science research benefits from the use of 
supercomputers, particularly when the research moves from the 
DNA sequence, the nucleics, into the proteomics. Our need for 
analysis by supercomputers will increase in the future 
especially due to the extreme complexity of protein research.
    Currently, some universities have supercomputers, but I 
think we will also work with Department of Energy. A dedicated 
facility probably would be desirable a few years down the line, 
especially considering the other research that USDA has. At 
this point I could not even think about it because the cost is 
not only the cost of the computer itself, but it also includes 
associated operation and maintenance costs. That would be 
something that would worry me because I have absolutely no idea 
how much it costs.
    Senator Bennett. Thank you very much. That is helpful.
    Senator Kohl, do you have any last questions?
    Senator Kohl. Just one. Mr. Gonzalez, in fiscal year 2003, 
Wisconsin had four applications for funding through the Section 
525 Technical Assistance Account to provide homeownership 
education for people in rural areas.
    Wisconsin has historically received funding for our good 
work in this area. In fiscal year 2003 funding, I understand 
the Administration selected priority States primarily within 
one region of the country, with justification that there was 
not enough funding to reach more applicants for other regions.
    I included language in the fiscal year 2004 bill that 
increased funding, and provided limits any one State could 
receive under this account.
    How will you ensure that States like Wisconsin receive a 
fair consideration for funds available this year?
    Mr. Gonzalez. Thank you, Senator Kohl.
    In terms of the 525, there was a $2-million grant amount 
that was allocated to that program for homeownership training 
and credit counseling. And we are closely following the 
conferees' report in terms of administering that program. There 
was a 10-percent cap to those 10 States in terms of providing 
that technical assistance, and we are looking at a NOFA being 
published May of 2004.
    Senator Kohl. I appreciate your consideration.
    Mr. Gonzalez. Thank you, sir.
    Senator Kohl. Thank you.
    Senator Bennett. Thank you. I do have one last question for 
Dr. Collins. You say the ag economy is booming, exports, 
consumption, industrial use, all the rest of it. Any chance 
that this can mean lowering of mandatory payments, mandatory 
support payments to help us out with the budget?
    Dr. Collins. Sure, Mr. Chairman. I think that is exactly 
what is going to happen. When you say ``mandatory payments,'' 
if you look at Commodity Credit Corporation expenditures on 
price support and related activities, in the year 2000, it hit 
an all-time record of $32 billion. In 2003, it was down to 
about $17.5 billion. In 2004, the President's fiscal year 2005 
budget released in February estimated a spending level of about 
$14.8 billion. I think that that number is more likely to come 
in closer to $10 to $11 billion rather than $14.8, which is in 
the President's budget. That will be updated in the President's 
Mid-Session Review of the Budget that will be released in July.
    Clearly, there are a couple of expenditure categories that 
do not change, such as direct payments, which are not a 
function of prices, and they are about $5.5 billion a year.
    And then there is also conservation spending, such as the 
CRP, which is about $2 billion a year. Those things are not 
going to change, but the loan deficiency payments, the loan 
programs, the countercyclical payments all are coming down 
dramatically, including the milk income contract payment 
program as well. So, yes, I think we are looking at a several-
billion dollar decline below the President's budget and a 
number that is probably about a third of what it was in the 
year 2000.
    Senator Bennett. I would like to find a way to get that 
into discretionary funds. I am not sure we can.
    You have a last question?
    Senator Harkin. Let me just follow up on that because I 
think it is an interesting story. When we passed the Farm Bill 
in 2001--I think that is right, 2001--we were given a budget to 
work with by the Budget Committee for 10 years for our 
programs. We stayed within that. We did not go beyond what was 
allotted to our Committee for our mandatory programs, and so we 
passed that.
    In that estimate, there was an estimate for how much the 
outlays would be for 2002, 2003, 2004 or 2005, et cetera. And, 
Dr. Collins, you can correct me if I am wrong, but I believe, 
Mr. Chairman, that if you look at just the 2002, 2003, 2004 
estimate, basically, since we kind of know what 2004 is going 
to be, that we have spent about $15 billion less than what we 
were allotted; in other words, what the Budget Committee gave 
us to spend, we have spent about $15 billion less; is that 
about correct?
    Dr. Collins. I have not done that calculation, but I can 
tell you that what we are spending is tracking very closely to 
what we would have expected spending to be with an extension of 
the 1996 Farm Bill, that is, before you even added on the 
programs of the 2002 Farm Bill. So, yes, it is running below 
the spending levels that were projected in the spring of 2002 
for the life of the 2002 Farm Bill.
    Senator Harkin. Well, my figures show about $15 billion 
less, so I think agriculture has got a good story to tell 
there. Of course, I come back to things like the other 
commodity program, the Conservation Security Program, that when 
people start talking about capping and stuff, we have saved $15 
billion less than what we were allotted to spend. I think that 
is pretty darn good. Surely, we could get a couple of billion 
out of that or a billion-and-a-half at least to help on the 
conservation program. I just want to make that point. I think 
it is a good story.
    Senator Bennett. We may make an attempt at that. I am not 
sure whether we will get----
    My comment is, repeating what I say in my role as Chairman 
of the Joint Economic Committee, I do not know various 
estimates about the economy. People ask me about it. Can we cut 
the deficit in half in 5 years? Will the Kerry numbers hold up? 
Are the Bush numbers accurate?
    And I say the one thing I know about them is that they are 
all wrong.
    They have always been proven wrong. Any attempt to make a 
forecast in an $11 trillion economy that goes out much more 
than 6 months fits into the category that we decided not to use 
earlier as we were describing one of the other estimates. It is 
basically a guess, and it may be a very well-educated guess, 
but it is basically a guess. And I think this illustrates, 
also, we made the best guess we could, and then the economy 
behaved differently.
    And for those who say, ``Well, why can you not be more 
accurate?'' I will use the phrase with which all politicians 
are very familiar, ``The numbers are all within the margin of 
error.''
    The difference between surplus and deficit on a $2.7 
trillion budget, when you move a couple of hundred billion 
either way, is within the margin of error that a pollster might 
use. And we get carried away with our rhetoric around here 
about we created this huge deficit or are we not wonderful, we 
have created this huge surplus. The economy has done what it 
has done, and we are kind of following along on the trail of 
that and hoping to take credit when it is good, and hoping to 
point and assume blame when it is bad.

                     ADDITIONAL COMMITTEE QUESTIONS

    But, apparently, this is the same kind of situation, and I 
am glad that this one was wrong on the right side of things 
instead of wrong on the other side of things.
    Senator Harkin. Mr. Chairman, it is just not pencil dust. 
Let us just be careful of that phrase.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

            Questions Submitted by Senator Robert F. Bennett

            CONSUMER DATA AND INFORMATION SYSTEM INITIATIVE

    Question. Dr. Jen, the Economic Research Service is looking for a 
significant increase in fiscal year 2005--$9 million and 6 additional 
research staff. The majority of this increase and all of the new staff 
would be for the Consumer Data and Information System initiative. The 
components of this initiative are a food market surveillance system, a 
rapid consumer response module, and a flexible consumer behavior survey 
module. What exactly, do you hope to accomplish with these additional 
information-gathering capabilities?
    Answer. Data and analysis from this initiative would provide a 
basis for understanding, monitoring, tracking, and identifying changes 
in food supply and consumption patterns. Without this increase in 
funding, many problems facing Americans will go unsolved. The data and 
analysis capability embodied in this forward-looking initiative will 
prove invaluable for policymakers in addressing issues ranging from 
obesity prevention to understanding market opportunities to food 
safety. Currently, large gaps exist in USDA's data and analysis system 
in the areas of consumer and industry behavior. Our Nation does not 
have timely consumer information upon which to base policy decisions 
and program actions. The centerpieces of this budget initiative are 
nationally representative consumer and retail surveys of food prices, 
retails sales, consumption and purchases of food for at-home and away-
from-home eating, as well as data on consumer behavior, reactions, 
attitudes, knowledge, and awareness.
    This information system will provide market surveillance and 
insights into price changes, market demand, and consumer reactions to 
unforeseen events and disruptions such as the recent discovery of 
bovine spongiform encephalopathy (BSE). In addition, the data and 
analysis framework will provide intelligence on the public's diets, 
knowledge and awareness levels helping policymakers respond to current 
events, such as the rise in obesity and overweight, especially in 
minority populations, and their interactions with the U.S. food and 
agriculture system.
    In addition, as our country faces bio-terrorist threats, increased 
knowledge about American eating behavior and its implications for food 
markets are of heightened importance. Understanding, where food is 
eaten and purchased and the amounts of different foods consumed by 
various demographic groups is important for understanding how to best 
protect our food supply, for designing and implementing rapid and 
effective government responses to unforeseen food related events, and 
for the management of events after they have occurred.
    The four components of the initiative in order of priority are:
  --The Flexible Consumer Behavior Survey Module would complement data 
        from the National Health and Nutrition Examination Survey 
        (NHANES). This module provides information needed to assess 
        linkages between individuals' knowledge and attitudes about 
        dietary guidance and food safety, their food-choice decisions, 
        and their nutrient intakes. Combining the NHANES with this new 
        module allows analysis of how individual attitudes and 
        knowledge and healthful eating affect food choices, dietary 
        status, and health outcomes. Cost: $3 million.
  --The Rapid Consumer Response Module would provide real-time 
        information on consumer reactions to unforeseen events and 
        disruptions, current market events, and government policies. 
        This module would be integrated into several proprietary 
        consumer data panels currently maintained by private vendors. 
        Consumer reactions would be linked to actual food purchases, 
        sales, consumption, and price information. For example, the 
        module could be executed to gather information on consumer 
        reactions to food safety problems and issues. Cost: $1 million.
  --The Food Market Surveillance System would consist of an integrated 
        set of surveys and supporting analysis concentrating on 
        linkages in the food and agriculture system. This system would 
        be the foundation of a research and monitoring program designed 
        to: provide timely price, purchase, and sales data; identify 
        food consumption patterns of consumers and how these change as 
        people age, households change, new products are introduced, and 
        new information is acquired; identify and develop consistent 
        strategies for consumers to adopt the Dietary Guidelines for 
        Americans; better understand the market dynamics of food safety 
        and other consumer health issues; and understand links between 
        foods, physical activity and health outcomes. Cost: $4.176 
        million.
  --Funding is needed to support 6 additional staff to ensure the 
        successful design and implementation of the initiative. Cost: 
        $500,000.
    Question. Is this a one-time expenditure, or are you envisioning 
continuing this level of funding in fiscal year 2006 and later?
    Answer. I envision that this level of funding will continue in 
fiscal year 2006 and beyond. This data system is a continuous, real 
time surveillance, tracking, and research vehicle whose demand will 
only grow over time as it becomes completely integrated into USDA 
operations.

                   AGRICULTURAL ESTIMATES RESTORATION

    Question. The National Agricultural Statistics Service is 
requesting a healthy increase in fiscal year 2005--almost $9.5 million 
and 14 new staff. Of this amount, $7 million and 10 new staff would go 
to the Agricultural Estimates Restoration and Modernization project. 
This is on top of $4.8 million provided in fiscal year 2004 for this 
purpose. Why is this additional funding necessary?
    Answer. Escalating survey expenses, unfunded pay costs, and 
declining response rates have forced adjustments to many of the 
Agency's survey and estimates programs, reducing the quality of survey 
data on which NASS estimates are based. The consequences of poor 
estimates can involve millions of dollars. For example, inaccurate crop 
and livestock forecasts may result in unstable market conditions for 
producers and consumers resulting in large price fluctuations. Funds 
are needed to increase area frame survey sample sizes to meet precision 
targets for major estimates from the base survey conducted in June, 
improve non-response follow-up for specialty commodities, increase 
sample sizes for surveys to measure coverage error, and increase list 
sample sizes to further improve commodity yield forecasts and 
production estimates. The fiscal year 2005 request will allow for 
continued progress in these areas, in addition to supporting adequate 
resources necessary to process, analyze, and disseminate vital 
statistical data.
    Question. Do you expect to request additional funds in fiscal year 
2006?
    Answer. At the present time, we do not know what will be reflected 
in the fiscal year 2006 budget request.

                       HORTICULTURAL SPECIALTIES

    Question. The National Agricultural Statistics Service is 
responsible for conducting the Census of Horticultural Specialties 
every 5 years. The fiscal year 2005 budget recommends that this program 
be delayed and, as a result, reduces the NASS budget by $3 million and 
the staffing by 6 staff years (FTE). When was the last Census of 
Horticultural Specialties conducted?
    Answer. The 1998 Census of Horticultural Specialties was conducted 
following the 1997 Census of Agriculture. This Census of Horticultural 
Specialities is completed on a 10 year schedule.
    Question. Why was the decision made to delay this next Census?
    Answer. The Census of Horticultural Specialities has traditionally 
been conducted every 10 years. Due to the dynamic growth of this 
industry, NASS was planning, pending available funding, to measure this 
component of agriculture every 5 years. Due to the tight budget 
constraints placed on all discretionary Federal spending, difficult 
decisions were necessary to maximize use of the available funds for 
improving and modernizing our base agricultural statistics, which are 
indispensable to the entire agricultural sector. The annual program 
covering selected horticultural commodities will continue to be 
available.
    Question. Who benefits from these updated statistics? How will they 
get their information absent this Census?
    Answer. The information provided by NASS surveys and the Census of 
Agriculture help to ensure an orderly flow of goods and services among 
agriculture's producing, processing, and marketing sectors. Many 
segments of the horticulture sector utilize NASS census data to make 
informed business decisions at the local level. Additionally, 
policymakers use NASS data in assessing the impact of potential 
legislation. In the absence of the Census of Horticultural 
Specialities, the NASS annual program provides information for selected 
horticultural commodities at the State level.
    The annual statistics program includes several reports on the 
production, value, and chemical usage for nursery and floriculture 
crops. Three main reports constitute the annual program. The 
Floriculture Crops Annual Summary is released each April and includes 
production, price, and wholesale value for growers having $100,000 or 
more in sales in 36 selected States. It also includes the number of 
growers and growing area for growers with $10,000 or more in sales. 
This report can be accessed via the Internet at http://
usda.mannlib.cornell.edu/reports/nassr/other/zfc-bb/. The Nursery Crops 
Summary is conducted periodically in tandem with the Agricultural 
Chemical Usage--Nursery and Floriculture Summary. The Nursery Crops 
Summary includes gross sales and the number of trees/plants sold for 17 
selected States and growers having $100,000 or more in sales. It also 
includes area in production and the number of growers and workers for 
operations having $10,000 or more in annual gross sales. The next 
summary will be released on July 26, 2004 and will be available at 
http://usda.mannlib.cornell.edu/reports/nassr/other/nursery/index.html. 
The Agricultural Chemical Usage--Nursery and Floriculture Summary is 
scheduled for release on September 15, 2004. This summary includes 
chemicals used (by active ingredient) and to what crop the chemicals 
were applied, the amount of chemicals applied, the method of 
application, who made the application, and the pest management 
practices used on operations for six selected States. Agricultural 
Chemical Usage Summaries are available at http://www.usda.gov/nass/
pubs/estindx1.htm#A.
    In addition to the annual program, the Census of Agriculture 
provides basic data on the area of nursery and floriculture crops 
grown, by crop, under protection or in the open, the total area 
irrigated, and an aggregate value of sales for nursery, greenhouse, 
floriculture, and sod. These data will be available in June 2004 at the 
National, State, and county level.

