[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
            HEARING TO REVIEW THE STATE OF THE FARM ECONOMY 

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                        GENERAL FARM COMMODITIES
                          AND RISK MANAGEMENT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 1, 2009

                               __________

                            Serial No. 111-7


          Printed for the use of the Committee on Agriculture
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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            FRANK D. LUCAS, Oklahoma, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California        SAM GRAVES, Missouri
DAVID SCOTT, Georgia                 MIKE ROGERS, Alabama
JIM MARSHALL, Georgia                STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South     RANDY NEUGEBAUER, Texas
Dakota                               K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
JIM COSTA, California                JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana              ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota           ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin               DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon                BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois       GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER,              BILL CASSIDY, Louisiana
Pennsylvania                         CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho
------

                                 ______

                           Professional Staff

                    Robert L. Larew, Chief of Staff

                     Andrew W. Baker, Chief Counsel

                 April Slayton, Communications Director

                 Nicole Scott, Minority Staff Director

                                 ______

      Subcommittee on General Farm Commodities and Risk Management

                   LEONARD L. BOSWELL, Iowa, Chairman

JIM MARSHALL, Georgia                JERRY MORAN, Kansas, Ranking 
BRAD ELLSWORTH, Indiana              Minority Member
TIMOTHY J. WALZ, Minnesota           TIMOTHY V. JOHNSON, Illinois
KURT SCHRADER, Oregon                SAM GRAVES, Missouri
STEPHANIE HERSETH SANDLIN, South     STEVE KING, Iowa
Dakota                               K. MICHAEL CONAWAY, Texas
BETSY MARKEY, Colorado               ROBERT E. LATTA, Ohio
LARRY KISSELL, North Carolina        BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi

               Clark Ogilvie, Subcommittee Staff Director

                                  (ii)

















                             C O N T E N T S

                              ----------                              
                                                                   Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa, 
  opening statement..............................................     1
    Prepared statement...........................................     2
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  prepared statement.............................................     6
Moran, Hon. Jerry, a Representative in Congress from Kansas, 
  opening statement..............................................     3
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     4
    Prepared statement...........................................     5

                               Witnesses

Glauber, Ph.D., Joseph, Chief Economist, U.S. Department of 
  Agriculture, Washington, D.C...................................     7
    Prepared statement...........................................     9
Henderson, Ph.D., Jason R., Branch Executive and Vice President, 
  Omaha Branch, Federal Reserve Bank of Kansas City, Omaha, NE...    21
    Prepared statement...........................................    22
Gruenspecht, Ph.D., Howard K., Acting Administrator, U.S. Energy 
  Information Administration, U.S. Department of Energy, 
  Washington, D.C................................................    29
    Prepared statement...........................................    30
    Submitted question...........................................   118
Harl, Ph.D., Neil E., Charles F. Curtiss Distinguished Professor 
  in Agriculture and Emeritus Professor of Economics, Iowa State 
  University, Ames, IA...........................................    50
    Prepared statement...........................................    53
Dumler, Troy J., Extension Agricultural Economist, Southwest 
  Kansas State Research and Extension, Garden City, KS...........    56
    Prepared statement...........................................    57
Angle, Ph.D., J. Scott, Dean and Director, College of 
  Agricultural and Environmental Sciences, University of Georgia, 
  Athens, GA.....................................................    63
    Prepared statement...........................................    66
Paggi, Ph.D., Mechel ``Mickey'' S., Director, Center for 
  Agricultural Business, College of Agricultural Science and 
  Technology, California Agricultural Technology Institute, and 
  Adjunct Professor, Department of Agricultural Economics, 
  California State University, Fresno, Fresno, CA................    69
    Prepared statement...........................................    72

                           Submitted Material

National Corn Growers and Corn Farmers Coalition, submitted 
  report.........................................................    83


            HEARING TO REVIEW THE STATE OF THE FARM ECONOMY

                              ----------                              


                        WEDNESDAY, APRIL 1, 2009

                  House of Representatives,
 Subcommittee on General Farm Commodities and Risk 
                                        Management,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 11:05 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. Leonard 
L. Boswell [Chairman of the Subcommittee] presiding.
    Members present: Representatives Boswell, Marshall, 
Ellsworth, Schrader, Herseth Sandlin, Markey, Kissell, Pomeroy, 
Peterson (ex officio), Costa, Moran, King, and Luetkemeyer.
    Staff present: Claiborn Crain, Adam Durand, Craig Jagger, 
John Konya, Scott Kuschmider, Clark Ogilvie, Anne Simmons, 
Rebekah Solem, Tamara Hinton, Josh Maxwell, Pelham Straughn, 
and Jamie Mitchell.

OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A REPRESENTATIVE 
                     IN CONGRESS FROM IOWA

    The Chairman. Okay. Well, thank you very much. We are glad 
to have you here, and the hearing for the Subcommittee on 
General Farm Commodities and Risk Management to review the 
state of the farm economy will come to order. And I will share 
a little opening statement, and then recognize my Ranking 
Member.
    First, I would like to thank everyone for joining us today, 
as we take an examination and review, if you will, of the 
nation's farm economy. I would like to give a special thanks to 
our witnesses for testifying before the Committee, and offering 
their insight into current issues facing the agriculture 
economy.
    I would also like to recognize, of course, a fellow Iowan 
who will be on the second panel, Dr. Neil Harl, a distinguished 
Professor from Iowa State University, as well as from Iowa. We 
very much look forward to hearing all the witnesses and 
testimony. We are all aware of the economic crisis our nation 
is facing, and the effects the crisis is having on businesses 
across the country.
    However, oftentimes, the agriculture economy is overlooked. 
In recent years, agriculture has seen some of the most volatile 
times in our history. With the record high commodity prices and 
input costs of last year, farmers took on more and more risk. 
In recent months, commodity prices have been declining, yet 
farmers tell us that input costs have remained very high. Even 
with unpredictable market conditions, crop farming remains one 
of the more stable and reliable aspects of agriculture, 
particularly when compared with animal agriculture, which seems 
to have fared relatively worse than crop farming.
    The signals are pointing to a very volatile year ahead for 
all of agriculture. One industry in particular, which has been 
struggling, is the dairy industry. Dairy prices have been 
declining so much over the past several months that in some 
parts of the country, prices have dropped below $10 down from 
almost $20 just 1 year ago. But the dairy industry is not the 
only one feeling the pinch. Cattle ranchers have lost money for 
21 straight months, I am told, and hog producers are losing 
over $20 per head. So, we will probably hear more details about 
these and other agriculture producers from our witnesses.
    As we have progressed through the decades, agriculture 
farmers have become bigger and less diverse. I would like to 
highlight one bright point, that even at this unprecedented 
economic time, more and more smaller farmers are getting 
involved. In 1952, there were 230,000 farms in Iowa, but by 
2002, that number dropped to around 90,000. So, it came as a 
surprise when the 2007 Census of Agriculture found the number 
of farms in Iowa had risen to 92,800. Some 4,000 new small 
farms have been created since 2002. While farmers are not 
unlike other industries facing a hard time getting credit, 
experiencing instability in the markets, and high input costs, 
it is these new smaller farms that are having, perhaps the 
toughest time coping with our economic climate.
    Personally, having survived the farm crisis of the 1980s, I 
understand firsthand what our producers are going through each 
day. Even with all the issues facing the agriculture industry, 
it is very much better than others, such as the auto industry. 
Personally, I believe that American agriculture is one of the 
bright spots in our economy, but producers are not immune to 
the economic crisis that is going on.
    Agriculture is a multi-billion dollar industry in the 
United States. Our industry not only helps feed us in this 
room, but also helps to feed the world. That is why it is so 
important that we make sure, as best we can, that agriculture 
economy continues to be strong.
    [The prepared statement of Mr. Boswell follows:]

  Prepared Statement of Hon. Leonard L. Boswell, a Representative in 
                           Congress from Iowa
    I would like to thank everyone for joining me here today as we take 
a thorough examination of the nation's farm economy. I would like to 
give a special thanks to our witnesses for testifying before the 
Committee and to offer their insight into the current issues facing the 
agricultural economy. I would also like to recognize a fellow Iowan, 
Dr. Neil Harl from Iowa State University. I very much look forward to 
hearing all the witnesses' testimony.
    We are all aware of the economic crisis our nation is facing and 
the effects that crisis is having on businesses across the country; 
however, oftentimes the agricultural economy is overlooked. In recent 
years agriculture has seen some of the most volatile times in our 
history. With the record high commodity prices and input costs of last 
year, farmers took on more and more risk.
    In recent months, commodity prices have been declining, yet farmers 
tell us that inputs costs have remained high. Even with unpredictable 
market conditions, crop farming remains one of the more stable and 
reliable aspects of agriculture particularly when compared with animal 
agriculture, which has fared relatively worse than crop farming. But 
signals are pointing to a very volatile year ahead for all agriculture.
    One industry in particular, which has been struggling, is the dairy 
industry. Dairy prices have been declining so much over the past 
several months that in some parts of the country prices have dropped 
below $10, down from almost $20 just 1 year ago. But the dairy industry 
is not the only one feeling the pinch. Cattle ranchers have lost money 
for 21 straight months and hog producers are losing over $20 per head. 
We will hear more details about these and other agriculture producers 
from our witnesses.
    As we have progressed through the decades in agriculture, farmers 
became bigger and less-diverse. I would like to highlight one bright 
point that even in this unprecedented economic time: more and more 
smaller farmers are getting involved. In 1952, there were 203,000 farms 
in Iowa but by 2002, the number had dropped to around 90,000. So it 
came as quite a surprise when the 2007 Census of Agriculture found that 
the number of farms in Iowa had risen to over 92,800. Some 4,000 new 
small farms have been created since 2002. While farmers are not unlike 
other industries facing a hard time getting credit, experiencing 
instability in the markets, and high input costs, it is these new 
smaller farms that are having the toughest time coping with our 
economic climate.
    Having survived the farm crisis of the 1980's I understand first 
hand what our producers are going through each day. Even with all the 
issues facing the agriculture industry it is faring much better than 
others such as the auto industry. I believe that American agriculture 
is one of the bright spots in our economy, but producers are not immune 
to the economic crisis going on.
    Agriculture is a multi-billion dollar industry in the United 
States. Our industry not only helps feed us in this room, but also 
helps to feed the world. That is why it is so important that we make 
sure the agricultural economy continues to be strong.
    At this time I would like to turn it over to my good friend and 
colleague, Jerry Moran from Kansas for any opening remarks he would 
like to make.

    The Chairman. At this time, I would like to turn it over to 
my good friend and colleague, Jerry Moran from Hays, Kansas, 
for any opening remarks he would like to make.

  OPENING STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN 
                      CONGRESS FROM KANSAS

    Mr. Moran. Mr. Chairman, thank you very much. This is our 
first Subcommittee hearing under your leadership, and I want to 
be the first to, again, congratulate you on your ascension to 
Chairman of this Subcommittee, a role that I played in the 
past. My only consolation is that Mr. Peterson used to be my 
Ranking Member, and he has become the full Committee Chairman, 
so perhaps there is still hope for those of us who fill the 
role that I am now in. But, I very much look forward to working 
with you throughout this term of Congress, and appreciate the 
close working relationship that we have always had.
    I, too, welcome the witnesses, and appreciate the 
opportunity to hear from them, and garner some expertise from 
their expertise. I am particularly interested in issues that, I 
hope, will be discussed in regard to budget implications in the 
farm bill that are currently being discussed in Congress, and 
its impact, or any changes in the farm bill and the budget as 
it relates to agriculture. What would that impact be upon 
production agriculture across the country. I am interested in 
knowing about access to credit, what circumstances our farmers 
find themselves in in this current environment. I have 
continued concerns about input costs and how to answer the 
question of many producers of why commodity prices have come 
down, grocery store prices have not come down as much, input 
prices have not come down as much, and that relationship 
between those prices. I am interested in the global economy, 
and its effect upon demand for agricultural products that we 
produce in the United States and any indication about what we 
foresee, as far as weather and climate changes that would 
affect the economy of producers across Kansas and around the 
country.
    So, this is, in my opinion, a good way for us to begin our 
Committee's work, by hearing from folks from across the country 
as to exactly what are the circumstances that our producers 
find themselves in, and hopefully, they will provide us with 
recommendations about how we can be helpful, to see that this 
important component of the economy of the United States is 
enhanced and has a bright future.
    So, Mr. Chairman, thank you very much. I look forward to 
hearing the witnesses' testimony and the opportunity to 
question and hear their answers. Thank you.
    The Chairman. Well, thank you, Jerry. Good to have you 
here, and I appreciate our long time friendship, and I always 
tell Jerry, when I traveled across, having to go through Hays, 
if they get one of those barriers up, why, I don't guess I know 
where I am going to head. I hope I can find a basement pad or 
something.
    Mr. Moran. We have a basement that you are always welcome 
in.
    The Chairman. Okay, good.
    At this time, we would like to recognize the Chairman of 
the full Committee, Congressman Peterson, for any remarks he 
might like to make.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    Mr. Peterson. Well, thank you, Mr. Chairman, and thank you 
and Mr. Moran for your leadership, calling this hearing, to 
take a look at the economic conditions in agriculture.
    Most people, with all the stuff that is going on, have not 
focused on the farm sector. Everybody is out there focused on 
housing, Wall Street, big banks, the auto industry, the G20, 
and all the stuff that is going on. But the farm economy, as we 
know, is vital to the health of this country, and it shouldn't 
be overlooked. And I would argue that some of this financial 
crisis that we are involved in has had, well, it has obviously 
had an effect on agriculture because of what it has done for 
the demand for some of our products. In my opinion, a lot of 
this extra money that came into agriculture over the last 
period of time, has caused problems, significant problems as 
well. And we tried to address that with the bill that we passed 
last year, and the bill that we have passed this year out of 
the Committee to try to make sure that we don't have people 
getting around the speculation limits in the commodity markets 
and futures markets and so forth.
    You know, people have argued that somewhere or another, all 
this extra money that came in from Wall Street didn't have an 
effect. I mean, when the money all came in, these prices went 
up, oil prices, commodity prices--all the corn, wheat, and so 
forth--and then, when the financial collapse happened, and 
these people had to take their money out, then the whole thing 
collapsed. And so, I mean, I am not an economist, but it just 
seemed pretty obvious to me that there is something going on 
here. I am not sure we can document how much.
    We have problems in ethanol now, and to some extent it was 
caused by this outside money that has come into agriculture, 
when there was a lot of money being made. There was a period of 
time there, if you built your plant at the right time, you 
could get your plant paid for in 1 year. And so, all this money 
came in from Wall Street thinking they were going to cut a fat 
hog, and when it went the other way it--same thing happened, 
they abandoned the situation. So, these folks are not 
necessarily in it for the long haul, and they are causing us 
problems by bringing in money that maybe we don't need.
    We have problems in the dairy sector. I commend the 
Secretary for buying, now saying that they are going to buy 200 
million pounds of dry milk. I wish they would go further and do 
the Maximum DEIP Program and some other things, but we will 
keep working with them. But by and large, agriculture is--we 
are not in the greatest shape, but compared to the rest of the 
country, we are doing pretty good. And the one thing that I am 
intent on is not screwing up.
    And so, that is why I told the President that I didn't 
agree that we should be opening up the farm bill. You know, we 
just got through doing that. We paid for it, and we made some 
cuts. We got it done. The bill isn't even implemented, and so 
it is not time to go in and start making changes, and I think 
we are. I hope people are listening to us in that regard as 
well.
    So, Mr. Chairman, I thank you for your leadership. I 
welcome the witnesses. I think it is important that we focus on 
this, and that we do what we can here, from the Agriculture 
Committee, to make sure that we have a profitable and healthy 
agriculture sector in this country.
    Thank you.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota
    Thank you, Chairman Boswell, for calling today's hearing. This is 
an important and timely hearing given the tough economic times we are 
all facing, perhaps the toughest in several generations.
    Most people have not focused on the farm sector when talking about 
our economic condition. Instead, they have focused on housing, Wall 
Street, the big banks, and now this week, the auto industry. But the 
farm economy is vital to the economic health of many areas in this 
country and it should not be overlooked.
    We have spent a lot of time and effort in highlighting what 
unprecedented price volatility has done to the agricultural economy. 
Less than a year ago, this Committee held a hearing to examine the 
dramatic movements in agricultural and energy commodity markets which 
had resulted in record- or near-record levels for vital commodities, 
due in large part to high demand and tight supplies. This volatility 
caused problems with producers and purchasers alike, hurting their 
ability to enter into forward contracts and offset price risk.
    However, as 2008 ended, the bottom fell out of many market prices 
for grains, dairy, livestock, and energy did snap back from record 
highs, and they crashed in a short amount of time.
    Oil, for example, went through the $100 barrier, up to $147, and 
then bottomed out at $32, all in 1 calendar year. This development, in 
particular, has caused a lot of hardships for those in the ethanol 
production sector, which is under financial strain and facing 
consolidation.
    This time last year, there were concerns from many different 
quarters on whether or not there would be enough crop production to 
meet demand. Now, we are facing a supply glut in many markets, with 
rapidly declining prices. But input costs still remain high, creating a 
classic price squeeze in the crop and livestock sectors. The price 
roller coaster hit the dairy industry very hard, and I'm pleased that 
USDA will buy 200 million pounds of nonfat dry milk for domestic 
feeding programs in order to support low-income families while 
providing relief for America's dairy farmers.
    We need to see how agricultural producers nationwide are faring in 
the current economic climate. Today's hearing will help this Committee 
get a picture of the overall agricultural landscape as we examine what 
current prices and trends may mean for the future. We will also look at 
farm sector financial health and broad macroeconomic factors that 
influence commodity markets. Debt-to-asset ratios, for instance, are 
much better in farm country than they are in other places, but that 
does not mean there isn't cause for concern. A deflationary economy can 
have adverse effects on farmland real estate value and the ability to 
repay debt.
    I appreciate each of today's witnesses for being here to share your 
thoughts with this Committee on the economic factors that influence 
farm policy. I look forward to your testimony, and I yield back.

    The Chairman. Thank you for those remarks.
    I think I will ask the rest of the panel to not share 
opening remarks. Anything you want to put in the record will 
certainly be acceptable, and then, in the question period, you 
can offer it at that time.
    [The prepared statement of Mr. Lucas follows:]

Prepared Statement of Hon. Frank D. Lucas, a Representative in Congress 
                             from Oklahoma
    Thank you Chairman Boswell and Ranking Member Moran for holding 
this hearing to review the state of the farm economy.
    And, thank you to our two panels for your time today.
    These are difficult and uncertain times for folks all across rural 
America. I hear of the specific challenges our farmers and ranchers 
face when I go back home to Oklahoma. But, it is important to take a 
long and broad look at the challenges our producers, as a whole, are 
facing all across the country.
    We are facing a global economic crisis, which has weakened the farm 
economy. Commodity prices have dropped significantly over the past 6 
months. Although input prices have fallen a bit as well, it is not 
enough to compensate for the loss in profits and cash flow for our 
producers. USDA recently reported that U.S. net farm income is down 20% 
from last year.
    These are serious issues alone. But, adding to the problem is the 
fact that we have an Administration that is intent on eliminating the 
farm safety net to our producers. This Administration doesn't seem to 
understand the problems facing our agriculture communities, or how 
important these communities are to our economy. If this Administration 
did, it wouldn't try to eliminate direct payments to those producers 
who make $500,000 in annual sales. Sales. Not profit. This is not only 
a bad idea, but it's the wrong policy approach and it is a direct 
attack on full-time, family-run farmers.
    Our farmers and ranchers are some of the hardest working people in 
the U.S. and they are struggling to make a living in a difficult 
economy. The people who provide us with the safest, most abundant, most 
affordable food and fiber supply in the history of the world are being 
asked to shoulder the burden of our economic crisis.
    My concerns about this Administration only grow when, despite 
opposition from House and Senate lawmakers and many farm groups, 
Secretary of Agriculture Tom Vilsack and the Director of the Office of 
Management and Budget, Peter Orszag both say they believe there will be 
a way to reduce farm supports.
    This Administration doesn't understand that farm supports, 
especially in the form of direct payments, allow farmers to show 
bankers and farm credit that they have the income to repay their loans. 
This Administration doesn't understand that direct payments provide 
producers with the flexibility to respond to market signals when 
choosing crops. And, most importantly, this Administration doesn't 
understand that direct payments are a commitment we made to our 
producers when we passed, with bipartisan support, the 2008 Farm Bill.
    I would like to thank Chairman Peterson for continuing to support 
the 2008 Farm Bill that he and many of us worked hard to secure.
    I look forward to the testimony from our panelists today, 
especially as it pertains to credit availability.

    The Chairman. So to move us along, I would like to 
recognize our first panel, and thank them for being here. Dr. 
Glauber, Chief Economist, U.S. Department of Agriculture, thank 
you for being with us. Dr. Henderson, the Vice President and 
Branch Executive, Federal Reserve Bank of Kansas City, Omaha 
Branch, Omaha, Nebraska, appreciate your presence and spending 
your time. Dr. Gruenspecht, the Acting Administrator, Energy 
Information Administration, U.S. Department of Energy, 
Washington, D.C. Good to have you, and I hope I got through 
your name okay.
    Thank you very much, and we would like to recognize Dr. 
Glauber at this time, please.

   STATEMENT OF JOSEPH GLAUBER, Ph.D., CHIEF ECONOMIST, U.S. 
          DEPARTMENT OF AGRICULTURE, WASHINGTON, D.C.

    Dr. Glauber. Well, thanks very much. Mr. Chairman, Members 
of the Committee, thank you for the opportunity to discuss the 
economic outlook for U.S. agriculture.
    This time last year, the outlook picture was quite 
different than it is today. Prices for most commodities were 
near records, record highs and rising, and farm exports and 
farm income were projected to be at record levels. There were 
concerns about whether there would be enough crop production to 
meet global demand. Livestock, dairy, and poultry producers 
were seeing their operating margins squeezed, and food price 
inflation was being discussed with concern for the first time 
in about 20 years.
    A lot has changed since then. We have seen prices for most 
commodities fall 40 to 50 percent from their mid-year peaks, 
and the global economic slump has cast a pall on most markets, 
and while net cash income is projected at high levels relative 
to historical averages, there remains much uncertainty.
    Yesterday, the National Agricultural Statistics Service 
released their annual Prospective Plantings Report. The NASS 
estimates are based primarily on surveys of producers' planting 
intentions conducted during the first 2 weeks of March. They 
indicate that farmers will likely plant about 85 million acres 
of corn, compared to about 86 million acres last year, 76 
million acres of soybeans, about the same level as last year, 
58.6 million acres of wheat, down 4.5 million acres from last 
year, and only 8.8 million acres of cotton, which would be the 
lowest level since 1983, and for many states, the lowest level 
since the early 1940s, when we started collecting the data.
    It is important to note that actual plantings will likely 
differ from intentions. Producers will adjust actual plantings 
as more information on price relationships, input costs, and 
weather becomes available. Our first official supply and demand 
estimates for the 2009-2010 marketing year will be published on 
May 12.
    In my written statement, I discuss the implications of the 
planting intentions for the crop outlook for the 2009/10 
marketing year. Most of the row crops will see a drop in prices 
from 2008/09 levels, though they will remain above the average 
for the previous 5 years. The livestock, dairy, and poultry 
sectors are being challenged by weak domestic demand, domestic 
and global demand for meat and dairy products.
    Uncertain demand, coupled with relatively high feed prices, 
caused producers to start cutting back or slow production by 
the last quarter of 2008. The pullback in output is expected to 
continue throughout most of 2009, with total meat production 
down about two percent from 2008, and milk production declining 
about 0.8 percent.
    Cattle, hog, and turkey prices are expected to be lower, 
particularly in the first half of 2009. Broiler prices are an 
exception. They are up, but largely due to the fact that they 
had sharp production cuts last year.
    Average milk prices for 2009 are forecast at $11.55 a 
hundredweight--that is the lowest level since 1978--although 
they are expected to rise over the second half of 2009, as more 
dairy cows are culled and production drops. USDA's Economic 
Research Service forecasts net cash income in 2009 at $77.3 
billion. That is down $16.1 billion from 2008. Crop receipts 
are forecast at $162.4 billion in 2009, down $18.7 billion from 
2008, but still the second highest on record. Livestock 
receipts for 2009 are forecast at $132.2 billion, down $10.9 
billion from 2008.
    Lower input costs, such as feed, fuel, and fertilizer, will 
lower cash expenses this year. ERS forecasts cash expenses at 
$247 billion, down $14 billion from 2008 levels.
    Despite the projected decline in farm income, the farm 
financial picture going into 2009 remains favorable, with total 
farm debt equal to about 9.1 percent of total assets. That is 
compared to over 20 percent in the mid-1980s. The debt-to-asset 
ratio has declined steadily, from 15.2 percent in 1998 to the 
current projected 9.1 percent.
    The decline was due to strong appreciation in land values, 
which increased by over $1 trillion from 1998 to 2008. ERS 
forecasts the value of farm assets to rise by 1.6 percent in 
2009. That would be the smallest increase since 1991. While 
farm real estate values remain significantly higher than last 
year, the recent Federal Reserve Bank survey showing fourth 
quarter declines in land values in many bank districts given 
further credence to the view that land markets have softened.
    Despite the weakened economic outlook for farmers, most of 
the districts report that availability of funds was higher in 
the fourth quarter of 2008 than in the third quarter of 2008. 
However, collateral requirements for non-real estate farm loans 
are becoming more restrictive.
    The downturn in the general economy may also be having an 
adverse effect on off-farm income sources for many farm 
households. Two thirds of all farm households reported income 
from wages and salaries from off-farm employment, and almost 
\1/4\ of farm households reported income from a non-farm 
business. That data is from 2007. Dividend earnings were 
reported by 36 percent of farm operator households in 2007.
    With confidence in financial markets weakened in the global 
economy in the worst recession since prior to World War II, the 
agricultural economy faces much uncertainty. As expected, most 
aggregate measures are forecast to be down sharply from record 
highs reached last year. Concerns with deflationary pressures 
remain, particularly if lower farm receipts persist over the 
long run. This could adversely affect farm real estate values, 
and undermine what has been to date a relatively strong 
financial position.
    That said, the outlook is for a return to higher prices, as 
many of the pressures that drove last year's price increases, 
like high energy prices, the Renewable Fuel Standard, and 
strong economic growth in emerging markets, will return to play 
a major role.
    In addition, while other sectors of the economy may be 
credit-constrained, many farm lenders appear to be in good 
financial shape, and access to credit for farmers appears to be 
sufficient.
    That completes my statement, Mr. Chairman, and I would be 
happy to answer any questions.
    [The prepared statement of Dr. Glauber follows:]

