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




   HEARING TO REVIEW THE ECONOMIC CONDITIONS FACING THE PORK INDUSTRY

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                     LIVESTOCK, DAIRY, AND POULTRY

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 22, 2009

                               __________

                           Serial No. 111-33


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov





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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
SCOTT MURPHY, New York
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 Livestock, Dairy, and Poultry

                     DAVID SCOTT, Georgia, Chairman

JIM COSTA, California                RANDY NEUGEBAUER, Texas,  Ranking 
STEVE KAGEN, Wisconsin               Minority Member
FRANK KRATOVIL, Jr., Maryland        BOB GOODLATTE, Virginia
TIM HOLDEN, Pennsylvania             MIKE ROGERS, Alabama
LEONARD L. BOSWELL, Iowa             STEVE KING, Iowa
JOE BACA, California                 K. MICHAEL CONAWAY, Texas
DENNIS A. CARDOZA, California        ADRIAN SMITH, Nebraska
BETSY MARKEY, Colorado               DAVID P. ROE, Tennessee
SCOTT MURPHY, New York
WALT MINNICK, Idaho

              Chandler Goule, Subcommittee Staff Director

                                  (ii)













                             C O N T E N T S

                              ----------                              
                                                                   Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa, 
  submitted article..............................................    63
Goodlatte, Hon. Bob, a Representative in Congress from Virginia, 
  opening statement..............................................     3
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     3
    Prepared statement...........................................     4
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................     1
    Prepared statement...........................................     2
Smith, Hon. Adrian, a Representative in Congress from Nebraska, 
  prepared statement.............................................     4

                               Witnesses

Scuse, Michael T., Deputy Under Secretary, Farm and Foreign 
  Agricultural Services, U.S. Department of Agriculture, 
  Washington, D.C................................................     5
    Prepared statement...........................................     7
    Submitted questions..........................................    63
Butler, Donald P., President, National Pork Producers Council; 
  Director of Government Relations and Public Affairs, Murphy-
  Brown LLC, Warsaw, NC..........................................    22
    Prepared statement...........................................    23
Greenwood, Mark, Vice President, Agri Business Capital, AgStar 
  Financial Services, Mankato, MN................................    32
    Prepared statement...........................................    33
    Submitted questions..........................................   126
Buhr, Ph.D., Brian, Professor, Head and E. Fred Koller Chair in 
  Applied Economics, University of Minnesota, St. Paul, MN.......    38
    Prepared statement...........................................    39
    Submitted questions..........................................   126
Brenneman, Rod K., President and CEO, Seaboard Foods LLC, Shawnee 
  Mission, KS....................................................    50
    Prepared statement...........................................    52
Moody, David, Chairman and Past President, Public Policy 
  Committee, Iowa Pork Producers Association, Nevada, IA.........    54
    Prepared statement...........................................    56
    Submitted questions..........................................   126

 
   HEARING TO REVIEW THE ECONOMIC CONDITIONS FACING THE PORK INDUSTRY

                              ----------                              


                       THURSDAY, OCTOBER 22, 2009

                  House of Representatives,
     Subcommittee on Livestock, Dairy, and Poultry,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:05 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. David 
Scott [Chairman of the Subcommittee] presiding.
    Members present: Representatives Scott, Kagen, Holden, 
Boswell, Baca, Markey, Murphy, Minnick, Peterson (ex officio), 
Goodlatte, King, Smith, Roe, and Moran.
    Staff present: Alejandra Gonzalez-Arias, Chandler Goule, 
Craig Jagger, James Ryder, April Slayton, Rebekah Solem, 
Patricia Barr, John Goldberg, Tamara Hinton, Pete Thomson, 
Jamie Mitchell, and Sangina Wright.

  OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN 
                     CONGRESS FROM GEORGIA

    The Chairman. This hearing of the Subcommittee on 
Livestock, Dairy, and Poultry to review the economic conditions 
facing the pork industry will now come to order.
    I am going to start out by just welcoming everyone and 
making a few opening statements, and then we will proceed from 
there. This is indeed a very important and a very timely 
hearing. We have many challenges facing our pork industry. As 
always, I am very appreciative of all of you for taking the 
time during a very busy week to help us examine the economic 
conditions facing the pork industry.
    Over the last several years, the pork industry has suffered 
a very serious decline in its financial state. It seems as 
though one calamity after another struck: high commodity 
prices, recession, the closing of export markets because of 
H1N1. As such, the pork industry has lost over $5 billion, 
nearly \2/3\ of producer equity. Clearly, if this situation 
persists, we will lose producers altogether at an ever-
increasing rate, which, in my opinion, is an unacceptable 
outcome. Something must be done both in the short term and the 
long term in order to aid the pork industry in turning itself 
around.
    Just yesterday our full Committee on Agriculture reported 
out a bill to address speculation in the commodities markets. I 
am hopeful that Congress will pass this legislation into law 
soon so that the price shocks we have experienced in commodity 
markets will be mitigated and producers will have more 
predictability, reliability and accurate pricing of their 
inputs.
    As I said earlier, the decline in economic condition of the 
pork industry is due to a number of causes, not simply input 
costs, so we must examine closely these other factors as well. 
For instance, the widespread public misinformation both 
domestically and internationally regarding H1N1, the influenza, 
that has had a direct, demonstrable and severe impact on 
producer income. Unfortunately, the general public was led to 
believe that pork was not safe to eat and so changed their 
purchasing habits. Nothing could be further from the truth. Let 
me reiterate once again: Our pork is safe to eat. Also, several 
of the largest export markets for pork, Russia and China, for 
example, used the H1N1 outbreak to erect artificial trade 
barriers against our U.S. pork product. I feel that we as 
Members of Congress need to press United States Trade 
Representative Kirk and the rest of the Obama Administration to 
hold these trading partners--and I use the term ``partner'' 
loosely--to hold them accountable for their reactionary 
behavior and press them to use sound science rather than 
misinformation to fully reopen their markets to U.S. pork 
products.
    These are just some of the issues the pork industry is 
facing currently, and I am sure our distinguished panelists 
will lay out numerous concerns in addition to those I have 
mentioned here. This Subcommittee is open to hearing everyone's 
opinion on what is hindering the pork industry currently, as 
well as hearing any ideas on how we may possibly assist this 
very vital and important industry in maintaining its long-term 
viability.
    In closing, I just want to remind our Members and the 
public that this hearing is not just about H1N1. There are so 
many other issues that are affecting the pork industry and it 
is about all of the factors that are affecting the pork 
industry. I saw in the press just this morning that this 
Committee was having an H1N1 hearing today, and that is not 
true. Certainly we will deal with the H1N1 crisis, but it is 
definitely a topic that I expect us to discuss very thoroughly 
in addition to all of the other issues that are facing our pork 
industry in all of its entirety.
    [The prepared statement of Mr. Scott follows:]