                         SMALL AREA ESTIMATION

    Question. Dr. Jen, $2.5 million and 4 new staff are requested by 
NASS for data acquisition for the Small Area Estimation Program. It is 
my understanding that this information is used by the Risk Management 
Agency and the Farm Service Agency. How will these USDA agencies 
benefit by this increased funding and staff?
    Answer. The Risk Management Agency and the Farm Service Agency are 
two of the major users of the NASS small area estimates. Due to the 
dynamic growth of the agricultural insurance programs and the farm bill 
utilization of these estimates, both agencies rely heavily on the 
precision of county level estimates produced by NASS. Due to limited 
funding, current estimates are derived through a survey process that 
does not allow for full implementation of the probability design that 
produces statistically defensible survey precision. This funding will 
be used to allow follow-up data collection activities to support the 
probability design in an initial one-third of the U.S. counties. 
Therefore, users of NASS small area statistics will be able to 
accurately define the statistical precision of each estimate.
    Question. What additional data will be acquired?
    Answer. This funding will allow the initial implementation of 
follow-up data collection activities necessary to calculate 
statistically defensible survey precision for the current program. The 
county estimates program continues to grow in scope and importance for 
Federally administered farm programs, thus increasing the need for 
defensible survey precision.
    Question. What is the impact on these agencies if these funds are 
not provided?
    Answer. These agencies will be forced to continue to administer 
Federal farm programs based on data which does not have a calculated 
level of precision. As the number of farm programs, and Federal 
outlays, which depend on these estimates continues to grow, the 
absolute level of precision must be known. Without a calculated level 
of precision, some payment decisions to farm operators may result in 
either an overpayment to farmers at the taxpayers expense or an 
underpayment to farmers who have a legitimate claim.

                         BSE TRADE RESTRICTIONS

    Question. Last week Secretary Veneman sent Japan a proposal to 
break the impasse over BSE trade restrictions. The Japanese in turn 
sent a letter rejecting the proposal. In a joint statement released 
Thursday, Secretary Veneman and Trade Representative Zoellick expressed 
their disappointment in the Japanese response. Would you care to 
comment on the current situation regarding Japan's trade restrictions 
on the import of U.S. beef?
    Answer. The Department has been and remains in close contact with 
Japanese government officials. Immediately following USDA's 
announcement of the BSE case, senior USDA officials held talks with 
Japanese officials in Tokyo, Japan, on December 29 and January 23. A 
Japanese technical team visited USDA in Washington, D.C., and the BSE-
incident command center in Yakima, Washington, during the period 
January 9-15. On March 23, the Agricultural Affairs Office, American 
Embassy in Tokyo, reported meetings with the Japanese Ministry of 
Health and Welfare (MHLW), Ministry of Agriculture, Fish and Food 
(MAFF), and the Food Safety Commission (FSC).
    There is still a significant difference in our official positions 
regarding BSE testing and specified risk materials (SRM) removal. On 
March 29, Secretary Veneman sent a letter to Japanese Agriculture 
Minister Kamei proposing to have a World Animal Health Organization 
(OIE) technical experts panel meet before April 26 to discuss a 
definition of BSE and related testing methodologies as well as a common 
definition of SRM. On April 2, Japan rejected the proposal, reasoning 
that the United States first needed to reach a bilateral scientific 
understanding on BSE. USDA is planning another high-level visit to 
Japan to continue talks in late April. The United States exported over 
$1.3 billion in beef to Japan in 2003, representing over 50 percent of 
Japan's total beef imports. The import ban has severely impacted 
Japan's market supplies and beef prices. Given Japan's need for beef 
imports and the importance of beef exports to Japan to the U.S. beef 
and cattle industry, we are hopeful that a solution can be found.

                        GENTICALLY MODIFIED FOOD

    Question. A recent Wall Street Journal article states that last 
week Angola decided to ban imports of genetically modified grain, even 
though it will disrupt the country's food aid. In 2002, 13 member 
countries of the Southern African Development Community all balked at 
accepting genetically modified food aid. Last year 17 scientists from 
the same Development Community conducted a fact-finding mission and 
concluded that genetically modified foods posed no danger to people or 
animals. What is FAS doing to educate countries regarding genetically 
modified foods?
    Answer. FAS is actively engaged in the interagency process to 
provide accurate information on the benefits and risks of agricultural 
biotechnology to food aid recipient countries. In the wake of the food 
crisis in southern Africa in the summer of 2002, USDA, the State 
Department, and the U.S. Agency for International Development committed 
to identifying food aid recipient countries where the issue of 
biotechnology could hamper relief efforts. Since being formed in the 
fall of 2002, this interagency group has also addressed new challenges 
to the delivery of food aid, including the entry into effect of the 
Cartagena Protocol on Biosafety in September 2003. This group has and 
will continue to work with foreign countries, international 
organizations and the private voluntary community to ensure that safe 
and wholesome U.S. food aid reaches those in need.
    Issues related to biotechnology are both varied and complex, 
affecting every country to differing degrees. FAS attaches are often 
relied upon in their host countries to provide answers to questions 
regarding the benefits and risks of agricultural biotechnology. A high 
premium is thus placed on ensuring that FAS attaches are properly 
trained in all facets of agricultural biotechnology and that they 
receive updated information regarding political, scientific, and trade 
developments affecting biotechnology.
    One of the most effective ways to encourage the acceptance and 
adoption of agricultural biotechnology around the world is to provide 
foreign regulators, policy makers, farmers, consumers, and members of 
the media with accurate information on agricultural biotechnology. FAS 
understands this and is heavily involved in developing exchange 
projects that showcase the U.S. regulatory system for agricultural 
biotechnology and allow foreigners to see firsthand how the technology 
is being used to benefit Americans. These programs are extremely 
effective in creating advocates for the technology at all levels of 
society, from farmers to high ranking government officials.
    International standards play an integral role in the movement in 
international trade of agricultural products of all types, including 
those containing the products of biotechnology. FAS plays the critical 
role of representing U.S. interests in a number of international fora 
that promulgate standards affecting agricultural biotechnology. FAS 
works with interested stakeholders to develop and advance U.S. 
positions within CODEX, the Cartgena Protocol on Biosafety, the World 
Trade Organization, the Organization for Economic Cooperation and 
Development, and the Food & Agriculture Organization, among others. 
Playing a prominent role in these international standards setting 
bodies is one of the many ways FAS encourages other countries to adopt 
science-based, transparent approaches to the regulation of agricultural 
biotechnology.
    Question. Is USDA currently conducting any research on the effects 
of genetically modified foods?
    Answer. The Agricultural Research Service (ARS) has identified 
three general areas for research on the effects of genetically 
engineered foods: environmental effects of crops, genetic effects from 
the introduction of new DNA into crop plants, and food safety/quality. 
The ARS research portfolio encompasses all three areas. Safety 
evaluations are currently focused on genetically engineered foods 
created by ARS research.
    The most notable genetically engineered food currently undergoing 
scrutiny by ARS is a soybean genetically engineered to reduce allergic 
reactions by two-thirds. Soy is one of the ``big eight'' sources of 
food allergies, estimated to affect 6 to 8 percent of children and 1 to 
2 percent of adults. The issue is especially important to vegetarians, 
for whom soy protein often serves as a staple of their diet. This 
example shows that genetically engineered foods can have highly 
beneficial effects, and they can in fact be less risky to human health 
than conventional foods.
    The Cooperative State Research, Education, and Extension Service 
(CSREES) also manages a Biotechnology Risk Assessment Competitive 
Grants Program that supports research to examine the effects of 
genetically engineered crops. This program, funded by a 2 percent set-
aside from all biotechnology research funding in USDA, is mandated to 
target only environmental risks.

                             IRAQ FOOD AID

    Question. Last month it was reported that 110,000 metric tons of 
wheat is destined for export to Iraq. This is good news and will 
certainly be beneficial to the Iraqi people. Can you update the 
Committee on the current situation regarding food aid for Iraq?
    Answer. There are no U.S. plans to provide additional food aid to 
Iraq this year. The renegotiated Oil for Food contracts and some 
additional World Food Program commercial tenders, using Iraqi funds, 
are expected to keep the pipeline sufficiently supplied into the 
summer. The Ministry of Trade, through the Iraqi Grain Board, is 
expected to take over commodity purchasing this spring and to buy 
commodities commercially for delivery during the remainder of the year. 
Additional food aid would simply displace the emerging commercial 
markets in Iraq.

                        FSA FARM LOAN PORTFOLIO

    Question. Dr. Penn, in fiscal 2003 the delinquency rate for direct 
farm operating loans was 12.5 percent and the default rate was 4.7 
percent. Fiscal 2003's delinquency and default rates are similar to 
past years even though last year was a good year for farm prices. Can 
you explain why this is?
    Answer. FSA has made considerable progress during the past 5 years 
in reducing both delinquency and loss (default) rates. In fiscal year 
1998, the direct farm operating loan program delinquency rate was 16.78 
percent; at the end of fiscal year 2003, it was 12.5 percent. The loss 
rate in 1998 was 5.6 percent, and in 2003 was 4.7 percent.
    A portion of the loss rate can be attributed to long-term 
indebtedness from the farm crisis period of the late 1980's and early 
1990's that had never been written off the Agency's books. Some of 
these debts had been reduced to judgments, which were still 
uncollected. Other loans could not be finally written off because of 
litigation and other circumstances.
    Implementation of the Debt Collection Improvement Act of 1996 in 
the past few years has resulted in more efficient and effective 
collection from the judgment accounts and delinquent debtors. This has 
allowed both greater recovery and final determination that some 
accounts are uncollectible, resulting in writing off of the latter 
debt, which had the effect of inflating losses during this period.
    Question. Does USDA believe these rates are acceptable?
    Answer. While the Agency would certainly like to see lower 
delinquency and default rates, the current numbers represent a vast 
improvement over historical rates. FSA will continue to make efforts to 
reduce these numbers. However, as the Government's ``lender of last 
resort,'' FSA can lend only to farmers who cannot obtain commercial 
credit. Providing credit to those who do not meet standard lending 
criteria will inevitably result in higher default and delinquency rates 
than are experienced by commercial lenders.
    Question. What specific actions are you taking to lower the 
delinquency and default rates?
    Answer. FSA has purchased and begun implementation of an automated, 
web-based farm business planning system widely used by commercial farm 
lenders. The new system will permit FSA staff to easily identify 
borrowers who, as the result of economic or production issues, will 
likely have financial problems. FSA loan personnel will then be able to 
proactively work with them to avoid delinquencies or mitigate them 
before financial problems become insurmountable. It will also help 
staff work with applicants and borrowers to identify potential risks 
and formulate risk management strategies.
    For those cases that do go into default, FSA and the Department of 
the Treasury continue to work together to enforce collection of 
delinquent debt through offset of Federal payments and salaries, income 
tax refunds, and a statutorily authorized portion of Social Security 
benefits, as well as other methods. In some cases, offset provides 
sufficient funds to cure the default, thereby reducing the delinquency 
rate.
    Through the cross-servicing program, Treasury contracts with 
private collection agencies to locate and attempt collection from 
delinquent debtors. Where the borrowers have no assets or prospects 
from which collection can be made, those accounts can then be written 
off, further reducing the delinquency rate.
    FSA also provides primary loan servicing to delinquent borrowers, 
through which their accounts can be restructured or written down to an 
amount they can repay, eliminating the default.
    Question. What level of delinquency and default are you aiming for?
    Answer. We aim for the lowest levels possible, given the type of 
customer we serve. FSA establishes goals for reduction of delinquency 
and loss rates, and has already exceeded those goals for the current 
year. Goals are revisited and adjusted each year, and the Agency will 
continue to make efforts to reduce these rates to the greatest degree 
possible.
    Question. FSA is requesting a loan level of $25 million for 
emergency disaster loans for fiscal year 2005. The default rate in 
fiscal 2002 was 20.3 percent and 11.5 percent in fiscal 2003. Based on 
historical data, we know there will be high loss rates on emergency 
loans. Do the benefits of these loans justify the high levels of loss?
    Answer. This assistance is available only to borrowers who have 
suffered losses through natural disasters and cannot obtain credit from 
commercial lenders. As in the Operating Loan program, this means that 
losses will always exceed those experienced by commercial lenders. 
Further, loans made to recover from disasters carry inherent risks that 
do not apply to normal operating and ownership loans. However, this 
program does appear to be the best method of providing assistance to 
those who have suffered disaster losses, especially considering that 
the alternative--grants and other aid that does not have to be repaid--
would increase the cost to the Federal Government.
    Question. What specific actions are you taking to lower the default 
rate?
    Answer. FSA has purchased and begun implementation of an automated, 
web-based farm business planning system widely used by commercial farm 
lenders. The new system will permit FSA staff to easily identify 
borrowers who, as the result of economic or production issues, will 
likely have financial problems. FSA loan personnel will then be able to 
proactively work with them to avoid delinquencies or mitigate them 
before financial problems become insurmountable. It will also help 
staff work with applicants and borrowers to identify potential risks 
and formulate risk management strategies.
    For those cases that do go into default, FSA and the Department of 
the Treasury continue to work together to enforce collection of 
delinquent debt through offset of Federal payments and salaries, income 
tax refunds, and a statutorily authorized portion of Social Security 
benefits, as well as other methods. In some cases, offset provides 
sufficient funds to cure the default, thereby reducing the delinquency 
rate.