  Prepared Statement of Joseph Glauber, Ph.D., Chief Economist, U.S. 
              Department of Agriculture, Washington, D.C.
    Mr. Chairman, Members of the Subcommittee, thank you for the 
opportunity to discuss the economic outlook for U.S. agriculture. This 
time last year, the outlook picture was quite different than today: 
prices for most commodities were near record highs and rising; and farm 
exports and farm income were projected to be at record levels. There 
were concerns about whether there would be enough crop production to 
meet global demand. Livestock, dairy and poultry producers were seeing 
their operating margins squeezed, and food price inflation was being 
discussed with concern for the first time in almost 20 years.
Recent Developments in Commodity Markets
    What a difference 12 months make. We have seen prices for most 
commodities fall 40-50 percent from their midyear peaks. The global 
economic slump has cast a pall on most markets and, while net cash 
income is projected at high levels relative to historical averages, 
there remains much uncertainty.
    World Economy and U.S. Trade: The International Monetary Fund is 
currently projecting global economic output to decline between 0.5 and 
1.5 percent in 2009. This would be the first time that global output 
has declined in the post-World War II era. Output of the advanced 
economies is projected to decline between 3 and 3.5 percent while 
emerging and developing countries are projected to grow by just 1.5 to 
2.55 percent. According to the World Trade Organization (WTO), world 
trade in goods and services is expected to decline by 9.0 percent--the 
first decline in world trade since 1982, and the largest drop in the 
post-World War II period. Exports by emerging and developing countries 
are projected to fall between two and three percent in 2009, after 
annual increases of 17 and 20 percent in 2007 and 2008, respectively.
    In Fiscal Year (FY) 2008, U.S. agricultural export sales surged by 
an unprecedented $33 billion, to a record $115.4 billion. Key drivers 
behind the growth were record grain and oilseed prices and volume gains 
for virtually all products. Strong global economic growth and a weak 
dollar were also key factors along with reduced competition in grain 
markets. With FY 2008 imports at $79.3 billion, the net agricultural 
trade balance for FY 2008 was a record $36.1 billion (figure 1).
    Our export forecast for FY 2009 is $95.5 billion, $20 billion lower 
than 2008, but still more than $13 billion above FY 2007's level and 
the second highest on record. Mainly due to increased competition, U.S. 
wheat and corn exports are expected to account for 60% (down $12.2 
billion) of the overall decrease due to falling prices and volumes. 
Soybeans and soy products account for another 20% (down $4.1 billion) 
of the $20 billion decrease, with lower unit values and volumes for oil 
and meal and lower prices for soybeans. While wheat and coarse grain 
export volumes are expected to fall about 5 and 6.5 million metric tons 
(mmt) respectively, soybeans are actually forecast to hold mostly 
steady at about 31 mmt. Foreign demand for U.S. soybeans remains strong 
with near record demand from China and reduced South American supplies. 
The outlook for cotton indicates sales will fall $1.2 billion and close 
to half a million tons as the global recession reduces demand for 
textiles.
    Like bulk commodities, our export outlook for high-value meats and 
other animal products calls for the value of exports to fall $1.3 
billion to $19 billion. Here, volume losses could be a more important 
factor. Beef and pork prices should hold relatively steady, but pork 
volume is down as China's pork industry rebounds. Price and volume 
declines are expected for other products like broiler meat, animal 
fats, hides and skins, and dairy products. Animal fats follow vegetable 
oil markets, and hides and skins (like cotton) are heavily affected by 
recession and declining sales of manufactured products. The global 
dairy market is once again facing an oversupply situation with weakened 
global demand and rising milk production in Europe, New Zealand, and 
Australia.
    Running counter to the general trend, horticultural exports are 
actually forecast to rise slightly to $21.5 billion. The recession's 
impact is felt as the growth in export value slows to its lowest rate 
in 7 years. Overall volume is likely to remain unchanged, but prices 
are sticky and may even rise in some fresh produce categories.
    FY 2009 agricultural imports are a record $82.5 billion. This 
reflects the slowest growth rate in many years due to the slowing 
economy and falling consumer spending. The net trade balance is 
expected to fall to $13.0 billion, down $23 billion from FY 2009, but 
remains the second highest trade balance since FY 2001.
    Crop Prospects: Yesterday, the National Agricultural Statistic 
Service released their annual Prospective Plantings report. The acreage 
estimates in this report are based primarily on surveys of producers' 
planting intentions conducted during the first 2 weeks of March. The 
supply and demand estimates that follow are based on the Prospective 
Plantings report. It is important to note that actual plantings will 
likely differ from intentions. Producers will adjust their actual 
plantings as more information on price relationships, input costs, and 
weather becomes available. The official USDA supply and demand 
estimates for the 2009/2010 marketing year will be published on May 12, 
2009, in the World Agricultural Supply and Demand Estimates report.
    Cropland area is expected to contract in 2009 as plantings for the 
major field crops decline with lower prices and generally less 
favorable net returns (table 1). Combined planted area for the eight 
major field crops (corn, sorghum, barley, oats, wheat, rice, cotton, 
and soybeans) is expected at 245.9 million acres, down 7.1 million 
acres from 2008.
    Soybean planted area for 2009 is expected to increase for a second 
year to a record 76 million acres, 0.3 million higher than last year. 
Higher intended soybean and rice plantings are not expected to offset 
declines in wheat, cotton, and feed grains. Corn area is expected down 
one percent to 85 million acres. Rising mandates for ethanol use are 
expected to support demand and corn prices. Net returns for corn remain 
favorable to those for soybeans, but the sharp year-to-year drop in 
expected returns will limit plantings. Wheat planted area is projected 
at 58.6 million acres, down 4.5 million from last year as winter wheat 
seedings fell 3.4 million acres last fall and spring wheat acres are 
expected to be lower with soybeans a more attractive option in the 
Northern Plains.
    In 2008/09, global wheat production exceeded expected global 
consumption by almost 36 mmt, creating record world supplies of wheat 
and declining prices. As a result, pressure to expand wheat production 
has receded since last year. Producer incentives to plant wheat were 
reduced by lower prices and high fertilizer costs last fall. Late row-
crop harvesting also limited seeding opportunities in the eastern Corn 
Belt, Delta, and Central Plains.
    U.S. wheat production is expected to decline in 2009/10 with lower 
acreage and a return to trend yields following last year's record. 
Despite a nearly 15 percent reduction in expected production, wheat 
supplies are expected to be up just one percent with beginning stocks 
up sharply from a 60 year low in 2008/09. U.S. wheat ending stocks are 
also projected to build slightly in 2009/10 as slow growth in domestic 
use and lower exports more than offset the expected decline in 
production. Wheat exports are projected down three percent as global 
wheat production in 2009/10, although down from this year's record, is 
expected to be the second highest ever.
    Wheat prices are expected to remain under pressure from large 
domestic and foreign supplies. The season average farm price is 
projected at $5.10 per bushel, down $1.70 from the mid-point of the 
2008/09 projection. Limited world wheat supplies last summer supported 
U.S. exports and prices during June through September when producers 
normally market more than half of their crop. The record 2008/09 farm 
price reflects forward contracting last year at prices well above $7 
per bushel. Similar pricing opportunities have not been available for 
2009-crop wheat.
    U.S. corn production for 2009/10 is projected up one percent as a 
return to trend yields more than offsets the one percent decline in 
planted area. Domestic demand is projected higher as a small decline in 
feed and residual use is more than offset by higher corn use for 
ethanol. Corn feed and residual use declines two percent as animal 
numbers continue to contract through 2009 and higher ethanol production 
increases supplies of distillers' grains.
    Rising mandates for ethanol use are expected to support corn demand 
and prices in 2009/10. Mandated ethanol use less the ethanol derived 
from advanced biofuel under the Renewable Fuel Standard (RFS) program 
rises from 10.5 billion gallons in 2009 to 12.0 billion gallons in 2010 
(figure 2). On a crop year basis, that translates into about 11.5 
billion gallons of ethanol demand for crop year 2009/10. Reflecting 
this increase, corn used to produce ethanol is expected to increase 11 
percent. At the projected 4.1 billion bushels, ethanol use will account 
for 33 percent of expected corn use in 2009/10, up from a forecast 31 
percent this year.
    The U.S. ethanol industry remains under significant financial 
pressure as the result of current economic conditions including 
historic volatility in energy and corn prices over the past year. 
Slowing gasoline consumption and lower prices have reduced incentives 
for blending ethanol in recent months. Excess ethanol production 
capacity weighs on ethanol producer returns even as more plant capacity 
becomes available. Ethanol plant data reported by the Renewable Fuels 
Association (RFA) put ethanol production capacity at 12.4 billion 
gallons as of January 2009, including plants currently not operating, 
with another 2.1 billion under construction or expansion. About 2.0 
billion gallons or more of plant capacity has been idled. Excess 
capacity is expected to continue to limit returns for ethanol 
producers. The 2009/10 ethanol corn use forecast suggests that as much 
as 15 percent of ethanol production capacity will be idle during the 
2009/10 marketing year (figure 3).
    Corn exports are projected nine percent higher in 2009/10. Global 
corn imports are expected to show some modest recovery as global 
livestock production begins to rebound in 2010. World corn demand is 
also expected to benefit from reduced availability and use of feed-
quality wheat.
    Ending stocks for 2009/10 are projected to decline as increases in 
total corn use outpace the growth in supplies. The season average farm 
price is projected at $3.80 per bushel, down $0.30 per bushel from the 
mid-point of 2008/09 forecast range. Declines in cash prices are not 
expected to be as large as implied by the year-to-year change in the 
projected farm price. Farm prices in 2008/09 have been well above cash 
market levels as producers benefit from forward prices contracted last 
spring and summer. Similar pricing opportunities have not been 
available to support farm prices in 2009/10.
    Global oilseed production for 2008/09 is projected at a record 408 
million tons, up four percent from 392 million produced in 2007/08. 
Much of the increase is attributed to a sharp expansion of area planted 
to sunflowerseed and rapeseed as producers around the world responded 
to high prices. Global soybean area also increased sharply, but lower 
yields in South American countries limited the gain in production.
    South American soybean production continues to account for almost 
half of global production. Brazil and Argentina are projected to 
account for 45 percent of global soybean production, up from 40 percent 
7 years ago. At a projected 100 million tons, combined 2008/09 
production for these two countries exceeds U.S. production by about 25 
percent despite drought in Argentina and southern Brazil.
    Brazil and Argentina account for just under half of global soybean 
trade in 2008/09, with the U.S. accounting for about 43 percent. The 
U.S. share has declined from about 55 percent 7 years ago.
    China's soybean imports now account for 49 percent of global 
imports, up from 34 percent in 2002/03 as soybean import penetration 
continues to grow (figure 4). China has accounted for virtually all of 
the growth in world trade over the same time period. Soybean imports by 
the world's second largest importer, EU-27, have declined over the same 
period.
    U.S. soybean production is expected to increase from 2008/09 with 
record planted area and a return to trend yields. Increased area is 
expected to come from reduced wheat, cotton, and peanut plantings. 
Although soybean plantings are projected to increase from 2008/09, 
lower double cropping of soybeans is expected due to lower soybean 
prices and reduced winter wheat area in the Delta and Eastern Corn 
Belt. With beginning stocks below year-earlier levels, increased 
production will result in a seven percent increase in soybean supply 
for 2009/10.
    U.S. soybean crush is projected to increase modestly to 1.675 
billion bushels reflecting mainly increased export prospects due to 
constrained South American supplies for the first half of the 2009/10 
marketing year. With minimal growth in animal numbers for 2009/10 and 
increased substitution of corn by-products and other protein meals in 
rations, growth in soybean meal domestic disappearance is projected at 
just above one percent. With the exception of 2008/09, soybean meal 
feeding in the U.S. is expected to be the lowest in 10 years.
    Total domestic soybean oil disappearance is projected to decline in 
2009/10 as biodiesel use remains flat and food use declines. Despite an 
increase in the mandated biodiesel level, growth in soybean oil used 
for biodiesel is not expected due to the continuing growth in use of 
other fats and oils. Soybean oil now accounts for about 50 percent of 
total oil used for biodiesel, down from around 85 percent 2 years ago. 
Substitution for transfats and slow growth in the economy are expected 
to result in the fifth consecutive year of declining soybean oil use in 
the domestic food market. Soybean meal and oil prices are projected at 
$260 per ton and $0.31 per pound, respectively compared with $285 per 
ton and $0.30 per pound in 2008/09.
    With drought-reduced crops and lower stocks expected in South 
America, and sharply higher domestic supplies, U.S. soybean exports are 
projected to reach a record 1.225 billion bushels in 2009/10. With 
increased supplies exceeding gains in crush and exports, soybean stocks 
are projected to rise 68 percent to 311 million bushels. This would be 
the highest level since the record of 574 million bushels in 2006/07. 
Prices are projected to decline to $8.50 per bushel, the lowest since 
2006/07.
    South American soybean production is expected to rebound from 
drought-reduced levels of 2008/09 as yields return to trend. Planted 
area is not expected to rise significantly due to relatively low 
prices. With limited supplies available until harvest in the spring of 
2010, trade shares for South America are likely to decrease in 2009/10. 
Global demand for soybeans is likely to expand only modestly, mostly 
due to growth in China. Shipments to EU-27 could also rise as demand 
for soybean meal is likely to be rebound with less availability of 
other grains.
    U.S. cotton planted area for 2009 is projected at 8.8 million 
acres, down seven percent from 2008. Planted area would be the lowest 
since 1983 and a 42 percent reduction from the recent high of 15.3 
million acres planted in 2006. More favorable returns for alternative 
crops, especially soybeans and corn, are the primary reason for the 
decline, but reduced access to irrigation in the Far West is also a 
factor. Harvested area is projected at 8.0 million acres based on a 
historical average abandonment of nine percent, compared with 18.4 
percent in 2008. With a projected yield per harvested acre of 810 
pounds, production of 13.5 million bales is also the same as last 
season. Domestic mill use is projected marginally higher and exports 
slightly lower, with a resulting decline of 1.4 million bales in U.S. 
ending stocks to 5.9 million bales, or about 40 percent of use. The 
U.S. season average price is projected to rise eight percent to 
53 cents per pound.
    The world cotton outlook for 2009/10 includes slightly lower 
production and slightly higher consumption. Global production is likely 
to fall once again in response to depressed world cotton prices, tight 
credit, and more favorable returns for other crops. In contrast, world 
cotton consumption is forecast to rise two percent as the world economy 
begins to recover from the current global recession in late 2009 or 
early 2010. World ending stocks of 56 million bales are projected about 
ten percent below the beginning level but are expected to be adequate 
to support demand.
    Livestock, Poultry, and Dairy: The livestock, poultry, and dairy 
sectors are being challenged by weakening domestic and global demand 
for meat and dairy products. Uncertain demand, coupled with relatively 
high feed prices, caused producers to start cutting back, or slow 
production by the last quarter of 2008. The pullback in output is 
expected to continue through most of 2009, with total meat production 
down about two percent from 2008, and milk production declining about 
0.8 percent.
    The recent Cattle report indicated that cattle inventories declined 
1.6 percent in 2008 and that producers were holding two percent fewer 
beef replacement heifers on January 1. These numbers combined with 
downward revisions to January 1, 2008, estimates, point to tight cattle 
supplies in 2009 and lower beef production.
    Beef production is forecast to decline around one percent in 2009. 
Steer and heifer slaughter declines as fewer cattle are available for 
marketing, but cow slaughter will likely remain relatively high as the 
dairy herd is reduced. U.S. beef imports are forecast to increase about 
six percent as foreign exporters increase shipments to the U.S. as 
other global markets weaken. U.S. beef exports are expected to be about 
unchanged from 2008 as a global recession undercuts exports and a 
strengthening of the U.S. dollar makes U.S. beef relatively more 
expensive. Per capita disappearance of beef in the United States is 
expected to decline about one percent.
    The March Quarterly Hogs and Pigs report indicated that hog 
producers farrowed about three percent fewer sows during the first 
quarter of 2009, and intend to farrow about 3-4 percent fewer sows 
during the next two quarters. Recent growth in pigs per litter has been 
substantial and expected to partially offset the effects of reduced 
farrowings on slaughter levels in 2009. In addition, live hog and pig 
imports from Canada are forecast about 25 percent lower than 2008, 
further reducing the number of hogs available for marketing this year.
    Pork production for 2009 is forecast to decline one to two percent. 
Pork imports are forecast about one percent higher than last year's 
level. Pork exports are forecast to fall 14 percent to 4 billion 
pounds. Strong foreign demand, especially in China, for U.S. pork 
during 2008 boosted exports almost 50 percent last year. This year, 
weak global demand will dampen export growth. China, which grew rapidly 
as an export market last year, is expected to have much lighter demand 
for imported pork in post-Olympics 2009 as well as larger domestic 
supplies as production recovers from hog disease outbreaks. U.S. per 
capita disappearance of pork is expected to increase more than one 
percent as a smaller share of pork output enters export channels.
    Broiler meat production for 2009 is forecast to decline three 
percent and turkey output is forecast to fall about four percent. The 
poultry sector was hit hard by high feed prices in 2008. Returns sank 
and producers began to reduce chick and poultry placements by the 
middle of last year. The production cuts are expected to continue 
through the third quarter for broilers and for the entire year for 
turkeys. Broiler exports reached a record of nearly 7 billion pounds in 
2008, but exports for 2009 are forecast to drop 13 percent because of 
across-the-board weakness in demand and downwardly revised quotas by 
Russia. Turkey exports also reached a record 676 million pounds last 
year, but are expected to drop almost 11 percent this year. Per capita 
disappearance of poultry meat is expected to decline one percent in 
2009.
    Cattle, hog, and turkey prices in 2009 are expected to be lower as 
a weak demand outlook more than offsets usual gains from tighter 
supplies (table 2). Broiler prices are the exception. Fed cattle will 
be about $6 per cwt lower than 2008, and hogs about $1 per cwt lower. 
Turkey prices are expected to be 2 cents per pound lower. However, 
broiler prices are expected to be about 3 cents per pound higher as 
production cuts are fairly sharp and broiler meat's relatively low 
price compared to other meats should benefit broiler prices.
    Sharply lower returns to producers result in lower milk production 
for 2009. The estimated milk-feed ratio for 2009 is expected to be a 
contractionary 1.50 (figure 5). Cow numbers are expected to decline 
during 2009 with an acceleration in the last half of the year. For 
2009, foreign demand for dairy products will be weakened by global 
recession, and increased exportable supplies from other suppliers 
dampens prospects for U.S. commercial exports. Dairy product prices 
dropped sharply at the end of 2008 as demand fell. The much weaker 
outlook results in sharp drops in dairy product prices and Class III 
and Class IV milk prices. The all-milk price for 2009 is forecast to 
decline to $11.25 to $11.85 per hundredweight (cwt), the lowest since 
1978.
Farm Finances, Real Estate Values, and Credit
    On February 12, USDA's Economic Research Service (ERS) released the 
farm income and costs forecasts for 2009. ERS forecasts net cash income 
at $77.3 billion, down $16.1 billion from 2008 (figure 6). Crop 
receipts are forecast at $162.4 billion in 2009, down $18.7 billion 
from 2008, but still the second highest on record. Livestock receipts 
for 2009 are forecast at $132.2 billion, down $10.9 billion from 2008. 
Lower input costs such as feed, fuel, and fertilizer will mean lower 
cash expenses. ERS forecasts total cash expenses at $246.8 billion, 
down $14 billion from 2008 levels.
    The farm financial picture going into 2009 remains favorable with 
total farm debt equal to 9.1 percent of total assets (compared to over 
20 percent in the mid-1980s). The debt-to-asset ratio has declined 
steadily from 15.2 percent in 1998. The decline in the debt-to-asset 
ratio over that period was due to the strong appreciation in land 
values, which increased by over $1 trillion from 1998 to 2008. ERS 
forecasts the value of farm assets to rise by 1.6 percent in 2009, the 
smallest increase since 1991.
    While farm real estate values remain significantly higher than last 
year, recent Federal Reserve Bank surveys showing fourth quarter 
declines in land values in the 5th (Richmond), 7th (Chicago), 9th 
(Minneapolis), 10th (Kansas City), and 11th (Dallas) districts gives 
further credence to the view that land markets have softened (table 3). 
Only farm real estate values in the 12th (San Francisco) district 
recorded an increase in farm real estate values in the fourth quarter 
of 2008. This follows double digit declines for much of farm real 
estate since late 2007.
    Despite the weakened economic outlook for farmers, most of the 
districts reported the availability of funds was higher in the fourth 
quarter of 2008 than in the third quarter of 2008. However, collateral 
requirements for non real-estate farm loans are becoming more 
restrictive. In the 7th district, 22 percent of district banks raised 
their collateral requirements during the fourth quarter and almost 50 
percent reported tighter credit standards compared to last year. 
Similarly, in the 9th district, only five percent of survey respondents 
said they had refused a loan due to a shortage of funds, but 21 percent 
of lenders reporting increased collateral requirements during the 
fourth quarter. Survey results from the 10th district also showed that 
while the funds availability index rose in the fourth quarter, 
collateral requirements increased to a 5 year high with more than a 
quarter of survey respondents expecting credit standards to tighten 
further in 2009. Last, survey respondents in the 11th district also 
reported that while there are still funds available for lending, the 
amount of collateral required has increased.
    The downturn in the general economy may also be having an adverse 
effect on off-farm income sources for farm households. Based on the 
2007 Agricultural Resources Management Survey conducted by the ERS, 
almost all farmer households earn a portion of their income from off-
farm sources (table 4). Two-thirds of all farm households reported 
income from wages and salaries from off-farm employment and almost \1/
4\ of farm households reported income from an off-farm business. The 
share of households reporting wage and salary income was highest for 
the rural residence farms at 73 percent. Nonetheless, more than half 
(54 percent) of households associated with commercial farms reported 
earning income from off-farm employment. Dividend earnings were 
reported by 36 percent of farm operator households in 2007. In contrast 
with earnings from off-farm employment, commercial farm households had 
the highest percentage reporting dividend income at 50 percent compared 
with only 32 percent of rural residence farm households.
Conclusions
    With confidence in financial markets weakened and the global 
economy in the worst recession since prior to World War II, the 
agricultural economy faces much uncertainty. As expected, most 
aggregate measures are forecast to be down sharply from the record 
highs reached last year. Concerns with deflationary pressures remain, 
particularly if lower farm receipts persist over the longer run. This 
could adversely affect farm real estate values and undermine what has 
been to date a relatively strong financial position. That said, the 
outlook is for a return to higher prices as many of the pressures that 
drove last year's price increases--high energy prices, the Renewable 
Fuel Standard, and strong economic growth in emerging markets--will 
return to play a major role. In addition, while other sectors of the 
economy may be credit constrained, many farm lenders appear to be in 
good financial shape and access to credit for farmers appears to be 
sufficient.
                              Attachments

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The Chairman. Thank you very much. I appreciate that. Dr. 
Henderson.

         STATEMENT OF JASON R. HENDERSON, Ph.D., BRANCH
          EXECUTIVE AND VICE PRESIDENT, OMAHA BRANCH,
         FEDERAL RESERVE BANK OF KANSAS CITY, OMAHA, NE

    Dr. Henderson. Thank you, Mr. Chairman and Members of the 
Subcommittee. My name is Jason Henderson. I am Vice President 
and Branch Executive of the Federal Reserve Bank of Kansas 
City, Omaha Branch, and I appreciate the opportunity to talk 
with you about some of our findings regarding agricultural 
credit demand and availability.
    The recession and fragile financial markets have raised 
concerns about credit availability for agricultural borrowers. 
Farm commodity prices have fallen after last summer's boom, 
reducing cash flows, and trimming intermediate and long-term 
investment demand for farms and equipment.
    At the same time, demand for operating loans has risen, due 
to lower cash flows and higher production costs. Shrinking cash 
flows and higher costs limited farmers' ability to pay off 
existing operating loans, and commercial bankers have reported 
an increase in farm carryover debt, with lower loan repayments. 
Agricultural bankers appear to have ample funds to meet rising 
loan demand. Agricultural lenders are expanding their loan 
volume of agricultural loans, and they have done so at 
historically low interest rates.
    My colleagues and I at the Federal Reserve Bank of Kansas 
City survey agricultural bankers in our seven state region four 
times a year to track developments in the farm economy. In our 
latest survey, few bankers reported refusing a loan due to a 
shortage of funds. Nationally, farm loan volumes rose at a 
record pace in 2008, and during the first quarter of 2009, 
operating loan volumes jumped again. Banks continue to report 
they are increasing their use of loan guarantees from the Farm 
Service Agency and seasonal credit from the Federal Reserve 
discount window, and other agricultural lenders, such as the 
Farm Credit System, the Farm Service Agency, and Farmer Mac 
appear to have also increased their loan portfolios. Business 
contacts also suggest that life insurance companies and vendor 
creditors are still active in agriculture markets.
    While agricultural lenders are meeting credit needs, they 
have altered loan terms and tightened credit standards, 
requiring more documentation and collateral to mitigate 
increased agricultural risk. Delinquency rates and charge-offs 
on agricultural loans have edged up in 2008, but they are 
historically low, and well below delinquency and charge-off 
rates on other types of loans.
    Still, commercial bankers have responded by raising 
collateral requirements on operating loans. Banks also reduced 
the term of operating loans, as they were more reluctant to 
extend loans for longer periods of time. Our research also 
indicates that smaller farm operations, and those owned by 
young and beginning farmers, are more likely to be denied 
credit, but various programs are already in place to assist 
these borrowers.
    While the recession poses challenges to agricultural credit 
availability, agricultural lenders appear to be in a position 
to meet agricultural credit demands. Nationally, agricultural 
banks are posting stronger returns than their banking peers. 
Stronger returns should help underpin agricultural lending. 
Banks are raising funds from a variety of sources, equity and 
debt markets, deposits, and nontraditional sources, such as 
Federal home loan banks, but despite low interest rates on CDs 
and other savings vehicles, bank deposits continue to expand, 
which will help provide funds for agricultural loans.
    The cost of funds for financial institutions has eased. 
After soaring in September 2008, the London Inter-Bank Offered 
Rate, or the LIBOR, a benchmark for short-term interest rates, 
has fallen, lowering the cost of funds. And while our survey 
indicates that farmland values edged down at the end of 2008, 
land values, which are a major source of collateral, remain 
well above year ago levels, and anecdotal reports from our 
business contacts indicate that farmland values have 
potentially stabilized in the first quarter of 2009.
    Finally, in rural America, an interdependency exists 
between Main Street and the farm gate. Rural America avoided 
the worst of the recession in 2008 due to residual strength in 
farm and energy industries, and a shallower decline in housing 
activity than elsewhere in the nation. Job losses were less 
prevalent, and rural home values continued to appreciate, in 
contrast to sharp national declines.
    While the recession has begun to weigh on the rural 
economy, the relative economic strength in rural communities 
could help limit losses on other types of loans and support 
world lending.
    In sum, economic prospects for the rural economy have 
dimmed and raised concerns about the availability of credit for 
agricultural enterprises. Delinquency rates and charge-offs 
have edged up, and credit standards have tightened on 
agricultural loans. While agricultural borrowers are being 
asked to accept more of the financial risk emerging from a 
volatile agricultural environment, credit remains available for 
creditworthy borrowers.
    Mr. Chairman, thank you for inviting me today, and I will 
be happy to respond to any questions at the appropriate time.
    [The prepared statement of Dr. Henderson follows:]