 Prepared Statement of Hon. David Scott, a Representative in Congress 
                              from Georgia
    I would like to welcome everyone once again to the Subcommittee on 
Livestock, Dairy, and Poultry. As always I very much appreciate you all 
taking time out during a very busy week to help us examine the economic 
conditions of the pork industry.
    Over the last several years the pork industry has suffered a 
serious decline in its financial state. It seems as though one calamity 
after another has struck; high commodity prices, recession, the closing 
of export markets because of H1N1. As such the pork industry has lost 
over $5 billion, nearly \2/3\ of producer equity. Clearly, if this 
situation persists we will lose producers altogether at an ever 
increasing rate, which in my opinion is an unacceptable outcome. 
Something must be done both in the short term and long term in order to 
aid the pork industry in turning itself around.
    Just yesterday the full Committee on Agriculture reported out a 
bill to address speculation in the commodity markets. I am hopeful that 
Congress will pass this legislation into law soon, so that the price 
shocks we've experienced in commodity markets will be mitigated and 
producers will have more predictable, reliable and accurate pricing of 
their inputs.
    As I said earlier, the decline in the economic condition of the 
pork industry is due to a number of causes, not simply input costs. So 
we must examine closely these other factors as well. For instance, the 
widespread public misinformation both domestically and internationally 
regarding H1N1 influenza has had direct, demonstrable and severe 
impacts on producer income. Unfortunately the general public was led to 
believe that pork was not safe to eat and so changed their purchasing 
habits. Let me reiterate once again: PORK IS SAFE TO EAT. Also, several 
of the largest export markets for pork, Russia and China for example, 
used the H1N1 outbreak to erect artificial trade barriers against U.S. 
product. I feel that we as Members of Congress need to press U.S. Trade 
Representative Kirk and the rest of the Administration to hold these 
trading partners, and I use the term `partner' loosely, accountable for 
their reactionary behavior and press them to use sound science rather 
than misinformation, and to fully reopen their markets to U.S. pork 
products.
    But these are just a few of the issues the pork industry is facing 
currently. I am sure our distinguished panelists will lay out numerous 
concerns in addition to those I have mentioned here. This Subcommittee 
is open to hearing everyone's opinion on what is hindering the pork 
industry currently, as well as hearing any ideas on how we may possibly 
assist the industry in maintaining its long term viability. With that I 
turn to the Ranking Member, Mr. Neugebauer, for any opening remarks he 
wishes to make.

    The Chairman. And with that, now I will turn to our 
substitute Ranking Member, Mr. Goodlatte, for his opening 
comments.

 OPENING STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN 
                     CONGRESS FROM VIRGINIA

    Mr. Goodlatte. Well, thank you, Mr. Chairman, and I very 
much appreciate your calling this hearing today. I look forward 
to hearing the testimony and responses to questions of our 
witnesses and the Administration, the pork production sector, 
agricultural credit and academia.
    A review of the prepared testimony tells a story of 
difficult economic conditions for the pork community. The 
causes are many and varied. As we listen to our witnesses 
today, I would ask that my colleagues pay particular attention 
to the adverse effects on producers that are the result of the 
actions of government, actions such as trade policies and 
additional regulatory burdens like mandatory country-of-origin 
labeling do not help, and in many cases hurt, the very people 
represented today. As we go forward in our work considering 
policy proposals like cap-and-trade, healthcare, antibiotic 
legislation, energy policy, animal welfare, industry structure, 
food safety, and changes to tax law, we should do it with 
today's hearing in mind. The people before us today will tell 
us about the sobering challenges they face. Each of us should 
measure our future votes according to whether we are helping 
them or contributing to their hardship.
    Again, Mr. Chairman, thank you for calling this hearing 
today. I look forward to gaining a better understanding of the 
problems facing the pork sector and the suggestions that they 
may have to help us address them.
    The Chairman. Thank you, Mr. Goodlatte.
    Now I would like to recognize our distinguished Chairman, 
Mr. Peterson, for his opening statement.

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

    Mr. Peterson. Thank you, Mr. Chairman, and I want to 
commend you and the Ranking Member for your leadership of this 
Subcommittee and on this issue, and all our Members that 
represent the areas that have pork production have been very 
much focused on this. I want to commend the Administration for 
doing whatever they can do to help with the situation. I think 
they have been very responsive. We have a number of Members who 
have really focused on this, Mr. Walz in my state, Mr. King, 
Mr. Latham, the folks in North Carolina, people around the 
country that have hog production. But I want to single out Mr. 
Boswell. There has been nobody that has been more focused on 
this, more interested, more on top of this than Mr. Boswell. He 
used to serve as Chairman of this Subcommittee and I just want 
to commend him for really stepping up to the plate on this, and 
not only on the overall situation with the industry but on the 
antibiotic issue.
    So we have a lot of Members that are really paying 
attention to this and are really focused on this, and I commend 
all of them for their actions and hope that we can come up with 
some solutions that will be helpful to the industry. Thank you.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota
    I want to thank Chairman Scott and Subcommittee Ranking Member 
Neugebauer for calling today's timely hearing and for their leadership 
on this Subcommittee. The situation facing the pork industry today is 
serious, and we need to find both short and long term solutions to 
stabilize the market for pork producers.
    Since September 2007, the U.S. pork industry has lost an estimated 
$4.6 billion in equity, with producers losing an average of more than 
$21 for each hog marketed. Several factors have contributed to these 
severe losses, including rising input costs and a worldwide recession. 
Recently, the unreasonable reaction of our trading partners to the 
outbreak of H1N1, specifically Russia and China, has only further 
intensified the economic crisis facing the pork industry.
    Responding to the current crisis, Secretary Vilsack has taken steps 
to bring some relief to U.S. pork producers. USDA recently announced 
that it will purchase $30 million of additional pork products this 
year. We will continue to work with USDA in finding more ways to 
support U.S. pork producers in the short term.
    We also need to work with the U.S. Trade Representative Kirk to 
open and expand export markets for U.S. pork. It is unacceptable for 
our trading partners to deny access to U.S. pork products based not on 
sound science, but on faulty politics.
    I look forward to hearing from our witnesses today about how we can 
best assist pork producers as they weather this economic storm. Thank 
you for appearing today before the Subcommittee and thank you again, 
Chairman Scott and Ranking Member Neugebauer for your leadership. I 
yield back my time.