                           PERFORMANCE REVIEW

    Question. Based on an OMB assessment, FSA is conducting a 
performance review of its loan portfolio. When will this review be 
complete?
    Answer. The Program Effectiveness Study of the FSA direct loan 
portfolio will be complete by June 2005. Preliminary data is expected 
by August 1, 2004.
    Question. What do you hope to learn from this review?
    Answer. We expect to learn more about financial characteristics of 
program participants as a group and how those characteristics change 
during the time borrowers have debts with FSA; how many participants 
``graduate'' to commercial credit and subsequently return to FSA for 
loans; the effectiveness of statutory assistance targets; potential 
improvements for administering the ``credit elsewhere'' requirement; 
and alternatives for reducing program subsidy rates.
    Question. Will you please share the results of the review with this 
Subcommittee?
    Answer. Yes, FSA will share the findings with the Subcommittee when 
the program effectiveness study is complete.

                           FARM LOAN STAFFING

    Question. FSA is requesting 100 new staff years to administer its 
farm loan programs. In the FSA administrator's testimony, he states 
that the new staff will ``help avert increases in direct loan 
delinquency and loss rates.'' Is that the best we can do--attempt to 
stop the rate of increases? Why won't these staff contribute to 
decreasing the overall level of defaults and delinquencies?
    Answer. The FTE request is intended to avert increases in loan 
delinquency and loss rates, and continue improvement in loan 
performance. FSA's Farm Loan Program has an urgent need to establish a 
training ``pipeline'' of loan officers and technicians to replace large 
numbers of anticipated retirees, to maintain a cadre of experienced 
loan program delivery personnel. Adequate training for a loan officer 
takes at least 2 years. Inadequately trained staff cannot be efficient 
because they must learn as they work, and they make more and 
potentially more serious errors. Because FSA farm loan programs are 
complex, poorly or partially trained loan officers are prone to errors 
that create substantial program vulnerability and result in higher loss 
rates. Merely replacing retirees with new hires is ineffective in the 
short run and will adversely affect program performance in the long 
run.
    Question. How was this level determined?
    Answer. In determining the request, the agency took into account 
the fact that resources are limited and proposed an increase that, 
while not completely solving the trained loan officer ``pipeline'' 
problem, will be a major step in that direction.
    Question. Does it not make sense to wait for the results of the 
performance review before creating 100 new positions?
    Answer. No, these two issues are not directly related. The Program 
Effectiveness Study will provide data that will allow more informed 
policy decisions, and possibly result in administrative or policy 
adjustments to make the programs more effective. The FTE request is 
necessary to maintain a cadre of fully trained staff which will 
maintain and enhance current performance, protect the government's 
financial interest in existing loans and guarantees, and help existing 
borrowers stay on the path to financial success.
    Question. How do you know this is the agency's most pressing need?
    Answer. The Agency has a combined guaranteed and direct loan 
portfolio of nearly $17 billion, annual loan and guarantee commitments 
approaching $4 billion, and a commitment to assist nearly 120,000 
borrowers. Farm loan programs make FSA the largest single farm lender 
in the country. Given the level of financial exposure and the 
anticipated scope of retirements of seasoned staff in the farm loan 
programs, the need for this additional staff is critical.

                             CROP INSURANCE

    Question. The Risk Management Agency (RMA) is currently working to 
renegotiate the Standard Reinsurance Agreement (SRA). This agreement 
establishes the terms and conditions under which the Federal Government 
will provide subsidies and reinsurance on eligible crop insurance 
contracts. Can you provide the Committee with an update on the 
negotiation process and have you set a deadline for completion?
    Answer. The Department announced on December 31, 2003 that the 
current standard reinsurance agreement would be renegotiated effective 
for the 2005 crop year. The first proposed reinsurance agreement was 
made publicly available at that time. Based on the advice of the 
Department of Justice, RMA established a process by which we 
renegotiate the agreement individually with each company and meet with 
each company in detailed negotiating sessions. Interested parties had 
until February 11, 2004 to provide written comments about the proposed 
agreement. RMA reviewed comments from insurance companies and 
interested parties to revise the first draft. On Tuesday, March 30, RMA 
announced the release of the second SRA proposal. RMA believes that the 
second draft demonstrates responsiveness to concerns raised by 
companies and interested parties. The proposed SRA will enhance the 
Federal crop insurance program by: encouraging greater availability and 
access to crop insurance for our nation's farmers; providing a safe and 
reliable delivery system; and reducing fraud, waste, and abuse, while 
achieving a better balance of risk sharing and cost efficiencies for 
taxpayers.
    As part of the process, RMA will meet with the insurance providers 
in individual negotiating sessions the last 2 weeks of April and will 
receive public comments until April 29. At that point RMA will evaluate 
the comments and negotiating session materials and develop another 
draft for discussion with the companies. There are several remaining 
issues of substance to resolve before a final draft may be completed. 
While it is the agency's desire to resolve them and complete the 
process before July 2004, given that this is a negotiation, RMA is not 
able to determine how long it will take to resolve issues to all 
parties' satisfaction. Prior SRA negotiations have taken well past July 
to conclude, but have not affected the continuing delivery of the 
program.
    Question. The Administration's Budget request for the RMA includes 
an increase of over $20 million to improve information technology. 
Within the increase, the Budget requests funding to monitor companies 
and improve current procedures to detect fraud and abuse. Can you 
explain how the department will monitor companies and improve detection 
of fraud and abuse?
    Answer. The current systems are based on technology that is more 
than 20 years old. The information that is collected from the Insurance 
Companies is distributed to a collection of 100+ databases. Any 
subsequent updates or changes, received from the Insurance Companies, 
to this information overlays the original information. This 
architecture does not allow RMA to track changes in the submissions 
from the external entities.
    As the data requirements of the current data structures change from 
year to year, new databases are created for each crop year. The prior 
years databases are problematic due to the intense effort needed to 
convert the historical information to formats that are consistent with 
the more recent years. This creates problems in data analyses when 
trying to use data from multiple crop years.
    The requested increase in funds is directed at the establishment of 
a consistent enterprise architecture and enterprise data model. This 
would replace the 100+ databases with a single enterprise data model 
that would be consistent across the organization. This enterprise data 
model would allow data mining operations to be conducted without first 
converting the data to a consistent useable format.
    By moving the data to a modern relational database system RMA will 
be able to track detailed changes that are made to the data that is 
received from the Insurance Companies. This will allow RMA to monitor 
the timing of the changes as they occur and identify those changes that 
could potentially be related to fraud and abuse.

                         ADVENTITIOUS PRESENCE

    Question. The U.S. government's intent to implement a science-based 
policy with respect to adventitious presence (AP) was announced by the 
Office of Science and Technology Policy (OSTP) in August 2002 (Federal 
Register Notice 67 FR 50578). The seed, grain, and food industry 
continue to face the possibility of disruptions in trade due to 
uncertainty around low levels of biotech events in conventional and 
biotech products. Can you update the Committee on this situation and 
what actions USDA may take this year?
    Answer. The biotechnology, food, and grain industries have all 
identified adventitious presence (AP) as a priority issue and 
development of an AP policy is a priority for APHIS as well. AP refers 
to the intermittent low-levels of biotechnology derived genes and gene 
products occurring in commerce as a result of the field testing of 
biotechnology crops. In August 2002, OSTP began coordinating a 
government-wide approach to AP, which involves updating APHIS field 
testing requirements and establishing early food safety assessments at 
the Environmental Protection Agency and the Food and Drug 
Administration. APHIS has participated in the Agricultural 
Biotechnology Working Group (ABWG) to develop an AP policy under the 
auspices of the White House and OSTP. APHIS is working as quickly as 
possible to establish an AP policy as part of its upcoming regulatory 
revisions.

                           RENTAL ASSISTANCE

    Question. Mr. Gonzalez, GAO has recently assessed the Rural Housing 
Service's rental assistance program. I understand that USDA does not 
generally agree with GAO's conclusions. Does USDA agree with the idea 
that rental assistance contracts should last only as long as the life 
of the contract, that is, in our current situation, for 4 years?
    Answer. RHS has worked diligently over the last 6-7 years to 
estimate rental assistance (RA) needs as closely as possible to the 
contract term. However, it is impossible to estimate the contracts 
exactly due to tenant turnover and market conditions in the last 2 
years of the contract. Therefore, requiring a set term provides an 
additional burden to both the borrower and the Agency in the monitoring 
of these contracts. Within the last year, automated technology has made 
it possible for the Agency to drill down to a per-property basis to 
determine the most current usage rate of rental assistance. Development 
of an automated rental assistance forecasting tool, now completing the 
testing phase, will enable RHS to establish a more accurate per 
property cost of RA over the life of the contract.
    Question. Do you believe that the fiscal 2005 request will be 
completely spent within 4 years (If not, why not?)
    Answer. RHS believes that the fiscal 2005 request will be 
completely spent within 4 years.

                       MANAGEMENT CONTROL REVIEW

    Question. Mr. Gonzalez, I understand that the rental assistance 
program will undergo a ``Management Control Review'' this month. Who 
will conduct this review?
    Answer. The Financial Management Division of the Rural Development 
mission area oversees the conduct of all Management Control Reviews 
(MCRs) within RD done on all programs deemed assessable. This includes 
most loan and grant programs, including the Section 521 Rental 
Assistance Program. The review is performed by subject matter experts, 
generally 8-10 field staff who work in the particular program area, as 
well as Civil Rights personnel, who conduct their review from a 
perspective of fair housing regulations and civil rights compliance.
    Question. Why did you choose to begin this review?
    Answer. MCRs are generally done on a 5-year cycle. In this case, 
the last MCR done on the Section 521 program was in 1999 and is due 
again in 2004.
    Question. What are the goals of this review?
    Answer. The general goals of a MCR are to improve the 
accountability and effectiveness of USDA's programs and operations 
through the use of sound systems of internal and management controls. 
The specific objectives of the MCR on Section 521 assistance are to 
ensure:
  --Priority of Rental Assistance (RA) applications properly processed 
        in accordance with RD Instruction 1930-C Ex. E IV;
  --That any denial of RA requested is in accordance with RD 
        Instruction 1930-C Ex. E V C 4;
  --Recordkeeping responsibilities are in accordance with RD 
        Instruction 1930-C Ex. E VII & X;
  --That borrower's administration of the RA program is in accordance 
        with RD Instruction 1930-C Ex. E VIII;
  --That assigning RA to tenants is in accordance with RD Instruction 
        1930-C Ex. E XI;
  --Suspending or transferring existing RA is in accordance with RD 
        Instruction 1930-C Ex. E. XV;
  --That unused RA units are reviewed and transferred in accordance 
        with RD Instruction 1930-C Ex. E XV B 5;
  --That AMAS (the automated multifamily accounting system) is 
        maintained to support the Rental Assistance program.
    Question. Will you please share the results of the review with this 
subcommittee?
    Answer. The MCR is expected to be completed this summer, and the 
report should be available by August 2004. RHS will provide the 
subcommittee with a copy of the report at that time.

                    COMPREHENSIVE PROGRAM ASSESSMENT

    Question. Mr. Gonzalez, the Section 515 housing program is 
currently undergoing a ``Comprehensive Program Assessment''. When will 
the Comprehensive Program Assessment be complete?
    Answer. Our target date for completion of the physical inspections 
and market analysis portions of the study is the summer of 2004.
    Question. How much did this assessment cost?
    Answer. The assessment cost is $1.8 million

                          MULTIFAMILY HOUSING

    Question. As part of this review, why did USDA choose to evaluate 
the organizational structure of the Multifamily Housing division?
    Answer. The Section 515 Rural Rental Housing program has 17,314 
properties in its portfolio as of April 2003. We have undertaken an 
effort to develop a comprehensive assessment of these properties. The 
Rural Housing Service has initiated an effort to determine the 
condition of the portfolio from several perspectives. The Comprehensive 
Property Assessment (CPA) has several objectives, all of which are 
designed to provide an all-encompassing evaluation of the state of the 
portfolio. These objectives include:
  --Assessment of property's physical condition,
  --Assessment of property's financial health,
  --Assessment of property's position in the real estate rental market,
  --Determination of continuing need for this rental housing,
  --Assessment of needed capital improvements and cost,
  --Assessment of future capital reserve needs,
  --Analysis of prepayment potential, and
  --Analysis of prepayment incentive costs to retain properties/use 
        restrictions.
    The Department convened a Multifamily Advisory Group to oversee 
completion of the study, and ICF Consulting, Inc. was hired in 
September 2003 to undertake the study. At the completion of this study, 
we will be able to determine the long-term capital needs of the 
portfolio for budget purposes.
    The study will make recommendations on needed modifications to the 
program delivery system to meet the long-term capital needs of the 
portfolio.