 Prepared Statement of Jason R. Henderson, Ph.D., Branch Executive and 
  Vice President, Omaha Branch, Federal Reserve Bank of Kansas City, 
                               Omaha, NE
    Mr. Chairman and Members of the Subcommittee, my name is Jason 
Henderson and I am the Vice President and Branch Executive of the 
Federal Reserve Bank of Kansas City--Omaha Branch. I appreciate the 
opportunity to talk with you about agricultural credit conditions in 
the current economic and financial environment.
Agricultural Credit Conditions
    The economic and financial downturn has weakened the farm economy 
and raised concerns about access to credit for agricultural borrowers. 
Shrinking global demand, falling commodity prices, and higher 
production costs have trimmed farm profits. As a result, reduced cash 
flows have raised the demand for credit by agricultural enterprises.
    While agricultural borrowers are concerned about credit 
availability, agricultural lenders are equally concerned about the 
creditworthiness of their borrowers as the farm economy weakens. 
Delinquency rates and charge-offs on agricultural loans remain near 
historically low levels but have edged up recently, eroding loan 
quality. Consequently, agricultural lenders have tightened credit 
standards on various types of agricultural loans. Agricultural 
enterprises most susceptible to being denied credit are small farm 
operations owned by young or beginning farmers.
    Despite these risks, ample credit appears available at historically 
low interest rates. Profitability in agricultural banks and relative 
strength in the rural economy could support rural lending. Still, the 
recent erosion in agricultural loan quality has led agricultural 
lenders to tighten credit standards and shift more financial risk to 
borrowers.
Agricultural Credit Demand
    My colleagues and I at the Federal Reserve Bank of Kansas City 
survey agricultural bankers in our seven-state region four times a year 
to track developments in the farm economy. Our recent data indicate 
weakness in the agricultural economy has shifted demand for loans 
toward financing short-term investments. With profits shrinking, plans 
have slowed for capital purchases such as farmland and equipment, which 
require intermediate and longer term investments (Chart 1). At the same 
time, the demand for operating loans has risen, due to lower cash flows 
and higher production costs.
    Agricultural producers' capital spending plans have fallen amid 
weaker farm income expectations. When profits rise, farmers and 
ranchers typically use higher cash flows to pay for various types of 
capital expenditures. Capital spending was stronger in 2008, coinciding 
with stronger farm incomes. Strong farm spending, in turn, helped 
insulate the rural economy from the worst of the recession in 2008 
(Henderson and Akers).
    While strong farm incomes boosted farmland and machinery sales over 
the past few years, these sales have slowed recently as farm income 
expectations weakened. In the fourth quarter of 2008, farmland sales in 
the Kansas City Fed's district had fallen from the previous year.\1\ 
Moreover, capital spending had slowed markedly with further declines 
expected in 2009. Similarly, the Association of Equipment Manufacturers 
recently reported slower growth in farm tractor and combine sales.\2\ 
Anecdotal reports indicate further contractions in machinery and 
farmland sales through 2009.
---------------------------------------------------------------------------
    \1\ The Kansas City Federal Reserve District covers the states of 
Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and 
western Missouri. See Henderson and Akers (2008) for more information.
    \2\ Tractor and combine sales data were obtained from U.S. Ag Flash 
Reports, Association of Equipment Manufacturers.
---------------------------------------------------------------------------
    In contrast to capital spending, operating loan demand continues to 
rise steadily. Operating loan demand often rises when prices fall and 
revenues decline. Shrinking cash flows constrain farmers' ability to 
pay off existing operating loans, leading to an increase in carry-over 
debt. At the end of 2008, commercial bankers reported an increase in 
farm carry-over debt as loan renewal or extensions jumped and loan 
repayment rates declined.\3\
---------------------------------------------------------------------------
    \3\ Indexes on farm loan renewals or extension and repayments rates 
are available from the Agricultural Finance Databook, Board of 
Governors of the Federal Reserve System, www.federalreserve.gov.
---------------------------------------------------------------------------
    Higher production costs also increased operating loan demand. Since 
the 1920s, farm production costs have risen at an average pace of 
almost two percent a year, but in 2008, production costs surged 11.7 
percent.\4\ The largest gains emerged from energy-derived inputs--fuel, 
fertilizer, electricity and pesticides. Livestock producers faced a 
surge in feed costs. While some decline is expected in 2009, farm 
production costs--especially for crop producers--are expected to remain 
historically high, raising the credit demand of agricultural 
enterprises.
---------------------------------------------------------------------------
    \4\ Farm production costs were obtained from the Farm Income and 
Costs Briefing Room, Economic Research Service, U.S. Department of 
Agriculture, www.ers.usda.gov.
---------------------------------------------------------------------------
Agricultural Loan Activity
    Agricultural lenders appear to be expanding loanable funds to meet 
rising loan demand. Commercial banks continue to report ample funds for 
agricultural loans. In general, they have expanded their total volume 
of agricultural loans, and they have done so at historically low 
interest rates. Moreover, government sponsored lenders have also 
expanded agricultural loan activity.
    According to the Federal Reserve Bank of Kansas City's fourth 
quarter survey, 70 percent of bankers reported the same amount of funds 
available for farm operating loans as the year before. An additional 14 
percent reported having more funds available. Moreover, these banks 
expected to have roughly the same amount, if not more funds, available 
for lending in the first half of 2009.
    Few bankers were refusing loans due to a shortage of funds. In 
December 2008, only 4.3 percent of bankers in the Kansas City survey 
reported refusing a farm loan due to a shortage of funds. This refusal 
rate was up slightly from levels reported in previous quarters and on 
par with levels reported prior to 2008.
    The Kansas City survey data are consistent with other national 
reports, which have also shown increased agricultural loan activity. 
Farm loan volumes rose sharply in 2008, led by record gains in farm 
real estate loans.\5\ In the first quarter, commercial banks greatly 
expanded farm operating loan volumes (Chart 2).\6\ Rising loan volumes 
were driven by expanding the number and size of farm operating 
loans.\7\
---------------------------------------------------------------------------
    \5\ Summary statistics for farm real estate and non-real estate 
loan volumes were calculated from the Quarterly Reports of Condition of 
Commercial Banks and obtained from the Agricultural Finance Databook.
    \6\ Non-real estate loan volumes obtained from the Survey of Term 
of Bank Lending to Farmers available in the Agricultural Finance 
Databook.
    \7\ In the first quarter, loans to the livestock industry declined 
as the livestock sector struggled to post profits.
---------------------------------------------------------------------------
    Other agricultural lenders are also extending more credit to 
agricultural enterprises. For example, the Farm Credit System 
significantly expanded its agricultural real estate mortgages and 
production/intermediate term loan volumes in 2008. The Farm Service 
Agency experienced a rise in its direct operating loan portfolio, 
although its guaranteed loan portfolio eased. And, Farmer Mac loans and 
guaranteed securities rose in 2008.
    Commercial banks appear to be tapping Federal Government and 
Federal Reserve funds. In response to higher risk, commercial bankers 
indicate they are increasing their use of guarantees from the U.S. 
Department of Agriculture's Farm Service Agency. In January 2009, 
Farmer Mac and the Independent Community Bankers Association initiated 
a program to improve credit availability for farm real estate 
mortgages. Moreover, smaller commercial banks have access to primary 
and secondary credit funds through the Federal Reserve's discount 
window and can request funds for seasonal credit, especially during the 
planting and harvest seasons, when funding needs are more 
significant.\8\
---------------------------------------------------------------------------
    \8\ More information on the Federal Reserve's discount window and 
seasonal credit program is available at www.frbdiscountwindow.org/
index.cfm.
---------------------------------------------------------------------------
    Agricultural enterprises are also receiving credit at historically 
low interest rates. According to agricultural credit surveys by the 
Federal Reserve, interest rates on all types of agricultural loans have 
dropped significantly below 2006 levels.\9\ In the Kansas City Federal 
Reserve district, the average interest rate on operating loans declined 
to 7.0 percent in the fourth quarter of 2008.\10\
---------------------------------------------------------------------------
    \9\ Data obtained from Federal Reserve agricultural credit surveys 
can be obtained from the Agricultural Finance Databook, or from the 
Federal Reserve Bank of Kansas City, www.kansascityfed.org/agcrsurv/
agcrmain.htm.
    \10\ During the same time, the average rate on farm real estate 
loans fell from roughly 8.5 percent to 6.75 percent.
---------------------------------------------------------------------------
Tighter Credit Standards
    While agricultural lenders are generally extending credit at lower 
interest rates, they have altered loan terms and tightened credit 
standards in response to increased risk in agricultural lending. 
Agricultural loan quality has declined amid lower farm income 
expectations and increased volatility in agricultural markets. In 
response, agricultural lenders, and commercial banks in particular, 
have shortened loan maturities and raised collateral requirements.
    In 2008, agricultural loan quality at commercial banks began to 
erode. After improving during the first part of the year, the average 
risk rating on agricultural loans edged up heading into 2009. 
Commercial bankers reported higher risk ratings, as livestock profits 
were elusive and margins declined for the crop sector.
    Along with elevated risk ratings, delinquency rates and charge-offs 
on agricultural loans also edged up. In 2008, delinquency rates on 
agricultural loans climbed steadily, rising 30 percent during the 
year.\11\ At the same time, net charge-offs on agricultural loans 
doubled. Delinquency rates and net charge-offs on agricultural loans 
were higher in the largest 100 U.S. banks.
---------------------------------------------------------------------------
    \11\ Charge-off and delinquency rate data were obtained from the 
Board of Governors of the Federal Reserve, www.federalreserve.gov/
releases/chargeoff/. 
---------------------------------------------------------------------------
    Still, delinquency rates and net charge-offs on agricultural loans 
remain historically low and well below other types of loans. For 
example, in the fourth quarter of 2008, the delinquency rate on all 
types of loans and leases was more than triple the rate on agricultural 
loans. Similarly, net charge-offs on all loans were more than eight 
times the size of net charge-offs on agricultural loans.
    Nevertheless, commercial bankers responding to the Kansas City 
survey reported raising collateral requirements on operating loans 
(Chart 3). In the fourth quarter of 2008, the collateral requirements 
index rose well above year-ago levels, as a quarter of the bankers 
reported higher collateral requirements. Higher collateral requirements 
on agricultural loans were also reported by commercial bankers in other 
Federal Reserve districts.
    In response to higher risk, commercial banks have also reduced the 
length of operating loans. For example, after steadily rising since 
2001, loan maturity on agricultural loans dropped 20 percent, to 12 
months, in the fourth quarter of 2008. Simply put, as agricultural risk 
increased, banks were more reluctant to extend loans for longer periods 
of time.
    Recent research indicates that smaller farm operations and 
operations owned by young and beginning farmers are generally more 
likely to be denied credit, due to the limited experience and net worth 
and higher debt levels of the owners (Briggeman, Towe, and Morehart; 
Harris, et al.). While these types of operations are likely to have 
more difficulty obtaining credit in the current environment, programs 
are already in place to support their financial needs.
Agricultural Lending in 2009
    The recession poses some risks to agricultural lending in 2009. 
Concerns about the availability and cost of funds and the 
creditworthiness of borrowers remain. However, the robust performance 
of agricultural banks and relative strength in the rural economy should 
support rural lending.
    Access to funds is a persistent concern for agricultural banks. 
Banks raise funds from a variety of sources--equity and debt markets, 
deposits and nontraditional sources such as Federal Home Loan Banks. 
Bank deposits are a major source of loanable funds for agricultural 
banks. Lower interest rates on CDs and other savings vehicles could 
slow bank deposit growth. Yet, despite lower interest rates, domestic 
deposits at agricultural banks continue to expand, which should support 
agricultural lending.\12\
---------------------------------------------------------------------------
    \12\ Domestic deposit data obtained from Statistics at a Glance, 
Federal Deposit Insurance Corporation (FDIC). FDIC identifies 
agricultural banks as commercial banks with agricultural loans 
accounting for at least 25 percent of their loan portfolio.
---------------------------------------------------------------------------
    Managing funding costs is an everyday challenge for commercial 
banks. In September 2008, the financial crisis fueled a spike in the 
London Inter-Bank Offered Rate (LIBOR), a benchmark for short-term 
rates that banks pay to borrow funds from other banks and a measure for 
bank funding costs. Since then, LIBOR has declined, suggesting that 
funding costs have fallen, which will support agricultural lending.
    Agricultural lenders are always concerned about the 
creditworthiness of agricultural borrowers. In 2009, profit margins are 
expected to narrow for crop producers and remain negative for livestock 
producers (Henderson and Akers). While historically low, delinquency 
rates and charge-offs on agricultural loans rose in 2008. Weakness in 
the agricultural economy could further erode the creditworthiness of 
agricultural borrowers and lead to tighter lending standards and higher 
collateral requirements on agricultural loans.
    Because of their prominent use as collateral, declines in farmland 
values at the end of 2008 are a concern. Federal Reserve surveys 
indicate that farmland values edged down in the fourth quarter of 2008, 
but remained well above year-ago levels. Still, further declines in 
farmland values could shrink the amount of collateral available for 
agricultural loans, especially at small and mid-sized banks that more 
frequently use farm real estate as collateral.\13\
---------------------------------------------------------------------------
    \13\ Small and mid-sized farm lenders had less than $25 million in 
farm loans. Large farm lenders had more than $25 million in farm loans. 
See the Agricultural Finance Databook for a more detailed description.
---------------------------------------------------------------------------
    The strong performance of agricultural banks, which are generally 
relatively small banks located in rural communities, should help 
sustain agricultural and rural lending. The Federal Reserve defines 
agricultural banks as commercial banks with agricultural loans 
accounting for more than 14 percent of their loan portfolio.\14\ In the 
fourth quarter of 2008, agricultural banks continued to post 
historically high rates of return, while all commercial banks reported 
negative returns (Chart 4). Agricultural banks also had much stronger 
performance than other similarly sized small commercial banks--those 
with less than $500 million in assets. Stronger returns should help 
underpin agricultural and rural lending.
---------------------------------------------------------------------------
    \14\ Agricultural banks have an agricultural loan concentration 
higher than the average agricultural loan concentration for all 
commercial banks. In 2008, the average agricultural loan concentration 
was 14 percent.
---------------------------------------------------------------------------
    Finally, the relative strength of the rural economy should support 
agricultural and rural lending. Last year, the relative strength of the 
farm and energy industries and a shallower decline in housing activity 
allowed rural economies to avoid the worst of the recession (Henderson 
and Akers). In contrast to home prices in most urban areas, rural home 
values continued to rise through most of 2008 (Wilkerson 2008). And, 
job losses were less prevalent on rural Main Streets as manufacturing 
and service firms that supported the agricultural and energy sectors 
posted strong gains. More recently, the recession has established a 
stronger foothold in rural America, but rural economies continue to 
outperform their urban counterparts. While the recession will limit 
rural economic gains, the relative strength in rural economies could 
help limit losses on other types of loans and support rural lending.
    In sum, the global recession has trimmed economic prospects for the 
agricultural and rural economy, raising concerns about the availability 
of credit for agricultural enterprises. Delinquency rates and charge-
offs have risen but remain at historically low levels. Agricultural 
lenders responded by tightening credit standards, especially for those 
segments of the agricultural sector experiencing losses. While 
agricultural borrowers are being asked to accept more financial risk, 
credit remains available for creditworthy borrowers.
References
    Board of Governors of the Federal Reserve System. ``Agricultural 
Finance Databook,'' www.federalreserve.gov.
    Briggeman, Brian, Charles A. Towe, and Mitchell J. Morehart. 2009. 
``Credit Constraints: Their Existence, Determinants and Implications 
for U.S. Farm and Non-Farm Sole Proprietorships,'' American Journal of 
Agricultural Economics. 
    Harris, J. Michael, et al. 2008. ``Agricultural Income and Finance 
Outlook,'' Economic Research Service, U.S. Department of Agriculture, 
AIS-86, December, www.ers.usda.gov.
    Henderson, Jason. 2009. ``Agricultural Credit Standards Tighten,'' 
Main Street Economist, Federal Reserve Bank of Kansas City, Issue 1. 
www.kansascityfed.org.
    Henderson, Jason and Maria Akers. 2009. ``Recession Catches Rural 
America,'' Economic Review, Federal Reserve Bank of Kansas City. First 
Quarter. www.kansascityfed.org.
    Henderson, Jason and Maria Akers. 2008. ``Farmland Values Decline 
and Credit Conditions Tighten,'' Survey of Tenth District Agricultural 
Credit Conditions. Federal Reserve Bank of Kansas City. Fourth Quarter. 
www.kansascityfed.org.
    U.S. Ag Flash Reports, 2009. Association of Equipment 
Manufacturers, February, www.aem.org.
    Wilkerson, Chad. 2008. ``Is Rural America Facing a Home Price 
Bust?'' Main Street Economist, Federal Reserve Bank of Kansas City, 
Issue VI. www.kansascityfed.org.
                              Attachments

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The Chairman. Thank you, Dr. Henderson. We appreciate that. 
Dr. Gruenspecht, we would like to hear from you at this time.

       STATEMENT OF HOWARD K. GRUENSPECHT, Ph.D., ACTING
             ADMINISTRATOR, U.S. ENERGY INFORMATION
           ADMINISTRATION, U.S. DEPARTMENT OF ENERGY,
                        WASHINGTON, D.C.

    Dr. Gruenspecht. Mr. Chairman and Members of the Committee, 
I appreciate the opportunity to appear before you today.
    The Energy Information Administration is the independent 
statistical and analytical agency within the Department of 
Energy. We do not promote, formulate, or take positions on 
policy issues, and our views should not be construed as 
representing those of the Department of Energy or the 
Administration.
    Agriculture is a major energy user. Diesel accounts for 51 
percent of total farm energy use, motor gasoline for 16 
percent, natural gas and propane for nine percent each, and 
electricity for 14 percent.
    Agriculture also plays a significant current role as an 
energy supplier, as exemplified by the growth in the use of 
ethanol as motor fuel, and will play an even larger role in the 
future.
    Starting with our outlook through the end of 2010, the 
world oil market saw a sharp price decline in the second half 
of last year. The price of West Texas Intermediate crude oil 
averaged $100 a barrel in 2008, and we expect it to be 
significantly below that level through 2009 and 2010, as a 
rebound in oil demand growth awaits economic recovery in the 
United States and around the world. Retail diesel fuel prices 
in 2009 are projected to average $2.19 per gallon, down from 
$3.80 per gallon in 2008.
    Turning to ethanol, we expect only modest growth in ethanol 
consumption in 2009. In July 2007, ethanol provided an average 
of 425,000 barrels per day, about five percent of 2007 average 
daily gasoline consumption volume, or about three percent of 
the energy consumed by gasoline-fueled vehicles. Ethanol plants 
operated at or near their design capacity limits during this 
period. Ethanol production capacity increased by more than 50 
percent in 2008, with production in December reaching 656,000 
barrels per day. Production capacity grew faster than demand, 
and average utilization rates fell from near full utilization 
at the beginning of 2008 to about 85 percent by year's end, and 
a further drop is expected in 2009.
    Before shifting to a long-term perspective, I should note 
that any projections are necessarily very uncertain, since 
long-term energy supply and demand trends are affected by many 
factors that are difficult to predict, such as energy prices, 
economic growth, advances in technologies, changes in weather 
patterns, and future public policy decisions. The Annual Energy 
Outlook reference case, actually just released yesterday, 
projects increased consumption of biofuels, including ethanol, 
biomass-to-liquids, biodiesel, and other non-hydroelectric 
renewable energy sources between now and 2030. The growing use 
of alternative fuels reflects both the higher prices projected 
for traditional fuels and support for alternative fuels 
provided in recently enacted Federal legislation.
    Biofuels use in the reference case grows from 7.3 billion 
ethanol-equivalent gallons in 2007 to nearly 30 billion gallons 
in 2022, and nearly 39 billion gallons in 2030. The projected 
consumption in 2022 is less than the 36 billion gallons 
mandated in the Energy Independence and Security Act of 2007, 
because we see difficulties in rapidly ramping up the 
production of cellulosic biofuels. However, the other targets 
in that legislation are projected to be achieved.
    Our reference case assumes that current laws and policies 
continue indefinitely. Other recent EIA analyses suggest that 
various policy proposals, including caps on greenhouse gas 
emissions or an increased renewable portfolio standard for 
electricity sellers, could significantly increase reliance on 
biomass as an energy source. Agricultural products and 
residues, as well as dedicated energy crops, are a key part of 
the overall biomass supply.
    The two main concerns that appear to motivate many recent 
policy proposals are energy security and the reduction of 
greenhouse gas emissions. Our recent policy analyses, many of 
which were done at the request of Congress, suggest that there 
are both synergies and conflicts between these objectives. The 
situation with respect to agriculture and biomass is 
particularly complex. A policy focused on energy security would 
likely emphasize use of biofuels to decrease our reliance on 
imported petroleum. Such a policy would also serve to reduce 
greenhouse gas emissions. However, if greenhouse gas emissions 
were the primary policy focus, biomass could be used as a 
substitute for coal-fired electricity generation, to provide 
significantly larger carbon dioxide emission reductions. While 
biomass from agriculture and other sources has an important 
role to play in either case, the way in which biomass can best 
be deployed will depend on how the objectives of energy 
security and emissions reduction are prioritized.
    That concludes my statement, Mr. Chairman, and I would be 
happy to answer any questions you or the other Members may 
have.
    [The prepared statement of Dr. Gruenspecht follows:]

       Prepared Statement of Howard K. Gruenspecht, Ph.D., Acting
Administrator, U.S. Energy Information Administration, U.S. Department 
                      of Energy, Washington, D.C.
    Mr. Chairman and Members of the Committee, I appreciate the 
opportunity to appear before you today to discuss developments in 
energy markets and their possible implications for agriculture.
    The Energy Information Administration (EIA) is the independent 
statistical and analytical agency within the Department of Energy. We 
do not promote, formulate, or take positions on policy issues, but we 
do produce objective, timely, and relevant data, projections, and 
analyses that are meant to assist policymakers, help markets function 
efficiently, and inform the public. Our views are strictly those of EIA 
and should not be construed as representing those of the Department of 
Energy or the Administration.
Energy Use in Farming and Farming-Related Sectors
    Agriculture is a major user of energy. For 2007, EIA estimates that 
energy use on farms totaled about 1,142 trillion British thermal units 
(Btu), more than one percent of total U.S. energy consumption of 101.9 
quadrillion Btu. The components of farm energy consumption are as 
follows: diesel accounts for 51 percent of total use, motor gasoline 
accounts for 16 percent, natural gas accounts for nine percent, 
liquefied petroleum gas (LPG or propane) accounts for nine percent, 
electricity accounts for 14 percent, and other fuels account for two 
percent. In addition to direct farm use of energy, agriculture is 
indirectly affected by energy requirements in the fertilizer industry, 
specifically in nitrogenous fertilizers. In 2007, the energy 
requirements of this industry, in terms of thermal content, were about 
420 trillion Btu, most of which is natural gas. Natural gas is the main 
feedstock in the production of ammonia fertilizer. Because of the 
volatility and high levels of natural gas prices over the last several 
years, several ammonia producers are planning to convert their 
facilities to use less expensive coal or petroleum coke instead of 
natural gas. Also, as domestic ammonia producers have idled many of 
their plants, imports of ammonia have significantly increased, with 
2007 reporting a net import reliance of 42 percent, compared to 29 
percent in 2002.
    Based on energy use on farms and in closely-related sectors, every 
dime added to the price of gasoline and diesel oil, sustained over 1 
year, costs U.S. agriculture $566 million annually. Every dollar added 
to the price per thousand cubic feet of natural gas costs agriculture 
more than $96 million annually in direct expense. Every penny increase 
in the price per kilowatthour of purchased electricity costs 
agriculture about $452 million annually in direct expense. The farm 
sector has seen a tremendous increase in fertilizer costs, particularly 
ammonia. The average annual ammonia price paid by farmers rose from 
$250 per ton in 2002 to $523 per ton in 2007.
Agriculture as an Energy Supply Source
    Testimony on the interaction between energy markets and agriculture 
would once have focused exclusively on agriculture's demand for energy. 
Today, however, the recent increase in the use of ethanol in motor 
fuels has focused attention to agriculture's current and potential role 
as an energy supplier. Ethanol use in motor fuels has grown from 1.7 
billion gallons per year in 2001 to an estimated 9.6 billion gallons 
per year in 2008. This growth has had a substantial impact on corn 
demand, commodity and land prices, and planting decisions. However, 
notwithstanding its recent growth, ethanol still accounts for a 
relatively small share of overall fuel use by gasoline-powered 
vehicles, which totaled 137 billion gallons in 2008.
    While ethanol from grain is by far the most important current 
energy supply activity in agriculture, other energy supply 
opportunities are also receiving increasing attention. Production of 
biodiesel fuel from oilseed crops has grown over the past decade, 
supported by Federal incentives. Farm wastes are increasingly being 
recognized as an energy resource, and their development is being 
promoted by Federal incentives and renewable energy portfolio mandates 
in many states. Farm operators are also benefiting from the growth of 
wind power, which is providing extra income from leases and royalties 
to farm operators in areas with attractive wind resources.
    The forward-looking sections of this testimony, which follow, offer 
EIA's perspective on the short-term and long-term energy outlooks and 
on the future for ethanol and other energy supply opportunities in 
agriculture.
Energy Trends Through 2010
    Turning first to the outlook through the end of 2010, I will be 
relying on EIA's Short-Term Energy Outlook, released March 10, 2009, 
which is updated each month.
    Global Oil Markets. Following the sharp price decline that occurred 
during the second half of 2008, the global oil market has remained 
relatively stable since the beginning of the year. This situation is 
expected to continue through most of 2009, until economic recovery in 
the United States and elsewhere leads to a rebound in oil demand 
growth.
    Crude Oil Prices. The future direction of world oil prices in the 
short-term will largely depend upon the timing and pace of the recovery 
of the global economy. The annual price of West Texas Intermediate 
(WTI) crude oil averaged $100 per barrel in 2008. The global economic 
slowdown is projected to reduce these prices, to an average of $42 per 
barrel in 2009 and $53 in 2010.
    Motor Gasoline Prices. Gasoline prices have been slowly increasing 
over the last 2 months while crude oil prices have stabilized and 
refiner margins have recovered from their recent near-historic lows. 
After averaging $1.69 per gallon in December 2008, the lowest monthly 
average since February 2004, the retail gasoline price in February rose 
to $1.92 per gallon. Retail gasoline prices are projected to average 
$1.96 per gallon in 2009 and $2.18 per gallon in 2010.
    Diesel Fuel and Heating Oil Prices. Retail diesel fuel prices in 
2009 are projected to average $2.19 per gallon, down from $3.80 per 
gallon in 2008, while residential heating oil prices are projected to 
average $2.58 per gallon during the 2008-2009 winter season compared to 
$3.31 per gallon last winter. The projected decrease is consistent with 
lower crude oil prices and more than adequate levels of distillate fuel 
inventories. Total distillate inventories at the end of March 2009 are 
expected to be 131 million barrels, up 23.5 million barrels from March 
2008 and well above the normal range.
    Natural Gas Production, Inventories, and Prices. Total U.S. 
marketed natural gas production is expected to remain flat in 2009 and 
then fall by 0.8 percent in 2010. Working natural gas inventories by 
the end of March are projected to reach 1,628 billion cubic feet, a 
level about 251 billion cubic feet above the previous 5 year average 
for March.
    The Henry Hub spot price averaged $4.65 per thousand cubic feet in 
February, $0.75 per thousand cubic feet below the average spot price in 
January. Prices continue to reflect demand reductions brought about by 
the current economic downturn. As the year progresses, it is expected 
that average spot prices will remain near $4 per thousand cubic feet. 
On an annual basis, the Henry Hub spot price is expected to average 
about $4.67 per thousand cubic feet in 2009 and $5.87 per thousand 
cubic feet in 2010.
    Electricity Consumption and Prices. An expected decline of 6.4 
percent in industrial electricity sales during 2009 leads to a 
projected decline in total electricity consumption of 1.7 percent this 
year. Total electricity consumption is expected to grow by 1.2 percent 
in 2010 as a slowly improving economic climate contributes to a 
recovery in the sales of electricity. Despite the recent drop in 
generation fuel costs, some electric utilities have proposed slight 
rate increases in response to higher costs of securing credit for 
purchases of fuel and wholesale power, while other retail electricity 
distributors, especially in the West South Central region, have been 
able to pass the declining fuel costs on to customers through lower 
rates.
    Ethanol.  EIA projects that the market for ethanol will continue to 
grow, although much more slowly than seen over the past 2 years. In 
2007, the ethanol industry produced an average of 425,000 barrels per 
day, providing about 4.6 percent of 2007 average daily gasoline 
consumption volume, or about three percent of the energy consumed by 
gasoline-fueled vehicles. Ethanol plants operated at or near their 
design capacity limit during this period. Ethanol production capacity 
increased by more than 50 percent in 2008 with production growing from 
an average of 492,000 barrels per day in December 2007 to an average of 
656,000 barrels per day in December 2008. However, high gasoline prices 
and the weakening economy contributed to declining gasoline consumption 
compared with the year before. Ethanol production capacity grew faster 
than the demand for ethanol, and average ethanol capacity utilization 
rates fell from close to 100 percent at the beginning of 2008 to about 
85 percent by the end of 2008. EIA's forecast for 2009 calls for 
continuing but very modest growth in ethanol consumption, with average 
capacity utilization rates falling to about 80 percent by the end of 
the year. Although farmers should continue to benefit from increasing 
corn demand, the availability of underutilized ethanol production 
capacity will tend to put downward pressure on the margin earned by 
ethanol producers over their variable production cost.
    The projected slowdown in ethanol demand growth reflects the 
existence of several distinct segments in the fuel ethanol market, each 
with a different sensitivity to market price and infrastructure 
limitations. The reformulated gasoline market, which represents about 
\1/3\ of the gasoline sold and is subject to the strictest 
environmental limits, is the least price-sensitive market segment for 
ethanol. Demand for ethanol in this type of gasoline, where it is used 
in blends of six to ten percent, increased significantly with the 
phase-out of methyl tertiary butyl ether (MTBE), which was completed in 
2006. Since that time, virtually all reformulated gasoline has been 
blended using ethanol.
    The next most attractive market segment for ethanol is as a volume 
extender for conventional gasoline in blends of ten percent. The high 
oil and gasoline prices last year, the availability of a 45 cents per 
gallon blenders' tax credit through 2010, and the ``consumer illusion'' 
that leads to choices between gasoline blended with and without low 
percentages of ethanol to be made purely on the basis of their price 
per gallon without consideration of the lower miles-per-gallon using 
fuel incorporating ethanol, all supported the growing use of ethanol as 
a volume extender in conventional gasoline. However, the recent fall in 
oil and gasoline prices has reduced the economic incentive for 
expanding ethanol blending capacity. While the current level of almost 
140 billion gallons per year in national sales for all types of 
gasoline could, in theory, accommodate roughly 14 billion gallons of 
ethanol in blends of ten percent or less, many regions still lack the 
transportation and blending infrastructure to use ethanol. EIA's latest 
Outlook projects that 10.7 billion gallons of ethanol are blended into 
gasoline in 2009. We are aware of some other projections as much as 1 
billion gallons per year lower, which would require the use of RINs 
(Renewable Identification Numbers) from prior years to comply with the 
renewable fuel standard established by the Energy Independence and 
Security Act of 2007 (EISA).
    The final market segment for ethanol is use in high-percentage 
blends such as E85. Currently, high-percentage blends account for well 
under one percent of the overall U.S. market for fuel ethanol. Expanded 
use of high-percentage blends is necessary if total ethanol use is to 
grow beyond the level of 12 to 15 billion gallons per year that would 
saturate the market for low-percentage blends. Based on the Brazilian 
experience, consumers would generally expect high-percentage ethanol 
blends to be price-competitive with petroleum-based alternatives on an 
energy-content basis.
Energy Trends Through 2030
    Turning now to the longer-term outlook, the discussion that follows 
relies on EIA's Annual Energy Outlook 2009 (AEO2009) and on several 
recent EIA analyses of energy and environmental policy proposals that 
could have a significant impact on agriculture's role as an energy 
supply source.
    Overview. Longer-term trends in energy supply and demand are 
affected by many factors that are difficult to predict, such as energy 
prices, U.S. economic growth, advances in technologies, changes in 
weather patterns, and future public policy decisions. It is clear, 
however, that energy markets are changing as they adapt to the 
significant volatility seen in recent years; higher energy prices since 
2000 (notwithstanding the sharp fall in oil and natural gas prices 
since mid-2008); the greater influence of developing countries on 
worldwide energy requirements; recently enacted legislation and 
regulations in the United States; and changing public perceptions of 
issues related to the use of alternative fuels, emissions of air 
pollutants and greenhouse gases, and the acceptability of various 
energy technologies.
    The AEO2009 reference case projects an increase in the consumption 
of biofuels (ethanol, biodiesel and biomass-to-liquids fuels), even as 
consumption of petroleum-based fuels remains essentially flat, and an 
increase in other nonhydroelectric renewable energy sources, together 
with accelerated improvements in energy efficiency throughout the 
economy. The growth in biofuels and other nonhydroelectric renewable 
energy consumption leads to a gradual reduction in the role played by 
fossil fuels in meeting U.S. energy needs. The oil, coal, and natural 
gas share falls from providing 86 percent of total U.S. primary energy 
supply in 2006 to 79 percent in 2030, assuming no changes in existing 
laws and regulations.
    Alternative Fuel Use. The use of non-petroleum liquid fuels is 
projected to increase substantially in the reference case as a result 
of the higher prices projected for traditional fuels and the support 
for alternative fuels provided in recently enacted Federal legislation, 
including EISA. Biofuels use grows in the AEO2009 reference case from 
7.3 billion ethanol-equivalent gallons in 2007 to 29.8 billion gallons 
in 2022 and 38.7 billion gallons in 2030. After 2022, the combination 
of the rising cost of petroleum-based fuels and steadily lower costs 
for biofuel technology results in the continued growth in biofuels 
consumption. The projected biofuels consumption in 2022 is less than 
the 36 billion gallons mandated in EISA largely because of the 
difficulties that we foresee in rapidly ramping up the production of 
cellulosic biofuels to the target levels set in that Act for the middle 
of the next decade. However, the targets for the use of 15 billion 
gallons of corn-based ethanol and not less than 1 billion gallons of 
biodiesel are projected to be achieved.
    From a marketing perspective, biofuels that are substitutes for 
diesel fuel, such as biodiesel and biomass-to-liquids fuels, are 
expected to be blended into the same diesel supply as petroleum-based 
diesel. Ethanol use for gasoline blending grows to the 12-13 billion 
gallon level between 2022 and 2030, while E85 consumption grows from 11 
to 17 billion gallons over that same time period.
    The Effect of Lower Oil Prices. The crude oil price can be expected 
to have an effect on the longer term outlook for biofuels. In the 
AEO2009, the difference in crude oil prices between the reference and 
low oil price cases is almost $70 per barrel (2007 dollars) in 2022, 
and this price differential continues to grow through 2030. There is a 
pronounced lowering of cellulosic ethanol consumption in the low oil 
price case by 2030 due to the fact that it is not as price-competitive 
with petroleum gasoline, which results in a significant lowering of the 
total ethanol consumed by the end of the projection period: 20.6 
billion gallons in 2030 in the low oil price case compared to 29.3 
billion gallons in the reference case. Biomass-to-liquids production is 
also lower in the low oil price case than in the reference case.
    Renewable Fuel Consumption and Supply. Total consumption of 
marketed renewable fuels in the AEO2009 reference case, including 
ethanol blended with gasoline, is projected to grow from 6.7 
quadrillion Btu in 2007 to 14.1 quadrillion Btu in 2030. The robust 
growth is a result of the nearly 30 state renewable portfolio standard 
programs, mandates, and goals for renewable electricity generation; 
technological advances; high petroleum and natural gas prices; and 
Federal tax credits, including those in the Energy Policy Act of 2005 
and the Energy Improvement and Extension Act of 2008.
    Outlook Risks.  As discussed previously, this longer-term outlook 
hinges upon the outcomes of a number of factors in addition to crude 
oil prices, which are not known with certainty. For biofuels the 
uncertainties include the actual implementation of the expanded 
renewable fuel standard in EISA, the continued difficulty second-
generation biofuels technology developers are facing with financing and 
building projects in the United States and globally, and whether 
intermediate ethanol blends in gasoline above E10 levels will be 
allowed.
The Potential Impact of Possible Future Policies on Energy Supply From 
        Agriculture
    As previously noted, the Annual Energy Outlook reference case 
assumes that current laws and policies continue indefinitely. Other 
recent EIA analyses suggest that various policy proposals, including 
caps on greenhouse gas emissions, a renewable electricity standard for 
electricity sellers, or a low carbon fuel standard, could significantly 
increase reliance on biomass as an energy source. Agricultural products 
and residues, as well as dedicated energy crops, are a key part of the 
overall supply of biomass in some of our recent policy analyses.
    The two main concerns that appear to motivate many recent policy 
proposals are energy security and reduction of greenhouse gas 
emissions. Our continuing policy analyses suggest that there are both 
synergies and conflicts between these objectives. For example, 
improvements in vehicle efficiency would advance both objectives. In 
contrast, the adoption of coal-to-liquids conversion without carbon 
capture and sequestration would advance energy security while 
increasing emissions.
    The situation with respect to agriculture and biomass is somewhat 
complex. A policy focused on energy security would likely emphasize the 
use of biofuels to reduce our reliance on imported petroleum. Such a 
policy also would serve to reduce greenhouse gas emissions. However, if 
greenhouse gas emissions were the primary policy focus, biomass could 
be used as a substitute for coal-fired electricity generation to 
provide larger reductions in energy-related carbon dioxide emissions 
per unit of biomass energy used. While biomass from agriculture and 
other sources has an important role to play in either case, the way in 
which biomass is deployed will depend on how the objectives of energy 
security and emissions reduction are prioritized.
    This concludes my statement, Mr. Chairman, and I will be happy to 
answer any questions you and the other Members may have.