    The Chairman. Thank you very much, Mr. Chairman.
    Now we would like to welcome our first witness, and I will 
request that other Members who have opening statements will 
submit their opening statements for the record so the witnesses 
can begin their testimony and ensure that we have ample time to 
hear from our witnesses.
    [The prepared statement of Mr. Smith follows:]

 Prepared Statement of Hon. Adrian Smith, a Representative in Congress 
                             from Nebraska
    Good morning and thank you, Mr. Chairman, for holding this hearing 
today ``to review the economic conditions facing the pork industry.'' 
As you know, over the past 2 years hog prices have declined due to loss 
of exports in the global economic downturn and the drop in demand after 
the H1N1 flu virus scare. Meanwhile, rising input costs and 
environmental regulations continue to further burden livestock 
producers. It is my hope this Subcommittee can explore robust solutions 
to assist pork producers in these tough economic conditions.
    While I am very pleased the U.S. Department of Agriculture has 
announced approval to purchase an additional $30 million in pork 
products this year, we must continue to work to ensure policies which 
will strengthen our agriculture economy and provide real, long-term 
stability for our nation's producers. Traveling throughout Nebraska's 
Third District, I have organized a number of meetings with livestock 
producers, which have provided me a chance to discuss the real impact 
of increasing input costs and government mandates on those working on 
the front lines of agriculture. In addition, increasing export markets 
has long been a priority of mine, and I will continue to help 
Nebraska's producers meet global marketplace demands.
    I look forward to hearing the testimony of our witnesses, including 
Deputy Under Secretary Michael Scuse who oversees, among many things, 
the Foreign Agriculture Service (FAS). As you know, the FAS is directed 
to foster economic opportunity for American farmers and U.S. 
agriculture products abroad. Since exports are imperative for U.S. pork 
producers, the recent announcements to expand the FAS development 
mission must not come at the expense of the U.S. producers. Now more 
than ever, our products must be as competitive as possible in the world 
market.
    Thank you, Mr. Chairman.

    The Chairman. Our first witness this morning is Mr. Michael 
Scuse, who is the Deputy Under Secretary for the Farm and 
Foreign Agricultural Services at the U.S. Department of 
Agriculture. Mr. Scuse, thank you very much for coming. You may 
begin.

          STATEMENT OF MICHAEL T. SCUSE, DEPUTY UNDER
            SECRETARY, FARM AND FOREIGN AGRICULTURAL
           SERVICES, U.S. DEPARTMENT OF AGRICULTURE,
                        WASHINGTON, D.C.

    Mr. Scuse. Thank you, Mr. Chairman. If you don't mind, I do 
have a statement.
    Chairman Scott, distinguished Members of the Subcommittee, 
I appreciate the opportunity to discuss the current economic 
situation facing the pork producers and the programs delivered 
by my mission area in the U.S. Department of Agriculture. As 
Deputy Under Secretary for Farm and Foreign Agricultural 
Services, I oversee three agencies: the Farm Service Agency, 
the Foreign Agricultural Service and the Risk Management 
Agency. I would like to take this opportunity to provide you 
with an update on the pork market situation, our forecast for 
the pork market, and my mission area's response to the sharp 
downturn.
    The reasons for the recent economic distress in the U.S. 
hog sector are varied and complex, as you have stated. Some are 
similar to the reasons for the distress suffered in the dairy 
sector: over-expansion in response to higher than normal 
profits in previous years, combined with recession-driven 
declines in domestic and international demand. In addition, the 
U.S. hog sector has also been unfairly linked to the emergence 
of the novel H1N1 influenza, reducing demand for pork and pork 
products. The hog sector, like dairy, is expected to improve 
substantially over the next year as the breeding herd continues 
to contract and domestic and international demand improves.
    September 2009 was the 22nd month of losses on hogs 
marketed since losses began accruing and the down phase of the 
current hog cycle in October of 2007. Given 200 million 
domestically produced hogs marketed during this 2 year period 
from October 2007 through September 2009, losses to the hog 
sector are estimated at approximately $4 billion. Losses are 
expected to moderate from now through 2010 as demand increases 
and hog supplies decline. Exports in the fourth quarter of 2009 
are expected to be up 12 percent from over a year ago to nearly 
20 percent of fourth quarter production, just below the record 
25 percent of production in the second quarter of 2008. The 
value of the U.S. dollar has fallen 10-30 percent against 
several major currencies since earlier this year, which should 
also help our exports. A return to domestic and global economic 
growth should also improve profitability. Ongoing adjustments 
on supply side are expected to also contribute to improved 
profitability in the U.S. hog sector in 2010. USDA forecasts 
that 2009 U.S. pork production will decline 1.45 percent from 
2008 production, and 2010 production will be down an additional 
2.5 percent compared to 2009.
    I know that H1N1 has been at the forefront of our attention 
since these past few months and days especially. To briefly 
update you on the situation, USDA's National Veterinary 
Services Laboratories, NVSL, has confirmed the presence of 2009 
pandemic H1N1 influenza virus in a pig sample collected at the 
Minnesota State Fair submitted by the University of Minnesota. 
Additional samples are currently being tested. The infection of 
the fair pig does not suggest infection in our commercial 
industry. If we do detect the 2009 pandemic H1N1 influenza 
virus in commercial swine, USDA will work with our state 
partners, producers and their veterinarians to prevent the 
spread of the virus, and we will continue to provide 
information and updates as they become available. When it comes 
to flu, swine are much like people: the vast majority recovers 
without lingering health effects. Only those animals that have 
fully recovered will be permitted to enter our food supply.
    It is paramount to note that you cannot get infected with 
the 2009 pandemic H1N1 influenza virus from eating pork or pork 
products, as you stated, Mr. Chairman.
    A number of our nation's trading partners have banned live 
pigs, pork or pork products since the outbreak among human 
beings. We will continue to urge countries to base any bans on 
scientific evidence and in accordance with international 
obligations.
    USDA has taken many other actions to assist the pork 
industry. The Secretary announced on September 3, 2009, USDA's 
intention to immediately purchase up to $30 million in pork 
products prior to October 1st. Since October 2008, AMS has 
purchased about 100 million pounds of domestic pork products at 
a cost of approximately $165 million for distribution to 
Federal food and nutrition assistance programs. This includes 
$28.9 million in funds authorized by the American Recovery and 
Reinvestment Act of 2009.
    The availability of credit is a critical factor to hog 
producers during this stressful period. This Administration has 
been proactive in efforts to assure that adequate credit is 
available for farmers and our ranchers. Within weeks of taking 
office, we aggressively sought additional funding for FSA farm 
loan programs. The American Recovery and Reinvestment Act 
provided an additional $173 million in direct operating loan 
funding.
    On August 12, 2009, Secretary Vilsack sent letters to all 
FSA farm loan borrowers advising them of assistance available 
if they are experiencing financial hardship. The Secretary also 
sent a letter to FSA guaranteed loan lenders on the same day, 
encouraging them to consider all possible options for loan 
modifications under the FSA Loan Guarantee Program. We are 
continuing to consider options and evaluate alternatives that 
might provide financial relief to hog producers and other 
farmers in financial distress.
    USDA's Market Access Program and Foreign Market Development 
Program help finance promotional activities for U.S. 
agricultural exports. With MAP funds, the U.S. Meat Export 
Federation promotes pork in Southeast Asia, the Caribbean, 
Central and South America, Europe, China, Japan, Korea, Mexico, 
Russia and Taiwan. USMEF also used FMD funds in program year 
2009 for administrative costs for operating 13 foreign offices 
that support U.S. meat export promotion activities, including 
pork.
    Despite the challenges in the past 5 years, U.S. pork 
exports have nearly doubled and the proportion of production 
exported jumped almost 11 percent. Much of the growth has 
occurred in Japan, Canada, Mexico, China and Russia.
    Two types of insurance for swine producers are available in 
the Federal crop insurance program: the Livestock Risk 
Protection and the Livestock Gross Margin Program Swine insures 
against declining markets. So far in 2009, 29,000 head were 
insured by LRP on 19 policies. The LGM for Swine insurance 
provides protection against the loss of gross margin. So far in 
2009, 126,000 head were insured with 62 policies.
    In conclusion, I appreciate the opportunity to testify 
before this Subcommittee today, and I look forward to working 
with each and every one of you, Mr. Chairman and all Members of 
this Committee, as we continue our hard work to ensure that 
USDA is responsive to the needs of our pork industry. At this 
time I will be happy to answer questions that, Mr. Chairman, 
you or the Committee may have.
    [The prepared statement of Mr. Scuse follows:]