                               BROADBAND

    Question. The Rural Broadband Program has received a great deal of 
interest from Congress, rural communities, and the broadband industry. 
Of particular interest is the status of many of the loan applications. 
Could you please provide us with an update on the loan program and some 
of the issues you are dealing with?
    Answer. There are 40 loan applications pending totaling $438.8 
million; 14 loans have been approved totaling $201.8 million; 20 loan 
applications totaling $300.3 million have been returned as ineligible; 
and 17 loan applications totaling $195.4 million have been returned as 
incomplete.
    The Broadband loan program is distinctive from all other lending 
programs within the RUS portfolio. Broadband is currently viewed as a 
commodity that must be properly marketed and potential customers must 
be made aware of the benefits of broadband service if they are to spend 
their discretionary dollars on it. As such, it is difficult to predict 
what penetration rates will be today and in the future.
    Nearly half of the applicants are ``start-up'' companies with 
little, if any, history of doing business in this industry. There are 
two distinctly different characteristics at play-competition (rather 
than a monopolistic environment) and multi-state businesses (rather 
than a single cooperative serving a single rural community).
    Applications for the Broadband Program are different from those in 
the other RUS infrastructure programs. Very few of these applications 
are designed to serve a single rural community or even a small grouping 
of geographically close rural communities. Most are applications 
requesting to serve 50, 75, or in excess of 100 rural communities in 
multiple states.
    Furthermore, the vast majority of the communities already have 
broadband service available in some of the proposed service area; in 
some instances, from more than one provider. To determine financial 
feasibility, RUS must determine what portion, if any, of a competitive 
market the applicant will be able to penetrate. As a result, working 
with each applicant is also uniquely time consuming.
    Finally, many of the first applications submitted were assembled 
hastily to secure positions due to our first-in first-out review 
procedures. Valuable time was used helping applicants assemble complete 
loan application packages.
    Based on this experience, RUS changed its review procedures to 
expedite reviews and has instituted new techniques to determine whether 
an application is complete and can be processed; is incomplete but can 
be completed with the submission of additional information; is 
incomplete and will require a significant amount of additional work and 
must, therefore, be returned; or is ineligible and must be returned.
                                 ______
                                 

                Questions Submitted by Senator Herb Kohl

                       DAIRY FORWARD CONTRACTING

    Question. Dr. Collins, in 1999, Congress passed legislation to set 
up a dairy forward contracting pilot program, which is set to expire at 
the end of this year. Dairy forward contracting allows buyers and 
sellers of milk to voluntarily agree upon delivery of a specific amount 
of milk for a set price over a specified period of time. About 655 of 
Wisconsin's 16,000 dairy farmers have participated in this pilot 
program. Many of them recommend making this voluntary program permanent 
because it gives them a new way to manage risk. What is the 
Administration's position on this program? Does the Administration 
support legislation that would make the dairy forward contracting 
program a permanent program?
    Answer. The Consolidated Appropriations Act of 2000 required USDA 
to conduct a study to determine the impact of the Dairy Forward Pricing 
Pilot Program on milk prices paid to producers. Data from the mandated 
study indicates that the program can help stabilize the price dairy 
producers receive for their milk and thereby be a valuable risk 
management tool. For this reason, USDA does not oppose extending or 
making permanent the current Dairy Forward Pricing Pilot Program.

                         EXPORT MARKET PROBLEMS

    Question. Following the BSE discovery in Washington State last 
December, our beef export markets were badly shaken. Similarly, we have 
seen problems with certain poultry export markets due to avian 
influenza. In both of these cases, the problem originated in another 
country and was imported to the U.S. Open markets are a two way street, 
they allow our products to move in foreign commerce, but they also 
raise the possibility that we are importing serious problems.
    Please update us on what USDA is doing to reopen export markets for 
our beef and poultry products. Also, can you please comment on how we 
protect our export markets from problems which are, themselves, foreign 
in origin?
    Answer. Re-opening foreign markets for U.S. beef and beef products 
is a top priority for USDA. As a result of USDA's efforts, Mexico and 
Canada, which are the second and fourth largest U.S. beef export 
markets, have opened their markets to selected U.S. beef, beef 
products, and ruminant by-products exports. Further, USDA is working 
very closely with NAFTA trading partners to harmonize animal health 
standards and regulations with regard to Bovine Spongiform 
Encephalopathy (BSE).
    USDA continues to work closely with foreign trading partners to re-
establish U.S. beef and beef product exports as quickly as possible. We 
are working with foreign officials at all levels to personally assure 
them of our robust safeguards and to indicate that trade can safely 
resume. The Animal and Plant Health Inspection Service (APHIS) was in 
constant contact with its counterparts providing them with updates on 
the BSE investigation, as well as new USDA regulatory policies imposed 
on BSE testing and specified risk material (SRM) removal. USDA 
continues to be engaged with foreign governments at the technical level 
responding to all of their questions and encouraging them to make trade 
decisions based on sound science.
    With respect to poultry exports, USDA responded quickly and 
effectively to control the spread of Avian Influenza (AI) in the AI-
affected states. Throughout this process, USDA officials were in 
constant contact with their foreign counterparts to provide timely 
information about the outbreaks and quarantine control measures. U.S. 
export markets accounting for 66 percent of total U.S. poultry meat 
export value continue to import U.S. poultry meat. In 2003, the export 
value of poultry meat to these markets was $1.31 billion.
    On April 1, the USDA Chief Veterinary Officer (CVO) announced the 
completion of the required surveillance and testing protocols per the 
World Animal Health Organization (OIE) guidelines. An official request 
from the CVO has been sent to major U.S. poultry export markets 
requesting the removal of all import bans on U.S. poultry and poultry 
product imports. The Department, at all levels, is diligently pursuing 
with its trading partners the lifting of all AI trade restrictions on 
products from the United States. By the summer of 2004 or earlier, the 
remaining countries imposing nationwide bans on U.S. poultry meat are 
expected to at least regionalize their import bans to those states 
affected by Low Pathogenic Avian Influenza (LPAI).
    The U.S. Department of Agriculture takes protecting U.S. 
agriculture from animal and plant diseases very seriously. APHIS makes 
its regulatory decisions using a science-based evaluation. Before 
approving a product for import from a given country, a rigorous risk 
assessment is conducted to determine the risk associated with 
introducing a particular disease. Once approved, APHIS continues to 
monitor that country's animal health standards to ensure implementation 
is enforced. Because of these standards and controls, USDA can assure 
countries that imports of agricultural and food products from the 
United States are wholesome and fit for human consumption.

                       GENETICALLY MODIFIED CROPS

    Question. USDA has pointed out the ever-increasing importance of 
biotechnology and its implications for U.S. agricultural trade. The 
more U.S. agricultural production includes elements of genetically 
modified (GM) materials, the more at risk our foreign markets become as 
long as there is a general reluctance throughout the world to accept 
such products.
    Over the past several weeks, items appeared in the Washington Post 
and the New York Times reporting that genetically modified traits are 
appearing in traditional seed supplies with unknown consequences.
    Secretary Penn, given the fact that there has been a tremendous 
increase in U.S. production of GM crops, and given the trade 
implications, do you think that we have allowed for too much production 
of biotech crops before we knew we had the knowledge and tools in hand 
to make sure contamination would not occur? In other words, have we 
moved so quickly on biotech crops that we have placed our exports 
markets at risk?
    Answer. USDA's Prospective Plantings report, released on March 31, 
2004, indicates that U.S. production of crops produced using modern 
biotechnology will continue to increase in 2004. However, U.S. farmers 
are not alone in their rapid adoption of this technology. According to 
the International Service for the Acquisition of Agri-biotech 
Applications, 2003 saw the 7th year of double-digit global growth in 
the production of biotech crops. Over 7 million farmers in 18 countries 
produce 167 million acres of crops enhanced though modern 
biotechnology. Farmers are increasingly using biotechnology for 
improved control of pests and weeds. In addition to these economic 
benefits, in some instances, farmers are realizing environmental 
benefits through increased use of no-till' and reduced use of chemicals 
and fuel.
    USDA will continue to work very hard to promote U.S. crops in 
overseas markets and is engaged on many levels to provide trading 
partners with accurate information regarding the benefits and risks 
associated with agricultural biotechnology.
    Question. What steps are you taking to meet concerns of some 
countries that won't even accept GM crops as food aid?
    Answer. FAS is actively engaged in the interagency process to 
provide accurate information on the benefits and risks of agricultural 
biotechnology to food aid recipient countries. In the wake of the food 
crisis in southern Africa in the summer of 2002, USDA, the State 
Department and the U.S. Agency for International Development committed 
to identifying food aid recipient countries where the issue of 
biotechnology could hamper relief efforts. Since being formed in the 
fall of 2002, this interagency group has also addressed new challenges 
to the delivery of food aid, including the entry into effect of the 
Cartagena Protocol on Biosafety. This group has and will continue to 
work with foreign countries, international organizations, and the 
private voluntary community to ensure that safe and wholesome U.S. food 
aid reaches those in need.
    Issues related to biotechnology are both varied and complex, 
affecting every country to differing degrees. USDA's Foreign 
Agricultural Service (FAS) attaches are often relied upon in their host 
countries to provide answers to questions regarding the benefits and 
risks of agricultural biotechnology. A high premium is thus placed on 
ensuring that FAS attaches are properly trained in all facets of 
agricultural biotechnology and that they receive updated information 
regarding political, scientific, and trade developments affecting 
biotechnology.
    One of the most effective ways to encourage the acceptance and 
adoption of agricultural biotechnology around the world is to provide 
foreign regulators, policy makers, farmers, consumers, and members of 
the media with accurate information on agricultural biotechnology. FAS 
understands this and is heavily involved in developing exchange 
projects that showcase the U.S. regulatory system for agricultural 
biotechnology and allow officials from other countries to see firsthand 
how the technology is being used to benefit Americans. These programs 
are extremely effective in creating advocates for the technology at all 
levels of society, from farmers to high-ranking government officials.
    International standards play an integral role in the movement in 
international trade of agricultural products of all types, including 
those containing the products of biotechnology. FAS plays the critical 
role of representing U.S. interests in a number of international fora 
that promulgate standards affecting agricultural biotechnology. FAS 
works with interested stakeholders to develop and advance U.S. 
positions within CODEX, the Cartgena Protocol on Biosafety, the World 
Trade Organization, the Organization for Economic Cooperation and 
Development, and the Food & Agriculture Organization, among others. 
Playing a prominent role in these international standards setting 
bodies is one of the many ways FAS encourages other countries to adopt 
science-based, transparent approaches to the regulation of agricultural 
biotechnology.

                             SOUND SCIENCE

    Question. I agree that these crops provide the opportunity for much 
improved food security throughout the world, and possibly, reduced 
pesticide use. But world-wide acceptance of these products will depend 
on world-wide acceptance of the science used to establish their safety. 
This is true for plant science, this is true for animal science, this 
is true for all science.
    Dr. Jen, would you please respond to the questions that have been 
raised regarding the use, or abuse, of science in the pursuit of 
certain policy objectives? What are you doing at USDA to ensure that 
the term ``sound science'' is a truly scientific term and not a 
political term?
    Response. USDA is committed to an open and transparent regulatory 
process that reflects the latest science to protect America's 
agricultural and natural resources. One of the purposes of our Office 
of Risk Assessment and Cost Benefit Analysis is to review risk 
assessments for certain regulatory actions. As part of the regulatory 
process, risk assessments are also made available for comment and input 
from stakeholders, industry, and the general public. Further, in the 
area of biotechnology policy and regulations, we have requested input 
from the National Research Council of the National Academy of Sciences. 
On the question of BSE risks, we have requested analyses by Harvard 
Center for Risk Analysis. These examples illustrate that we attempt to 
find and use the best science based information available in a 
transparent process to help guide our decisions.

                  DOWNED ANIMAL RISK MANAGEMENT TOOLS

    Question. Dr. Penn, it was recently announced that downed cattle 
will no longer be accepted for slaughter at plants destined for the 
food chain. Since that announcement, producers have pointed to their 
potential lost income as a result of this policy. Would you recommend 
that RMA develop a risk management tool to help these producers seek 
compensation for lost income resulting from this new policy, as crop 
producers have tools for similar losses?
    Answer. Section 523(a)(2) of the Federal Crop Insurance Act (Act), 
states the Corporation shall not conduct any pilot program that 
provides insurance protection against a risk if insurance protection 
against the risk is generally available from private companies. It is 
my understanding there are a number of private insurance products in 
the market that cover livestock from injury or disease loss, which 
would prohibit the Federal Crop Insurance Corporation Board of 
Directors from approving such a product. However, if it is determined 
that insurance protection for downed cattle is not generally available, 
the Risk Management Agency could contract for a feasibility study to 
determine if an appropriate insurance product may be developed to 
protect against the risk of loss due to downed cattle.

                           FARM LOAN STAFFING

    Question. Dr. Penn, you have requested an increase of $7,395,000 
for 100 new Federal permanent employees. Your justification indicated 
these new employees will prevent direct loan delinquency and loss rates 
from increasing and assist in loan processing and servicing. We also 
understand that FSA faces tremendous problems in the future related to 
large numbers of senior loan officers eligible for retirement. How will 
you allocate these resources, will it be used primarily to backfill 
senior loan officers in the field that retire?
    Answer. The staff years would be deployed first to States with the 
highest attrition rates of loan officers and secondly to high loan 
volume offices.
    Question. Will other factors, for example loan processing delays, 
servicing of large loan portfolios be considered?
    Answer. Offices with larger portfolios and those that are 
experiencing difficulty in delivering farm loan programs due to lack of 
trained staff will be considered. It should be noted that new hires 
must complete a training program that can last up to 2 years, so the 
workload in these offices will not be immediately affected.
    Question. Will racial, ethnic and gender diversity be considered 
when filling these positions in the field?
    Answer. Certainly, there will be discussion about hiring employees 
who represent the States' underserved constituencies. The States are 
being encouraged to use outreach efforts to ensure that qualified 
diverse individuals are hired for these positions.
    Question. The farm credit programs have remained relatively flat in 
the past few years. Isn't there a need to address retirement or work 
flow needs in other areas of FSA that are outside of the positions 
devoted to farm credit programs?
    Answer. There are definitely attrition and workflow issues in other 
programs within FSA. However, the farm loan program area is unique in 
that adequate training for loan officers can take up to 2 years. Many 
of the other jobs in FSA have training programs that would allow the 
employee to be fully functional in their jobs much sooner. In the farm 
loan program area, retirees cannot be replaced with untrained new 
hires.