    The Chairman. Well, thank you very much. I appreciate that, 
and now we will go to questions.
    I would like to remind the Members that they will be 
recognized for questions in order of seniority, for Members who 
were here at the start of the hearing, and after that, Members 
will be recognized in order of arrival. And I appreciate the 
understanding.
    We will start off with, I just wonder if all of you would 
make some comment. The past couple of years, pork and beef 
producers in our state and across the country have borrowed 
against their equity, equity in land, to continue to operate. 
And, about the high cost inputs, and what has happened to the 
commodity price; I am wondering just how deep that can go. 
Where do you think we might be, and where that might be taking 
us, what the effects might be if that is so?
    I'll start off with you, Dr. Glauber, whatever you might 
want to say, and the rest of you, please jump in.
    Dr. Glauber. Well, there is no question that debt has been 
rising, and one measure, again, if you look at all of the 
aggregate measures for financial stability, that is, the debt 
relative to assets, as I mentioned, that at least in the 
aggregate, those remain pretty good.
    However, there are other measures you can look at it. And 
you could look at debt relative to net income, and those 
certainly have been rising, and that is, of course, would be of 
some concern if your debt servicing, the amount you have to 
pay, is large relative to the amount of income that you have 
coming in, in a given year.
    But that said, I think that generally, again with the 
availability of credit, and again, the relatively strong 
financial position, that people are coming into with this 
downturn, that is one thing that sets agriculture apart from 
other sectors of the economy.
    The Chairman. Thank you. Anybody else? Dr. Henderson?
    Dr. Henderson. Yes. We have spent some time talking with 
the agricultural bankers over the last couple of years, and the 
mantra that they have been saying in these good times is 
remember the 1980s, and encouraging the farmers not to load up 
their farm operations with debt. And, I think I am going to 
agree with Dr. Glauber's comments if that the farm sector is 
able to maintain debt levels at relatively historically low 
rates, and that is going to be supportive of the farm sector 
going forward.
    The Chairman. Okay, thank you. Dr. Gruenspecht. Well, I 
will recognize my Ranking Member for any questions he might 
have, and move us along.
    Mr. Moran. Mr. Chairman, thank you. Dr. Glauber, welcome to 
the Committee. You will be very important to us as we make 
policy decisions over a long period of time, and I appreciate 
your demonstrated expertise.
    One of the conversations I had with your predecessor on 
numerous occasions, Dr. Collins, was about the definition of a 
farm. And I would again encourage the Department of Agriculture 
to change its definition for its economic analysis, because I 
think it so poorly reflects the reality. Statistics that you 
and the Department of Agriculture place to the public, and to 
us as policymakers, do not accurately or appropriately reflect 
the reality of agriculture, when you define a farmer in ways 
that, just a small amount of farm income causes somebody to be 
labeled as a farmer.
    I would be happy to have your response. I have not been 
successful yet in getting USDA to change their position, but I 
do think it is important, as we try to analyze what is the 
right answer to many questions we face, plus I think it 
misleads the public in ways that are detrimental to producers.
    Dr. Glauber. Well, thanks very much.
    The concern, of course, is the fact that the definition of 
a farm is anyone that has grown $1,000 worth of farm produce, 
or could have grown $1,000 worth of produce. If you look at the 
increase in farms the Chairman alluded to in the Census, almost 
all of that increase is in that category of farms who grew 
$1,000 or less in the 2007 Census.
    It remains the fact that the bulk of production is produced 
by those who are at the other end of that sales category. I 
mean, you understand the issues on number of farms, and there 
are a lot of funding things, of course, that we do in the 
appropriations that are determined by the number of farms, so I 
am at least a little aware of the politics of how that is 
defined. But it is true that the bulk of the farms are in this 
category of very small.
    For farms reporting sales less than $250,000 class, that is 
where you see the majority of farms and their production, of 
course, they are important contributors to the total aggregate 
production, and they are also, hold a lot of lands, so they are 
important from a conservation point of view, as well.
    Mr. Moran. Let me--I may come back to you, but you are no 
more forthcoming than Dr. Collins, so that--I take that--I mean 
that as a compliment.
    Dr. Henderson, I am very impressed with the Kansas City 
Federal Reserve Board. I appreciate the activities that you all 
are engaged in, in regard to rural America. One of the 
conversations that I have had, with previous opportunities in 
visiting the Federal Reserve is that I think that the Fed--and 
again, I know that you are not the person, but you are my 
opportunity to speak about this--is that while the Fed has 
lowered interest rates, with the desired outcome of increasing 
economic activity, increasing borrowing, at the same time, the 
regulators have significantly reduced the willingness or 
ability of bankers across our, across your region, to be able 
to loan money.
    To some degree, I think it is in agriculture. I have 
community and farm bankers tell me that the regulators will not 
allow them to make more farm loans, because they are too 
concentrated. But, it is also much more true in our more urban 
areas, where a real estate developer is not eligible, or the 
bank is incapable of making a loan to a real estate developer, 
because there are too many loans in real estate development.
    And there is just this constant fear that what a regulator 
told a community banker, a small town banker, the last 
examination, is going to be something totally different than 
what that examiner is going to say during this examination. So, 
there is this great retrenchment in loaning money, and so, 
while we are making policy decisions designed to encourage the 
borrowing of money at low interest rates, the regulators are 
making decisions through examinations that are restricting the 
ability of banks to loan money to farmers and others across the 
country.
    And I welcome your reaction or response to that.
    Dr. Henderson. Thank you, and you are correct, in terms, I 
am outside the regulatory function at the Federal Reserve Bank 
of Kansas City.
    We do, however, talk with each other, talk about the 
situations, and I have spent much time talking with regulators 
inside of our bank, but also throughout the country, talking 
about this issue. In general, the comments that I am hearing 
from them is, that they are asking the agricultural banks to 
think about their risk management profile, and how to manage 
the agricultural risk that is emerging in terms of your bank's 
portfolio, especially high loan concentrations. How do you 
manage that risk, and do you have a plan, systematic plan put 
in place to manage the volatile markets that are emerging in 
agriculture today?
    Mr. Moran. My time has expired. My final question, although 
I had one from, for our third panelist as well, but when will 
interest rates begin to rise?
    Dr. Henderson. I assume that question is directed to me.
    Mr. Moran. It is. This is similar to the question that I 
refuse to answer, from my own constituents, is whether I should 
sell my wheat.
    Dr. Henderson. This is one of those questions that are 
probably best answered by someone else in a different position 
than myself.
    Mr. Moran. You must have learned from Dr. Collins as well. 
Thank you, Mr. Chairman.
    The Chairman. It is almost like a virus. Well, I would like 
to recognize the gentleman from Georgia, Mr. Marshall, for 5 
minutes.
    Mr. Marshall. Thank you, Mr. Chairman, and gentlemen, I 
apologize. I had to step out, had a meeting on missile defense. 
We are busy doing lots of different things up here, and many of 
us can't claim a great deal of expertise, certainly with regard 
to the issues that you all deal with daily.
    I am regularly asked by folks in the poultry business, 
livestock business, and others, whether the production of 
biofuels is causing price increases in the inputs in those 
industries. And there are those who contend that it is, and it 
is a serious problem, and then, they will argue that in the 
long run, it poses a real threat globally. Projections are, at 
least, that arable land is going to decline, population will 
continue to increase. Consequently, yields must increase if we 
are to feed the globe, and that it doesn't do us much good 
globally to devote large swaths of our arable land to the 
production of energy, as opposed to production of food.
    And so, you have Lester Brown and others out there who, 
even if we didn't add in the production of energy, say we are 
headed toward disaster. Then, you add the production of energy 
in, you have folks that I have known for a long time saying 
that this is causing them problems in their business. And I 
would ask our two non-financial experts, the ag experts, to 
comment on that.
    Dr. Glauber. Well, no question that ethanol has caused, or 
the increase in ethanol production over the last few years has 
caused impacts on, particularly, corn and soybean markets, and 
those have radiated throughout the rest of the sector. One 
thing that I would point out is that under the Renewable Fuel 
Standard, because of the growth in that over the last few 
years, we saw sharp increases in ethanol production, certainly, 
particularly from 2006.
    As we are looking out, however, that growth, the annual 
growth, begins to decline a bit. This year, for example, we are 
looking at about 3.7 billion bushels of corn being used for 
ethanol. And next year, we are projecting that to be closer to 
4.1, and the following year, about 4.2, 4.3. So, you see those 
increases are smaller, and that will mean that the actual price 
effects should be less.
    There is no question, though, with the rapid runup 
increasing corn grind by about a billion bushels.
    Mr. Marshall. You are limiting your reference to corn, 
soybeans and other----
    Dr. Glauber. Well, soybeans--no, soybeans. It certainly has 
an effect as well, because if, indeed, more corn is being grown 
for ethanol purposes, that means less area is going to 
soybeans, so that means price impact on soybeans, but also 
biodiesel, that has an important role, as well.
    All I would say is that as we will begin to approach the 15 
billion gallon cap, these increases are less sharp than they 
were, and over time, with moderation, or excuse me, with 
technological developments, we should see yields catch up with 
that, as it were. When we look out 10 years, we see the ending 
stocks, which is one measure of how tight those markets are, 
those begin to build again. As that increase in ethanol 
production slows, and the yield increases, which are modest, 
one percent per year, catch up.
    Mr. Marshall. Sort of bottom line, once we get past the 
initial startup phase, you don't think that the devotion of a 
fair amount of our acreage toward the production of ethanol is 
going to cause problems for other producers?
    Dr. Glauber. What I am saying is with average yields. Now, 
the problem, of course, is any given year, if you have a 
shortfall, then that comes in too, and that is one concern we 
would have, even now, with relatively tight supplies. I mean, 
we have more carryout than we thought we were going to have, 
say, in June of last year, but still, supplies are relatively 
tight, and if you were to have a big drought or a big 
production shortfall----
    Mr. Marshall. Let me move, in the limited amount of time I 
have left----
    Dr. Glauber. Sure.
    Mr. Marshall.--to Dr. Gruenspecht, and just a little 
editorial comment before I begin. We ought to, in my opinion, 
add nuclear energy to the renewable fuels portfolio, so that 
certain parts of the country, the Southeast in particular, can 
meet the standards that people want to impose. But having said 
that, what is your comment about this competition, energy 
versus food for the use of land?
    Dr. Gruenspecht. Clearly, any extra demand for renewable 
fuels inputs, that are based on land, is going to have some 
impact on the rest of the markets, but I would associate myself 
with Dr. Glauber's remarks. How that works through is going to 
depend on, ultimately, where the demand is going. It is going 
to depend on the yield improvements, and really all the factors 
that he identified. I think you would have to say it has some 
impact. How much and how important in the long term--I would 
defer to the ag experts on that.
    Mr. Marshall. Thank you, Mr. Chairman.
    The Chairman. You are welcome. I would just make this 
comment, and maybe our second panel will discuss it somewhat, 
but what we have done in increased production, Jim, over the 
last few years, is just remarkable. And I don't think we have 
tapped what the American farmer can do in production, really, 
as we continue to apply science to it. So, that is part of the 
consideration as well.
    At this time, I would like to recognize for 5 minutes the 
gentleman from Missouri, Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    My first question will be to Dr. Henderson, just to like 
follow up on Mr. Moran's comment about the examinations. I have 
had a lot of discussion with a lot of folks in my district, 
including the Fed examined banks, with regards to what seems to 
be some overzealousness sometimes, with the examinations, 
inconsistencies of how they are looking at loans, and in doing 
that, discouraging credit.
    Do you care to comment just for a quick second?
    Dr. Henderson. Again, I just want to repeat that the 
examination function is outside the scope of my 
responsibilities. But in general, in terms of my conversations, 
and working with the examiners, in our district. The primary 
message that I have been hearing from them as they talk to 
bankers in meetings, is put in place a risk management 
strategy. Agricultural risks in this environment are higher 
than what they have been the last couple years. Put your 
strategy in place, and manage that risk, going forward.
    Mr. Luetkemeyer. My only concern, and the message I would 
hope that you take back to your counterpart within your agency, 
is that there seems to be a disconnect between those people in 
the field and the management here in D.C., who oversee these 
things. Because I don't think that the message from what you 
are saying and what your counterpart is saying, and I have met 
with the FDIC folks as well, seems to be getting back to the 
folks in the field, from the standpoint that there is this 
disconnect and an inconsistency in how they are doing these 
examinations, which they need to be very concerned, obviously. 
I am not saying they shouldn't be, but I think that the level 
of inconsistency is such that it certainly gives great pause to 
those people who are making credit decisions, on what they 
should and should not be doing.
    As a follow-up to that, I would just like your input with 
regards to what do you think of the FDIC proposal of 20 basis 
points assessment to all of the banks, to be able to continue 
the FDIC insurance fund? What kind of impact do you feel that 
is going to have on the farm economy and rural communities as a 
whole?
    Dr. Henderson. In general, I do not have a personal opinion 
on the FDIC's assessment. What we have been hearing from our 
bankers, and what they have been telling us, is that the 
concern they have is that the assessment is going to reduce the 
amount of funds that they have for agricultural lending, rural 
lending, and various other types of lending out there, in terms 
of their community.
    They are talking about it in terms of reducing their 
profits. That is going to have a dramatic impact, and then, 
that is going to reduce lending activity. So that is the 
assessment and the impacts that we are hearing about from our 
bankers, and the concerns that they are raising at this point 
in time.
    Mr. Luetkemeyer. Okay, when you say reduce, do you reduce 
it one percent, ten percent, 50 percent? Do you have a figure 
on it?
    Dr. Henderson. No, we have not done any analysis or 
economic impacts to understand what type of reduction it would 
potentially have, or the types of impacts it would have on 
lending activity.
    Mr. Luetkemeyer. Okay. Thank you. Dr. Gruenspecht. I am 
very curious, how do you feel about the cap-and-trade systems 
being proposed, what kind of effect do you think that is going 
to have on the agricultural economy, in particular, on their 
input costs of fuel and fertilizer?
    Dr. Gruenspecht. Well, I haven't read it yet. It just came 
out yesterday, but, we at EIA have done analyses of past cap-
and-trade proposals and, generally, there is an impact on 
delivered energy prices and that would potentially affect 
things like fertilizer as well as energy commodities, but 
certainly, fertilizer, that has a very high content of natural 
gas.
    Really, in terms of the economic impact on agriculture, I 
mean, for all these policy calls, it is a cliche, but the devil 
is really in the details. Agriculture, presumably, has some 
opportunities to be involved in carbon sequestration and other 
things, and a lot depends on exactly what the proposal is. It 
is hard to talk about proposals in general, but one can say 
that in most proposals I have seen there would be an impact on 
energy prices, and that is certainly one part of the equation, 
affecting agriculture and other sectors.
    Mr. Luetkemeyer. Well, in all due respect, Dr. Gruenspecht, 
I have seen you before this Committee before in my short time 
here in Congress, and you already understand the realities of 
this situation. Can you give me an indication, just from the 
preliminary view of what is going on here, what kind of effect 
you would think it will have?
    Dr. Gruenspecht. We really have not looked at the package. 
Frankly, in the package itself, from what I know about it, a 
lot of the key things, like the allocation of allowances are 
not even specified in the discussion draft. So, without even 
that level of detail, it is just very hard to reach a 
conclusion.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    The Chairman. Mr. Luetkemeyer, we will have the opportunity 
to invite the gentleman when we have opportunity, because we 
are going to all see lots more of that as we go down the trail.
    Mr. Luetkemeyer. I appreciate that. Thank you.
    The Chairman. I appreciate your questioning. I would like 
to recognize for 5 minutes the gentleman from Indiana, Mr. 
Ellsworth.
    Mr. Ellsworth. Thank you, Mr. Chairman. Thank you gentlemen 
for being here. I would like to concentrate my minutes on 
ethanol production. I can drive about 10 minutes from my house 
to a very beautiful ethanol plant that stopped mid-production, 
mid-construction, I should say. Another, not too far away, that 
stopped mid-production, we all had very high hopes, ribbon 
cuttings, and announcing jobs in our area, which we were all 
very proud of, only to see things shut down, with a lot of 
stainless steel and a lot of piping.
    So, I guess my question to you is, if you could explore for 
me, and for the folks listening, just where your thoughts are 
on the future of ethanol, what do we need to do here in 
Washington? Is it going to be a big part of our energy future? 
You know, we are hearing a lot of chatter about raising the 
blend rate, how do you think that might affect ethanol. What 
are the impediments? I think, Dr. Gruenspecht, you had 
mentioned, in testimony, that you didn't think we were going to 
meet the Renewable Fuel Standards, and just explore into that a 
little bit. What we can go home and tell our folks about the 
future of ethanol, what we might be doing in that area. And 
maybe, Dr. Glauber, you may want to start, if that is----
    Dr. Glauber. Well, let me just address the economics first. 
There is no question that, if you were to go back 18 months 
ago, these guys were getting great margins. And, the Chairman 
or someone mentioned, or maybe it was Chairman Peterson 
mentioned the fact that a lot of these plants were able to 
almost pay for themselves within their first 12 months or so of 
operation.
    What has happened, of course, then, is that we have seen 
first, an increase in feed costs, so feedstock, that is, corn 
prices, rose to record levels, and in particular, if you were 
an ethanol producer and hadn't hedged those costs, you were hit 
very hard, and we know, certainly, of one company that ended up 
going bankrupt because of that.
    Since that time, margins have been close to zero, and when 
I say margins, I am just talking about returns relative to 
variable costs. So, we are not talking about repaying capital 
and financing costs, which of course, over the long run, you 
will have to do that as well. However, they have improved a bit 
over the last few months. Certainly, most anticipate, as energy 
prices start to increase again, that you will see some 
profitability return to that industry.
    We also know, however, that since about 2006, the price of 
corn has tracked fairly closely to the price of oil, so there, 
too, I don't think that anyone is expecting the sort of 
heydays, that you might have seen 18 months ago, return. I 
think there will be returns in there for the industry. The fact 
is the Renewable Fuel Standard creates demand for ethanol, and 
if you are a blender, you will need to buy ethanol, which means 
you will bid up the price sufficiently, so that someone makes a 
profit selling it.
    But certainly, in the near term, particularly since we have 
a lot of credits from ethanol production that was previous to 
this, it wasn't, that was in excess of the Renewable Fuel 
Standard, the so-called RINs, they are being enabled to offset 
that, so we have excess capacity for the moment. But I expect, 
over the longer run, that we should be operating at close to 
capacity, as we move towards the 15 billion gallons towards the 
Renewable Fuel Standard.
    Mr. Ellsworth. Thank you. Dr. Gruenspecht, do you have any 
comments?
    Dr. Gruenspecht. You know, as Dr. Glauber said, oil prices 
matter and corn prices matter. There are really three segments 
of the market for fuel ethanol that Dr. Glauber was describing. 
It was really a must-have ingredient to make reformulated 
gasoline with the phase-out of MTBE, so that really propelled 
prices--people would pay whatever, it didn't really matter what 
you paid. And there was tight supply.
    Then, there is the market segment we are in now, which it 
is sort of the volume extender. Sometimes, in internal 
discussions, we call it the Hamburger Helper type of thing, 
because it increases the volume. That is going to compete with 
gasoline on a volume basis, taking account of the tax credit 
difference. Right now, there is excess supply, so in fact the 
spot price of ethanol doesn't exceed the spot price of gasoline 
by the full extent of the tax credit, and that is an indicator 
that there is excess production capacity.
    The final segment is the one where it competes on its fuel 
value basis. That is going to have to happen at some point if 
we are going to have a lot more ethanol. In the small volume 
blends, I don't think people notice the difference in energy 
content, but if you were buying a large volume blend of 
ethanol, you would definitely notice that a gallon doesn't get 
you as far as a gallon of competing fuels.
    So, in the long run, that is a tough segment. The Renewable 
Fuel Standard program, obviously, what happens there matters a 
lot. You mentioned my testimony. Where we think things will 
fall short is on the cellulosic side. Actually, in the 
provisions that were enacted, there is a provision that calls 
for modification of amounts. The whole 36 billion gallons is 
sort of a series of nested sub-targets, almost like a set of 
Russian dolls, and each of them has to be met, and if they are 
not met, if there is a 20 percent or larger shortfall in any 
one of the targets, there is a required rulemaking to modify 
the amounts. We actually think the cellulosic ethanol is not 
coming along as fast as the targets in that bill had 
anticipated.
    The other issue that has to be dealt with, I think you 
mentioned, is what you might call the blend wall issue. I think 
I am past my time, so I should probably stop, but there is a 
lot going on in this market.
    Mr. Ellsworth. Thank you. We will revisit it.
    Dr. Gruenspecht. Thank you. I appreciate it.
    The Chairman. You are welcome. The chair recognizes, for 5 
minutes, Mr. Schrader from Oregon. Mr. Schrader.
    Mr. Schrader. Thank you, Mr. Chairman.
    We have had pretty good testimony on the state of American 
agriculture. I am curious how the rest of the world is doing in 
this global economy and meltdown. And I noticed from the one of 
the charts from one of you that there, our imports are still 
up, even though our exports are down, and wonder if you could 
comment, any of you gentlemen, on that.
    Dr. Glauber. Yes, you're right. Imports are up, and they 
have been pretty steady, I would say, over the last 10 or 15 
years, in terms of the growth in imports. You asked about 
conditions worldwide. Certainly, there are serious credit 
problems that many countries are experiencing. The former 
Soviet Union countries, Russia in particular, there are 
indications that there are credit problems there for financing 
production. There have been press reports of problems in 
Brazil. The question is whether those get sorted out by the 
time people are making planting decisions. We aren't foreseeing 
great drops in productions, all that said, but certainly, there 
are countries that are experiencing difficulties. There are 
still countries that are experiencing very high food prices. 
Some of that is due to the fact that they can't get exports 
into those countries.
    There is financing problems with credit. I think the World 
Bank just made an announcement that they are going to try to 
address that issue by making some funds available for credit 
for the purpose of sales, but the financial situation is quite 
difficult for a number of countries worldwide.
    Mr. Schrader. Just as a follow-up. Are there things that we 
should be doing to assist American farmers to be in the best 
position as this economy turns around, to compete and improve 
our exports?
    Dr. Glauber. Well, a couple of things: We are looking at 
lower exports this year, but there are some bright spots. I 
mean, China continues to import soybeans at very high levels, 
and of course, we are very interested in looking at what 
happens to China, in terms of their economy. Because hopefully, 
that will continue, that they will continue to eat meat. They 
will continue to import protein meal and other grains.
    The other issue is, just in general, of course, the 
currency values. Over the last couple of years, the dollar was 
relatively weak, and so, it was not only cheap to import U.S. 
goods, we did well vis a vis some of our competitors. The 
dollar, of course, has appreciated over the last few months, 
and so, that has had some effect on our exports as well.
    Mr. Schrader. Dr. Gruenspecht, in my neck of the woods, we 
are very interested in biomass and the cellulosic 
opportunities. You indicated that we are not meeting targets, 
and there are some problems. Could you elaborate a little bit 
on that, and also, in your testimony, you talked about the 
complex relationship with our energy policy, possibly. Could 
you elaborate?
    Dr. Gruenspecht. Sure. The Energy Independence and Security 
Act of 2007 sets up this 36 billion gallon target, and it is 
divided into different categories, and one of the categories is 
cellulosic ethanol. We follow pretty closely what is going on 
in the industry and when plants might actually be constructed 
at various scales, and there is some talk about constructing 
some plants at a 20 million gallon a year type scale, which is 
a pretty significant scale, but small relative to a full-scale 
corn ethanol plant--but definitely more than a demonstration.
    The expectation is, the first of those simply aren't going 
to be coming online until 2011, 2012 timeframe, and then, I 
don't have the number in my head, but for 2016, the target is 
4.3 billion gallons of cellulosic ethanol for many of the 
issues we have a good vision of there, and we know where here 
is, and the question is can you get from here to there, and it 
just doesn't seem likely. I think a lot of people will be 
looking at these first plants that get built and they won't 
quite be ready to go into mass production, in terms of building 
large numbers of those plants. I think the thought is they will 
learn things from the initial plants, and it will take some 
time for the standard type of plant to be developed, and, then, 
it will take time for that plant to be built. It is more 
complex than a corn ethanol plant.
    So, all those things lead us to believe, and the first 
Administrator of EIA said there are no facts about the future, 
and that is true. It is the future. We don't know, but it seems 
unlikely to us that you would get to those type of levels by 
2015, 2016. In terms of the interaction with other areas, 
biomass can, and already is used significantly to generate 
electricity. It is used to generate electricity and provide 
energy in the pulp and paper industry, among others. Also, it 
is used outside the paper and pulp industry, in some particular 
areas--in the South, in Maine, for instance. The Southeast is 
very rich in biomass, and there is potential to use the biomass 
either for electricity generation, or as a feedstock for liquid 
biofuels.
    Liquid biofuels could be something other than ethanol. In 
fact, in our projections, we tend to think that there will be 
compelling reasons to make something we call BTL, biomass-to-
liquids. There already is technology, the Fischer-Tropsch 
technology, to make coal into liquids, or gas into liquids, and 
the liquids you get out of that are diesel, and diesel has a 
lot of advantages, potentially, relative to ethanol, in terms 
of its market value, and in terms of its ability to go directly 
into the stream of commerce.
    So, again, we think there will be some of that, but there 
is also an opportunity to make electricity, depending, in part, 
on what Congress does. The energy and climate change bill that 
was floated yesterday has what is called a Renewable 
Electricity Standard. Certainly, one way to go toward meeting 
that standard would be to use biomass to generate electricity.
    As I said in my testimony, a lot of it comes down to policy 
calls, which my organization certainly doesn't make, on how you 
prioritize what I would call the two major energy-related 
concerns, which are energy security and greenhouse gas emission 
reduction.
    So, hopefully, that is an answer to your question.
    Mr. Ellsworth. Thank you very much. I yield my time, sir.
    The Chairman. Thank you. The chair recognizes the lady from 
South Dakota, Ms. Herseth Sandlin.
    Ms. Herseth Sandlin. Thank you very much, Mr. Chairman, and 
thank you for having this hearing. My questions will follow up 
on Mr. Ellsworth and Mr. Schrader's questions about the ethanol 
industry, as well as a question for Mr. Henderson on the credit 
issues facing young and beginning farmers.
    But let me first make a few comments for the record with 
regard to my colleague, my friend from Georgia, Mr. Marshall, 
with regard to this fuel versus feed issue. Certainly, we heard 
from our witnesses and from the Chairman the extraordinary 
advances that we are seeing in feed technology, that have 
vastly improved the yields over the years of corn and other 
commodities, but we know that there is more to come in that 
area, to be able to meet the needs for fuel, feed, and food.
    But I would contend that the overall health of the farm 
economy has benefited in years past, and will continue to 
benefit in years ahead, when you have competition for 
commodities. And unfortunately for some in the poultry 
industry, and some in livestock quarters of the industry, that 
have been vastly vertically integrated, they benefited for 
years, before the ethanol industry developed, from cheap corn, 
i.e., taxpayer-subsidized corn, that was sold on the market for 
less than the cost of production. And now, they are feeling the 
effects of the fact that corn farmers are getting a fair price 
for their commodity. And so, yes, they are being squeezed, but 
at the same time, with the feed technology advancements, with 
the dry distillers' grain, and other research going on in that 
area, we would hope that we could find the partnership 
necessary, rather than what we saw. Some, regrettably, joined 
forces with the Grocery Manufacturers Association, in their 
public misinformation campaign at the beginning of last year. 
We hope they understand the partnership that is going to be 
necessary between livestock producers and grain producers, 
going ahead to ensure competition for all of their commodities.
    Dr. Gruenspecht, the blend wall issue, you were going to, 
if you had had time get to that, in Mr. Ellsworth's question.
    Has EIA studied the economic effect for the ethanol 
industry of allowing an E15 blend, or even the interim step of 
an E12 or E13 blend?
    Dr. Gruenspecht. We have not looked at that. As I am sure 
you are aware, this is an issue that is the subject of a 
petition that has been filed with EPA. There are a lot of 
statutory issues. Other parts of the Department of Energy, I 
know, are involved in testing of the compatibility of existing 
infrastructure and vehicles, and various other types of 
engines, with different blends. But EIA itself has not looked 
at it. From our perspective, to evaluate it would be a pretty 
mechanical thing. We know how much gasoline is projected to be 
used. You can figure out what a ten percent blend of ethanol 
means and, obviously, a higher percentage mixture of ethanol 
would accommodate more ethanol.
    There really are four ways of dealing with a blend wall. 
There are three ways over it, and one is E85 and flexible fuel 
vehicles. One is other biofuels, and the other one is sort of 
mid-level blends, which is what you are raising. And the way 
around it is to use the waiver authority. So, it has good 
policy options.
    Ms. Herseth Sandlin. Okay. Well, I am running out of time.
    Dr. Gruenspecht. I am sorry.
    Ms. Herseth Sandlin. Let me also--given Dr. Glauber's 
testimony about how, currently, there is excess capacity. That 
is why many of us are looking at this blend wall issue as the 
way to maintain an industry that is necessary to get to 
cellulosic biofuels, sort of as the bridge to get there to meet 
these requirements set forth in the Renewable Fuel Standard.
    So, do you agree that there is a nexus, with the credit 
crunch that the ethanol plants have been facing, the issue of 
gaining better, greater percentage of the market, as it relates 
to the blend wall issue, and being able to then meet the out-
year targets in the Renewable Fuel Standard for cellulosic 
ethanol?
    Dr. Gruenspecht. I am not sure I fully understand the 
question. I think the immediate thing that we see with the 
cellulosic ethanol is that it is just not, in our view, and 
this is the future so we don't know for a fact, but it is not 
likely that we will have the levels for 2015 and 2016 and 2017 
that are there in the standard. I don't know that that is tied 
specifically to the situation now with corn ethanol.
    It may be tied somewhat to the situation with the overall 
economy and the availability of credit.
    Ms. Herseth Sandlin. With the Chairman's indulgence, if I 
could rephrase it another way. If we are currently faced with 
excess capacity in the corn ethanol, then where will the market 
be for cellulosic ethanol? And that is the issue that I think 
some out in financing are asking. And so I do think, in my 
opinion, there is a nexus between the tools available to us as 
policymakers and, hopefully, the approval of the waiver 
application at the EPA for a higher blend, as well as getting 
over the barriers on infrastructure for E85 and flex fuel 
vehicles. We can't move the research and development and the 
deployment to get to commercial production of cellulosic 
biofuels if we are facing these current issues of excess 
capacity and the market available for corn ethanol. The 
incentives won't be there. So, I guess I maybe didn't phrase it 
as artfully the first time, but I will submit for the record my 
question for Dr. Henderson, as it relates to the particular 
impact of the current credit crunch on young and beginning 
farmers, and how some of the provisions, the loan guarantees 
and other programs that we authorize in the farm bill are 
affecting----
    The Chairman. This is very important, and maybe you would 
like to, you want to try and answer her question?
    Ms. Herseth Sandlin. Well, if--I know we have other Members 
here who have been waiting, but it is just--in terms of 
overseeing the implementation of the new farm bill, have some 
of those new programs been specifically included for young and 
beginning farmers? Are they being utilized, or are they being 
helpful in addressing what is happening to some of the smaller 
farming operations that tend to be young and beginning farmers?
    Dr. Henderson. In general, my colleagues at the Kansas City 
Fed, in conjunction with the USDA economists, have done some 
recent research, and it has recently been published, upon 
denials of credit. What they have been finding is that smaller 
farm operations, and those operations owned by younger farmers 
with less experience, are more likely to be denied credit.
    So now, going forward, I think the implications become, 
what are the roles of these programs, are they utilizing these 
programs? Are these programs being utilized at the Federal 
level? Various different states have their own small and 
beginning farmer programs. We have not really conducted any 
thorough analysis on that at this point in time, but it is 
something that we will be looking at, going forward.
    Ms. Herseth Sandlin. Thank you. Thank you very much.
    The Chairman. Thank you. The chair at this time would like 
to recognize Ms. Markey from Colorado, 5 minutes, please.
    Ms. Markey. Yes, thank you, Mr. Chairman, for holding this 
hearing, and thank you, panel members.
    I want to switch gears just a little bit, and talk about 
natural gas, which is important to my district in eastern 
Colorado. Mr. Gruenspecht, you mentioned that natural gas 
production is likely to fall in 2010. Can you give me, and give 
us an estimate, of what percent of this country's natural gas 
production is for agricultural purposes, as opposed to, let us 
say, electricity generation for residential use? And then, 
second, are trends showing more, less, or stable competition 
against agriculture for each cubic foot of natural gas?
    Dr. Gruenspecht. I probably don't have the numbers for your 
first question right at hand. I think that the industrial 
sector, as a whole, is a very big user of natural gas. I think 
agriculture is a relatively small piece of that. There is 
electricity generation, and, then, there is heating in 
residential and commercial buildings. But I will get you the 
exact numbers you want for the record.
    I am sorry, I have forgotten a little bit about the rest of 
the question.
    Ms. Markey. And, as natural gas production decreases, how 
do you think agriculture fares against residential use? Do you 
think that the percentage----
    Dr. Gruenspecht. Well, natural gas prices this year or next 
year we expect to be a lot lower than they were in 2008. 
Natural gas prices have come down a lot, in part because non-
agricultural industrial demand has been significantly affected 
by the economic conditions, and, in fact, natural gas 
production domestically has been a great success story, really 
increasing dramatically from unconventional sources of gas, in 
gas shales and in tar sands. Some of your neighboring states, 
have a lot of tar sands gas production. Colorado has pretty 
significant natural gas production as well, and it has been a 
strong market and reserves are increasing.
    But the issue now is that prices have fallen with, really, 
the decline in industrial demand, which has been affected by 
the economy, and that, in turn, has led to a reduction in the 
number of drilling rigs in use, as the industry looks at what 
the near term opportunities are to sell gas. Some of the gas 
projects can generate production in a relatively short period 
of time. It is not like the offshore oil projects, where the 
investments you make today don't begin to pay off for 6 or 8 
years.
    So, producers looking at the economy and the demand for 
natural gas, and the current prices, which have fallen a lot, 
have responded by backing off a little bit on their production. 
So, it is really a situation of lower demand that has driven 
the decline in production and presumably, if the economy would 
recover, demand would increase, and one might expect to see 
more natural gas production.
    But, generally, I would think that this year, 2009, because 
of those conditions, is really sort of a buyer's market for 
natural gas. So, to the extent that agriculture is one of the 
buying sectors, they are going to be seeing pretty attractive 
prices.
    Ms. Markey. All right. Well, thank you. I would appreciate 
that information. Thank you, Mr. Chairman. I yield back.
    The Chairman. Well, thank you. The chair at this time would 
like to welcome back Mr. Pomeroy from flooded North Dakota. We 
feel a lot of concern about what is going on with our good 
friends up there. And welcome back. I am sure you have some 
things to share with us, but I would like to recognize you to 
question the panel for 5 minutes.
    Mr. Pomeroy. Thank you very much, Mr. Chairman. Thank you 
for your concern, and the concern other Members have expressed. 
I am happy to report the water in the Red River continues to go 
down, and it looks like this heroic community-wide effort put 
forward by Fargo, in putting 43 miles of temporary dike in 
place, will have largely saved the city. There will be some 
number of residences lost outside city limits, but just an 
extraordinary achievement. It was thrilling to be out there and 
to be a part of it. Although we have to make sure we get some 
permanent flood protection in place, so we don't live with this 
Sword of Damocles hanging over our head.
    A couple quick questions about CRP. CRP leases expiring in 
upcoming years, literally millions of acres enrolled that will 
be expiring. What do you anticipate happening? Just run across 
the panel on that.
    Dr. Glauber. Well, you are right. You know, the farm bill, 
of course, limits enrollment to 32 million acres by the end of 
this year, starting October 1, 2009. There is currently 33.7 
million acres enrolled. I believe at the end of this year, we 
have some 3.9 million acres that are on contracts that are set 
to expire, and I think if you, when you run through the 
eligible acres, that is essentially 1.4 million acres. Most of 
that land is located in the plains, in essentially land that is 
susceptible to wind erosion. There are some wildlife benefits, 
as well, in those lands, but we are talking land, essentially, 
that would potentially go into wheat, as opposed to, say, land 
further east, where you might see more into soybeans or corn.
    Mr. Pomeroy. So, you see a fairly seamless way the acreage 
coming out hits our farm bill target?
    Dr. Glauber. Yes, the, I mean, there is a slug of land that 
is coming out this year, and that is the critical thing. And 
when you were debating the farm bill, and looking at getting to 
32 million acres, that was taken into account, knowing that it 
would be able to reach that.
    Mr. Pomeroy. Do you believe we will hold in at about 32 
million acres, or do you think----
    Dr. Glauber. Well, again, a lot depends on what happens 
with this 1.4 million acres.
    Mr. Pomeroy. In the years ahead, do you see the----
    Dr. Glauber. What--yes----
    Mr. Pomeroy.--that land coming back into production, and 
going well below 32 million acres?
    Dr. Glauber. Well, I think a lot depends on prices. There 
is some land that would remain long-term in enrollment, and 
some land that, in particular, where the environmental benefits 
are so high that a lot of people are going to want to keep that 
land in reserve status.
    The issue is, well, is there a class of land that is fairly 
productive, that the environmental benefits are less than these 
more environmentally sensitive lands, whether that will come 
in. And I think a lot will depend on prices.
    By and large, though, if we were looking at our baseline, 
we are looking at CRP levels close to the 32 million acres.
    Mr. Pomeroy. I would ask that one across the panel, but in 
light of rapidly diminishing time, let me move to my second 
one, and it concerns the cost of fertilizer. What will happen 
now that energy prices have come down? Are we going to see 
substantially better buys on fertilizer, and how does that 
relate to the net income position for the farmers?
    Dr. Glauber. Yes, if you look at the wholesale prices, they 
dropped fairly quickly in the fall, and plummeted. At the 
retail level, as you are well aware, a lot of these prices held 
strong. In fact, as we were looking at, when we were doing our 
outlook projections, for the outlook conference, and that is 
one reason why you saw estimates for corn acreage all over the 
map prior to those prospective plantings coming out.
    Just, for example, at the end of November, anhydrous was 
selling, and this is data from the AMS reports out of Illinois, 
for which there is variation in pricing, region to region, town 
to town, has varied a lot. But just to show you, the anhydrous 
prices are down probably 35 percent from where they had been at 
the end of November. Same with urea, down about 40 percent. DAP 
prices have been down 50 percent. So, they have come down, but 
they only have really come down over the last month or so, 6 
weeks, and so, as you are trying to figure out what farmers are 
going to do, in terms of making their planting decisions, more 
importantly, what, as they try to figure out what to do, a lot 
depends on what the--a lot of the pricing decisions on inputs 
was put off later this year, than it had been in previous 
years.
    Mr. Pomeroy. You are seeing localized variations at the 
retail level. The wholesale prices come down, but basically, 
farmers might well be advised, then, to shop closely on this 
one. They might be able to find better----
    Dr. Glauber. I think that is true. You know, a lot of 
things have, with the late harvest, there wasn't a lot of field 
work. So, I think that, in some areas--there were delays 
anyway--but with the pricing, with the input prices so high, if 
you priced your, if you bought those inputs last fall, you are 
looking at pretty tough margins. If you were able to take 
advantage of the price drops over the last 2 months, you are in 
a little better position.
    Mr. Pomeroy. Thank you, Mr. Chairman.
    The Chairman. Thank you. We are going to dismiss the panel, 
but just before we do, I want to thank you very much for your 
time. We are going having to call again, I am sure, from time 
to time, so you will be hearing from us.
    Just kind of a parting shot, though, to Mr. Gruenspecht. 
Ms. Herseth Sandlin kind of triggered my thoughts on that, I 
realize that the oil industry has got a big investment and so 
on, but it just seems to me like we ought to be able to figure 
out some way to get some of this alternative product to the 
places that can use it. And I won't ask you to speak to it now, 
because of the time, but I would like to engage in 
conversation. Ms. Taylor will beat you wherever you go, and 
maybe we can sit down and visit sometime.
    So, thank you very much. We are going to excuse the panel. 
We appreciate it, and ask the second panel to come to the 
table. Thank you.
    Well, I thank the new panel, too, for your patience in 
waiting, and we will try to move along. I am going to ask my 
colleagues to help me on some of the introductions here, but we 
will start off with recognizing Dr. Harl, I have known for a 
long, long time. I don't know if we want to reveal that or not, 
just as an interest, when he went off to the college and 
university, I went off to the Army, and we met again in the 
farm crisis, when I came back and took up agriculture. I 
attended a lot of your meetings, and got to respect and admire 
Dr. Harl very much for his expertise, and drove a lot of miles 
at different times to hear what you had to say, and try to put 
it into practice. And I appreciate what you have done, and your 
accomplishment as the Charles Curtiss Distinguished Professor 
in Agriculture and your emeritus position as Professor of 
Economics. And you have a law degree, and many other 
accomplishments. So, the list is long, and we welcome you to 
the panel.
    And I would like to, at this time, recognize Mr. Moran to 
make the next introduction.
    Mr. Moran. Mr. Chairman, thank you. I, too, welcome Dr. 
Harl back to our Committee, to our Subcommittee.
    Next to him is Mr. Dumler, who is with the Kansas State 
University Extension Service. He is an extension economist, and 
we are delighted to have him back. Mr. Dumler has testified 
here before, and I am very pleased that he has joined us. He 
comes from Garden City, Kansas, where we had 16 to 20 inches of 
snow over the weekend, and----
    The Chairman. Doesn't sound like a garden to me.
    Mr. Moran. He is--well, it is very much a garden, assuming 
that it stayed on the fields and didn't blow away. It was very 
important and necessary. Mr. Dumler is very thoughtful, and I 
appreciate his testimony. He is perhaps less flamboyant than 
who is usually seated next to Dr. Harl, Dr. Flinchbaugh, and 
while today we may miss out on the antics of the two 
professors, we are delighted to have Mr. Dumler here instead 
of, well, I shouldn't say it quite that way, we are delighted 
to have Mr. Dumler, thank you very much.
    The Chairman. I would like to recognize Mr. Marshall for an 
introduction.
    Mr. Marshall. Thank you, Mr. Chairman. Scott Angle is Dean 
and Director of the College of Agricultural and Environmental 
Sciences at the University of Georgia, and we are just 
delighted to have him as our Dean. He is very well known in 
farming circles throughout Georgia. He is very good about 
outreach, and getting around the state, and meeting with folks, 
and runs a very, very important program to all farmers in the 
Georgia area. He has access to staff and faculty that have true 
expertise with regard to economic conditions throughout the 
Southeast, where farming is concerned.
    Scott is very, very extensively published, and has had a 
distinguished career as an academician in farming, but he also 
happens to be a farmer, and he might have the longest commute 
in the country. His farm is in Maryland, and he serves in 
Athens, Georgia. So, we are very pleased to have you with us, 
sir.
    The Chairman. Well, thank you, and Mr. Costa got called 
away, so we will have to stand in for him to introduce Dr. 
Mickey Paggi. He is Director of the Center for Agricultural 
Business and Adjunct Professor, Department of Agricultural 
Economics, California State University at Fresno.
    We welcome all of you to the panel, and at this time, we 
would like to recognize Dr. Harl for this remarks.