 Prepared Statement of Michael T. Scuse, Deputy Under Secretary, Farm 
   and Foreign Agricultural Services, U.S. Department of Agriculture,
                            Washington, D.C.
    Chairman Scott, Ranking Member Neugebauer, and distinguished 
Members of the Subcommittee, I appreciate the opportunity to discuss 
the current economic situation facing pork producers and the programs 
delivered by my mission area in the U.S. Department of Agriculture 
(USDA). As Deputy Under Secretary for Farm and Foreign Agricultural 
Services (FFAS), I oversee three agencies: the Farm Service Agency 
(FSA), the Foreign Agricultural Service (FAS), and the Risk Management 
Agency (RMA). I would like to take this opportunity to provide you with 
an update on the pork market situation, our forecasts for the pork 
market, and my mission area's response to the sharp downturn.
Background and Expectations for 2010
    The reasons for the recent economic distress in the U.S. hog sector 
are varied and complex. Some are similar to the reasons for the 
distress suffered in the dairy sector: over-expansion in response to 
higher than normal profits in previous years, combined with recession-
driven declines in domestic and international demand. In addition, the 
U.S. hog sector has also been unfairly linked to the emergence of the 
novel H1N1 influenza reducing demand for pork and pork products. The 
hog sector, like dairy, is expected to improve substantially over the 
next year as the breeding herd continues to contract and domestic and 
international demand improve.
    Hog production is cyclical, with a period of profits normally 
inducing expansion, followed by a period of losses that induce 
contraction. September 2009 was the 22nd month of losses on hogs 
marketed since losses began accruing in the down phase of the current 
hog cycle in October 2007. According to Dr. John Lawrence of Iowa State 
University, a typical Iowa-Southern Minnesota farrow-to-finish 
operation experienced monthly losses per hog marketed averaging about 
$20 for the 24 months from October 2007 to September 2009, with losses 
as high as $40-$46 per head in November and December 2008 (see chart). 
Given 200 million domestically-produced hogs marketed during this 2 
year period from October 2007 through September 2009, losses to the hog 
sector are estimated at approximately $4 billion.
    These losses compare to average monthly profits, calculated by Dr. 
Lawrence, of $24.27 per head over the 43 months from February 2004 to 
September 2007. Those profits were due to rapid increases in domestic 
and export demand for pork, driven by strong worldwide economic growth 
and a depreciating U.S. dollar. That period of profitability was a 
contributing factor to the expansion of the hog sector in 2007. Annual 
farrowings in 2007 increased 5.3 percent over 2006 farrowings, and in 
the last half of 2007, farrowings were up 7.7 percent over farrowings 
in the last half of 2006. In contrast, farrowings between 2004 and 2006 
increased an average of only 0.6 percent annually. Moreover, imports of 
live hogs from Canada increased 14 percent in 2007, to ten million 
head, as Canada's hog sector also expanded, and represented over nine 
percent of hogs slaughtered in the U.S. in 2007. Hog imports from 
Canada began to drop below year ago levels in May 2008 and are down 32 
percent so far in 2009. Both countries have continued to experience 
increases in litter size, with litter size in the United States 
increasing 4.3 percent between the 4th quarters 2006 and 2008, for 
example.
    The second contributing factor to the past 2 years of losses has 
been the worldwide recession. The combination of large inventories and 
recession caused a sharp drop in the market value of live hogs, from a 
June 2007 peak of $152.50 to $103.30 in November 2007. Hog prices were 
temporarily pulled up in 2008 because of a 49 percent increase in pork 
exports as a result of a continuation of world economic growth and a 
weakening U.S. dollar through the first half of 2008, with 2008 pork 
exports representing 20 percent of pork production. As worldwide 
economic growth slowed, and the U.S. dollar sharply appreciated in 
late-2008 in response to the September 2008 financial crisis, pork 
exports began declining sharply in late 2008. U.S. pork exports during 
the first 3 quarters of 2009 were down 18 percent over the same period 
in 2008 even before the 2009 pandemic H1N1 influenza outbreak. In 
recent months, pork exports have recovered somewhat and are forecast to 
decline by ten percent in 2009. The value of market hogs fell from 
$172.34 in August 2008 to the $120 range from January 2009 through 
July, before collapsing to $98.71 per head in August 2009.