                           DIGITAL DATA MAPS

    Question. In the Common Computing Environment account, there is a 
request for $9,000,000 for FSA to complete digital data maps. In my 
home State of Wisconsin, not a single county has been certified and it 
is my understanding the only State that has every county certified is 
Minnesota. This has been an ongoing effort for several administrations. 
How many counties are certified, when do you expect to finish this 
work, and what has been spent to date by FSA to complete this effort?
    Answer. As of April 7, 2004, 1,767 counties have digitized common 
land units (CLU's) and 381 of these counties have been certified. Of 
the 72 counties in Wisconsin, 20 counties have digitized CLU's. While 
only one county in Wisconsin is currently certified, certification is 
planned for about 10 counties by the end of fiscal year 2004.
    Within current funding constraints, approximately 2,200 counties 
should be digitized by the end of the fiscal year. At the current rate, 
we would expect to have as many as 600 to 800 counties certified by the 
end of the fiscal year. Minnesota, Nebraska, Oregon, and Massachusetts 
are fully certified, and Kansas has 102 of 105 counties certified.
    To date, USDA has spent about $16,000,000 on contracts to digitize 
the Common Land Unit. The expectation is that all of the CLU will be 
completed except for some areas in Alaska and the territories by the 
end of fiscal year 2005. Not all of the $9,000,000 in the current 
request is for the CLU. Most of this request is for annual expenses for 
obtaining compliance imagery (National Agricultural Imagery Program).
    Question. What other Federal agencies have this capability, and can 
you use their information for your purposes?
    Answer. Many other Federal agencies have GIS capability and the 
ability to digitize information, either directly or through contract 
support. However, the Common Land Unit is information collected and 
managed only by USDA. No other Federal Agency tracks this kind of 
information for private (non-Federal) land nationwide. U.S. Department 
of Interior, Bureau of Reclamation tracks similar information for 
watersheds in the Western United States and USDA has worked with them 
to share information. There are similarities between this information 
and information tracked by some State and local agencies, but there is 
no consistency across States and local areas and no single 
authoritative source for this information outside of the Farm Service 
Agency.

                         BROADBAND LOAN PROGRAM

    Question. Secretary Gonzalez, please elaborate upon the RUS 
broadband loan program internal review process. Your response should 
detail the average timeframe for: (a) acknowledgement of an application 
by RUS; (b) the actual review of an application including review by the 
RUS senior loan review committee; (c) the preparation of 
recommendations to the Administrator; (d) the consideration of the 
recommendations by the Administrator; and (e) notification to the 
applicant regarding the final ruling upon an application including 
instances when any further action is requested of the applicant.
    Answer. When an application is received, RUS performs an initial 
review for eligibility and completeness within 20 working days. When 
that review is complete, a letter is sent to the applicant detailing 
the results of the review: (1) the application is complete and will be 
processed; (2) the application is incomplete, including details needed 
for making the application complete; or (3) the application has been 
determined ineligible in accordance with program regulations. If the 
application is determined to be complete, upon assignment, the 
application should be processed within 60 days, including the following 
committee reviews. If the application is feasible and adequately 
secured, the loan is presented to the Assistant Administrator's Loan 
Committee (AALC) for recommendation. At a minimum, this committee meets 
twice a week or as necessary to review loans. Upon approval from the 
AALC, the loan is forwarded to the Senior Loan Committee (SLC) for 
review and recommendation. Again, at a minimum, this committee meets 
twice a week or as necessary to review loans. The Administrator 
participates as chair of the Senior Loan Committee. Upon final action 
from the SLC, applicants are immediately notified of the status of 
their application. If the SLC approval is conditional upon the 
applicant agreeing to complete further action, then the action is 
stated in the letter notifying the applicant of the status of the 
application.
    Question. Please provide an accounting of the total number of 
applications that have been received, approved, returned, currently 
under review and not yet reviewed under the RUS broadband program. 
Please include detailed information about the corresponding loan levels 
for each category.
    Answer.

                          [Dollars in millions]
------------------------------------------------------------------------
              Applications                    Number          Amount
------------------------------------------------------------------------
Received................................              93          $1,157
Approved................................              18             216
Returned................................              40             538
Under review............................              34             386
Not yet reviewed........................               1              17
------------------------------------------------------------------------

    Question. When will the RUS announce the opening of the application 
process for funds appropriated in fiscal year 2004? What will be the 
deadline for submitting applications for fiscal year 2004 loans? What 
actions have been taken by RUS to ensure that potential RUS applicants 
submit complete and thorough applications?
    Answer. The ``application window'' for fiscal year 2004 has been 
open since the beginning of the year, since mandatory funding from the 
previous year was carried forward to fiscal year 2004. There is no 
``deadline'' for the submission of applications--applications are 
accepted year-round. On March 24, 2004, RUS published a Notice of Funds 
Availability that detailed the amount of funding available, including 
the mandatory funding and the fiscal year 2004 appropriation. The 
notice also detailed the amount of funding available by category (4 
percent direct, direct cost-of-money, and guaranteed). The notice also 
sets forth the maximum and minimum loan levels as well as the 
definition of broadband service to be used for loans made this fiscal 
year.
    To ensure timely loan processing, RUS has been diligent in 
reviewing and re-engineering its Broadband Program loan processing 
procedures in an effort to expedite loan processing. The agency has 
instituted new triaging techniques to more rapidly review applications 
upon submission to determine whether the application is complete and 
can be processed; is incomplete but can be completed with the 
submission of additional information; is incomplete and will require a 
significant amount of additional work and must, therefore, be returned; 
or is ineligible and must be returned. In addition, field personnel 
have been trained and instructed in working with potential applicant 
borrowers to facilitate the submission of completed applications.
    Question. Please detail the overall number of applications that 
have been received by RUS under each of the various RUS Rural Broadband 
Access Loan and Loan Guarantee Programs loans: (1) direct cost of money 
loans; (2) direct 4 percent loans; (3) private lender guaranteed loans. 
How many applications have been approved under each category of loans?
    Answer. The overall number of applications received by RUS under 
the requested categories follows: (1) Under the direct cost of money 
category, 92 applications totaling $1,153 million. Of those, 18 
totaling $216 million have been approved. (2) Only one application has 
been received under the 4 percent direct program totaling $4.2 million. 
This application has been approved. (3) No applications for private 
lender loan guarantees have been received.
    Question. Please detail the current and planned allocation of your 
staffing resources among the various RUS administered programs 
including how many FTE's are solely devoted to loan processing and 
servicing for the broadband loan program.
    Answer. The RUS telecommunications program currently has a total of 
128 assigned FTEs (including the broadband program), of which 113 
positions are filled. This office is responsible for the 
telecommunication loan program, DLT, Broadband loans and grants and 
other programs like the weather radio grant program. No new FTEs have 
been added since receiving the broadband program and the Local to Local 
TV loan guarantee program.
    A team of 14 headquarters individuals were initially assigned to 
the Broadband program. Under a recently approved reorganization plan, 
approximately 25 individuals will be assigned to it, pending filling 
vacancies which currently exist.
    Question. Secretary Gonzalez, please provide the private contracts 
for services including the dollar amount and purpose that were provided 
in fiscal year 2003 and fiscal year 2004 to date. Please include carry-
over funds from previous appropriations that have been placed in the 
FISERV and GOVWORKS accounts.
    Answer. The information is provided for the record.
    [The information follows:]

                                             RBS--BUSINESS PROGRAMS
----------------------------------------------------------------------------------------------------------------
               FISCAL YEAR                     PERFORMING AGENCY          AMOUNT                PROJECT
----------------------------------------------------------------------------------------------------------------
2003....................................  Mineral Management Service         $60,000  Enhancement to RBS Data
                                           (GovWorks).                                 Project.
2003....................................  GSA/FEDSIM................          97,000  Web-delivery of Moody's
                                                                                       Financial Analyst
                                                                                       software training.
2003....................................  Farm Credit Administration         542,600  Assist redevelopment of
                                                                                       the Business Programs
                                                                                       Assessment Review
                                                                                       process.
2003....................................  GovWorks..................          30,000  Assist in development of
                                                                                       regulations for Section
                                                                                       9006 of the Farm Bill.
2004....................................  MACTEC (GovWorks).........          25,712  Assist in development of
                                                                                       regulations for special
                                                                                       project for Under
                                                                                       Secretary.
                                                                     ----------------
      Total.............................                                     755,312
----------------------------------------------------------------------------------------------------------------

                GUARANTEED SINGLE-FAMILY HOUSING PROGRAM

    Question. Secretary Gonzales, the President's budget request for 
the Section 502 Guaranteed Single-Family housing program for fiscal 
year 2003 was below what your agency really needed. I have been told 
you face similar problems for fiscal year 2004. In fiscal year 2003, 
this Committee, at USDA's informal request, provided an additional $900 
million in loan authority. Now, we are told by concerned housing 
lenders that the President's request for fiscal year 2005 will once 
again fall short and you will be forced to shut this program down prior 
to the end of the fiscal year.
    Since this program is highlighted as part of the President's 
Homeownership Initiative, why haven't you asked for a reasonable 
program level to carry you through this year? Will this program run out 
of money before the end of the year? If so, when?
    Answer. The Agency is considering administrative measures to 
supplement its program level this fiscal year. Early this year, we 
discussed funding management options with the Office of Management and 
Budget and Senate and House staffs. We are in the process of approving 
and implementing some of the options we discussed, including a 25 basis 
point increase in the fee on guaranteed loans. Certain administrative 
transfers of funds are also being considered. These should alleviate 
any problems that might have arisen due to the demand for funds 
exceeding the amount of funds available in 2004.
    Question. Will you ask this Committee again to increase this 
program during this current fiscal year or in fiscal year 2005 prior to 
the depletion of funds?
    Answer. There are no plans to request an increase in the Guaranteed 
Loan Program funding during the current fiscal year and we do not 
anticipate requesting an increase to GLP funding during fiscal year 
2005.
    Question. The President's fiscal year 2005 budget request increases 
the origination fee from 1.5 percent to 1.75 percent. Additionally, I 
understand that you may consider raising this fee administratively to 2 
percent during the current fiscal year to stretch your funding. In 
fiscal year 2003, the President's Housing Initiative at RHS entitled 
``Lowering Fees to Reduce Barriers to Minority Homeownership'' reduced 
the fee for this program from 2 percent to 1.5 percent. What impact 
will reinstating what you previously considered a ``barrier'' have on 
borrowers?
    Answer. The 25 basis point increase in the fee will be negligible 
for homebuyers. The increase of less than $250 per loan will not be a 
barrier to homeownership. The resultant monthly payment increase will 
be about $2, on average. Raising the fee will allow about 1,000 more 
families to be served this year than would have been possible 
otherwise.
    Question. When you run out of funding before the end of the year, 
do you lose many rural lenders you have worked so hard to bring into 
the program? What will you do to keep these lenders in the program?
    Answer. We are currently exploring the potential of transferring 
unused budget authority to the program.

                SECTION 515 MULTI-FAMILY HOUSING PROGRAM

    Question. Transfers of Sec. 515 properties typically require new 
financing from sources other than USDA--from banks, Low Income Housing 
Tax Credit equity investors and public agencies. RD typically does not 
give any indication prior to the transfer itself that it will approve 
the resources and other items it must provide required for the transfer 
to work. Would the Department be able to provide formal binding 
commitments (with reasonable conditions for final approval and closing, 
as other lenders do) at a stage earlier in the transfer process in 
order to facilitate the approvals of other parties to transfer 
transactions?
    Answer. The Department has tried to be sensitive to the timing 
requirements of our lending partners, while at the same time, 
performing the required due diligence for underwriting transfers and 
maintaining as much flexibility as possible. We have modified our 
proposed regulations and will soon issue an Administrative Notice (AN) 
designed to improve and streamline transfer processing. In addition, 
the Department has been actively working to develop methods to ease the 
transfer process. We are currently working with Fannie Mae and the 
Federal Home Loan Mortgage Corporation (FHLMC) to create a standardized 
process to accommodate transfers that involve multiple parties. This 
process, once completed, will remove duplication of effort for each 
agency and allow for work done by either Fannie Mae or FHLMC to be 
accepted by Rural Development and vice versa. Another step that has 
been taken by the Agency is the proposed transfer that will replace RD 
AN 3767 (1965-B). The new AN outlines standardized processing 
guidelines and a checklist for the transfer process. This will ensure 
that all transfers completed by Rural Development are consistent across 
the country. The Agency is attempting to utilize more creative and 
innovative approaches and is developing alternative tools to leverage 
other financing in our multifamily properties. Through these steps, we 
hope to expedite the transfer process.
    Question. Under what conditions will Rural Development approve 
forgiveness of Section 515 debt? What has been RD's historical 
experience--under what circumstances and for what amounts has RD 
approved debt forgiveness and when has the Department not approved 
this? Is there national policy (regs, ANs) providing guidance? What are 
the constraints? Is debt forgiveness viewed as a tool to facilitate 
transfers of Sec. 515 properties?
    Answer. Rural Development has approved forgiveness of debt in 
circumstances where the appraised value of the property no longer 
supports the debt and the borrower intends to make substantial 
improvements to the property to prevent loss of affordable housing. 
This has occurred when the property is being rehabilitated or when 
transfers are required due to administrative or legal actions. In these 
instances, no equity exchange is made. Historically, Rural Development 
has written off $171,800,000 since inception of the housing loan 
programs. This represents 1,013 loans. This is 1.45 percent of the 
$11.8 billion multifamily portfolio. Most recently, RD has received 5 
debt forgiveness requests in the last 3 years: three of those were 
disapproved and two were approved. The National policy governing debt 
forgiveness is in regulation 7 CFR Ch. XVIII  1956 Subpart B, which is 
provided for the record. Debt forgiveness is not viewed as a tool to 
facilitate transfers of Section 515 properties but rather a method by 
which to retain properties that would otherwise no longer be available 
because of severe deterioration, bankruptcy or foreclosure, or legal 
action against the borrower. [The information follows:]  1956.54 Debt 
forgiveness. For the purposes of servicing Farm Loan Programs 
(FPL)loans, debt forgiveness is defined as a reduction or termination 
of a direct FLP loan in a manner that results in a loss to the 
Government. Included, but not limited to, are losses from a writedown 
or writeoff under subpart S of part 1951 of this chapter, debt 
settlement, after discharge under the provisions of the bankruptcy 
code, and associated with release of liability. Debt cancellation 
through conservation easements or contracts is not considered debt 
forgiveness for loan servicing purposes.
    Question. Nonprofit owners of Sec. 515 properties are not permitted 
any distributions of project surplus cash as are for profit owners. 
What would be the Department's position on establishing a national 
policy allowing non profit owners a fee from surplus cash in order to 
cover the costs of asset management, accounting, compliance reporting 
and other obligations to government, lenders and investors which 
participate in the financing of transfer and rehabilitation of older 
properties? Currently, there is a mixture of state RD guidance in this 
area.
    Answer. The proposed regulation 3560 included a provision for 
nonprofit borrowers to earn an asset management fee in lieu of a return 
to owner. This fee is intended to pay expenses directly attributable to 
ownership responsibilities. Many nonprofit borrowers also serve as the 
property management agent and, as such, are entitled to a management 
fee. In these identity of interest situations, we must ensure that 
duties as outlined in the management plan are appropriate to earn a 
management fee but are not also charged as an asset management fee. A 
final rule on the regulation is being developed.