      STATEMENT OF NEIL E. HARL, Ph.D., CHARLES F. CURTISS
           DISTINGUISHED PROFESSOR IN AGRICULTURE AND
          EMERITUS PROFESSOR OF ECONOMICS, IOWA STATE
                      UNIVERSITY, AMES, IA

    Dr. Harl. Thank you very much, Mr. Chairman, and Members of 
the Committee. It is a pleasure to be testifying before the 
Subcommittee. I am pleased to be back in room 1300. I might 
add, parenthetically, the first time I have had an opportunity 
to thank Congressman Moran for his kindness the last time I was 
here and apologize for leaving in the middle of my testimony, 
but I had to catch a plane. You may recall that, July 30, 1998. 
So, I apologize for that, Congressman Moran.
    Let me say that I want to try to avoid duplication of 
comments from the earlier panel. We are all trying to cover 
some of the same material, so I will hit the high points, and 
leave it to the questioning to draw out any additional details 
which you might be interested in.
    This is a very grim time for the country. My first 
recollection of life is of a hot July afternoon in 1936. I was 
not quite 3, looking out the window of my dad's rental home, 
rented farm home, which was in foreclosure, I found out later. 
And out in front, a strange sight, about 20 men in, with round 
point shovels widening the road. My mother later told me that I 
asked who those guys were, and she said well, it is a new 
Federal program. It is, she said WPA, I might have that wrong, 
but she said that, it is close at least. We are quite a way 
from that. I can recall from that time forward living on a 
farm, and how we coped with the Great Depression. And this 
downturn has been compared, excuse me, to the greatest downturn 
since the Great Depression.
    And I want to stress this morning that the agriculture 
sector is not an economic island. The global financial 
difficulties that have caused a lot of heartburn for financial 
firms and most of the global economy have so far largely 
bypassed the agricultural sector. Now, I do see some warning 
signs, some danger signals, and I want to identify those in 
just a couple of moments. It is clear, though, to me, that if 
the meltdown persists, and the longer it persists, the more 
serious and far-reaching the effects are likely to be on 
farming, on rural areas, and on ranching.
    If investor confidence is not soon restored, credit 
availability could eventually pose a significant problem. The 
worldwide demand for agricultural products would likely 
decline, and we know, of course, already, rural areas have 
suffered layoffs, with rising unemployment, stock market 
losses, they have lost their 401(k)s as well as other areas. 
So, we need to separate rural areas, to a degree, from farming, 
because farming has done relatively better, because primarily 
of better commodity prices, and also, reduced discretionary 
spending in rural areas.
    Budgetary problems at the state level and at the county 
level are serious in much of rural America in the current year. 
These effects seem likely to continue for the next several 
quarters, and in some instances, beyond. Crop farming has fared 
better than livestock farming in recent months, but there are 
storm signals that are flying.
    Now, in my view, the major unknown is how long this 
downturn is likely to continue. And let me offer just a couple 
of thoughts on that point, because I have been working on this 
off and on for a little over a year. My biggest concern since 
last summer has been that the global meltdown that we are 
experiencing has not displayed the features of a normal 
economic decline. Usually, when we have had a decline over the 
last 80 years, since the Great Depression, or 70 years, we 
would see a sharp drop, usually a fairly prompt recovery, and 
in somewhere between 18 months and 2 or 3 years, we had pretty 
well forgotten about it, except maybe the one in the mid-1970s 
and the one in the early 1980s. But generally that was the 
case.
    But the drop in economic activity that began in late 2007 
appears to be more of a downshifting of the economy. Now, with 
due regard to TIME magazine, the current issue cover story is 
about pressing the restart button. I don't really view it as a 
restart situation, because that connotes that all at once, we 
manage to restore operations, restore the economy at about the 
level it was. I don't believe that is the case here, because I 
think what we are dealing with is a revolutionary shift in 
thinking about debt, the likely result of companies curtailing 
the high use, the high levels of debt, the corralling of 
patently unwise strategies employed on a widespread basis to 
deal with debt. A revolutionary shift by consumers about debt.
    So, what we are doing is trying to eat, if you will, to 
consume debt, and either we can do it as consumers and 
companies, or we can offload it onto government, and so far, we 
seem to be doing more of the latter. But however it is done, it 
is going to cause a longer term problem for us, for the 
economy. Consumers, companies, governments have all been living 
beyond their means, and we have been doing it heavily with debt 
capital. That bubble has now burst, and adjustments are going 
to take quite a while.
    And so, that is why I started off my testimony by saying 
the longer this continues, the more serious it is for the 
agricultural sector. And my concern is that it may last longer 
than we anticipate. Although I have been watching carefully, 
the stimulus effects, the stimulus programs, and I hope that we 
can accomplish a great deal with those. But, I warn that we 
have incurred, and are going through a massive shift in 
thinking, about debt, and that is going to take a while to work 
through. Now, I said that the agriculture sector is not an 
economic island, but let me mention that we seem today to have 
missed the worst of it. I just don't think it is going to 
continue to miss it, if we don't get an upturn soon.
    A word or two about ethanol production. That was discussed 
by the prior panel, and in a number of the questions. The boost 
in commodity prices is heavily related to the growth of the 
ethanol industry. The demand of ethanol plants for corn caused 
a drop in prices for other commodities, soybeans, and to a 
degree, wheat as well. As early as 2009, we had about 170 
plants in production, representing roughly 4 billion bushels of 
demand for corn. More than 20 have filed for bankruptcy. We 
have somewhere around 12 percent of the capacity that is idled, 
and some estimates run as high as 30 percent, if you factor in 
also the amount of production that is on slowdown.
    So, there are two brakes dealing with ethanol. One is the 
brake that comes from prosperity in the ethanol, raising the 
price of corn because demand goes up, and that, of course, 
reduces profitability for the ethanol plant, because they have 
to pay more for their raw material that makes somewhere, 60, 
70, 80 percent of their input cost. Also, the second brake is 
the relationship to the price of crude, and as we have seen 
this so very clearly in the last year, the ride up was a lot of 
fun. The ride back down again wasn't so much fun.
    So, we have two brakes here that are of concern. What about 
ethanol plants that are now shuttered, or cannot cover their 
variable costs? Some are likely to be sold at a discount. In 
fact, that is going on almost as we speak. A government credit 
line would help to buy time, but it is not a viable long term 
solution. In the long term, ethanol must be a competitive 
source of energy to survive, unless subsidies continue, 
mandates increase, and tariffs are maintained.
    I think we are going to see, going forward, with a huge 
amount of economic incentive for alternative energies, we are 
going to see a lot of emphasis on new possibilities, and there 
is a lengthy list of them. I think that what we need to realize 
is that the economics of it are eventually going to have a lot 
to say about the role of ethanol. I think it will be with us 
for a while, but I don't think it is going to be the dominant 
source of energy.
    I would like to say a word or two about the impact 
worldwide on the demand for food and fiber. The World Trade 
Organization, about a week ago, indicated about a nine percent 
decline in world trade expected in 2009. That is an awesome 
decline in economic activity, and of course, the reverse of 
that has been that we saw the buildup of per capita incomes in 
a lot of third world countries, as jobs moved overseas, as 
outsourcing occurred, globalization took place. And it was a 
success story, helping to solve world hunger problems in places 
like Bangladesh and India, China, and elsewhere. Now, we are 
seeing the beginning, maybe, of the reverse of that, where our 
lessened demand for labor intensive products is causing 
problems of unemployment in those very areas, and that can 
lead, because of the very high income elasticity of demand in 
those countries, can lead to a decline in the demand for 
agricultural products. So, one of the more important and 
enduring components of our increase in demand in recent years 
has been the growth of third world incomes, and that could be 
at risk if, again, the downturn and the global meltdown 
continues.
    A word about signs of tightening credit. I have been 
looking at the FDIC data from the end of 2008 compared to 2007, 
2006, an increase to about seven percent in Iowa banks that 
were unprofitable, compared to 4.3 percent a year earlier, and 
2.87 percent a year before that. I just picked up a copy of the 
annual report of one of our banks in Ames, and their income 
dropped by half last year, and a lot of it was because of their 
investments in Fannie Mae and Freddie Mac, which was a very 
common and believed to be very secure investment. That is 
biting a lot of banks that are in the coastal group of banks 
that are getting assistance, but it is part of the problem that 
they face.
    So, to close my comments, the economic state of the sector 
depends heavily on whether the world economy continues to 
decline. If confidence is not restored, and the financial 
systems continue to deteriorate, the agricultural sector will 
likely suffer the effects on a widespread basis. I think the 
non-farming part of the agricultural sector, of the rural 
sector, is already feeling many of those effects. I think it 
will eventually embrace even the farming side. We have seen a 
sharp drop in commodity prices, notwithstanding yesterday's 
increase, spike up, because of the reports from the USDA.
    So, the success of the stimulus packages, the efforts to 
stabilize the finance institutions, are vitally important to 
the agricultural sector. It is just that I have also concerns 
about how we really ought to be addressing this very unusual 
downturn period in our economy, when it doesn't seem to be the 
normal type. It seems to be based on the fact that we have to 
deal with a huge amount of debt, either as individuals, 
companies, or as governments, and that is a decision for a 
higher pay grade than I have, and some question for down the 
street as well.
    So, thank you so very much for the opportunity to be here.
    [The prepared statement of Dr. Harl follows:]