    Losses are expected to moderate from now through 2010, as demand 
increases and hog supplies decline. Exports in 4th quarter 2009 are 
expected up 12 percent over a year ago, to nearly 20 percent of 4th 
quarter production, just below the record 25 percent of production in 
the 2nd quarter of 2008. The value of the U.S. dollar has fallen 10 
percent to 30 percent against several major currencies since earlier 
this year, which should help exports. A return to domestic and global 
economic growth should also improve profitability.
    Ongoing adjustments on the supply side are expected to also 
contribute to improved profitability in the U.S. hog sector in 2010. 
USDA forecasts that 2009 U.S. pork production will decline 1.45 percent 
from 2008 production, and 2010 production will be down an additional 
2.5 percent compared to 2009 production. The September Hogs and Pigs 
report shows the June 2009 breeding herd down 2.7 percent from June 
2008 and the September 2009 breeding herd down 3.1 percent from 
September 2008. The September 2009 breeding herd is down 5.4 percent 
from its September 2007 peak. Farrowing intentions for September 2009 
through February 2010 are down 3.1 percent from the previous year. 
Year-over-year farrowings are expected to decline through the third 
quarter 2010, with total 2010 farrowings down over four percent from 
the 2007 high of 12.25 million. Moreover, live hog imports from Canada 
are forecast to decline by 875,000 from 6.475 million in 2008 to 5.6 
million in 2010 compared to a peak of ten million in 2007, as Canada's 
hog sector also contracts.
    USDA expects live hog prices to increase from the current mid-to-
high $30 per cwt range to the high $40 per cwt range, and feed costs to 
average about the same in the last half of 2010 as in the last half of 
2009. Unfortunately, the 4th quarter is the seasonal low for hog prices 
and the 4th quarter 2009 price for live hogs is expected to average $35 
per cwt, down from a 3rd quarter average $38.90. Hog prices are 
expected to increase during the first 3 quarters of 2010. The 1st 
quarter 2010 price is expected to average $40 per cwt; the 2nd quarter 
average is an expected $45, and the 3rd quarter 2010 price is forecast 
to average $49 before seasonally declining to $45 in 4th quarter 2010. 
Feed prices are expected to increase seasonally, through the first and 
second quarters of 2010 before declining in the third and fourth 
quarters.
H1N1
    USDA's National Veterinary Services Laboratories (NVSL) has 
confirmed the presence of 2009 pandemic H1N1 influenza virus in a pig 
sample collected at the Minnesota State Fair submitted by the 
University of Minnesota. Additional samples are currently being tested.
    The infection of the fair pig does not suggest infection of 
commercial herds because show pigs and commercially raised pigs are in 
separate segments of the swine industry that do not typically 
interchange personnel or animal stock. If we do detect the 2009 
pandemic H1N1 influenza virus in commercial swine, USDA will work with 
our state partners, producers and their veterinarians to prevent spread 
of the virus, and will continue to provide information and updates as 
they become available. When it comes to flu, swine are much like 
people--the vast majority recovers without any lingering health 
effects. Only those animals that have fully recovered will be permitted 
to enter the food supply. It is paramount to note that you cannot get 
infected with the 2009 pandemic H1N1 influenza virus from eating pork 
or pork products.
    USDA continues to remind U.S. swine producers about the need for 
good hygiene, biosecurity and other practices that will prevent the 
introduction and spread of influenza viruses in their herd and 
encourage them to participate in USDA's swine influenza virus 
surveillance program.
    Since last spring and the onset of the 2009 pandemic H1N1 influenza 
outbreak in humans, USDA has consistently asked that the media stop 
calling this ``novel'' pandemic virus ``swine flu.'' By continuing to 
mislabel the 2009 pandemic H1N1 influenza virus that is affecting human 
populations around the world, the media is causing undue and undeserved 
harm to America's agriculture industry, especially to pork producers.
    Each time the term is used it unfairly hurts America's hog 
producers who are suffering severe economic losses during these 
challenging economic times. It is simply not fair or correct to 
associate the 2009 pandemic H1N1 influenza with hogs, an animal that 
does not play a role in the ongoing transmission of the pandemic 
strain.
    While about 27 countries originally imposed restrictions on U.S. 
pork since the April outbreak, 17 countries have removed their 
restrictions--in large part due to the Administration's efforts to 
encourage these countries to base their measures on science. We will 
continue to urge countries to base any bans on scientific evidence and 
in accordance with their international obligations. Three major 
international health organizations--the World Organization for Animal 
Health (OIE), the United Nations' Food and Agriculture Organization, 
and the World Health Organization--have all issued statements that 2009 
pandemic H1N1 influenza is not transmitted by eating pork.
    USDA will be devoting $27.75 million provided via supplemental 
appropriations to 2009 H1N1 flu preparedness and response activities. 
Of this total, $25 million will go to the Animal and Plant Health 
Inspection Service (APHIS) for surveillance activities, outreach to 
industry, and support to help expedite licensing of any new swine 
vaccines. APHIS will also receive $0.75 million to purchase human 
antivirals and personal protective equipment for animal health 
officials through the National Veterinary Stockpile program. The 
remaining $2 million will go to the Agricultural Research Service to 
develop improved tools for detecting and preventing H1N1 from being 
established in U.S. swine populations.
    Even before the novel H1N1 flu virus appeared last spring, we had 
been working with the Centers for Disease Control and Prevention on a 
voluntary surveillance program for swine influenza viruses. That 
program which now includes voluntary monitoring for the novel H1N1 flu 
virus, has now been launched, with the aim of identifying such viruses 
quickly in the U.S. swine herd. Monitoring and studying these influenza 
viruses in swine will help us learn about the virus, create better 
tools to diagnose the disease and develop new and improved vaccines to 
protect U.S. swine herds and humans. USDA continues to study the virus 
in agricultural animals to provide the best protection for both public 
and animal health. To address producer reluctance to participate in the 
program, we have worked with the states to formulate guidelines for 
swine infected with the novel H1N1 flu virus and ensure that infected 
swine may move freely in commerce once they recover from their illness.
    APHIS also recently made available master seed virus for the novel 
H1N1 flu virus to interested manufacturers so they can produce approved 
vaccine more rapidly. We believe that a H1N1 vaccine for swine will be 
available in the coming months.
Trade
    The U.S. pork industry has been facing barriers to trade because of 
non-science based restrictions that are being imposed by importing 
countries. The H1N1 pandemic virus is a primary example of an issue 
that has resulted in non-science based barriers to trade. Secretary 
Vilsack has worked to correct misconceptions about the relationship 
between the current H1N1 virus and swine and to emphasize that U.S. 
pork is safe.
    A number of countries continue to maintain bans on U.S. live pigs, 
pork and pork products, contrary to advice of three major international 