                           RENTAL ASSISTANCE

    Question. What do you do with rental assistance in projects that 
prepay? How is it distributed?
    Answer. Rental assistance in properties that prepay their mortgage 
is returned to the State for distribution in accordance with Regulation 
1930 Subpart C, Exhibit E, paragraph XV A 2.
    Question. I understand that you have indicated there is not enough 
rental assistance for preservation efforts. Have you or will you 
consider unobligated transfers to this account similar to your activity 
in the last 2 years with the Section 502 guaranteed program? Isn't 
preservation a priority with this administration?
    Answer. Preservation of the multifamily portfolio has been and 
continues to be a priority with this Administration; however, the 
Agency does not have the authority to convert other appropriated funds 
to rental assistance.

               SECTION 502 SINGLE-FAMILY HOUSING PROGRAMS

    Question. It has come to the Committee's attention that RHS has 
different policies for making section 502 direct and guarantee loans 
available under continuing resolutions. We understand that, in general, 
less money is made available for direct loans under continuing 
resolutions and that this policy has made it more difficult for 
builders to plan for and deliver houses for construction under the 
direct program. We understand that this is particularly a problem for 
self help housing.
    Please describe for the Committee the differences between the 
policy for direct loans and guarantee loans, and the spending for the 
two programs under the fiscal year 2004 continuing resolutions. Also, 
please explain why RHS has different policies. Finally, please make 
recommendations to the Committee on ways in which section 502 direct 
loans could be administered during continuing resolutions so that 
delays in obligation of funds and construction may be minimized.
    Answer. Priority is given to all Rural Development housing programs 
during periods covered during continuing resolutions (CR). However, 
there is a difference between our direct and guaranteed programs. In 
the direct program, since Rural Development controls the application 
process, we can notify applicants to not be actively signing contracts 
to purchase a home. In the guarantee program, Rural Development does 
not work directly with the homebuyer. These homebuyers work with real 
estate agents, builders, and over 2,000 private sector lending 
institutions that are unfamiliar with a lender not having available 
funding. When 502 guaranteed funds are not available, it is not just 
the consumer who is affected but also private sector lenders and the 
financial markets that are vital to the economy. Thus, while 502 direct 
loan customers are a priority, a higher priority during continuing 
resolutions is given to section 502 guaranteed customers, private 
sector lenders, and the secondary markets.
    Realizing the realities of the annual appropriations process, the 
Agency does its best to manage its programs within the authorities 
available. We would be happy to work with the committee to come up with 
solutions to keep both programs operating through the CR process.
    Question. According to the USDA Economic Research Service, 4 
million, or 17 percent of the households in non-metro areas, are 
classified as being in housing poverty. Households are defined as being 
in housing poverty when their housing has at least one of four 
important indicators of housing disadvantage:
  --Economic need--housing costs over 50 percent of household income;
  --Inadequate quality--physical quality defined as moderately or 
        severely inadequate using the HUD measure based on 26 
        indicators of physical problems;
  --Crowding--more household members than rooms; and
  --Neighborhood quality--perception of poor quality in at least 2 out 
        of 4 neighborhood conditions (crime, noise, inadequate public 
        services, and litter/deteriorating housing).
    How many units of housing will the Rural Housing Service finance 
with the budget authority requested in the fiscal year 2005 budget? How 
does this relate to the need?
    Answer. USDA expects to finance approximately 11,900 units of 
Section 502 Single Family Housing through the Direct loan program and 
approximately 27,000 units through the Guaranteed program in fiscal 
year 2005.
    Question. What is the dollar value of Section 502 direct loan 
applications on hand?
    Answer. As of May 24, 2004, there is a backlog of demand totaling 
approximately $3.3 billion.
    Question. Last year, the Administration made much of the increase 
in homeownership spending and its priority for home ownership. Now, a 
year later, RHS proposes to reduce section 502 loans by more than $200 
million. Is homeownership less important than last year?
    Answer. For fiscal year 2005, an expectation of increasing interest 
rates causes the subsidy rate for the Direct Section 502 program to 
increase. Therefore, while we are dedicating slightly higher budget 
resources to the Direct program, the supportable program level is down. 
For fiscal year 2004, we were able to support a dramatic increase in 
the Direct loan program and we proposed a 30 percent increase in the 
program level. For fiscal year 2005, the proposed program level of $1.1 
billion is still higher than the fiscal year 2003 program level. 
Despite the budget constraints, we were also able to keep the Section 
523 Mutual and Self-Help Technical Assistance program at level funding. 
The Administration is committed to increasing rural homeownership and 
in particular, meeting our minority homeownership goals. We plan to 
manage our resources responsibly and to maximize the results in order 
to meet our program goals.

                             SUBSIDY RATES

    Question. I understand that the subsidy rate for rural housing 
loans has increased. What is the basis for the increase in subsidy 
costs? What are the elements of the subsidy cost calculations?
    Answer. The subsidy rates for Federal loan programs are affected 
annually by changes in technical assumptions such as default rates, 
prepayments, or fees and also by the economic assumption of interest 
for the term of the loan. The technical assumptions for every program 
are updated annually to reflect the most recent year's performance. 
Additionally, new interest rates are set by OMB annually. The change in 
interest rates affects all Federal credit programs and is not unique to 
USDA. These changes are routine upward or downward changes that reflect 
the cost of borrowing by the Federal Government to finance its credit 
programs. I will provide for the record a more detailed summary of the 
changes by program.
    [The information follows:]
    The change in the subsidy rates for the following Rural Housing 
Service (RHS) programs is due primarily to the change in interest 
costs. Changes were also due to technical changes, but those changes 
were minimal.
    Increased Subsidy Rate from 2004 to 2005:
  --Section 504 Very Low-Income Housing Repair Loans;
  --Section 515 Multi-Family Housing Loans; and
  --Multi-Family Housing Credit Sales.
    Decreased Subsidy Rate from 2004 to 2005:
  --Section 502 Guaranteed Refinance Single Family Housing Loans
    The change in the subsidy rate for the following RHS programs is 
due primarily to changes in technical assumptions such as defaults, 
fees, and prepayments. Changes were also due to the interest rate 
change, but that change did not account for the primary shift in cost.
    Increased Subsidy Rate from 2004 to 2005:
  --Direct Section 502 Single Family Housing Loans;
  --Direct Section 514 Farm Labor Housing Loans; and
  --Single Family Credit Sales of Acquired Property Loans.
    Decreased Subsidy Rate from 2004 to 2005:
  --Section 502 Guaranteed Single-Family Housing Purchase Loans;
  --Section 538 Guaranteed Multi-Family Housing Loans;
  --Section 524 Housing Site Development Loans; and
  --Section 523 Self-Help Land Development Loans.
    The Direct Section 502 Single Family Housing Loan program has a 
higher subsidy rate due to the increase in payment assistance.
    The Direct Section 514 Farm Housing Loan program has a higher 
subsidy rate due to the increase in the net default component.
    The Single Family Housing Credit Sales program has a higher subsidy 
rate due to the change in prepayments and the subsequent change in the 
unpaid principal balance.
    The Section 502 Guaranteed Single Family Housing Purchase Loans 
program has a lower subsidy due to the increase in the upfront fee 
percentage from 1.50 percent in 2004 to 1.75 percent in 2005.
    The decrease in the subsidy rate for the Guaranteed Section 538 
Multi-Family Housing Loan program was the result of an increase in the 
annual fee percentage to 0.50 percent in 2005 and a slight increase in 
the percentage of program level receiving interest assistance.
    Methodologies used for calculating defaults, recoveries, and 
scheduled collections changed for both the Section 524 Site Development 
and Section 523 Self-Help Development programs. Program performance 
assumptions are based on historical program performance on a loan-by-
loan basis. Prior to this, program assumptions were based on the 
historical trend of the total portfolio.

                       REPAIR AND REHABILITATION

    Question. The budget requests $60 million for rural rental housing. 
This amount does not include any funding for new construction. This is 
the third consecutive year that the Administration has not requested 
funds to finance new rental housing units. Does the Administration plan 
to seek new construction any time in the future?
    Answer. Over 45 percent of the Section 515 portfolio is 20 years 
old. Many of our apartment complexes are in need of repair and 
rehabilitation. The average apartment complex has reached the age where 
major components such as roofs, cabinets, siding, and heating and 
cooling systems need to be replaced. Ensuring that our residents 
continue to be housed in decent, safe, and sanitary rental housing 
continues to be one of the Agency's top priorities and will be our 
focus in fiscal year 2005. We believe it is appropriate for the Agency 
to focus its efforts on maintaining the existing stock of housing.
    Question. I understand that the Sec. 515 portfolio is aging and 
that close to 10,000 of the 17,000 developments across the country are 
more than 20 years old. Does RHS have an estimate of the overall dollar 
need for restoration of existing Section 515 developments?
    Answer. We estimate that approximately 45 percent of the portfolio 
has been in operation for 20 years or more. We do not have an estimate 
of the overall dollar need for restoration of existing section 515 
developments. However, below is the recent history and projections of 
requests and funding for rehabilitation loans.

                                         REPAIR AND REHABILITATION LOANS
                                            [In thousands of dollars]
----------------------------------------------------------------------------------------------------------------
                           Fiscal year                               Requests         Funded        Not Funded
----------------------------------------------------------------------------------------------------------------
2000............................................................         128,900          54,900          74,000
2001............................................................         128,900          50,900          78,000
2002............................................................         139,500          49,000          90,500
2003............................................................         139,000          60,000          79,000
2004 (est.).....................................................         167,100          55,800         111,300
2005 (est.).....................................................         160,000          60,000         100,000
                                                                 -----------------------------------------------
      Total.....................................................         863,400         330,600         532,800
----------------------------------------------------------------------------------------------------------------

    Question. The Department has recently hired a consulting firm to 
assess the Section 515 portfolio. What is the status of that report? 
Can you share with the Committee any preliminary findings?
    Answer. The fieldwork has been completed. The report will not be 
available until late this summer. At that time we would be more than 
willing to share the report and its recommendations with the Committee.
    Question. In recent years, due to budget cuts RHS has offered 
little in the way of incentives for section 515 owners to maintain 
long-term use. This lack of funding has prompted both the courts and 
the Congress to consider the provision of the law that regulates 
section 515 and provides incentives. All section 515 tenants are low 
income--with an average annual income of approximately $9,000--and two-
thirds are elderly or disabled households. What is RHS doing to resolve 
this issue so that owners are compensated consistent with the law and 
tenants are not displaced?
    Answer. The Agency is working with Fannie Mae, Freddie Mac, 
nonprofit organizations and public housing authorities to alleviate 
some of the demand for preservation incentives. These efforts are slow 
in providing relief because due diligence must be done to ensure that 
each participant maintains integrity to its authorizing statute, 
charter and/or by-laws. The Agency is working very closely with 
partners such as Fannie Mae and Freddie Mac to realize some 
preservation and rehabilitation deals yet this year.

                   PREPAYMENTS IN SECTION 515 PROGRAM

    Question. If Congress, or the courts, lifted the restrictions in 
the 1987 Housing Act, what is your estimate of the number of units that 
would be lost and the number of households that are likely to be 
displaced?
    Answer. It is difficult to project the number of borrowers who will 
prepay their mortgage. Considerations such as motivation, real estate 
market, and economic conditions all play a role in determining the 
likelihood of prepayment. While approximately 11,000 properties are 
eligible to prepay (mortgages made prior to 1989), our most recent 
prepayment history has been averaging about 100 properties a year or 
less than 1 percent of those eligible.

                       RENTAL ASSISTANCE PROGRAM

    Question. The fiscal year 2004 Appropriations Conference Agreement 
and the fiscal year 2005 budget request reduce the total for rural 
rental assistance, by reducing term of contracts from 5 years to 4 
years. What are the implications of this change for future budgets? 
What are the annual estimates of costs for the contracts expiring 
fiscal year 2004? Is the appropriation adequate to cover more than the 
4-year period?
    Answer. The objective of RD's estimation of rental assistance needs 
is to predict as closely as possible the exact amount of rental 
assistance needed at each property. However, predicting these costs is 
not an exact science, especially in recent years as property and health 
insurance, and benefits and utility costs have driven up property 
expenses and increased the rate of rental assistance usage. In theory, 
the 4-year contracts written in fiscal year 2004 should last 4 years, 
until fiscal year 2008. In reality, the rate at which contracts use 
rental assistance changes every month and their funds'exhaustion date 
changes as well. However, the impact of fixed terms on these contracts 
is that all fiscal year 2004 contracts, except those which exhaust 
funds prior to fiscal year 2008, will be renewed in fiscal year 2008. 
These fiscal year 2004 renewal contracts will be added to the expected 
number of renewals needed for contracts written prior to fiscal year 
2004 and expected to expire in fiscal year 2008. Our estimate at this 
time is that all 40,754 fiscal year 2004 contracts will need renewals 
in fiscal year 2008 and 33,435 contracts written prior to fiscal year 
2004 will need renewals in fiscal year 2008 for a total number of 
contracts requesting renewals in fiscal year 2008 of 74,189.
    Question. The recent GAO Study ``Standardization of Budget 
Estimation processes Needed for Rental Assistance Program'' and 
testimony before the House of Representatives last year indicated that 
there is a large sum of unspent rental assistance funds in existing 
contracts. What is the status of these funds, how much is unspent? Have 
you or will you work with owners that have large unobligated rental 
assistance funds to voluntarily change existing contracts for 
preservation and other purposes?
    Answer. The amount of unliquidated obligations on rental assistance 
contracts entered into between 1978 and 1999 was $597,000,000 as of 
December 30, 2003. RHS does not have the authority to amend the current 
RA Agreements to allow rental assistance funds obligated for a project 
to be used for other purposes. Such a use of funds would be a violation 
of the legislation that appropriated the funds. To allow RHS to enter 
into such amendments, Congress would have to specifically authorize the 
expenditure of such funds for other purposes as the Congress would like 
to authorize.
    Question. Secretary Gonzalez, in fiscal year 2003, my State of 
Wisconsin had four applications for funding through the Section 525 
Technical Assistance Account to provide homeownership education for our 
rural residents. Wisconsin has historically received funding for our 
good work in this area. In the fiscal year 2003 selection process, I 
understand the Administration selected priority states primarily within 
one region of the country with the justification that there was not 
enough funding to reach more applicants for other regions of the 
nation. I included language in the fiscal year 2004 bill that doubled 
the account and provided limits any one state could receive under this 
account.
    How will you ensure that states like Wisconsin will receive a fair 
playing field for consideration for the funds available this fiscal 
year?
    Answer. A Notice of Funding Availability (NOFA) for the fiscal year 
2004 funding will be published soon in the Federal Register, outlining 
the competitive application process. In accordance with our published 
regulations, priority must be given for funding to targeted states. To 
meet the requirements of our regulations, we intend to target up to 
half of the funds to 10 states, based on the 2000 Census, including: 
Texas, California, North Carolina, Georgia, Mississippi, Louisiana, 
Kentucky, Alabama, Florida and Pennsylvania. States may receive no more 
than one grant from target funds.
    For remaining funds, a scoring system will favor programs serving 
rural counties with high rates of poverty and deficient housing, as 
well as those operating most efficiently. No grant may exceed $100,000 
(except multi-state or group programs, to $200,000). Funding to any 
state or territory will be limited to 10 percent of available funds.
    We believe the proposed award method will meet the objectives of 
the TSA program by funding projects in the most needy areas and 
supporting the most effective programs throughout the nation. The 
language you suggested in the fiscal year 2004 Appropriations Bill will 
help further ensure that all states, including Wisconsin, have better 
access to funding.