     Prepared Statement of Neil E. Harl, Ph.D., Charles F. Curtiss 
   Distinguished Professor in Agriculture and Emeritus Professor of 
               Economics, Iowa State University, Ames, IA
    Although I endeavor to be objective in my testimony, in the 
interests of full disclosure, I should note for the Subcommittee that 
my wife and I through an entity, Harl Farms, LLC, own farmland in Iowa 
which is operated under livestock-share and crop-share leases. I am in 
emeritus status from Iowa State University and continue to be engaged 
in writing, publishing and consulting. I do not believe that my 
testimony is affected in the slightest by any of those activities, 
however.
I. Introduction
    The agricultural sector is not an economic island. However, the 
global financial difficulties that have caused severe heartburn for 
financial firms and most of the global economy have largely bypassed 
the agricultural sector. It is clear that the longer the meltdown 
persists the more serious and far-reaching the effects are likely to be 
on farming and ranching and on rural areas. If investor confidence is 
not soon restored, credit availability could pose a significant problem 
for production credit, land purchases and trade in agricultural 
products and the worldwide demand for agricultural products would 
likely decline further. Moreover, rural areas have suffered lay-offs 
with rising unemployment, stock market losses and reduced discretionary 
spending in addition to the long-term adjustments that have been on-
going for decades. These effects seem likely to continue for the next 
several quarters and, in some instances, beyond. Farming, particularly 
crop farming, has fared relatively better than livestock farming in 
recent months but storm signals are flying for crop production.
II. The Danger Signals
    Higher commodity prices in 2007 and 2008 and modest debt levels 
(compared to the 1980s era) have helped the farming sector in many 
areas of the country avoid the worst effects of the global meltdown and 
have enabled agricultural lenders, in general, to maintain healthy 
balance sheets. But the sharp declines in commodity prices in late 
2008, the economic and financial woes of the ethanol industry and the 
falling demand for agricultural products, especially in developing 
countries, are impacting the sector to a much greater extent in 2009.
Commodity demand and supply
    When corn prices were hovering near $8 per bushel, soybeans were 
selling at more than $15 per bushel and wheat had skyrocketed to near 
$25 per bushel in some specialty wheat markets, optimism was justified 
for those who believed that such price levels would continue. An 
unprecedented amount of net income was bid into cash rents and 
capitalized into land values. But with corn dropping to the vicinity of 
$4 per bushel, soybeans in the $9 to $10 per bushel range and wheat 
declining to $5 to $6 per bushel, there is less income to capitalize 
into land values. Moreover, production costs have risen, almost across 
the board, cutting into the net income per acre. Granted, the sharp 
drop in crude oil price in recent months has provided some relief on 
the cost front with the impact going well beyond the costs for gasoline 
and diesel fuel. One sobering factor on the demand side (particularly 
on the commodity futures markets) has been the role played in futures 
prices by the commodity funds. While the role of the funds in the steep 
run-up in crude oil prices is now fairly well established, the role of 
the investment funds in the dramatic climb of agricultural commodity 
prices (and subsequent declines) is less well accepted. Suffice it to 
say, it may not have been all demand and supply in the traditional 
sense.
    As a consequence of several factors, mostly related to demand, 
farmland values declined in late 2008 and are expected to decline 
further in 2009 and, possibly, in 2010. Long-term, land prices are 
influenced by the net income from the farm commodities produced on the 
land in question. While a replay of land value declines in the 1980s is 
not anticipated, any decline affects credit availability, especially 
for the more heavily leveraged prospective purchasers.
Ethanol production
    The boost in commodity prices was heavily related to the growth of 
the ethanol industry. The demand of ethanol plants for corn caused a 
run-up in the prices for other commodities competing for farmland, 
notably soybeans and, to a lesser degree, wheat. As of early 2009, 
approximately 170 ethanol plants were in production, representing 
roughly 4 billion bushels of demand for corn.
    That demand appears less secure in light of the economic problems 
faced by the ethanol industry. More than 20 ethanol plants have filed 
for bankruptcy in recent months and several more have ceased operations 
for various financial and economic reasons. By some estimates, as much 
as 30 percent of ethanol capacity is idled or on slowdown.
    The economic trauma in some instances has been partly the result of 
factors affecting all ethanol plants; in other situations, the economic 
hurdles have been more severe for recently-constructed plants. Dramatic 
fluctuations in the price of corn (the major input) and in the price of 
crude oil (which has a considerable influence on the price for ethanol) 
have wrenched the industry well beyond anything that could possibly 
have been anticipated by investors in ethanol plants. These are the two 
``brakes'' that are faced by the ethanol industry. The steep rise in 
construction costs has contributed to the economic problems, also.
    Several plants have been shuttered or are in bankruptcy because of 
ill-fated steps taken to manage risk with the hedges resulting in huge 
losses as the price of corn rose to record levels and then declined 
sharply to more normal levels.
    The future of the ethanol industry depends heavily upon three 
factors--(1) the energy policy of the United States (which has been 
friendly to ethanol for several years); (2) the economics of conversion 
of feedstock (principally corn) into ethanol fuel; and (3) the emerging 
technologies and their competitive positions. Ethanol is likely to 
merit a ``place in the sun'' for 3 to 5 more years. Beyond that, 
ethanol may well rank as a component of the package of alternative 
energy sources for some time in the future. Economic considerations 
will almost certainly be the major determinants as to which energy 
alternatives survive as energy sources. The energy source that can 
produce the units of energy needed at the lowest price and with the 
safety factors and reliability factors demanded by consumers will be in 
the driver's seat.
    As for ethanol plants that are now shuttered or cannot cover their 
variable costs, some are likely to be sold at a discount (currently, 
variable costs are roughly 90 percent of the cost of producing ethanol, 
leaving little for fixed costs and profit for investors). A government 
credit line would help to buy time but is not a viable long-term 
solution. In the long-term, ethanol must be a competitive source of 
energy to survive unless subsidies continue, mandates increase and 
tariffs are maintained.
Impact of the meltdown on the demand for food and fiber
    In recent years, the gradual increase in per capital incomes around 
the world, but particularly in the low-income countries, caused a 
steady increase in the demand for food. The income elasticity of demand 
for food is high in those countries (as high as 0.7 which means that 70 
percent of additional income goes for food). The increase in per 
capital incomes was heavily related to trade, outsourcing and 
globalization, with production gradually moving to areas of lowest cost 
production and with all manner of economic activities shifting to low 
wage countries, raising per capita incomes.
    All of that has been affected by the global meltdown in recent 
months with the demand for the goods and service produced in those 
countries declining, in some instances dramatically. This is leading to 
reduced demand for food, worldwide. Most of the leading importers of 
farm commodities from the United States have reduced imports except for 
China. The rising unemployment in China will likely lead to reduced 
demands for food in that country as the world-wide demand for the labor 
intensive products produced in that country slips. The World Trade 
Organization is predicting a nine percent decline in world trade this 
year.
Signs of tightening credit
    Depending upon how long the economic crisis persists and how deep 
the trauma becomes, it will clearly affect credit availability at all 
levels. Denial of credit in the short-run results in economic pain and 
the disposal of assets serving as collateral which affects asset values 
in the markets. Those with weak balance sheets (high debt-to-asset 
ratios) generally suffer the greatest. The relatively thin band of 
equity capital on the part of lenders makes the lenders particularly 
vulnerable.
    As an example, as of December 31, 2008, the Federal Deposit 
Insurance Corporation (FDIC) reported that as of the end of the fourth 
quarter of 2008, 6.93 percent of Iowa banks were unprofitable compared 
to 4.3 percent in the fourth quarter of 2007 and 2.87 percent in 2006. 
About half of the banks reported non-performing loans above one percent 
at the end of 2008. Although agriculture is a major part of the Iowa 
economy, these data do not appear to reflect weakness of the 
agricultural economy so much as weakness in the general economy. 
Agricultural banks in recent months have had a much stronger 
performance than similarly-sized commercial banks. However, with lower 
commodity prices and higher costs of production in prospect, the 
agricultural economy may be a greater contributor to lender problems 
going forward.
III. Conclusion
    The economic state of the agricultural sector (both farms and 
ranches and rural areas generally) depends heavily on whether the world 
economy continues to decline. If confidence is not restored, and the 
financial systems continue to deteriorate, the agricultural sector will 
likely suffer the effects on a widespread basis. The success of the 
stimulus packages and the efforts to stabilize the world's financial 
institutions are vitally important to the agricultural sector.
    My biggest concern is that the global meltdown that is being 
experienced has not displayed the features of a normal economic 
decline. The drop in economic activity that began in late 2007 appears 
to be more of a ``downshifting'' of the economy, due principally to a 
revolutionary shift in thinking by consumers about debt, the likely 
result of companies curtailing the use of high levels of debt and the 
corralling of patently unwise strategies employed on a widespread basis 
to deal with risk. Consumers, companies and governments have all been 
living beyond their means. That bubble has now burst. Adjustments in 
economic activity promise to be profound and far-reaching as the 
world's economy comes to reflect a more cautious use of debt at all 
levels, at least for the foreseeable future. That is likely to affect 
the buoyancy of the general economy for several years.

    The Chairman. Well, we appreciate your comments, and we 
will have some questions, but we recognize Mr. Dumler.

STATEMENT OF TROY J. DUMLER, EXTENSION AGRICULTURAL ECONOMIST, 
 SOUTHWEST KANSAS STATE RESEARCH AND EXTENSION, GARDEN CITY, KS

    Mr. Dumler. Mr. Chairman, Members of the Subcommittee, 
thank you for inviting me to testify. As Dr. Harl noted, I will 
try to reduce some duplication of comments that have already 
been made here as well.
    I appear before the Subcommittee to discuss the 
agricultural economy. While many aspects of this discussion are 
relevant to producers across the country, my focus will be on 
Kansas, and my goal is to provide a snapshot of economic 
conditions in the Great Plains.
    As an agriculture economist at Kansas State, I have access 
to farm level data from farms in the Kansas Farm Management 
Association, one of the largest farm management programs in the 
country. This information will serve as the foundation of my 
comments today, basically providing a farm level view of the ag 
economy.
    The last several years have been interesting ones for 
Kansas producers. Following trends nationwide, average net farm 
income for farms in the Kansas Farm Management Association 
topped $115,000 in 2007, nearly double the previous record set 
in 2004. Final data is not yet available for Association farms 
in 2008, but preliminary estimates suggest that net farm income 
will again be high for Kansas farms, although likely not as 
high as it was in 2007. The record incomes in recent years can 
largely be explained by historically high grain prices and 
oilseed prices, as noted earlier. But as agriculture commodity 
prices increased, so did the production cost. As an example, 
total expense for fuel, fertilizer, crop chemicals, and seed 
increased 75 percent from 2003 to 2007 for Association farms. 
These expenses rose even more dramatically in 2008. 
Fortunately, fuel and fertilizer prices have dropped back from 
the 2008 peaks, providing the opportunity for Kansas crop 
producers to potentially earn a profit in 2009.
    The recent record farm income masked the variability 
experienced by different types of farms. While farm income for 
crop producers has been buoyed by the rise in demand for 
ethanol, the higher crop prices have put pressure on livestock 
producers. While income on crop farms in 2007 was more than 
double that of 2006, it was a different story for livestock 
producers. In 2007, beef cattle backgrounding operations 
experienced a second year of negative net farm income, and 
losses have been historically large for cattle feeders as well. 
A colleague of mine is estimating that cow/calf producers in 
the state will not be able to cover variable costs in either 
2008 or 2009.
    Financial data from farms in Kansas show a sector that is 
in good financial condition on average. Debt-to-asset ratios 
and the percentage of farms that are financially stressed are 
substantially lower than they were during the mid-1980s, and 
interest rates remain low by historical standards.
    Anecdotal evidence says that in spite of tightened credit 
market, credit is still available for good credit risks in the 
state. Because of the good overall financial conditions of 
farms and the continued availability of credit, another farm 
financial crisis does not appear imminent.
    However, there are currently a small percentage of farms in 
Kansas that are financially vulnerable. Consequently, should 
farm income or land values decline, or if interest rates would 
rise significantly, farm financial conditions could quickly 
deteriorate.
    Finally, there is little question that commodity subsidies 
have reduced the income variability of Kansas farms. Even in 
2007, government payments still contributed 20 percent of net 
farm income for Association farms. While grain and oilseeds are 
well above levels that would generate either countercyclical 
payments or loan deficiency payments, the new ACRE and SURE 
Programs, passed as part of the 2008 Farm Bill, offer the 
opportunity to support crop income in either the event of a 
drop in price or a drop in production.
    Current discussions with farmers in Kansas, however, 
suggests that enthusiasm for these programs, especially the 
ACRE Program, may not be as high as originally anticipated.
    Mr. Chairman, thanks, again, for inviting me to testify, 
and I look forward to an opportunity to answer any questions.
    [The prepared statement of Mr. Dumler follows:]

Prepared Statement of Troy J. Dumler, Extension Agricultural Economist, 
     Southwest Kansas State Research and Extension, Garden City, KS
Prepared by Troy Dumler, Michael Langemeier, Allen Featherstone, and 
James Mintert \1\
---------------------------------------------------------------------------
    \1\ Respectively, Extension Agricultural Economist, Professor, 
Professor, and Professor in the Department of Agricultural Economics, 
Kansas State University.
---------------------------------------------------------------------------
Introduction
    Recent years have brought challenges and opportunities to producers 
across the United States. Historically high grain and oilseed prices, 
spurred by demand for biofuels, have pushed farm income to record 
levels. While this scenario has presented tremendous opportunities for 
crop producers, it has been burdensome for livestock producers, who 
have seen production costs increase dramatically. The increased 
production costs have not been exclusive to livestock producers, 
however. Fuel, fertilizer, seeds, and chemicals have all increased over 
historical levels. While some of these production costs have fallen 
over recent months, the downturn in the global economy has presented 
some additional challenges for agricultural producers. The global 
recession has put downward pressure on agricultural commodity prices 
and tightened credit markets. Coupling these events with a new farm 
bill that offers two new, complex programs designed to help farmers 
manage risk, makes for an interesting time in agriculture. Following is 
a discussion of the challenges facing Kansas producers.
Farm Income
    Data from the Kansas Farm Management Association (KFMA) indicates 
that net farm income in Kansas has mirrored U.S. net farm income (Table 
1). After experiencing a drop in income in 2006, net farm income, both 
nationwide and in Kansas, recovered to record levels in 2007. But there 
were some differences between Kansas and the rest of the U.S. Though 
U.S. net farm income was barely a record in 2007, net farm income in 
Kansas was actually 84 percent higher than the previous record set in 
2004. Supported by historically high grain and oilseed prices, U.S. 
farm income is forecast to set another new record in 2008. Final KFMA 
data is not yet available for 2008, but preliminary data suggests that 
net farm income will again be high for Kansas farms--although perhaps 
not as high as it was in 2007.
    The variability in income in recent years can largely be explained 
by widely fluctuating commodity prices and production costs. Following 
the energy markets, agricultural commodity prices increased rapidly 
from 2006 to 2008. Figure 1 shows prices for diesel fuel and natural 
gas, two of the primary energy sources used in agriculture, from 2000-
2009. The increasing energy costs and rising demand for crop inputs 
resulted in increased crop production costs. Table 2 shows the selected 
crop input expenses for KFMA farms from 2003-2007. In fact, there were 
significant increases in crop input expenses each year from 2003 to 
2007. This was especially the case for fertilizer and diesel fuel, 
which increased 105 percent and 110 percent, respectively, over the 5 
year period. Total expenses for the four crop inputs listed in Table 2 
increased 75 percent from 2003 to 2007.

      Table 1. Net Farm Income in the U.S. and Kansas (2003-2008).
------------------------------------------------------------------------
          Year            U.S. (Total, $Billion)      Kansas ($/Farm)
------------------------------------------------------------------------
             2003                      60.5                  51,051
             2004                      85.8                  62,604
             2005                      79.3                  56,982
             2006                      58.5                  46,593
             2007                      86.8                 115,035
             2008                      89.3                     N/A
------------------------------------------------------------------------
Source: USDA-ERS and the Kansas Farm Management Association.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Although crop input expenses increased dramatically from 2003 to 
2007, the largest increase occurred in 2008. According to the prices 
paid indexes published by USDA-NASS, fertilizer costs increased 80 
percent from 2007 to 2008 (Table 3). That increase was coupled with a 
56 percent increase in fuel costs, a 27 percent increase in seed costs, 
and a nine percent increase in chemical costs. However, as energy and 
agricultural commodity prices declined with the global economy in late 
2008, fuel and fertilizer prices also declined. Using the price indexes 
in Table 3, it is estimated that KFMA farms would have spent $23.77 per 
acre and $65.71 per acre on fuel and fertilizer, respectively, in 2008. 
Based on current prices, KFMA farms are estimated to spend $12.42 per 
acre and $48.90 per acre on fuel and fertilizer, respectively, in 2009. 
While the estimated fertilizer costs still remain above previous 
levels, fuel costs are estimated to fall to levels not experienced 
since 2005. So, even though commodity prices have dropped significantly 
from the historically high levels experienced in 2008, the drop in fuel 
and fertilizer input costs provides the opportunity for crop farmers in 
Kansas to earn a profit in 2009.

  Table 2. Energy Intensive Expenses for Non-Irrigated KFMA Crop Farms
                              (2003-2007).
------------------------------------------------------------------------
 Expense Category     2003       2004       2005       2006       2007
------------------------------------------------------------------------
Fertilizer and
 Lime:
  Crop Expense       $22,649    $25,556    $32,231    $33,847    $46,348
  Expense/Crop        $18.50     $21.19     $25.91     $26.67     $35.54
   Acre
  Annual Change                   10.2%      26.3%       1.6%      33.3%
   (%)
Gas, Fuel, and
 Oil:
  Crop Expense       $10,545    $13,102    $17,730    $20,493    $22,179
  Expense/Crop         $8.62     $10.86     $14.25     $16.15     $17.01
   Acre
  Annual Change                   16.6%      26.5%      13.8%       5.3%
   (%)
Herbicides/
 Insecticides:
  Crop Expense       $14,438    $15,030    $16,519    $18,017    $21,513
  Expense/Crop        $11.80     $12.46     $13.28     $14.20     $16.50
   Acre
  Annual Change                    5.6%       6.6%       6.9%      16.2%
   (%)
Seed:
  Crop Expense       $15,455    $18,348    $20,498    $21,877    $27,484
  Expense/Crop        $12.63     $15.21     $16.48     $17.24     $21.08
   Acre
  Annual Change                   20.4%       8.4%       4.6%      22.3%
   (%)
Total Expense:
  Crop Expense       $63,087    $72,036    $86,978    $94,234   $117,524
  Expense/Crop        $51.55     $59.72     $69.92     $74.26     $90.13
   Acre
  Annual Change                   15.9%      17.1%       6.2%      21.4%
   (%)
------------------------------------------------------------------------
Source: Kansas Farm Management Association.


       Table 3. Annual Prices Paid Indexes (1990-1992), USDA-NASS.
------------------------------------------------------------------------
                                                              Feed Hay/
     Year         Fertilizer      Chemicals    Seed Index      Forages
                     Index          Index                       Index
------------------------------------------------------------------------
       2003              124            121           154           115
       2004              140            121           158           116
       2005              164            123           168           124
       2006              176            128           182           139
       2007              216            129           204           164
       2008              388            140           259           195
     2009 *              294            143           275           172
------------------------------------------------------------------------
* Monthly Prices Paid Indexes, February 2009.

    As higher commodity prices resulted in increased profitability over 
the last 2 years, demand for crop land increased as well. This increase 
in demand resulted in higher cash rents and land values. Table 4 shows 
the average land value and cash rent for irrigated and non-irrigated 
crop land in Kansas from 2003 to 2008. Although land values increased 
each year, the largest increases in both irrigated and non-irrigated 
land values occurred in 2008. Given that crop production is expected to 
remain profitable in 2009, albeit at a much lower level than 2008, land 
values are expected to hold relatively steady.

 Table 4. Crop Land Values and Cash Rental Rates in Kansas (2003-2008).
------------------------------------------------------------------------
                                Value                     Rent
                     ---------------------------------------------------
        Year                           Non-                      Non-
                       Irrigated    irrigated    Irrigated    irrigated
------------------------------------------------------------------------
              2003        $1,080         $645       $68.00       $36.00
              2004        $1,110         $665       $72.00       $37.50
              2005        $1,240         $810       $73.00       $38.50
              2006        $1,300         $890       $74.00       $39.00
              2007        $1,410         $980       $82.00       $41.00
              2008        $1,660       $1,130       $88.00       $45.00
Annual Avg. % Change       10.7%        15.1%         5.9%         5.0%
------------------------------------------------------------------------
Source: Kansas Agricultural Statistics Service, Agricultural Land Values
  and Rents.

Livestock Operations
    The recent record farm income in production agriculture masks the 
variability experienced by different types of farms. While farm income 
for crop producers has been buoyed by the rising demand for ethanol, 
the higher crop prices have put pressure on livestock producers. 
Evidence of this occurring may already be evident in the KFMA data. 
While income on crop farms in 2007 was more than double that of 2006, 
it was a different story for livestock producers (Table 5). In 
particular, losses have been historically large for cattle feeders and 
for cattle backgrounding operations, which experienced another year of 
negative income. The extended period of large losses for commercial 
cattle feeders is without precedent over the last 3 decades, resulting 
in a huge equity drain for the industry.

                         Table 5. KFMA Net Income per Operator by Farm Type (2003-2007).
----------------------------------------------------------------------------------------------------------------
                              No. of Farms                       Net Income per Operator
        Type of Farm         -----------------------------------------------------------------------------------
                                 (2007)         2003          2004          2005          2006          2007
----------------------------------------------------------------------------------------------------------------
                All Farms           1,453       $52,410       $63,491       $57,584       $46,804      $116,130
        Cash Crop Dryland           1,010        51,424        57,087        49,422        49,366       120,594
      Cash Crop Irrigated              62        57,580        62,729        64,955        92,335       280,585
      Stock-Ranch Cowherd              21        34,148        51,366        45,396        35,986        23,633
                  Cowherd              15        22,458        32,088        24,914        13,344        34,948
                    Dairy              35        24,484        71,192        52,658        25,663        82,088
            Backgrounding              11        63,035        82,252        63,279        ^5,823          ^941
        Cash Crop-Cowherd             137        33,879        49,613        50,149        31,132        61,588
          Cash Crop-Dairy              11        49,643        81,068        72,799        55,538       161,507
  Cash Crop-Backgrounding              29        87,728        79,308        83,820         1,203        74,803
----------------------------------------------------------------------------------------------------------------
Source: Kansas Farm Management Association.

Financial Condition of Kansas Farms
    The economic downturn in 2008 was remarkable in both depth and 
breadth. Widely regarded as one of the most severe financial crises in 
recent times, there are few industries unaffected by its impact. 
Agriculture in the U.S. is no exception. The decline in demand for 
energy has resulted in a similar decline in demand for feed grains and 
oilseeds. While the primary consequence of the drop in demand for 
agricultural commodities has been a drop in price, a major consequence 
of the economic downturn has been a lack of available credit to 
businesses and consumers. In regard to the overall credit freeze, 
however, agriculture may be the exception. The Survey of Tenth District 
Agricultural Credit Conditions conducted by the Federal Reserve Bank of 
Kansas City indicates that although demand for agricultural credit has 
fallen somewhat during the fourth quarter of 2008, there are still 
funds available to lend to credit worthy agricultural producers.\2\ In 
addition, from a historical perspective, interest rates remain low. 
Figure 2 shows the annual average interest rates for operating and real 
estate loans in Kansas from 1988-2008.\3\ The average operating loan 
interest rate was the third lowest over the 21 year period, while the 
real estate interest rate was the second lowest during the same period.
---------------------------------------------------------------------------
    \2\ The information on credit conditions are from the Kansas City 
Federal Reserve Bank, 
http://www.kc.frb.org/Agcrsurv/CreditConditions_KC.xls.
    \3\ Agricultural interest rates are from the Kansas City Federal 
Reserve Bank, http://www.kc.frb.org/Agcrsurv/InterestRates_KC.xls.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The Kansas City Federal Reserve Bank also surveys for information 
on loan repayments and loan collateral requirements. The survey 
indicates that the average repayment rate was lower in the fourth 
quarter 2008 than it was early in 2008, but was still much higher than 
it was from 1998 through 2003, when farm income was lower. In addition, 
the survey indicated that collateral required for agricultural loans 
increased from the fourth quarter of 2007 to the fourth quarter of 
2008.
    The survey from the Kansas City Federal Reserve Bank gives some 
indication of the financial condition of farms in Kansas, but does not 
tell the entire story. Given the current macroeconomic environment, it 
is important to examine long-term trends in financial measures. In 
1985, the debt to asset ratio for U.S. farm businesses was 0.222 (USDA-
ERS). In contrast, in 2007, the debt to asset ratio for U.S. farm 
businesses was only 0.096 (USDA-ERS). The average current ratio for 
U.S. farms was 3.40 in 2007. The USDA-ERS noted that the average 
current ratio in 2007 was considerably higher than the average current 
ratio of 2.90 exhibited a decade earlier. In Kansas, the change in the 
current ratio and the debt to asset ratio is not as dramatic for KFMA 
farms. Table 6 illustrates trends in the 5 year average of the current 
ratio, debt to asset ratio, and financial stress from 1973 to 2007. 
Given variability in weather and prices, it is often useful to examine 
5 year average financial measures rather than examining the averages 
for a single year. The 5 year average current ratio for KFMA farms for 
the 2003-2007 period was 2.47, which was the highest average since the 
1996-2000 period. Using Table 6, the debt to asset ratio peaked during 
the 1985-1989 period at 0.330. The average debt to asset ratio for the 
2003-2007 period, 0.279, was the lowest 5 year average since the 1979-
1983.
    Averages often hide the variability in financial measures among 
farms. Consequently, it is useful to examine the number of farms with 
low net farm income, high debt, or both. The USDA-ERS defines 
vulnerable farms as those with a negative net farm income and a debt to 
asset ratio above 0.40. Approximately 3.5 percent of U.S. farms were 
classified as vulnerable in 2007 (USDA-ERS). Using these criteria to 
define vulnerability, approximately 6.8 percent of KFMA farms were 
vulnerable in 2007.
    Negative earnings and a debt to asset ratio above 0.70 are used in 
Table 6 to define financial stress for KFMA farms. Earnings are 
computed by subtracting unpaid operator and family labor from net farm 
income. Approximately 45 percent and 11 percent of the farms had 
negative earnings and a debt to asset ratio above 0.70, respectively, 
for the 2003-2007 period. Combining these two items, approximately 6.4 
percent of the KFMA farms were financially stressed. The level of 
financial stress is substantially lower than that experienced in the 
mid-1980s, but is still higher than the averages experienced in the 
1970s. The percentage of farms with negative earnings and a debt to 
asset ratio of 0.70 was 45 percent and 15 percent during the 1985-1989 
period, the most recent peak financial stress years in the U.S.
    Farms with negative earnings and/or high debt to asset ratios are 
more vulnerable to the current credit crisis than farms that have lower 
debt levels and that have experienced relatively high net incomes in 
recent years. These farms may find it increasingly difficult to 
generate a positive cash flow and repay debt.
    To summarize, credit is available for the 2009 planting season for 
good credit risks. Certainly, the underwriting standards have increased 
in order to obtain that credit, but farmers with good repayment 
histories and fairly strong balance sheets are able to obtain the 
credit they need. Borrowers should expect to be required to put up more 
collateral going forward than in the past. Borrowers of marginal credit 
quality in the past may see more difficulty in obtaining credit in 2009 
than in the past. In addition, there likely will be larger differences 
in interest rates among borrowers than in the past. Because of the 
overall good financial condition of farms in Kansas and the U.S., and 
the continued availability of credit, another farm financial crisis 
does not appear imminent. However, should farm income and/or land 
values decline, or interest rates rise rapidly, farm financial 
conditions could deteriorate quickly.

  Table 6. Trends in Liquidity, Solvency, and Financial Stress for KFMA
                                 Farms.
------------------------------------------------------------------------
                                        Debt to Asset
       Years          Current Ratio         Ratio       Financial Stress
------------------------------------------------------------------------
        73-77                2.23             0.217             0.69%
        74-78                2.06             0.225             0.01%
        75-79                1.97             0.236             1.38%
        76-80                2.03             0.237             1.45%
        77-81                2.08             0.245             1.83%
        78-82                2.08             0.256             2.31%
        79-83                2.16             0.265             3.14%
        80-84                2.12             0.281             6.73%
        81-85                2.06             0.294             7.61%
        82-86                2.11             0.304             8.77%
        83-87                2.13             0.313             9.49%
        84-88                2.17             0.320            10.10%
        85-89                2.24             0.330            10.84%
        86-90                2.36             0.320             8.51%
        87-91                2.51             0.310             8.34%
        88-92                2.50             0.306             7.29%
        89-93                2.56             0.302             7.21%
        90-94                2.56             0.301             8.10%
        91-95                2.52             0.304             9.20%
        92-96                2.55             0.299             6.87%
        93-97                2.58             0.295             6.79%
        94-98                2.61             0.291             8.15%
        95-99                2.54             0.290             6.98%
        96-00                2.51             0.296             7.03%
        97-01                2.43             0.301             8.20%
        98-02                2.35             0.301             9.67%
        99-03                2.31             0.301             9.47%
        00-04                2.32             0.302             9.11%
        01-05                2.34             0.299             9.89%
        02-06                2.36             0.293             8.92%
        03-07                2.47             0.279             6.39%
------------------------------------------------------------------------
Source: Kansas Farm Management Association Newsletter, Volume 2, Issue
  12. December 2008.

Government Payments
    Government payments have contributed significantly to farm income 
in Kansas over the past 10 years. As shown in Figure 3, from 1998-2001, 
government payments (including all commodity, conservation, and 
disaster assistance payments) averaged over 100 percent of net farm 
income for KFMA farms. From 2002-2007 government payments averaged 54 
percent of net farm income. As market prices have increased in recent 
years, the relative importance of government payments as a contributor 
to net farm income has decreased, as government payments were only 20 
percent of net farm income in 2007. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Three factors could have a negative impact on crop income in 2009: 
a decline in commodity prices, an increase in production costs, and a 
drop in production. While grain and oilseed prices are well above 
levels that would generate countercyclical payments or loan deficiency 
payments, two new government programs could potentially provide 
significant payments to producers in the event of a decline in crop 
revenue. The Average Crop Revenue Election (ACRE) and Supplemental 
Revenue Assistance (SURE) programs each offer the opportunity to 
support crop income in the event of drop in price and/or production. 
Because the final details of these programs have not been published, it 
remains to be determined how large payments from these programs may be. 
However, preliminary analysis suggests they could offer significant 
support in scenarios in which prices or production falls significantly. 
With the ACRE program specifically, the question remains whether 
producers will participate in large numbers. The Food and Agricultural 
Research Policy Institute (FAPRI) estimates that the majority of corn, 
soybean, and wheat producers will choose to participate in ACRE while 
the majority of cotton, rice, and peanut producers will not 
participate.\4\ Anecdotal evidence suggests producers in Kansas may not 
sign up for ACRE in large numbers. The reasons for the lack of interest 
in ACRE likely include understanding the complexities of a new program, 
the unwillingness to give up guaranteed money (a 20 percent reduction 
in direct payments) for potential payments, and concerns that farms 
will incur revenue losses but the state will not--resulting in no 
payments to the producer. Although ACRE may offer some risk management 
protection not available in previous commodity programs, the overall 
level of support it offers could be mitigated by the level of 
participation.
---------------------------------------------------------------------------
    \4\ FAPRI U.S. Baseline Briefing Book #01-09, available at: http://
fapri.missouri.edu/outreach/publications/2009/
FAPRI_MU_Report_01_09.pdf.

    The Chairman. Thank you. Dr. Angle.