health organizations, and USDA continues to press these countries to 
rescind these bans. President Obama and several Administration Cabinet 
officials including USDA Secretary Vilsack and U.S. Trade 
Representative Ron Kirk have sent letters to those countries 
maintaining bans and raised the topic in high level bilateral meetings. 
The U.S. delegation to the WTO SPS Committee, led by USTR, will also 
raise the issue at the upcoming committee meeting in Geneva in late 
October.
    As a result of our efforts, many countries that initially imposed 
bans have rescinded them, but additional work remains. Russia and China 
are key pork export markets and USDA has expended considerable efforts 
to engage those countries on this issue. I am happy to report that 
Russia has rescinded all of their bans. China continues to maintain 
bans on all U.S. pork and pork products and the Administration is using 
every opportunity to press China to remove these unscientific bans.
    Secretary Vilsack will travel to China to participate in the Oct. 
28-29 meeting of the U.S.-China Joint Commission on Commerce and Trade 
(JCCT) in Hangzhou, along with U.S. Trade Representative Ron Kirk and 
Commerce Secretary Gary Locke. This issue is a high priority on their 
agenda. The JCCT serves as an important forum for Cabinet-level 
officials from both countries to resolve trade concerns and enhance 
economic opportunities and cooperation.
    Another issue on which USDA has been working closely with the pork 
industry is that regarding residues of the veterinary drug ractopamine. 
Ractopamine is widely used in the U.S., but banned in some key markets 
such as the European Union, China, and Taiwan. The U.S. has been 
working diligently to gain final approval for an international standard 
for trace residues of ractopamine in pork to help address this issue 
with our key trading partners.
Other USDA Actions and Programs to Assist the Pork Industry
USDA Purchases of Pork
    Due to the declining prices paid to producers, the Secretary 
announced on September 3, 2009, USDA's intention to immediately 
purchase up to $30 million in pork products prior to October 1, 2009. 
Since October 2008 (i.e., FY 2009), Agricultural Marketing Service 
(AMS) has purchased about 100 million lbs. of domestic pork products at 
a cost of $164.6 million for distribution to Federal food and nutrition 
assistance programs. This includes $28.9 million in funds authorized by 
the American Recovery and Reinvestment Act of 2009 (ARRA). It is 
important to note that school districts are never required to accept 
any USDA Food, they cannot effectively use or do not want. In FY 2009, 
schools elected to order some pork products, but the majority or the 
USDA purchased pork products were provided to the Emergency Food 
Assistance Program. In FY 2008, AMS purchased approximately 40.6 
million pounds of domestic pork products at a cost of $65.2 million. 
The Department continues to evaluate pork market conditions and, if 
justified, AMS will initiate additional surplus removal purchases this 
fiscal year.
Credit Assistance
    The availability of credit is a critical factor for hog producers 
during this stressful period. This Administration has been proactive in 
efforts to assure that adequate credit is available for farmers and 
ranchers. Within weeks of taking office, we aggressively sought 
additional funding for FSA farm loan programs. The ARRA provided 
funding to support an additional $173 million in direct operating 
loans.
    We recognize that some producers will be unable to meet their 
financial obligations due to negative profit margins in the pork 
industry. The Administration is committed to the use of the authorities 
at its disposal to assist those hog producers in coping with the 
financial challenges they face. On August 12, 2009, Secretary Vilsack 
sent letters to all FSA farm loan borrowers advising them of assistance 
available if they are experiencing financial hardship. The Secretary 
also sent a letter to FSA guaranteed loan lenders on the same day, 
encouraging them to consider all possible options for loan 
modifications under the FSA loan guarantee program. FSA field staffs 
have been given direction, and are prepared to assist hog producers and 
other farmers through loan restructuring up to and including write-down 
of FSA debt. Furthermore, we are continuing to consider options and 
evaluate alternatives that might provide financial relief to hog 
producers and other farmers under financial stress.
Export Promotion
    USDA's Market Access Program (MAP) and Foreign Market Development 
(Cooperator) Program (FMD) help finance promotional activities for U.S. 
agricultural exports. With MAP funds, the U.S. Meat Export Federation 
(USMEF) promotes pork in Southeast Asia, the Caribbean, Central and 
South America, Europe, China, Japan, Korea, Mexico, Oceania, Russia, 
and Taiwan. USMEF also used FMD funds in program year 2009 for 
administrative costs for operating 13 foreign offices that support U.S. 
meat export promotion activities, including pork.
    Export markets are increasingly important to the U.S. pork 
industry. Despite challenges, in the past 5 years, U.S. pork exports 
have nearly doubled and the proportion of production exported jumped 
from almost 11 percent to 18 percent. Much of the growth has occurred 
in Japan, Canada, Mexico, China, and Russia.
Federal Crop Insurance Program
    Two types of insurance for swine production are available in the 
Federal crop insurance program: the Livestock Risk Protection (LRP) and 
the Livestock Gross Margin (LGM).
    Livestock Risk Protection (LRP) Swine insures against declining 
market prices. Pork producers may select from a variety of coverage 
levels and insurance periods that match the time their hogs would 
normally be marketed. Producers may purchase this insurance throughout 
the year from approved livestock insurance agents. Premium rates, 
coverage prices, and actual ending values are posted on the RMA website 
daily. So far in 2009, 29,672 head were insured by LRP on 19 policies.
    Livestock Gross Margin (LGM) Swine insurance provides protection 
against the loss of gross margin (market value of livestock minus feed 
costs) on swine. The indemnity at the end of the 6 month insurance 
period is the difference, if positive, between the gross margin 
guarantee and the actual gross margin. The LGM for Swine Insurance 
Policy uses futures prices to determine the expected gross margin and 
the actual gross margin. The price the producer receives at the local 
market is not used in these calculations. So far in 2009, 126,539 head 
were insured by 62 policies.
Disaster Assistance Programs
    The 2008 Farm Bill created several new disaster programs that 
provide assistance through USDA's Farm Service Agency to producers. The 
program that is available to pork producers who have recently suffered 
a natural disaster, in addition to the current economic crisis, is the 
Livestock Indemnity Plan (LIP).
    LIP compensates producers for livestock death losses in excess of 
normal mortality due to adverse weather that occurred on or after 
January 1, 2008 and before October 1, 2011. Counties are now authorized 
to make payments upon completed applications.
Conclusion
    I recognize the decisions that we make in Washington affect the 
livelihood of America's farmers and ranchers and we are committed to 
ensuring that we work together to help meet the needs of U.S. pork 
producers.
    I appreciate the opportunity to testify before this Subcommittee 
today, and I look forward to working with you, Mr. Chairman, Mr. 
Neugebauer, and all the Members of this Subcommittee as we continue our 
hard work to ensure that USDA is responsive to the needs of the pork 
industry. I will be happy to answer questions you may have.