                          COOPERATIVE SERVICES

    Question. What is the number of full-time permanent positions in 
the field devoted to providing cooperative technical assistance for 
fiscal year 2002 through fiscal year 2005?
    Answer. While only a couple of States currently have full-time 
staff providing technical assistance for cooperatives, 12 States have a 
staffer who works at least 50 percent of their time in Cooperative 
Services (CS) activities. The remaining States have individuals who 
perform a range of technical assistance, outreach, and CS administered 
grant program activities as a collateral duty.
    Question. I understand you have a current analysis ongoing to 
review the cooperative service mission. Can you share your results to 
date?
    Answer. We are in the early stages of a review of our Cooperative 
Services Program. We have assembled a review team, representing a 
diverse range of cooperative and rural perspectives, to take a 
comprehensive look at the role of CS, review of present activities and 
priority areas, resource history and allocation, and recommendations 
for pursuing cooperative strategies within the Rural Development 
portfolio. Scheduling for review activities is underway and we expect 
the review process and completion of the final report to take 
approximately 3 months. We will be happy to share results as they are 
completed by the review team.
                                 ______
                                 

               Questions Submitted by Senator Tom Harkin

                     CONSERVATION SECURITY PROGRAM

    Question. Mr. Rey, the press has recently reported that USDA plans 
to spend $13.4 billion on the Conservation Security Program (CSP) over 
the next ten years. I have also been told that other numbers attributed 
to USDA are out there. Most recently, you testified that USDA will 
spend $13.4 billion on CSP for the life of the program, from fiscal 
2004-fiscal 2007. I have looked at the cost information NRCS is 
distributing on CSP. According to the NRCS charts, USDA plans to spend 
only $1.372 billion during the farm bill, not $13.4 billion.
    While I recognize the difference between obligations and actual 
spending, this question is strictly about how much USDA plans to spend.
    Can you please confirm that the total spending for CSP during the 
farm bill time period are actually estimated by USDA to be $1.372 
billion, or approximately that amount?
    Answer. The Administration's proposed funding approach for the 
Conservation Security Program is to fund only the annual payment for an 
active CSP contract plus the technical assistance out of each 
respective year's budget authority. This approach is similar to the 
funding approach for the Conservation Reserve Program, unlike all other 
USDA conservation programs where the total financial assistance for the 
life of a contract is obligated to the Federal budget in the first 
year. This approach will allow greater participation by farmers and 
ranchers in CSP at the proposed budget levels and represents a 
significant commitment and investment over the life of the contracts by 
USDA. The $1.374 billion in budget authority through fiscal year 2007 
will result in $6.92 billion in estimated payments to farmers and 
ranchers over the life of their individual CSP contracts. The $4.411 
billion in baseline projections through 2010 will result in $13.32 
billion in estimated payments to farmers and ranchers over the life of 
their contracts. Keep in mind that this represents a theoretical 
estimate at this point in time based on certain program design 
assumptions that could change in the final rule. The current USDA 
baseline budget projections for CSP is submitted for the record.
    [The information follows:]

                          [Dollars in millions]
------------------------------------------------------------------------
                                                           Estimated
                                                         Commitment for
                                                        the CSP Contract
            Fiscal year              Budget Authority  Life to Farmers &
                                                            Ranchers
                                                           (Financial
                                                        Assistance Only)
------------------------------------------------------------------------
2004..............................               41.4              430.6
2005..............................              209.4            1,742.2
2006..............................              457.4            2,579.2
2007..............................              665.4            2,163.2
2008..............................              873.4            2,163.2
2009..............................            1,045.6            2,070.8
2010..............................            1,118.5            2,173.7
                                   -------------------------------------
      Total fiscal year 2004-2007.            1,373.6            6,915.2
                                   -------------------------------------
      Total fiscal year 2004-2010.            4,411.1           13,322.9
------------------------------------------------------------------------

                    FOREST SERVICE MANAGEMENT PLANS

    Question. The Administration's proposed rule for National Forest 
System Land and Resource Management Planning would make substantial 
changes to the extent in which the public is involved in Forest Service 
management plans. Most importantly, the proposed rule would allow 
forest supervisors to categorically exclude new forest plans as well as 
plan amendments and changes from environmental analysis under NEPA.
    The proposed rule would also make a significant change to existing 
rules by explicitly stating that agency-wide management policy and 
procedure relevant to planning and resource management should be issued 
through the Forest Service Directive system. This means that major 
management policy would be issued in Forest Service manuals, handbooks, 
or white papers which are subject to only very limited public review or 
comment and would not be subject to NEPA. I am aware that the Forest 
Service is currently looking at comments to the proposed rule and is in 
the process of drafting a new final rule.
    Given that the overall goal of managing the National Forest System 
as stated in the proposed rule is ``to sustain in perpetuity the 
productivity of the land and the multiple use of its renewable 
resources,'' and that multiple uses may involve many different types of 
public users, why has the Administration chose to limit public input 
for long term forest management plans?
    Answer. The Forest Service has completed review of public comments 
on the December 6, 2002 proposed planning rule. The Agency is in the 
process of drafting the final rule. The proposed rule included National 
Forest Management Act (NFMA) requirements for public involvement, which 
were the same as for previous rules. The Department strongly supports 
active public participation and collaboration in planning.
    Question. Since sustainable management is by definition a long-term 
goal, how do you expect members of the public to have input into the 
Forest Service's plans for sustainable management if entire forest 
plans can be categorically excluded from NEPA?
    Answer. The Forest Service has completed review of public comments 
on the December 6, 2002 proposed planning rule. The Agency is in the 
process of drafting the final rule. The proposed rule included National 
Forest Management Act (NFMA) requirements for public involvement, which 
were the same as for previous rules. The Department strongly supports 
active public participation and collaboration in planning.
    Question. Furthermore, by limiting public input into the 
establishment and revision of long-term management goals and 
objectives, won't this simply encourage members of the public to object 
to every project that appears to go against their particular interests, 
thus decreasing the efficiency of the Forest Service planning and 
increasing costs?
    Answer. The Department strongly supports public involvement in 
planning. For the proposed 2002 rule, the Department used the input 
provided by the Committee of Scientists for the 2000 rule. The current 
rulemaking process has retained this Committee's recommendation for 
emphasis on public involvement, adaptive management, monitoring and 
evaluation, use of science, and sustainability. There are requirements 
for use of science in the proposed rule, and the final rule will also 
include science requirements.
    Question. In addition, your proposed regulations were developed 
without the formal input of an independent Committee of Scientists, in 
contrast to the development of all previous versions of these 
regulations. You also proposed eliminating most requirements for 
independent scientific input into forest plans themselves, making the 
involvement of independent scientists optional on the part of the local 
forest manager.
    Won't this approach lead to less scientifically based forest 
management and less credibility with the scientific community and the 
public in general? And won't it therefore lead to more controversy and 
difficulty in implementing forest plans? Most importantly, won't 
limiting scientific input increase the chance that poor management 
decisions will harm the forest resources we seek to maintain?
    Answer. The Department strongly supports public involvement in 
planning. For the proposed 2002 rule, the Department used the input 
provided by the Committee of Scientists for the 2000 rule. The current 
rulemaking process has retained this Committee's recommendation for 
emphasis on public involvement, adaptive management, monitoring and 
evaluation, use of science, and sustainability. There are requirements 
for use of science in the proposed rule, and the final rule will also 
include science requirements. The planning rule will result in 
management based on science.

                        HIGH FRUCTOSE CORN SYRUP

    Question. Last month, the Office of the Trade Representative 
announced that they would pursue a WTO case against the government of 
Mexico for its blatantly unfair imposition of a 20 percent tax on 
beverages using high fructose corn syrup (HFCS) that has kept U.S. HFCS 
exports out of its previously largest market for more than 2 years. 
Under WTO rules, parties to the dispute are supposed to undertake 
bilateral discussions to see if a formal dispute panel can be avoided.
    I understand that representatives of the sweeteners sectors in both 
countries have also been engaged in negotiations to try to reach a 
resolution of this issue and also the issue of Mexican sugar exports to 
the United States. Do you think either of these sets of discussions 
will be successful in the next few months, and if they are not, will 
the U.S. government go ahead and request the formation of a WTO dispute 
resolution panel later this spring?
    Answer. We are not optimistic about the bilateral discussions, 
since prior efforts to resolve the disagreements between Mexico and the 
United States involving trade in sugar, high fructose corn syrup, and 
corn have not been fruitful. We will only be able to evaluate the 
results of the private sector discussions once they are concluded. The 
U.S. government will request the formation of a WTO dispute resolution 
panel if that appears to be the best course of action once 
consultations have been exhausted.

                           PAYMENT LIMITATION

    Question. The Commission on the Application of Payment Limitations 
for Agriculture recommended that more resources should be allocated for 
payment limit administration in USDA's Farm Service Agency (FSA) and 
Office of the Inspector General (OIG). The commission recognized the 
integrity and determination of FSA county office staff, but noted that 
more resources could augment current efforts to train staff on payment 
limits and monitor compliance. What efforts, if any, have you taken to 
implement this recommendation?
    Answer. As part of FSA's initiative to improve the delivery of 
programs with the available county office staffing, the agency is re-
engineering its business processes dealing with program eligibility and 
payment limitations. An important component of the re-engineering is 
the development of software to improve the efficiency and 
implementation of payment limitations and other related payment 
eligibility provisions. The first phase of the re-engineering, payment 
eligibility, will be piloted in the next few months and is anticipated 
to be deployed nationally in late fall 2004. This deployment will be 
followed next year with the rollout of the re-engineered payment 
limitation system, which includes many automated validations and 
decision points that will assist the County Committees in their person 
determinations. Training on the software and payment limitations will 
be held for the pilot counties in August. If piloting goes well, the 
national training will be held shortly thereafter.
    Question. The Commission also recommended that FSA track all 
benefits through entities to individuals as required in section 1614 of 
the 2002 farm bill. Often program benefits are delivered indirectly 
through complex business arrangements or through marketing 
associations. To enable Congress to better understand the complexity of 
payment limitations, the 2002 farm bill included a requirement to track 
benefits--both direct and indirect--to individuals and entities:

``SEC. 1614. TRACKING OF BENEFITS.

    ``As soon as practicable after the date of enactment of this Act, 
the Secretary shall establish procedures to track the benefits 
provided, directly or indirectly, to individuals and entities under 
titles I and II and the amendments made by those titles.''

    What steps have you taken to begin tracking commodity and 
conservation benefits as required by law?
    Answer. The payment database is currently being revised to enable 
the tracking. The reporting capability will be completed no later than 
September 30, 2004.

                              SOYBEAN RUST

    Question. Although Asian soybean rust has not yet arrived in the 
United States, its recent arrival in major soybean producing countries 
in South America has caught the attention of American soybean framers. 
Given the ability of the soybean rust spores to move on air currents, 
we know it is only a matter of time until the disease arrives on U.S. 
fields. One of the research activities that will be key to combating 
soybean rust over the long run will be the identification or 
development of soybean varieties that are resistant or tolerant to 
soybean rust, and incorporation of such traits into commercially 
available varieties.
    Since there are restrictions from the Bioterrorism Act limiting 
work on viable rust spores to the Fort Detrick facility, will those 
hinder USDA's research effort, and what steps are you taking to relieve 
that constraint?
    Answer. Soybean rust has been reported in numerous countries 
throughout the world including Australia, China, India, Taiwan, 
Philippines, and Thailand in the Eastern Hemisphere; Brazil, Argentina, 
Paraguay, Uruguay, Costa Rica, Columbia, and Puerto Rico in the Western 
Hemisphere; and in Zimbabwe and South Africa on the African continent.
    ARS researchers at Fort Detrick are screening approximately 18,000 
accessions of soybean varieties for soybean rust resistance. This 
material represents a worldwide collection of ancestral soybean that is 
maintained in the USDA Soybean Germplasm collection in Urbana, 
Illinois. In addition to these soybean lines, ARS scientists at Fort 
Detrick are screening 1,000 commercial soybean lines for broad spectrum 
soybean rust resistance using a mixture of four soybean rust strains 
with varying levels of virulence.
    To relieve the constraints at Fort Detrick, international 
agreements are in place with cooperators in Brazil, China, Thailand, 
South Africa and Paraguay to evaluate soybean varieties currently grown 
in the United States for tolerance to soybean rust and to screen exotic 
soybean germplasm for resistance to soybean rust under field 
conditions. The international cooperations, now in their second year, 
will identify varieties that exhibit broad spectrum resistance.
    ARS is also working with cooperators in South America to monitor 
and map the incidence of soybean rust outbreaks in South America. This 
information will be used to develop models to predict possible routes 
of entry into the United States.