STATEMENT OF J. SCOTT ANGLE, Ph.D., DEAN AND DIRECTOR, COLLEGE 
   OF AGRICULTURAL AND ENVIRONMENTAL SCIENCES, UNIVERSITY OF 
                      GEORGIA, ATHENS, GA

    Dr. Angle. Thank you and good morning. Again, I am Scott 
Angle, the Dean and Director of the College of Agricultural and 
Environmental Sciences at the University of Georgia. I am also 
a farmer.
    I am here to give you my assessment of agriculture, in 
light of the current economy, and to discuss what I see as the 
primary issues facing us both in the long and the short term. 
Most of what I will discuss today will relate to the 
southeastern region part of this great nation. Much of my 
testimony will focus on issues that seem like problems, and 
indeed, many are.
    However, please know that for the long run, I remain quite 
positive. I say this for several reasons. It is crystal clear 
that rising population and enhanced nutritional demands of 
emerging societies will require food production to double by 
the year 2050, yet the amount of land available for food 
production is unlikely to increase. In fact, as reforestation 
removes land from agricultural production, the amount of land 
used for food production may actually decline during this 
period. Therefore, the amount of food produced per acre will 
have to double by the year 2050.
    Just where this increase will occur will depend on 
geopolitics, climate, climate change, and a variety of 
environmental considerations. For example, it is unlikely that 
Europe will adopt new and emerging technologies to increase 
food production. In the United States, agricultural patterns 
are changing as our climate changes. In particular, climate 
change is likely to exacerbate drought conditions in much of 
the western part of the United States. The drought we now see 
in California may actually become a permanent feature as the 
climate warms.
    This suggests that the eastern half of the United States 
will need to produce greater amounts of food than it does 
today. The Southeast is blessed with a long growing season, 
abundant sunlight, good soils, and reasonable amounts of 
rainfall and irrigation water. Thus, it is clear that 
agriculture in the southeastern part of the United States must 
continue to grow if world food demand is to be met.
    I also remain fundamentally optimistic for U.S. agriculture 
for two additional reasons. I believe there is an inherent and 
lingering appreciation of the rural lifestyle, the values held 
by our rural citizenry, and the cultural heritage that exists 
only in these areas of our country. These are vital components 
of our culture that no one wants to lose. And last, I also 
believe that you, our elected political leaders, understand 
better than anyone that food production is an issue of national 
security. We can't always count on other countries to produce 
for us. Previous food safety incidents have shown how a single 
accident can close imports of an entire commodity. Intentional 
contamination of the food supply would not be difficult, and 
can paralyze an entire products' entry into the United States 
for an extended period of time.
    Despite the long term positive potential, we are facing 
several very significant and complicated challenges that will 
make the next 2 years difficult for both southeastern and U.S. 
agriculture. There are few sectors of agriculture that 
traditionally, and certainly, in the current economic downturn, 
will not do well. For example, the green industry and high 
priced foods will not do well. These items tend to fall more 
within those areas that customers can do without when 
disposable income is reduced. Meat sales are also likely to 
decline further, as the U.S. dollar strengthens. A high dollar 
hurts exports and aids imports. This is especially important 
for the poultry industry, the largest segment of Georgia 
agriculture, where exports are an important component of that 
overall market.
    Macro trends will also have a significant impact on the 
future of southeastern agriculture, and I would like to discuss 
a few of these, and how they may shape our future. The 
unprecedented droughts in the Southeast over the last 2 years, 
which by the fact, are still far from over, despite recent 
rainfall, has clearly demonstrated that water is not an 
unlimited resource, and that we will have to better plan for 
its use, if agriculture is to be sustained and even grow.
    Southeastern states need to do a much better job of 
planting and developing and deploying infrastructure policies 
and technologies to be able to move to meet future demand for 
water in both agricultural and nonagricultural use. This issue 
is particularly critical during drought periods. There is no 
reason to dump millions of cubic meters of water into the Gulf 
of Mexico at the expense of agriculture.
    As a resident of Georgia, the country's largest producer of 
peanuts, I cannot go without discussing food safety. The 
reported incidents of foodborne illness has increased in recent 
years. Two major steps need to be taken to stem this trend. 
First, we need to institute improved, science-based food safety 
standards, and we need to establish audit-compliant programs 
that identify the gaps in the network, that is to provide field 
to fork safety of the entire food supply. Both programs 
necessitate an investment in the understanding of production, 
harvest, and processing of all aspects of the food supply 
chain.
    Labor is obviously an area that has been hotly debated for 
decades, and one that still cries out for a solution. Whatever 
the solution, it is imperative that Federal policies enable 
agricultural producers to have access to competent field labor 
at reasonable wages. As the market for locally grown, 
sustainable food increases, more and more of our food will be 
grown within a few hundred miles of where it is consumed. The 
concept of food miles is a driving factor that will assure 
increases in local production. However, without competent field 
labor, none of this will be possible, and the potential 
increase in food and fiber production will not be realized.
    One of the most pressing issues for the southeastern 
agricultural community is the most recent farm bill. Nearly the 
entire southeastern farm community does not want the farm bill 
to be reopened. Most Farm Bureaus, I believe, have gone on 
record to this effect. Any changes to the farm bill are likely 
to be less favorable to the southeastern farms in this region.
    A related issue is that the U.S. needs to more aggressively 
promote sales of U.S. agricultural products around the world. 
Foreign sales of agricultural products remain one of the bright 
spots for U.S. trade. We hope future trade agreements will not 
be made which benefit other sectors of our economy, at the 
expensive of agriculture. In the year 2007, agriculture was one 
of the areas that alleviated our trade deficit. This year, we 
imported $79 billion of food and fiber, while we exported $116 
billion in exports.
    One last area that is important is in the area of farm 
finance, which you have already heard. The farm credit industry 
has been regulated through the USDA, and has been successful 
even during most of the credit crunch. Indeed, this is one of 
the reasons why agriculture has been able to move forward, 
while so many industries have been suffering. Please don't lump 
the farm credit system in with solutions for Fannie Mae and 
Freddie Mac. We should not attempt to fix that which is not 
broken.
    Finally, I cannot leave this testimony without mentioning 
biofuels. The southeastern part of the United State has been 
labeled the Saudi Arabia of bioenergy. This is because we have 
abundant sunlight, a long growing season, adequate rainfall, 
and a long history of pine production. The exact role plants 
will play in energy production, in my opinion, remains to be 
seen. Nearly everyone agrees that energy production from 
grains, especially corn, is only a short-term solution. 
Cellulosic ethanol is the long-term hope for ethanol from 
plants, especially pine. However, important technology 
breakthroughs must be developed before we can expect to see 
widespread use of cellulosic ethanol in the United States. 
Whether or not this breakthrough come next year or 20 years 
from now still remains to be seen.
    There are serious issues facing agriculture today and in 
the future. Some, we can control, others we cannot. We are good 
stewards of the land and our natural resources, and we are a 
strong and stable segment of our nation's economy. My message 
to you today is relatively simple. Given sound policies, strong 
support, solid investment in research and education, and 
stepped-up focus on food safety, security, science, and trade, 
the agricultural industry of the United States is poised to 
meet the demand for feed and food, and to nourish a growing 
population.
    Thank you for the opportunity to be with you today.
    [The prepared statement of Dr. Angle follows:]

Prepared Statement of J. Scott Angle, Ph.D., Dean and Director, College 
  of Agricultural and Environmental Sciences, University of Georgia, 
                               Athens, GA
    Thank you for the opportunity to speak to you today. I am the Dean 
and Director of the University of Georgia College of Agricultural and 
Environmental Sciences. My background is in soil science. I have 
specifically worked to develop agriculturally friendly ways to clean 
polluted soil. I am also a farmer. My farm is just east of Frederick, 
Maryland.
    I am here to give you my assessment of agriculture today and to 
discuss what I see as the primary issues facing agriculture both in the 
short term and the long term. Most of what I discuss today will relate 
to the southeast region of our nation.
    Much of my testimony will focus on issues that seem like problems, 
and, indeed, many are. However, please know that for the long run, I 
remain quite positive. I say this for several reasons. It is crystal 
clear that rising population and enhanced nutritional demands of 
emerging societies will require food production to double by the year 
2050. Yet, the amount of land available for food production is unlikely 
to increase. In fact, as reforestation removes land from agricultural 
production, the amount of land used for food production may actually 
decline. Thus, the amount of food produced per acre will have to double 
by 2050.
    Just where this increase will occur will depend upon geopolitics, 
climate and climate change, and environmental considerations. For 
example, it is unlikely that Europe will adopt new and emerging 
technologies needed to increase food production. In the United States, 
agricultural patterns are changing as our climate changes. In 
particular, climate change is likely to exacerbate drought conditions 
of the western U.S. The drought we now see in California may become a 
permanent feature as the climate warms.
    This suggests that the eastern half of the U.S. will need to 
produce greater amounts of food than it does today. The Southeast has a 
longer growing season, abundant sunlight, good soils and reasonable 
amounts of rainfall and groundwater for irrigation. Thus, it is clear 
that agriculture in the southeastern U.S. must continue to grow if 
world food demand is to be met.
    A brief review of recent history tells us it is certainly possible 
to increase crop production on static land resources in this country. 
Remember, for years Malthusian predictions were that mass starvation 
was inevitable as populations increase and food production could not 
keep up. The evidence has been just the opposite.
    Food production has kept up both with population and improving 
nutrition of those living in less-developed societies. In fact, there 
is currently a surplus of food worldwide. We all know that there are 
still starving populations in the world. Most often the situation is 
not a lack of ample food, but rather the result of an inability to move 
food to where it is needed. Frequently, food delivery is impeded by 
local political instability.
    There is every reason to believe that rising yields and improved 
nutrition in agriculture will continue for many years to come. Most 
yield increases have come from the introduction of new technologies. I 
can promise you, as someone who works in the area, the U.S. system of 
agricultural research and education will continue to produce the 
incredible discoveries that have driven the success of American 
agriculture.
    Recent evidence from Georgia, for example, tells us that farm 
production continues to increase. Just look at changes from 2007 to 
2008. The year 2008 was a terrible year for Georgia farmers. One of the 
worst droughts on record played havoc on nearly every aspect of 
agriculture. Some commodities like the green and landscape industries 
were decimated when watering bans assured your new plants would not 
survive. But, despite the drought and emerging economic downturn, 2008 
was better in terms of farm-gate value than 2007.
    This is a testament to the tenacity and creativity of our farmers 
who can still make money in the face of so many problems. For 2008, the 
total value of farming and processing in Georgia was $55 billion. The 
industry generated 356,000 jobs for the state--a source of jobs that 
has remained relatively stable even as the economy continued to 
deteriorate. This only confirms what we have known for many years; 
agriculture, while not immune from economic downturns, is less impacted 
than most sectors of our economy.
    By the way, two other interesting facts about farming in the 
southeast: The general perception is that we have fewer farms than in 
the past and that farms are getting larger due to consolidation. 
Instead, just the opposite is true. We have more farms than we did just 
10 years ago, and the farms are actually smaller by compared to the 
same time. This does suggest that more and more farming families are 
working off the farm to support their weekend work on the farm.
    I also retain a fundamental optimism for U.S. agriculture for two 
additional reasons. I believe there is an inherent and lingering 
appreciation for the rural lifestyle, the values held by our rural 
citizenry, and the cultural heritage that exists only in these areas of 
the country. These are vital components of our culture that no one 
wants to lose.
    Last, I also believe that you, our elected political leaders, 
understand better than anyone that food production is an issue of 
national security. We can't always count on other countries to produce 
for us. Previous food safety incidents have shown how a single accident 
can close imports of an entire commodity. Intentional contamination of 
the food supply would not be difficult and could paralyze an entire 
product entry into the U.S. for an extended period of time.
    For this reason, no one wants to have our food production shipped 
overseas. We have seen clearly with imported energy supplies how easily 
we can be at the mercy of others who may not always like us. It's bad 
to be dependent on imported fuel. It would be disastrous if we depended 
on other nations for our food. Remember, we have only an 11 day supply 
of food in our food chain. If that chain is broken, critical problems 
arise almost immediately.
    We never want to be in a position where food can be used as a 
political weapon against us. We must not forget the lessons the French 
learned during World War II when Germany stopped imports of food into 
France. That single Act helped to pacify the French population with 
relatively little effort on the part of the Germans.
    I know I am preaching to the choir, but this is a message some, who 
have absolutely no connection to agriculture, seem to have forgotten. 
Unlike other industries that can be brought back online after a 
prolonged period of inactivity, agriculture is very different. It is 
not just training workers in the science and practice of agriculture. 
Rather, agricultural knowledge is learned over generations, is 
location-specific and is part of the ingrained heritage of a farming 
community. It may be impossible to ever bring back this knowledge once 
lost.
    So, to reiterate, despite many of the problems I will be 
discussing, there is a crucial need for agriculture to continue to grow 
and there are unique opportunities in the southeastern U.S. to meet 
this demand. I remain very optimistic.
    Despite the long-term, positive potential, we are facing several 
very significant and complicated challenges that will make the next few 
years quite difficult for U.S. agriculture.
    I noted previously that agriculture is in relatively good shape 
over the coming years. However, there are a few sectors of agriculture 
that traditionally and certainly in the current downturn, will not do 
well. The green industry and high-priced foods will not do well. These 
items tend to fall more within those areas that consumers can do 
without when disposable income is reduced. Meat sales are also likely 
to further decline as the U.S. dollar strengthens--a high dollar hurts 
exports and aids imports. This is especially important for the poultry 
industry, the largest segment of Georgia agriculture, where exports are 
an important component of the overall market.
    Again, in the short term, we expect to see some commodities perform 
better than others. The prediction for the southeast for 2009 is that 
there will be an increase in acres of soybeans and grain sorghum while 
the acreage of corn, peanuts and wheat will decline. There will be no 
change for cotton and tobacco.
    Broiler production will continue to decline, which is good for the 
overall industry because prices will increase to the point where many 
integrators will become profitable. Unfortunately, if you are one of 
the growers or factory workers affected by reduced production, the 
change is clearly personally devastating.
    Red meat production is predicted to increase over the next few 
years. Whether producers make any money depends upon input costs, 
something that so far has been very difficult to predict. Dairy 
production is the one area where we remain relatively pessimistic. We 
see few scenarios where the price of milk will improve and dairy will 
resume a profitable upward trend.
    Macro trends will also have a significant impact upon the future of 
southeastern agriculture. I would like to discuss a few issues and 
suggest how each may shape our future.
    Water is an overarching factor affecting the future of agriculture. 
The western U.S. has worked for years to develop good water policies 
and agriculture has responded to these policies in terms of growth, 
location and profitability. The Southeast, however, has always assumed 
that our water supplies were unlimited. Rainfall was deemed to be 
nearly adequate with abundant surface and groundwater supplies 
available for irrigation when needed.
    The unprecedented drought over the past 2 years (which still is far 
from over despite recent rains) has clearly demonstrated that water is 
not an unlimited resource and that we have to better plan for its use 
if agriculture is to be sustained and even grow. States need to do a 
better job of planning and developing/deploying infrastructure, 
policies and technologies to be able to meet future demand for water in 
both agricultural and non agricultural use. This issue is particularly 
critical during drought periods--there is no reason to dump millions of 
cubic meters of water into the Gulf at the expense of agriculture.
    Water shortages in agriculture during prolonged droughts can 
irreversibly harm agriculture. The current drought has done just that 
to the green industry in the Southeast. A significant percentage of 
landscape, nursery, and horticulture businesses went out of business in 
the face of falling sales to homeowners who could not water recently 
installed plants. Coupled with the region's building bust, huge 
declines in sales to contractors who were not building crippled the 
industry.
    As a representative from Georgia, the country's largest producer of 
peanuts, I can not go without discussing food safety. The incidence of 
foodborne illness has increased in recent years. Two major steps need 
to be taken to stem this trend. First, we need to institute improved, 
science-based food safety standards. And, we need to establish audit 
compliant programs that identify the gaps in the network that is to 
provide ``field to fork'' safety of the food supply. Both programs 
necessitate an investment to understand the production, harvest and 
processing aspects of the food supply chain.
    It is well recognized that animals and plants can be contaminated 
with human pathogens in many places along the food chain. The 
significance of food safety can be seen in the impact of the 2008 
Salmonella-tomato debacle which had a $25.7 million negative impact on 
Georgia's economy. In conjunction with the relevant Federal agencies, a 
coordinated research and development effort to gain fundamental and 
practical knowledge of the interactions of human pathogens with the 
plants and animals that become our food is paramount.
    We can never compete with a number of lesser developed countries 
where labor costs are low, land costs are a fraction of that in the 
U.S., and environmental regulations are rarely enforced. Our only 
competitive advantage is for our farmers to be on the cutting edge of 
the technology curve. The unique partnership of land-grant 
universities, the Federal Government through the USDA and private 
industry has allowed the American farmer to maintain the technological 
advantage for over 100 years. Yet, as other countries adopt the 
technologies we develop then modify these technologies for low-cost 
production, we are under constant stress to push farther ahead of the 
curve. This issue is particularly important for labor-intensive crops.
    Labor is obviously an area that has been hotly debated for decades 
and one that still cries out for a solution. Whatever the solution, it 
is imperative that Federal policies enable agricultural producers to 
have access to competent field labor at reasonable wages.
    As the market for locally grown, sustainable food increases, more 
and more of our food is being grown within a few hundred miles of where 
it is consumed. The concept of ``food miles'' is also a driving factor 
that will assure increases in local production. However, without 
competent field labor, none of this will be possible and the potential 
increases in fruit, vegetable and tree nut production will not be 
realized.
    One of the most important issues for the southeastern agricultural 
community is the most recent farm bill. Nearly the entire southeastern 
farm community does not want the farm bill to be reopened. Most farm 
bureaus has gone on record to this effect. Any changes to the current 
farm bill are likely to have less favorable impact on farms and 
farmers.
    A related issue is that the U.S. needs to more aggressively promote 
sales of U.S. agricultural products around the world. Foreign sales of 
agricultural products remain one of the bright spots for U.S. trade. We 
hope future trade agreements will not be made which benefit other 
sectors, but at the expense of agriculture.
    In 2007, agriculture was one of the areas that alleviated our trade 
deficit. That year we imported $79 billion versus $116 billion in 
exports. Don't kill the golden goose.
    One last related area is farm finance. The farm credit industry has 
been regulated through USDA and has been successful even during the 
most recent credit crunch. Indeed, this is one of the reasons why 
agriculture has been able to move forward while so many other 
industries are suffering. Please don't lump the farm credit system in 
with solutions for Freddie Mac and Fannie Mae. We should not attempt to 
fix that which is not broken.
    A seldom considered issue, but one that will have a significant 
impact on the future of agriculture, is that we must consider 
supporting the economic development of less-developed countries. As I 
noted previously, much of the future demand for U.S. agricultural 
products will come from rising incomes, and thus rising consumer 
demand, for our products. It is rare when we can help agriculture while 
at the same time ``doing the right thing'' for many of the world's 
poor.
    I want to call your attention to a few other issues that farmers 
tell me are important problems for the industry, yet do not fall into 
the ``macro'' category. One is Roundup resistant pigweed. This invasive 
weed threatens to significantly reduce yields of a variety of crops. 
Roundup is the primary tool to manage pigweed. As this weed develops 
greater tolerance to Roundup, the primary weed control technology used 
in the U.S., we face losing entire crops, especially cotton, or at 
least the use of no-till cultivation which has many useful 
environmental benefits. Research is desperately needed to find 
alternative strategies to control pigweed.
    Second, methyl bromide is used to sterilize soil prior to planting 
disease-sensitive crops. Methyl bromide is being taken off the market 
in stages, depending upon the crop and need. However, there are few 
effective replacements available and yields are likely to be negatively 
affected. Again, research is needed to find suitable replacements.
    Finally, I can not leave this testimony without mentioning 
biofuels. The southeastern part of the U.S. has been labeled the Saudi 
Arabia of bioenergy. This is because we have abundant sunlight, a long 
growing season, adequate rainfall and a long history of pine 
production.
    The exact role plants will play in energy production remains to be 
seen. Nearly everyone agrees that energy production from grains, 
especially corn, is a short-term solution. Cellulosic ethanol is the 
long-term hope for energy production from plants, especially pine 
trees. However, important technological breakthroughs must be developed 
before we can expect to see widespread use of cellulosic ethanol in the 
U.S. Whether this breakthrough comes next year or 10 years from now 
remains to be seen.
    There are serious issues facing U.S. agriculture today and in the 
future. Some we can control, others we cannot. There are few we cannot 
overcome. We are good stewards of the land and our natural resources. 
And, we are a strong, stable segment of the nation's economy. My 
message to you today is: Given sound policy, strong support, solid 
investment in research and education, and stepped-up focus on food 
safety, security, science and trade, the U.S. agricultural industry is 
poised to meet the demand to feed and nourish the growing world 
population.

    The Chairman. Thank you, sir. I recognize Dr. Paggi.

        STATEMENT OF MECHEL ``MICKEY'' S. PAGGI, Ph.D.,
          DIRECTOR, CENTER FOR AGRICULTURAL BUSINESS,
  COLLEGE OF AGRICULTURAL SCIENCE AND TECHNOLOGY, CALIFORNIA 
   AGRICULTURAL TECHNOLOGY INSTITUTE, AND ADJUNCT PROFESSOR, 
    DEPARTMENT OF AGRICULTURAL ECONOMICS, CALIFORNIA STATE 
                 UNIVERSITY, FRESNO, FRESNO, CA

    Dr. Paggi. Thank you, Mr. Chairman, Members of the 
Committee. Again, my name is Mechel Paggi. I am the Director of 
the Center for Agricultural Business at California State 
University, Fresno, and I appreciate the opportunity to testify 
today on the state of the farm economy in California.
    Today, the economic viability of California agriculture is 
being challenged. Arguably, the most important and immediate 
challenge facing California agriculture is the availability of 
water. California is currently in the third year of a drought, 
with conditions among the worst in recent memory. In addition, 
Federal judicial action has restricted deliveries of water from 
the North to the South in efforts to enhance the environment 
for certain endangered fish species.
    A recent study estimates that as a result of the cutback in 
water availability, we will lose about $2 billion in income in 
the Central Valley of California. Excuse me. The same study 
estimates about 850,000 acres of cropland in California will be 
idle. The study estimates a loss of 70,000 jobs in farming and 
support industries, jobs in many of the small towns and rural 
towns in California, towns like Firebaugh, Mendota, where 
unemployment is likely to reach 40 percent.
    At the same time, California producers are struggling under 
drought conditions, the worst economic recession in 26 years in 
the U.S., and a related global economic downturn has created a 
whole other set of problems for California agriculture. 
Declining export demand has contributed to collapse in 
commodity prices. The decline in the demand for cheese has 
contributed to a rapid decline in California milk prices. The 
current downturn in the dairy industry has negative spillover 
effects in the California feed and hay market as well.
    A few specific examples help demonstrate the magnitude of 
the problems facing California agriculture. Over the past year, 
the price for Class I milk has declined by over 38 percent. At 
the same time, the price of supreme alfalfa hay delivered to 
those dairies in Tulare, Visalia, and Hanford Counties, were 
sold for around $265 a ton last year. That same hay is selling 
for about $163 a ton this year.
    These problems are hopefully cyclical in nature. However, 
there are elements of the issues facing California agriculture 
that involve programs and policies affecting the agricultural 
economy that persist across markets and climate fluctuations. 
The current problems associated with the lack of water 
availability to agriculture will not disappear with a return to 
normal weather. California water use, within the context of the 
existing storage and conveyance systems, is likely not 
sustainable. The solution to this problem will require a 
combination of increasing storage capacity, increased 
conveyance capability, and increased adoption of conservation 
practice among all users.
    Another area of concern is linked to California 
agriculture's dependency on a reliable agriculture labor 
supply. California agriculture producers, particularly grape, 
tree fruit, and berry farmers, employ around 450,000 workers 
during the peak harvest season. Some reports indicate that as 
much as 85 percent of this farm labor payroll is made up of 
undocumented workers. The development of a program to establish 
a legal and reliable agricultural workforce is critical to the 
agricultural economy of California.
    Food safety: Not too long ago, an outbreak of Salmonella 
saintpaul was initially attributed to fresh tomato consumption. 
Ultimately, the outbreak strain of Salmonella saintpaul was 
traced to Serrano peppers grown on a farm in Tamaulipas, 
Mexico. Not a single tomato linked to ill persons was found to 
test positive for Salmonella, but the damage was done. Industry 
estimates put the loss to the tomato industry in excess of $100 
million. In California, retail sales of tomatoes were down more 
than 50 percent, even after tomatoes had been cleared from 
suspicion. These events suggest the need for an examination of 
FDA programs and policies, with a view toward discovering what 
can be done to prevent future unsubstantiated warnings and 
related disruptions, market disruptions.
    Trade policy: California agricultural products are highly 
dependent on export markets. However, in some cases, producers 
are subject to market disruptions that result from trade policy 
decisions over which they have no control. The recent canceling 
of the NAFTA cross-border trucking program with Mexico is a 
ready example. The most disturbing aspect of this immediate 
dispute is Mexico's intention to place a 45 percent tariff on 
the imports of fresh grapes to Mexico. Mexico is the second 
largest market for California fresh grape exports, accounting 
for almost $50 million in 2008. Clearly, this is policy action 
that has a negative effect on the growing market for California 
agricultural products in Mexico.
    There are many areas that need to be addressed, and the 
time is short: the infrastructure, a revitalization of roads, 
ports, and rails; the development of programs designed to 
promote agricultural contributions to carbon sequestration; the 
role of biofuels; the improvements to border security, to 
prevent entrance of damaging foreign pests and disease, to name 
a few. The agricultural community in California and our elected 
representatives will need to work together with our colleagues 
from other states and other industries and interest groups, to 
develop innovative policies and programs that address the 
issues discussed here today.
    Thank you again for arranging for this public hearing to 
better understand the state of the agricultural economy, and 
for allowing me to share my views on the current issues facing 
California agriculture.
    Thank you.
    [The prepared statement of Dr. Paggi follows:]