    The Chairman. Thank you very much, Mr. Scuse, and again, it 
is good to have you.
    Let us just deal first of all with the situation facing us 
with the H1N1 situation to make sure that we get the accurate 
facts and information out. Isn't it a fact that the H1N1 flu 
virus cannot, cannot be transmitted through food including 
pork?
    Mr. Scuse. That is correct, Mr. Chairman. Pork, if properly 
prepared, you are not going to have a problem. It is not a 
human health issue to consume pork.
    The Chairman. And----
    Mr. Scuse. That is the message that we do need to get out 
to the public, so thank you very much for your help in getting 
that message out, Mr. Chairman.
    The Chairman. It is also important for us to note that the 
most important thing facing us now with H1N1 is to get our flu 
vaccinations and to make sure that we have that information be 
accurate and out. One of the tragic figures that we have before 
us is that there have been about 86 children who have died from 
the H1N1 virus, and just from your information, what research, 
what is the status of the research that the United States 
Department of Agriculture is now doing in regards to H1N1?
    Mr. Scuse. Mr. Chairman, the USDA continually does 
different types of research on swine to look at the different 
types of viruses that are out there.
    The Chairman. Just finally on that, the situation with the 
pigs at the Minnesota State Fair, it is very important to note 
as Secretary Vilsack has pointed out that there was a situation 
with three pigs. Is that correct? What is the disposition on 
that at this point? Do you have any information on that?
    Mr. Scuse. Mr. Chairman, there was only one confirmed case 
at the Minnesota State Fair, and that was in a show hog. To the 
best of our knowledge, it did not come from a commercial 
operation. It was a show pig, and there was only one confirmed 
hog at the Minnesota State Fair for H1N1.
    The Chairman. Thank you very much for that.
    Let us move on to another question. What is the status of 
the Department of Agriculture's regulations implementing the 
competition provisions in the farm bill?
    Mr. Scuse. Mr. Chairman, we currently are working with the 
Department of Justice that will hold hearings after the 1st of 
the year to look at violations of antitrust laws and the 
Stockyard and Packers Act. We realize that there has been some 
concern in the industry about consolidation and we will be 
holding hearings, hopefully, and will have a tremendous amount 
of input from our producers as to what direction needs to be, 
what path we need to go down and to give us direction.
    The Chairman. I understand, Mr. Scuse, that the USDA has 
announced that it along with the Department of Justice will 
hold a series of workshops in early 2010 to examine competition 
issues in the livestock industry. Could you share with the 
Committee further details about these workshops and how they 
will factor into decision making at the Department?
    Mr. Scuse. Mr. Chairman, we are going to hold a series 
workshops, again throughout the United States, to get input 
from industry as well as our producers on the effect that 
corporate consolidation and other issues affecting production 
agriculture--not just in the animal sector but in the feed 
grain sector, the dairy sector--as well as the effect that it 
has on our consumers. There has not--I don't believe we have 
established at this time where those meetings are going to be 
held, but they will be held so that, hopefully, we will get 
input from the various regions of the United States on all of 
those issues.
    The Chairman. Now let me ask about the credit situation 
that still remains a very important issue to producers. What, 
aside from what you mentioned in your testimony, is the 
Department doing to ensure that credit remains available to 
producers and is FSA considering raising loan limits to help 
lenders better help producers?
    Mr. Scuse. Well, Mr. Chairman, in the 2008 Farm Bill, the 
loan limits were raised for both our guaranteed as well as our 
direct operating loans. USDA has sent out notices to all of our 
borrowers, as well as those lending institutions that we 
partner with, asking them to look at ways that we can help our 
producers through refinancing or other avenues to make sure 
that we can keep them in business. Our loan portfolio, we 
increased our lending this past year, 2008, by almost $1 
billion. So we have been working very hard with Congress to 
make sure that we do have the funding available to help those 
producers that are in need.
    The Chairman. Thank you, Mr. Scuse.
    Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Secretary, welcome. On October 2, over 60 Members of the 
House wrote to the Secretary of Agriculture to request $100 
million in pork purchases, to secure appropriated funds for 
surveillance, diagnostic and vaccine development and to 
encourage efforts to address these export challenges that we 
have been talking about, particularly with China. Could you 
take a moment to outline the Secretary's progress in these 
areas?
    Mr. Scuse. Well, we have $25 million set aside for the 
surveillance program. AMS currently is looking at the request 
for the pork purchase. They are doing the analysis of that 
request, which will take some time. And as far as our trade 
goes, Secretary Vilsack and Under Secretary Miller will be in 
China next week and our pork trade with the Chinese is a major 
topic for both of them.
    Mr. Goodlatte. Well, with regard to that, in 2006 we had 
$55 million in exports of pork products to China; in 2007, $147 
million; in 2008, $268 million, and a very successful and 
rapidly growing market. Recently the Administration, President 
Obama placed a 35 percent tariff on tires imported from China. 
What participation or consultation did the Department of 
Agriculture have before that decision was made to engage in 
that measure with regard to China?
    Mr. Scuse. On the----
    Mr. Goodlatte. Which obviously many in this industry are 
concerned about the dampening impact on that growing market.
    Mr. Scuse. Specifically the question is the tire tariff?
    Mr. Goodlatte. Yes.
    Mr. Scuse. I can't answer that question, Congressman. I 
don't know at my level what discussions we had before that was 
done, but I will say that if you look at the tremendous 
increase in our exports to China for the year of 2008, there 
were two factors that contributed to that tremendous growth. 
One was the Summer Olympics and the demand for pork products to 
feed all the Olympians in Beijing, and the second factor was 
that the Chinese did have some health issues in their own pork 
industry at that particular period of time. So those two 
factors contributed to the steep increase in our exports to the 
Chinese. If you recall----
    Mr. Goodlatte. We want to try to sustain that growth, do we 
not?
    Mr. Scuse. No doubt about it, but if you will remember when 
H1N1 was first found in the United States, the Chinese 
immediately, unfortunately, banned all pork products from the 
United States. That is what the Secretary and the Under 
Secretary will be working very hard in the next 10 days to see 
if we can resolve that issue.
    Mr. Goodlatte. Well, I wish you would consult with the 
Secretary and his staff and determine whether or not they were 
consulted before a significant trade position was taken by the 
Administration that could have serious ramifications for 
agricultural trade, number one, and number two, if they have 
not been consulted, what measures they have taken to speak with 
the USTR and others and ask that they be consulted in the 
future when issues like this arise that could have 
ramifications for significant sectors of our agricultural 
economy.
    Mr. Scuse. If I may, I would like to say that USTR, State 
and the Department of Agriculture have been working very, very 
closely together on trade issues as they pertain to agriculture 
to see what we can do to----
    Mr. Goodlatte. I want to get one more question in. Let me 