                      NATIONAL RESEARCH INITIATIVE

    Question. I am pleased to hear that the CSREES National Research 
Initiative, in response to language in the fiscal year 2004 
appropriations bill, will soon be issuing a supplemental Request for 
Applications to solicit integrated research, education, and extension 
proposals that respond to the goals of the Initiative for Future 
Agriculture and Food Systems to enhance farm profitability, small and 
medium-size farm viability, and rural economic development. I commend 
you for this effort and would like to have two questions answered. It 
is my understanding that this will be more than a token effort, and 
will be at least in the range of $5 million or more. First, I would 
like to know the projected funding level for this supplemental RFA?
    Answer. The projected funding level for the supplemental RFA is $5 
million. These funds will primarily come from the fiscal year 2004 
budget; however, part of the RFA may be funded by fiscal year 2005 
funds, if necessary. All funds will be made available within calendar 
year 2004.
    Question. Second, as we are already now half way through the fiscal 
year, I am wondering what the timeline is for the issuance of the RFA, 
the proposal deadline, the review process, and the ultimate grant 
awards?
    Answer. Since passage of the Agriculture appropriation in February, 
we have been actively engaged in consulting with stakeholders and 
expert groups through a series of workshops to help shape the ideas in 
the RFA. The RFA is planned to be released in June 2004 with a 
September 2004 deadline. Following peer review of the applications in 
the Fall of 2004, it is anticipated that awards will be made no later 
than December 2004.
    Question. Is the RFA imminent and what can you tell me about the 
timeline for the full grantmaking process?
    Answer. The RFA is currently being prepared, having benefited from 
stakeholder input and internal discussions concerning this complex area 
of research. The RFA is planned for release in June 2004 with a 
September 2004 deadline for applications. Peer review of all 
applications will occur in the Fall of 2004, with awards being made by 
the end of calendar year 2004.

         ORGANIC AGRICULTURE RESEARCH AND EXTENSION INITIATIVE

    Question. As you know, the 2002 farm bill contains modest mandatory 
funding for a new Organic Agriculture Research and Extension 
Initiative. I am anxious to see this program get started, and I know 
many of my colleagues are also quite interested in this initiative. Can 
you tell me when the Request for Applications will be issued?
    Answer. The Cooperative State Research, Education, and Extension 
Service-CSREES--published the Request for Applications for the 
Integrated Organic Program on our website on April 15, 2004, at http://
www.csrees.usda.gov/fo/fundview.cfm?fonum=1141. The Request for 
Applications offers two program areas: the Organic Transitions Program 
and the Organic Agriculture Research and Extension Initiative. 
Together, the two programs will fund integrated research, education, 
and extension projects that address critical organic agriculture 
issues, priorities or problems. The deadline for applications for both 
program areas is June 10, 2004.
    Question. Also, more broadly, can you tell me what plans ARS or 
CSREES has for expanding its research effort on organic production and 
marketing?
    Answer. Since 2001, the Organic Transition Program has provided 
approximately $3.9 million for competitive grants to fund the 
development and implementation of organic production practices and 
improve the competitiveness of organic producers.
    In 2004, approximately $1.9 million of funding for the Organic 
Transition Program will be combined with an additional $3 million of 
mandatory funding provided by the 2002 Farm Bill for the Organic 
Agriculture Research and Extension Initiative (OAREI). The 2004 funding 
level for organic research, education and extension programs is $4.9 
million. As authorized by the 2002 Farm Bill, OAREI will provide a 
total of $15 million through fiscal year 2008, $3 million per year for 
4 years, to fund studies that will help producers and processors grow 
and market certified organic food, feed, and fiber products.
    ARS has been actively increasing its efforts to better serve 
organic producers over the last several years. Much of this research 
has been in cooperation with organic producers and organizations, 
particularly the Organic Farming Research Foundation (OFRF). In many 
instances research is conducted jointly with scientists at land grant 
universities including 1890 institutions. In addition, National Program 
Leaders from ARS and CSREES regularly discuss research on organic 
farming and sustainable agriculture at joint meetings such as those 
held by the USDA Sustainable Development Council, the Sustainable 
Agriculture Research and Education (SARE) Program and the informal USDA 
organic agriculture interest group. ARS and CSREES scientists and 
National Program Leaders also continue to participate with OFRF and 
organic producers in the Scientific Congress for Organic Agricultural 
Research (SCOAR) meetings and related activities to identify research 
priorities for organic agricultural.
    ARS has assembled a database of its researchers that are doing or 
are interested in doing research on organic agriculture. More than 140 
ARS scientists are doing research that could benefit organic producers. 
In addition ARS is doing research on many topics such as biological 
control, integrated pest management (IPM), weed control, and soil 
management that may fit well with organic farming practices. Organic 
growers, therefore, could reap benefits even though the research may 
not have originally been specifically directed towards organic systems. 
ARS is planning on holding a workshop later this year to improve its 
focus, interactions and coordination of its research on organic 
farming. Representatives from CSREES and OFRF will be invited.
    A few examples of ARS research on organic production include the 
following. All of these examples are on systems that are certifiably 
organic under the new USDA organic standards.
  --In Salinas, California ARS has a scientist dedicated solely to 
        organic agriculture. Some of his research is studying how to 
        best incorporate cover crops in organic systems for fertility 
        and weed management. University of California researchers, 
        extension agents and producers are all cooperating in this 
        research.
  --ARS scientists in Weslaco, Texas in cooperation with producers, 
        organic organizations and university colleagues are researching 
        a broad number of organic systems including olive, melon, 
        citrus and grain crop production systems. One unique aspect of 
        this research is to determine if organically produced crops 
        have higher levels of beneficial compounds.
  --ARS researchers from Beltsville, Maryland and Wyndmoor, 
        Pennsylvania are cooperating with the Rodale Institute in 
        Pennsylvania to develop improved weed management and fertility 
        using for example, mycorrhizae inoculation. Three of the five 
        systems of the Beltsville Farming System Project are 
        certifiably organic. This research receives input from a group 
        of farmers, extension agents and university cooperators.
  --Other Beltsville scientists are cooperating with farmers and others 
        across the United States on organic practices. The system they 
        have developed based on cover crops has been shown to be 
        successful for a variety of crops from Maryland to Florida to 
        California. Furthermore, it can eliminate the need for methyl 
        bromide and plastic for those producers interested in 
        transitioning into organic agriculture.
  --ARS led research in Georgia in cooperation with university 
        scientists and organic farmers is investigating insect and 
        fertility management. Other significant research on organic 
        systems is occurring in Iowa, Minnesota, Washington and 
        Florida.
    All these are examples of an expanded ARS effort to address the 
needs of organic producers and almost all have CSREES partners.
    A proposed new effort involves ARS in cooperation with sustainable 
and organic organizations (e.g., Michael Fields Agriculture Institute, 
Practical Farmers of Iowa, Land Stewardship of Minnesota). We are 
organizing a cooperative project on how to better integrate forage and 
animal production in grain crop systems in the cornbelt. This planned 
project involves ARS units and sustainable and organic NGOs in Iowa, 
Wisconsin, Minnesota, North Dakota, South Dakota and Illinois and will 
include university researchers as well. The extent of this effort is 
dependent on obtaining increased funding.

                   RURAL BUSINESS INVESTMENT PROGRAM

    Question. The 2002 Farm Bill established the Rural Business 
Investment Program in order to attract venture capital financing to 
businesses located in rural areas. It is the only Federal program of 
its kind to target rural areas for venture capital investments.
    For decades, venture capital has helped develop industries of the 
new economy and is responsible for creating or maintaining as many as 
12.5 million jobs and generating business revenues of as much as $1.1 
trillion. Most of these jobs, however, have been established in cities 
and states along the two coasts and not in the rural communities of 
America's heartland.
    Congress authorized $280 million of investment capital debentures 
for the Rural Business Investment Program however the Administration's 
proposal would sharply cut this program to $60 million for fiscal year 
2005.
    I understand that USDA may release a program design in May so 
comments can be received. I think a stakeholder meeting would be highly 
advantageous if it can occur soon thereafter.
    I believe the RBIP program should clearly use the New Markets 
Venture Capital Program debenture model. That is the type of debenture 
that Congress used in developing the program. That is how the cost was 
estimated. There are some rumors that the Department may act otherwise. 
Is the New Markets model type of debentures your plan for the program?
    Answer. USDA is working with the Small Business Administration in 
developing regulations for this program, consistent with the statutory 
requirements. It is anticipated that a proposed rule will be published 
for public comment before the end of fiscal year 2004.
    Sec. 384E of the statute authorizes the Secretary to guarantee 
debentures issued by a rural business investment company, including a 
provision for the use of discounted debentures.
    As stated in the related Conference Report, Congress modeled RBIP 
after the Small Business Administration's Small Business Investment 
Company program, where considerable expertise in operating the program 
that provides capital for equity investments has been developed. The 
Managers noted that the RBIP grant provisions are similar to the New 
Markets Venture Capital program.
    For the RBIP, the Small Business Administration has recommended the 
guarantee of either standard debentures or discounted debentures, 
pursuant to Sec. 384E.
    Question. The President's budget limits the program to $60 million 
in debentures for fiscal year 2005, equivalent to $12 million in Budget 
Authority. And, the President's budget Appendix calls for an 
elimination of $65 million in BA in fiscal year 2005. Is this 
elimination a proposal to end the program after 2005 or is it simply an 
accounting item? Does the Department believe that the RBIP program 
should continue for the long term?
    Answer. The President's fiscal year 2005 budget proposal for this 
program does not discuss subsequent program years. However, Rural 
Development, in association with our program partner, the Small 
Business Administration, intends to design and implement a program that 
will produce measurable results, on behalf of America's rural 
entrepreneurs, for the long-term.

                               BROADBAND

    Question. I appreciate your letter to mine concerning Broadband. As 
your statement indicated, this is a very important need, crucial for 
rural America.
    I wanted to briefly raise a few points: (1) I think the next time 
the Department sends out a NOFA that it would be very useful to adopt a 
two-step process: preliminary applications that could be reviewed by 
RUS staff and for those applications that appeared to have viability, a 
second stage application that would be complete. I think a lot of small 
entities are putting a lot of funds into a complete application and 
that is limiting applications. (2) That the Department adjust its 20 
percent cash rule to count ongoing receipts within this sum. I 
understand that the Department wants equity in place by applicants. But 
I think ongoing recurring revenue streams should be counted. I am not 
talking about speculative possible receipts, but mainly the monthly 
billings from existing customers. (3) We need to be careful to manage 
risk in this program. But, we should not become excessively risk 
adverse.
    If these things are done, I believe we could see a considerable 
improvement and increase in applications. And, I would like to work 
with you on this important need. What will you do to address the points 
that I have outlined above?
    Answer. The required components of a completed application, taken 
as a whole, form the basis for determining the viability of a project. 
Each is dependent upon the other to evaluate the technical and 
financial feasibility of a project. Before a project is undertaken, it 
is critical to determine if a market exists for the product and, if so, 
to what extent and what are potential customers willing to pay for that 
product. This market study provides the basis for a determination of 
potential revenue streams and the size and capability requirements of 
the system. To properly estimate the cost of the system, and, 
ultimately, the amount of the loan request, the system must be designed 
and quotes gotten from venders. Operational expenses must be estimated 
to determine whether the project is sustainable from a financial 
perspective. Each of these aspects of a business plan is critical in 
the determination of viability. Therefore, it would be difficult to 
provide a potential applicant with a meaningful determination without 
each of these components.
    It is important to note that RUS' field and headquarters staffs are 
available to assist potential applicants in developing a loan package. 
RUS has general field representatives (GFR) located throughout the 
country who will visit potential applicants, review their business 
plans, and assist them in developing a completed application. During 
this process, if a business plan does not appear viable, the GFR will 
be able to inform the applicant.
    RUS' 20 percent credit support requirement is intended to improve 
the sustainability of a project by ensuring that it is not 100 percent 
debt financed. The credit support requirement may be satisfied with 
cash, cash equivalents, undepreciated assets that would otherwise be 
eligible for financing, licenses, and an unconditional letter of 
credit. An applicant must have, as part of the 20 percent requirement, 
cash equal to the first full year's operating expenses. RUS will waive 
this requirement for entities with 2 years of positive cash flow. RUS 
is a facilities-based lender and does not, therefore, lend for 
operating costs. As such, the applicant must have the ability to fund 
its operating expenses without RUS assistance. If an applicant is a 
start-up entity or is experiencing negative cash flow, the 1-year cash 
requirement ensures the entity's ability to sustain operations and to 
make principle and interest payments.
    We agree that risk must be properly managed which entails assuming 
the appropriate amount of risk. RUS works very diligently to 
appropriately manage risk and its fiduciary responsibility to the 
American taxpayers with its mission of extending broadband service into 
the most remote, highest cost rural areas of our country. RUS 
recognizes that an appropriate amount of risk must be taken if we are 
to succeed in our mission. However, the meaningful deployment of 
broadband services can only be met by making quality loans that produce 
exponential benefits through reduced subsidy rates and greater lending 
levels. A failed business plan translates not only into the loss of 
taxpayer investments, but deprives millions of citizens living in rural 
communities of the technology needed to attract new businesses, create 
jobs, and deliver quality education and health care services.

                        CONCLUSIONS OF HEARINGS

    Senator Bennett. I know a politician who used that phrase 
and maybe regretted it, but I will be appropriately admonished.
    Thank you all for your testimony and your attendance here 
today. And, again, than you for your service to the country in 
the various positions that you hold.
    The hearing is recessed.
    [Whereupon, at 5:03 p.m., Tuesday, April 7, the hearings 
were concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]