  Prepared Statement of Mechel ``Mickey'' S. Paggi, Ph.D., Director, 
 Center for Agricultural Business, College of Agricultural Science and
 Technology, California Agricultural Technology Institute, and Adjunct 
   Professor, Department of Agricultural Economics, California State
                     University, Fresno, Fresno, CA
    Chairman Boswell, and Members of the Subcommittee, my name is 
Mechel Paggi, I am the Director of the Center for Agricultural Business 
at California State University, Fresno. I appreciate the opportunity to 
testify today on the state of the farm economy in California.
    California has the largest agricultural economy in the United 
States. If California was a country it would be the fifth largest 
agricultural producer in the world in terms of agricultural revenue as 
a percentage of GDP. Farm production generates around $36 billion in 
annual revenue to our state. In addition, activities related to the 
processing, transportation, handling and marketing of products such as 
milk, tree nuts, grapes, processing tomatoes, cotton, vegetables and 
nursery products create additional jobs, income and tax revenues that 
are vital to state. For every $1 billion in farm sales, there are about 
18,000 jobs created in the state in the farm sector itself plus another 
7,000 in other industries.
    About \1/2\ of all the fruits, vegetables and nuts grown in the 
United States come from our state. California products play a major 
role in programs designed to enhance child nutrition by supplying fresh 
fruits and vegetables for school lunches and snacks.
    California agriculture is also integrally linked to the global 
economy. On average 28% of California's agricultural products go to 
international markets. Exports of some important crops such as tree 
nuts regularly amount to over 50% of California production. The on-farm 
value of California's agricultural exports exceeds $10 billion and the 
final export value is many times greater. For every $1 billion in 
exports 16,000 jobs are created. Our nation's agriculture is one of the 
few segments of our economy that enjoys a positive world trade balance 
and California is a big part of that accomplishment.
    Unlike many other states the majority of California agricultural 
producers are not participants in commodity programs that provide 
direct income and price supports. Government payments make up less than 
3% of gross farm revenue in California compared to areas like the 
Midwest where farm payments account for around 11%. However, California 
agriculture does benefit from some Federal and state programs and 
policies that provide support in areas such as marketing and market 
information and plant and animal health and safety.
    Today the economic viability of California agriculture is being 
challenged. A number of factors have combined to create an environment 
that is making it difficult, if not impossible, for growers who are 
among the nation's most innovative, in one of the most productive 
agricultural areas in the world, to maintain their current operations.
    Arguably the most important and immediate challenge facing 
California agriculture is the availability of water. California is 
currently in the third year a drought with conditions among the worst 
in recent memory. The lack of adequate rainfall and snow pack has 
resulted in the lowest average reservoir levels in 17 years and 
severely diminished recharge of ground water supplies. In addition 
Federal judicial action has restricted deliveries of water from the 
north to the south in efforts to enhance the environment for certain 
endangered fish species.
    The climate related drought and legal restrictions will combine in 
2009 to severely restrict the flow of water from the two largest water 
storage and conveyance projects in California. The U.S. Bureau of 
Reclamation has informed producers in the western central San Joaquin 
Valley they can expect to receive zero deliveries of water from the 
Federal Central Valley Project (CVP) this year, down from 45 percent 
last year. The CVP supplies about \1/4\ of the water used by California 
farmers and is the primary source of water for the 600,000 acre 
Westlands Water District (WWD) in western Fresno and Kings Counties. 
The WWD is the largest irrigation district in the United States; farms 
in the district produced about $1.3 billion in agricultural products in 
2008. Reports indicate deliveries from the State Water Project (SWP) 
are expected to decline to 15 percent, from 35 percent last year. The 
SWP is the state's largest water delivery system serving Southern 
California
    A recent study by UC-Davis estimates that as a result of the 
cutback in water availability we'll lose about $2 billion in income 
Central Valley. That same study estimates about 850,000 acres of 
cropland in California will be idled resulting in a reduction of about 
$800 million from lost farm revenue and additional $1.2 billion decline 
in income associated with a loss of some 70,000 jobs in farming and 
support industries, many in the valley's small, rural towns. Towns like 
Firebaugh and Mendota, where unemployment is likely to reach the 40 
percent range. While conditions are most severe in the San Joaquin 
Valley, the Department of Water Resources estimates indicate losses of 
around $300 million distributed across the North, Sacramento Valley, 
Central Coast and Southern regions.
    At the same time California producers are struggling under drought 
conditions, the worst economic recession in the 26 years in the U.S. 
and related global economic downturn has created another set of 
problems for California agriculture. For example, the tightening of 
credit markets has made access to funds for investments in water saving 
technologies (e.g., subsurface drip systems) and new wells for 
supplemental ground water supplies, more difficult. Declining export 
demand has contributed to a collapse in commodity prices. The decline 
in foreign demand for cheese has contributed to a rapid decline in 
California milk prices. The current downturn in the dairy industry has 
negative spillover effects in the California feed and hay markets as 
well as support industry services. Cut backs in orders from China, 
India and other important overseas customers in the face of another 
record crop have contributed to a fall in almond prices. Few, if any, 
agricultural products in the state have not seen negative effects from 
current economic environment.
    A few specific examples help demonstrate the magnitude of the 
problems facing California Agriculture. The statewide average price for 
Class I milk was $18.81 May, 2008; the March 10, 2009 reported price 
was $11.60 a decline of over 38%. The reference prices for dairy 
products (butter, cheddar cheese, non-fat dry milk and dry whey) have 
declined from $18.91 per lb. to $12.05 per lb. State average milk 
production costs, even with reduced feed costs are in the $12 to $14 
dollars per cwt range.
    As one California analyst put it, when the buyer of 75 percent of 
the hay and feed produced in the state is hurting financially we have a 
problem. The weighted average price for supreme alfalfa hay delivered 
to dairies in the Tulare-Visalia-Hanford area sold for around $265 last 
year, on March 27, 2009 that same class of hay is selling for $163 per 
ton.
    These problems are hopefully cyclical in nature; rain and snow will 
return to replenish our reservoirs and recharge the ground water; and 
the economy will recover here and abroad. However there are elements of 
the current water crisis and other issues facing California agriculture 
that involve programs and policies effecting the agricultural economy 
that persist across market and climate fluctuations.
    The current problems associated with the lack of water available to 
agriculture will not disappear with a return to normal weather 
patterns. California water use within the context of the existing 
storage and conveyance systems is likely not sustainable. Department of 
Water Resources reports indicate that even in periods of average 
precipitation California has an overdraft of around 2 million acre-
feet. The solution to this problem will require a combination of 
increasing storage capacity, increased conveyance capability and 
increased adoption of conservation practices among all users. To 
implement these solutions will require a public-private sector 
partnership at the local, state and Federal level. In addition some 
consideration must be given to modifications of existing Endangered 
Species Act provisions. In periods of extreme drought short-run needs 
to make water available for citizen use and food production may take 
precedent over the long-run species protection goals, an issue that 
will need to be addressed at the Federal level.
    Another area of continued concern is linked to California 
agriculture's dependence on a reliable supply of agricultural labor. In 
a recent poll of California Grape and Tree Fruit League Board of 
Directors, immigration reform was rated the number one priority issue 
for 2009. The single biggest expense for these producers is labor 
costs. Since the fresh market is the first choice for most fruit 
producers, hand picking insures minimal damage to the fruit, insuring a 
greater share of the crop will meet the qualifications for selling in 
the fresh market. Farm labor is also critical to tree nut production, 
dairy operations and to a lesser extent in grain production. California 
producers, particularly grape, tree fruit and berry farmers, employ 
around 450,000 workers during peak harvest season and 300,000 in off 
peak periods. Some reports indicate that as much as 85 percent of this 
farm labor payroll is made up of undocumented workers. The development 
of a program to establish a legal and reliable agricultural workforce 
is critical to the California agricultural economy.
    California producers have adopted farming practices that comply 
with most stringent standards for food safety in the world. Our 
dependence on foreign markets and reputation for high quality require 
it. Despite these efforts the difficulties associated with the existing 
programs and policies related to the detection and control of outbreaks 
of foodborne illness in the U.S. can result in substantial negative 
economic consequences for the agriculture industry. Most recently an 
outbreak of Salmonella saintpaul was initially attributable to fresh 
tomatoes consumption. Ultimately the outbreak strain of Salmonella 
Saintpaul was traced to Serrano peppers grown on a farm in Tamaulipas, 
Mexico. Not a single tomato linked to ill persons and randomly 
collected from the distribution chain in outbreak states were found to 
test positive for Salmonella. But the damage was done. Industry 
estimates put the losses to the tomato industry in excess of $100 
million. In California retail sales of tomatoes were down more than 50 
percent even after tomatoes had been cleared from suspicion. These 
events suggest the need for an examination of FDA programs and policies 
with a view toward discovering what can be done to prevent future 
unsubstantiated warnings and related market disruptions.
    As mentioned earlier, the returns for many California agricultural 
products are highly dependent on export markets. However in some cases 
producers are subject to market disruptions that result from trade 
policy decisions over which they have no control. The recent canceling 
of a NAFTA cross-border program that gave Mexican truckers access to 
U.S. markets is a ready example. In retaliation Mexico has targeted a 
total of 36 agricultural products for increased import tariffs. 
Included in the 36 agricultural products targeted for tariffs are: 
onions, strawberries, cherries, pears, wine, almonds, juices and 
peanuts. Some will be taxed at 10-15 percent, some at 20 percent. Among 
the most disturbing for California producers is the intention to place 
a 45 percent tariff on imports of fresh grapes. Mexico is the second 
largest market for California fresh grape exports, accounting for over 
$49 million in 2008. Clearly this policy action can have negative 
effects on the growing market for California agricultural products in 
Mexico. In contrast Congressional inaction on pending trade agreements 
with Columbia, Panama and South Korea may prevent California and other 
U.S. producers from capitalizing on potential market opportunities. To 
provide a more competitive international market place for California 
and U.S. agricultural products will require Congressional action 
leading to the adoption of pending beneficial trade agreements, 
compliance with obligations under existing agreements and continued 
efforts to secure meaningful trade liberalization with increased 
agricultural market opportunities in a multilateral setting (Doha).
    There are many other areas that need to be addressed such as 
infrastructure revitalization for roads, ports and rail; the 
development of programs designed to promote agricultural contributions 
to carbon sequestration; the role of biofuels; improvements in border 
security to prevent entrance of damaging foreign pests and diseases to 
name a few.
    The agriculture community in California and our elected 
representatives will need to continue to work with our colleagues from 
other states and in other industries and interest groups to develop 
innovative policies and programs that address the issues discussed 
today. Identifying areas of concern and understanding the issues 
involved is a first step in that direction. Hopefully the information 
provided in this hearing has helped in that regard. At the end of the 
day we all need to work toward improving the system that can provide 
assistance to the resolution of immediate crises and establish the 
elements of a strategic pathway to a prosperous future for U.S. 
Agriculture and rural America.
    Thank you again for arranging this public hearing to better 
understand the state of the agricultural economy and for allowing me to 
share my views of current issues facing California agricultural 
interests.

    The Chairman. Well, thank you, Dr. Paggi. The largest 
agriculture producer has some real challenges. We all have 
challenges, but you are painting a pretty tough picture there. 
I hope we can do something to help.
    I would just address this to all of you, to start off with 
the questions. You know, bankers look at farmers' participation 
in the farm programs, as they sit down and go over their 
program for the year, and the analysis and so on, and I am just 
curious what your thoughts might be. Do you anticipate bankers 
weighing in with, or even pushing producers on whether to 
remain in the Direct and Countercyclical Program, or sign up 
for the Average Crop Revenue Election Program? What are your 
thoughts on that? Anybody.
    Dr. Harl. Just to be sure I understand, the traditional 
program or the new program, that they can sign up.
    The Chairman. Yes.
    Dr. Harl. For the first time, well, if we had perfect 
foresight, as perfect as our hindsight, in terms of what is 
going to happen to prices, that would be an easy one.
    The Chairman. Yes.
    Dr. Harl. I have been, a lot of the producers in Iowa have 
been saying I am going to sign up for the new program. I have 
been cautious. I have, in my testimony, a statement of 
disclosure that I am involved, with my wife, in owning farmland 
in Iowa, and we have share-rent leases, so we are as involved 
as our tenants are on this issue.
    But I am so concerned about the commodity prices, going 
forward, that I am putting off that decision as long as I 
possibly can, and anyone who asks me, I am telling them the 
same thing, because we just don't know. But it can be costly, 
if we have a shift against us in commodity prices, which I fear 
could happen.
    Philosophically, what we have in the Federal programs is a 
safety net, and we are beginning to change our philosophy a 
little bit out in the country that this is a way to maximize 
our income without looking at the basic nature of the program, 
which is to catch us from a freefall in a bad year or series of 
year, like we had from about 1998, when I was here, up through 
about 2005, when ethanol pushed us up into the stratosphere. 
That is unnatural. It is unusual to have that kind of thing 
happening.
    So, I think we need to keep our eye on what is the basic 
purpose of Federal farm programs.
    The Chairman. Thank you for that comment. You went right to 
the heart of what I was getting at. Anybody else?
    Mr. Dumler. My experience so far this year in Kansas is I 
don't think the lenders are pushing farmers one way or another. 
I think they are trying to figure out the programs just every 
bit as much as farmers are. And, as Dr. Harl noted, it is 
unknown right now.
    I think, personally, in Kansas, it is a toss-up as far as 
which direction may be the right one to go, and I will tell 
farmers they will know in 2013 what the right decision was. So, 
at this point, it is that farmers and lenders are both in an 
information gathering stage at this moment, and putting off the 
decision, for the most part.
    The Chairman. Okay. The chair recognizes Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you very much. I want to try 
once again. Apparently, I didn't ask my question seriously 
enough to the Federal Reserve, but I am interested in someone's 
analysis as to the expectations for interest rates. While you 
have testified that at the moment, interest rates are low, debt 
service is not a significant problem for most farmers, there 
has to be a day of reckoning that is coming, based upon a 
number of factors, including Federal spending.
    Mr. Dumler. Right.
    Mr. Moran. Is there a prediction, an estimation of when 
this becomes a serious problem for agriculture?
    Dr. Harl. My position has been we will eventually face 
enormous inflationary pressures. We will eventually face higher 
interest rates. What most of us don't know is when that is 
going to happen, and it really depends upon when things begin 
to turn, because as soon as the Federal Reserve sees that the 
economy is turning, my prediction is that they will shift their 
philosophy from trying to save us from a freefall to trying to 
control inflation. Because the 1970s are not totally lost on 
the building down in the flats.
    I remember sitting with Mr. Volcker shortly after he became 
Chair of the Fed, and they slammed on the monetary brakes. So, 
agriculture has been through this. We know what happens, and we 
need to be very alert to this. And we should now, with low 
interest rates, be taking advantage of those low interest 
rates, although, in the long part of the yield curve, it is not 
as dramatic as it is on the short term money. I think that the 
safe thing to do, for farmers and others, is to try to lock in 
the longest terms they can get at the current cost of money, 
knowing that we are going to have inflation, because you just 
don't pour the kind of money into the economy without 
consequences. And we can pretty well predict what those 
consequences are.
    Dr. Angle. Excuse me. Could I add a footnote. I think the 
earliest we can see is a turnaround in Q4 of 2009, but more 
likely, in 2010, and so, I don't think it is imminent. I don't 
think these efforts that are being made are going to give us a 
great deal of buoyancy this year, but it could happen as early 
as the fourth quarter of this year, I think. But nobody really 
knows. We are all trying to see around corners. And this is a 
difficult corner to see around.
    Mr. Moran. I see no one else jumping at the opportunity to 
answer my question. Projected percentage of farm income, 
someone mentioned this, and I want to make sure I understand 
it, and it may have been you, Mr. Dumler, I am not certain 
about projected percentage of farm income that is coming from 
government programs. What is the trend?
    Mr. Dumler. The trend has definitely been down. Obviously, 
with the commodity prices, the programs that make payments 
based off of low market prices don't kick in. So, we went from 
levels in Kansas, looking at a 5 year average, 50 to 60 percent 
of net farm income coming from government payments down to 20 
percent in 2007. I would expect numbers in 2008 would be very 
similar to that.
    That includes, though, and you need to keep in mind, that 
includes actually all government payments, commodities and 
conservation payments in the data that we have. So, that may 
be, perhaps, a little overstating some of those values, but the 
trend has certainly been down the last couple of years.
    Mr. Moran. I don't know that anybody mentioned this, but I 
am interested in the percentage of farm income that is based 
upon exports.
    Dr. Harl. Exports.
    Mr. Moran. Is that a number that anybody has, and do we 
know what the trend is there?
    Dr. Harl. Well, exports have been growing, and the 
difficulty is, in trying to calculate how much of that increase 
is attributable, or should be attributable to the export 
activity, because of the way it works out in the markets. There 
is no question, but what our exports have been rising 
generally. I used to, in fact, I still have a slide that shows, 
going back about 40, 50 years, showing the trend, and it was up 
and down, but basically, we are moving up.
    I think that one thing we need to be very cautious about 
here is the question of competitive position that we are in in 
the country. Most sectors of the U.S. economy are having 
difficulty because they are losing jobs, they are losing 
economic buoyancy abroad, because we are in a period when 
everyone is seeking the lowest cost place to produce. But we 
have an advantage in agriculture, in the sense that our soils 
are not mobile, and our climates are not mobile, and as long as 
they are not mobile, then we will probably be producing crops 
in the United States. They are not going to get outsourced like 
a lot of other things are.
    Livestock is mobile, and livestock could move. And we are 
seeing a dramatic increase in livestock production in Romania, 
in Poland, in a lot of the Central and Eastern European 
countries. But generally speaking, livestock production is 
pretty tightly tethered to feed grains, and we have the 
advantage, of course, in feed grains, and probably will for 
some time.
    So, when we take the very long view here, we can take 
comfort in the fact that we are a little different from most of 
the sectors. It is a very serious problem for almost every 
sector, including the service sector, because a friend of mine 
just had a knee surgery in India, and that means movement of a 
lot of value overseas rather than here. So, trade is good if 
your unit of observation is the globe. Trade is not so good if 
your unit of observation is Newton, Iowa, that lost the Maytag 
plant, and they are still recovering from it.
    So, this is part of a much broader issue, as to where we 
are going in the world, and of course, we have one overarching 
objective, and that is to try to increase the level of harmony 
in the world, and that is best done by raising people's 
incomes. And so, this is long term, but it is kind of a hard 
sell to someone who just lost their job.
    Mr. Moran. I describe that as trade is always good in the 
macro sense, but difficult to explain in the micro sense.
    Dr. Harl. Exactly.
    Mr. Moran. My time has expired. I hope that, I want to give 
everybody a chance. We have votes soon, and I hope to be able 
to ask another round of questions if the votes haven't been 
called.
    Mr. Chairman, thank you.
    The Chairman. Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Chairman.
    Just an observation, in light of Mr. Moran's questioning 
concerning interest rates. Some argue, at least, that our 
current circumstances are a good bit different than those in 
the 1970s. Yes, it is true that a huge amount of liquidity, 
hopefully, is being injected into the market by the Fed, by 
stimulus packages, et cetera. But that is in response to a 
massive contraction in the money supply that has occurred, and 
if managed appropriately, it may not lead to--it certainly does 
not inevitably lead to inflation. If the right kind of measures 
are taken, judgment is exercised, and the effect of this is to 
simply stop the contraction, and then gradually build it back 
up as the economy builds back up. And if it occurs, if there is 
a harmonious relationship between our efforts where the money 
supply is concerned and the economy, then we ought to be able 
to avoid deflation and inflation, both those things. There are 
plenty of people who are saying that now.
    My question, though, is, it has to do with Dr. Angle's, 
Dean Angle's testimony. I am struck, in your testimony, the 
written testimony, some of which you read to us in your opening 
remarks. You say that it is just a given, ``crystal clear'' is 
the term that you use, that rising population will lead to food 
production having to double by the year 2050, and arable land 
is going to decrease. We have climate change issues that you 
discussed in your piece, and the solution to, getting to, 
despite the smaller available land, getting to doubling the 
food production by 2050 is going to be increase as a yield, as 
a result largely of technological improvements.
    And I guess my question is this. Are any of you aware of 
what you would view as credible agricultural economists who are 
pessimistic about the ability of technology, scientific 
advances in crop yields, to keep up with the need at this 
point? I have read a few pieces that, where people who purport 
to be experts are saying gosh, the huge technological 
improvements that we have seen, starting in the 1950s to the 
present day, are slowing down, and as they look at how things 
are likely to evolve, we are not going to see that kind of 
improvement in the future. So, it is unrealistic to think that 
somehow, we are going to get out of this problem, well, it 
would be a problem if, in fact, we can't keep up food 
production in light of population.
    Any of you know of credible economists, this reminds me of 
somebody who doesn't have expertise in this area, it sort of 
reminds me of the argument over global warming. And if the mass 
of scientists who are experts in the area are saying yes, we 
have a problem with this, and a small number are saying no, we 
don't, policymakers like me sort of feel like we better go with 
the mass here, because the consequences of being wrong are 
pretty significant. And so, maybe we need to take some 
reasonable measures to try to address the problem.
    I guess the same thing is true here. Are there credible 
agricultural economists out there who say we are not going to 
be able to keep up?
    Dr. Angle. Let me discuss this historically. Fifty years 
ago, there were the same, ``type'' of economists saying that 
food production could never keep up with the increase in 
population, Malthus and some of the other experts back at that 
time were predicting in the year 2000, that we would be looking 
at mass starvation on a global basis. That didn't happen. 
Technology is what kept up with the growth in population, and 
our ability to double food production on a fairly regular 
basis.
    The same type of people are saying those same things now. 
My argument against that is that while the easy things have 
been done in agriculture, our advances in technology, genetic 
engineering, improved understanding of genetics, both plants 
and animals, has given us tools that did not exist 50 years 
ago. We have the opportunity to make incredible advances over 
the next 50 years. Again, the easy things were done 50 years 
ago. The hard things are left, but we have some tools in our 
tool belt now that did not exist 50 years ago, and so----
    Mr. Marshall. If I could interrupt. You said--it is the 
same, you are saying, it is the same type of person, the 
generally pessimistic----
    Dr. Angle. I would call them more futurists than true 
economists, the people who look at some of these macro trends 
that were making these predictions 50 years ago. Those same 
type of people are still out there today, making predictions.
    Mr. Marshall. So, what you are saying, I guess, in response 
to my question, is that you are unaware of what you would view 
as credible agricultural economist, experts in the field of 
food production, who themselves believe that we are not really 
going to be able to increase crop yields to the degree we need 
to, in order to meet the challenge. You are just not aware of 
people like that.
    Anybody on the panel aware of folks like that? The industry 
is pretty much unanimous, you experts are pretty much unanimous 
that we are going to be able to move forward?
    Dr. Harl. It is very difficult to get a group of economists 
to agree on much of anything, but I would say that the majority 
view is that this does not pose an earthshaking problem for us. 
And I think there are a number of reasons for that. There is a 
lot of potential supply response. We have not really----
    Mr. Marshall. I have to interrupt for a second here. I am 
really just sort of interested, my time has expired, we are 
going to have votes, there is another person who wants to ask 
questions. I am interested in not the details, as much as I am 
whether or not there is a substantial minority view here.
    You said just a minute ago, you just said in your opening 
remarks responding, ``that the majority of.'' Had you not 
spoken, had we just left with Dr. Angle's remarks and nobody 
else, I would have said not a majority, it is like a super-
majority. There is just nobody out there who is viewed as a 
credible agricultural economist that would think we are not 
going to be able to keep up. That is really the issue for me. 
Is there a real substantial view among credible agricultural 
economists that we are not going to be able to keep up? Dr. 
Harl.
    Dr. Harl. I would have to say that the majority view is 
clearly that that is not a huge problem facing us, that we 
will----
    Mr. Marshall. Fifty-one percent say it is not a huge 
problem, 49 percent say it is an overwhelming problem. From a 
policymakers' perspective, that is something for us to worry 
about.
    Dr. Harl. I have never seen agricultural economists lined 
up in a row, and then, to see how many were over on one side of 
the line or on the other side of the line, but it is not the 
view of the profession, as I would put it, that this is a huge 
problem. And part of the reason is, we all lived through the 
last 80 years, and those who argued in the 1930s that we had a 
problem on our hands have been proved pretty much wrong over 
the years. As I started to say, there is a huge supply response 
we could exploit here if we have higher commodity prices. And 
the technology is going to be very significant, too.
    Mr. Marshall. Thank you all for your testimony. My time has 
expired.
    The Chairman. Thank you. I now recognize, my colleague from 
Iowa, Mr. King.
    Mr. King. Thank you, Mr. Chairman, and I do thank all the 
witnesses, and Mr. Dumler, I recall your testimony down there 
in the rain-drenched land of the purple tie, long ago. I tease 
you a little bit as I do my colleague here, Mr. Moran, for that 
reason, to catch Kansas while it was raining.
    But as I listened to all the testimony here, I want to just 
make the comment that the Malthusian's have always been wrong. 
We have always risen to all of those challenges, and that is a 
thread that I think, came from the witnesses. And in the time 
that I have, I have a lot of questions, but I would like to 
take this opportunity to direct my first question to Dr. Harl, 
and that is, what we have seen happen, and especially in the 
feed grains commodities, and in our part of the country, is 
that grain prices have been strong. The demand for 
countercyclicals and LDPs have been essentially eliminated for 
at least a couple of those crop years.
    In the middle of that, we have a little bit of EQIP funding 
that has been going to our livestock producers primarily. If we 
were to lose the funding for direct payments, would there be 
anything that existed in Federal policy that would provide an 
incentive for soil conservation, protecting our water quality, 
and preserving the productivity of our soil?
    Dr. Harl. Well, as long as the prices stay high enough, so 
that we don't have countercyclical and we don't have market 
assistance benefits, because we have the cross compliance rules 
that really are the stick to keep people doing the right thing. 
So, the loss of direct payments would mean that there would be 
less penalty for doing the things that people might be inclined 
to do.
    I guess I would be, to be fair, I would have to say that 
most of the people I know aren't terribly willing to tear up 
terraces and that type of thing, even with high prices. There 
is a great stewardship feeling among farmers and landowners as 
well. So, I have argued against direct payments from a public 
relations point of view, and when farmers are having good 
commodity prices, I think it is difficult to justify to a 
person who sees in the papers payments of significant size 
going out to individuals.
    Mr. King. What if we just renamed them conservation 
compliance payments, then? Would that be more accurate?
    Dr. Harl. That would be--I really think we should start 
working on something to make these closer tied, more closely 
tied to those things that the public believes are really 
important. We have data back many years showing 60 to 65 
percent of the population will be supportive of programs to 
help family farmers, if they think they are needed, or it is 
serving a good purpose. And this is what we have to do here is 
to reinvent direct payments in another form.
    Mr. King. You know, if I might pick up on that, Dr. Harl, 
and I appreciate that, because I think we go to the same place 
eventually. And the culture that is there for land stewardship, 
I believe, is something that has been built, because we have 
had incentives in place, and I, of course, have spent a lot of 
my life engaged in that, and it is one of the reasons my focus 
comes on that. And I am concerned about losing the direct 
payment component of this, because it remains a last hook if 
countercyclicals and LDPs would no longer be demanded because 
of market prices.
    But I wanted to take you to another question. And that is, 
I just put some numbers together here as I was listening to the 
testimony, and it really goes to the food versus fuel argument. 
And in the 2007 crop, we raised more corn than ever before, and 
that would be about 13.1 billion bushels, and we exported more 
corn than ever before, that would be 2.5 billion. We committed 
about 3 billion bushels to ethanol production out of that crop. 
But then, I would also calculate that, make your argument, 
whether you add a third of it back in or half of it back in, 
but since half of the waste is also lost in feed, I would argue 
you would have had half of that back in, mostly in the feed 
value, in the form of DDGs. So, I end up with a net domestic 
consumption out of the 2007 crop for corn of 9.1 billion 
bushels, effectively.
    And when I look at that, and I look at the average that has 
been available for domestic consumption over the previous years 
and the decade, that is 7.5. So, we really had 1.6 billion more 
bushels of corn available out of the 2007 crop for domestic 
consumption than we had seen in any other year of the decade. 
How could we then have the demand for fuel drive up food prices 
as high as the people that are on that side of the argument 
say? Dr. Harl.
    Dr. Harl. The issue of the relationship of the price of 
corn and soybeans, and to a degree wheat, to the price of food, 
is a very complex issue, and to understand that, you have to 
look at the structure of the segments of the supply chain. Most 
of the producers are in perfect competition, and before we see 
livestock, the corn that goes into livestock production, cause 
an increase in, beyond the farm gate price, you have to have 
forces squeezing the producer to reduce supply, and that takes 
a while. And I was questioning, in the articles I was writing 
over the last several months, that livestock production isn't 
forcing up prices.
    Now, it is a little different story where corn is used 
directly in production. But you move one step up the processing 
side, and that is not as competitive. That is not perfect 
competition, and the retail side in the stores, that is not 
perfect competition, either. And so, where we have seen a great 
deal of concentration occur, they are always slower to drop 
their prices when the price of raw materials goes down, and 
they are very quick to raise their prices. That is really the 
reason why I consider the structure question in agriculture one 
of the most important, going forward, of any of our policy 
issues.
    I think the public is best served when we have as much 
competition as we possibly can get, not only in the production 
side, but in the processing and every other step. And so, I am 
strongly supportive of everything that will make the price 
system, the market system work better.
    Mr. King. Well, thank you Dr. Harl, and just if I could 
conclude with a question, thank you, Mr. Chairman, for the 
deference. As I listen to this, I also am aware that during the 
same period of time, this would be about a little over a year 
ago, we saw food prices go up about 4.9 percent, and we saw 
energy prices go up about 18 percent. So, I would submit that 
at least the ethanol and the market had to lower the, keep the 
price of gas from inflating as it might have otherwise. But I 
would just like to conclude with a question to Dr. Angle, and 
that would be that if we are concerned about meeting these 
goals of doubling food production by 2050, and concerned about 
water and the things that you talked about, then how do we 
justify, then, subsidizing non-food commodities such as cotton?
    Dr. Angle. Well, it is certainly a local issue. Cotton is a 
very important part of the Georgia economy, and despite what we 
heard recently, and despite some of the programs, we are 
starting to see an increase in the desire to plant cotton in 
Georgia and neighboring states. You know, I don't feel 
qualified to give you any better answer.
    Mr. King. Can I just summarize that.
    Dr. Angle. I understand.
    Mr. King. It becomes a local economics question, and 
parochial.
    Dr. Angle. Yes, sir.
    Mr. King. And I really shouldn't have been presented that 
question to you. I must have gotten up on the wrong side of the 
bed this morning. So, I thank you all for your testimony very 
much. It is very engaging and enlightening, and I appreciate 
it, Mr. Chairman. I would be happy to yield back.
    The Chairman. We have been called for a vote. However, we 
can take a couple of minutes, yet. And so, I would recognize 
Mr. Moran for his last question, and any closing remarks he 
would like to make as the Ranking Member.
    Mr. Moran. I thank the Chairman, and I will try to avoid 
asking questions, because there is a tendency out there to have 
long answers, at least by some of the witnesses.
    And Dr. Harl, I do appreciate very much what you had to say 
about the political nature of direct payments. I am one who 
believes they are a very important component of the safety net 
that we provided farmers, which came about in the 2000 Farm 
Bill, that so-called three-legged stool. I understand the 
difficulty in explaining why a payment would be made when 
commodity prices may be higher than they are historically. But 
I certainly would encourage you to make the case, based upon 
what you said subsequent to that, about the role that the 
market should play in making decisions, and those direct 
payments are the least trade distorting, and they are the most 
market oriented, and at a time when commodity prices are what 
they are, and there is no other payment being made. But, input 
costs, again, we don't take into account, except in a small 
way, in regard to those revenue payments, what the cost is of 
production. And those direct payments are a very important 
safety net at the moment, when fertilizer, fuel, and natural 
gas matter. And I would love to have you talking about yes, it 
is difficult to explain this politically, but they matter.
    And I also wanted to just ask, or comment to Mr. Dumler 
about I wish we had had more time to explore the circumstances 
that our livestock and dairy industry are facing in Kansas and 
across the country. You, Dr. Paggi, mentioned that in 
California, it is a huge issue, with tremendous consequences, 
and then, it spills over into the grain side. It also creates 
difficulties when it comes to ethanol and biofuels, and kind of 
the consequences to our livestock and dairymen. On one hand, 
when we promote the use of grain for fuel purposes, yet, at a 
time in which livestock and dairymen have such dire 
circumstances that they face.
    I have spent some time in California with producers, 
specialty crops, cotton, rice. Your university gets great 
commendation from the producers that you serve in California, 
and I appreciate very much the relationship that you apparently 
have in promoting agriculture.
    Dr. Angle, this Subcommittee has spent time in Georgia. I 
look forward to working with you in regard to the issues that 
matter in the South. And I thank the Chairman for allowing me 
at least, not asking questions, but to express an opinion.
    The Chairman. Well, we appreciate that, and we have had the 
second call, so we are going to bring this to a close. I just 
want to thank the panel for giving us the time you have given 
us.
    I think you have told us pretty clearly that it is a 
challenging time, and we need to stay tuned in, and I can't 
appreciate you bringing your expertise and coming to use, can't 
say it strong enough. Please stay in touch with us. We will 
probably stay in touch with you.
    And so I am going to bring this a close, and under the 
rules of the Committee, the record of today's hearing will 
remain open for 10 calendar days to receive additional material 
and supplementary written responses from the witnesses to any 
questions posed by a Member.
    The hearing of this Subcommittee is now adjourned.
    [Whereupon, at 1:35 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
  Submitted Report of National Corn Growers and Corn Farmers Coalition

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                           Submitted Question
Response from Howard K. Gruenspecht, Ph.D., Acting Administrator, U.S. 
        Energy Information Administration, U.S. Department of Energy
Question Submitted By Hon. Betsy Markey, a Representative in Congress 
        from Colorado
    EIA estimates that in 2007 2.6 percent of total U.S. natural gas 
consumption was used for on-farm activities such as facility heating 
and grain drying, and as the primary feedstock and process energy 
source to produce required farm chemicals and fertilizers. Feedstock 
and process energy uses of natural gas to produce farm chemicals and 
fertilizers are roughly five times greater than on-farm uses of natural 
gas.
    In the updated Annual Energy Outlook 2009 reference case (including 
the impact of the American Recovery and Reinvestment Act), the share of 
total U.S. natural gas used on-farm and to produce agricultural 
chemicals and fertilizer is expected to increase to roughly three 
percent by 2016, then decline towards the 2007 share of total gas used 
by 2030.

                                  
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