shift over to this, because this is very important. Recently 
your Administration testified before the House Rules Committee 
in favor of H.R. 1549, which would severely restrict the use of 
antibiotics in food animal production. Did the Department of 
Agriculture have any input into that position?
    Mr. Scuse. I can't answer that question. I will get you a 
response, though, sir.
    Mr. Goodlatte. Has the Department done any economic 
analysis of the adverse economic impact on pork producers of 
this legislation?
    Mr. Scuse. Again, I can't answer that question, but I will 
supply you with the answer.
    Mr. Goodlatte. All right. Well, I thank you very much, 
because that is of grave concern to many people on this 
Committee and many people sitting behind you.
    Mr. Scuse. No doubt.
    Mr. Goodlatte. Thank you very much, Mr. Chairman.
    The Chairman. Thank you.
    The gentleman from Wisconsin, Mr. Kagen.
    Mr. Kagen. Well, thank you, Mr. Chairman.
    Thank you very much for being here, Mr. Scuse. I really 
appreciate your efforts. I wish that all of your efforts would 
bring about an increase in the price of pork for our producers 
more immediately, but you can't control worldwide markets. But 
there are some things that you can have an influence on. With 
regard to our trade policies with China, is there any way you 
can bring about a more rapid response from the Chinese people 
understanding the facts are that H1N1 cannot be transmitted by 
properly prepared meat from pigs, understanding that when we 
ship our pork overseas after it has been properly prepared, it 
does not transmit the H1N1 virus?
    Mr. Scuse. Congressman, that is the one thing that we have 
tried to get across to all of our trading partners. We would 
like for them to follow the OIE guidelines from the World 
Animal Health Organization. We have been trying to convey that 
message to the Chinese and, hopefully, the Secretary and Under 
Secretary in their meetings with the Chinese next week will be 
successful, but again, that is a priority for them. We want to 
resolve this issue and open up our markets to China as quickly 
as possible, and we recognize the impact, the immediate impact 
that that opening would have on our pork industry and our pork 
producers. So it is a priority and we are urging them to follow 
the OIE guidelines which would allow our products into China.
    Mr. Kagen. Especially at a time when our dollar is at a 
current value that it really would favor the export of our pork 
and everything we manufacture and produce in this country.
    I would like to ask you about the Livestock Risk Protection 
Program and also the Livestock Gross Margin Program. In 
particular, as a business owner myself, did a great number of 
producers take advantage of those programs?
    Mr. Scuse. No, they did not, and I gave the numbers in my 
opening statement. Very few producers, unfortunately, took 
advantage of the programs. But when you come out with new 
programs, it does take a while for them to become accepted, 
understood, and as well there probably are issues with the 
programs where there are changes that need to be made, as we go 
through this we have to take a look at those programs. Our 
Dairy Margin Insurance Program is another program, sir, that 
very few people took advantage of it, had they taken advantage 
of it they wouldn't be suffering the losses, but as you are 
well aware, hindsight is 20/20. So we are going to work to do a 
better job with outreach and tweak those programs so that we 
can get more producers involved in risk management.
    Mr. Kagen. I would encourage you to do that. I think that 
producers should take advantage of every possibility to not 
just hedge their commodity, but also to make certain that they 
have proper insurance, not just workmen's compensation but this 
risk insurance could be very valuable to them, especially right 
now.
    I would also like to inquire about what role, if any, any 
possible speculation in the commodities market may have played 
with regard to the suppression of the price. Do you feel that 
that played any role at all?
    Mr. Scuse. At this point in time I doubt it. When you look 
at where the markets have been now for almost 2 years, there 
would be some that would argue yes, that it did. But, if you go 
back and look at the markets 2 years ago and what has happened 
in the last 2 years, I would say that had little, if any, 
impact.
    Mr. Kagen. And my final comment has to do with your immune 
system. I am an immunologist, and I will share with you the 
fact that if you are preparing pork that has the H1N1 virus 
protein in it and it is going to be denatured, it won't cause 
any infection in you, but if there is any protein left, it is 
going to stimulate your immune system. I am not suggesting that 
this is a way of getting immunized for H1N1 or to eat more 
pork, but you can certainly understand that by eating something 
you are stimulating your immune system at the same time. So, it 
would be a good thing for people to consider that feeding their 
family and themselves the pork product that we have here in 
this country could be good for your immune system, good for 
your health, and your economy as well.
    So thank you for being here. I appreciate the opportunity 
to inquire about the programs.
    Mr. Scuse. Thank you, Congressman.
    The Chairman. Thank you, Mr. Kagen.
    The gentleman from Iowa, Mr. King.
    Mr. King. Thank you, Mr. Chairman. I appreciate Dr. Kagen's 
unique approach to this and want to let him know that we did 
our best. We roasted a 300 pounder last Saturday night.
    Mr. Kagen. Congratulations.
    Mr. King. Thanks for opening that subject up, and I would 
first turn to the issue of the letter signed by 61 or 62, many 
Members of the Agriculture Committee, Members of Congress, that 
asks the Department to purchase meat from sows as a way to take 
some of this pork off the market and, potentially, reduce the 
breeding stock. We need to do that so we can see more demand in 
this market and see some recovery after this perfect storm that 
we have seen in the pork industry. I thank you for your 
attention to that, and I encourage that there be a lot more of 
it. The issue, though, of meat from sows seems to be a little 
bit more difficult than we had anticipated. I am informed that 
in the school lunch program there is a restriction that exists 
that only pressed sausage patties from sow meat is approved, 
not other types of sow meat. Could you speak to that and let us 
know why that might be, if it is true?
    Mr. Scuse. I can't speak to that specifically but we will 
get you a response to that. I do know that on our pork 
purchases there are a tremendous variety of different products, 
not just canned pork products but all the different pork 
products are actually purchased through our program, the 
Section 32 program. So I can't speak to that specifically on 
what the requirement is for our school lunch program, but we 
will get you a response for that.
    Mr. King. I appreciate you taking a look at that, and I 
also appreciate a broad and aggressive approach to this. I 
think it sends the right message to the pork industry when they 
see that kind of a response by the USDA, and we have a new 
budget here now to take a look at as well.
    I also understand the USDA is now soliciting bids from sow 
processors and cookers but bids haven't been very great in 
number and that the USDA has imposed TARP-like restrictions on 
firms that are bidding. They want them to disclose the salaries 
of their top five employees. And it is presumed that the 
payroll czar, the executive pay czar, is taking a look at 
these. Can you confirm that that is the case and could you also 
advise this Committee as to whether you are compelled by law to 
evaluate the salaries of companies that are bidding to the 
USDA?
    Mr. Scuse. Congressman, I have no knowledge of that, and if 
that is taking place, it is something that I don't know about, 
but again, we can get you a response to that. I have no 
knowledge that that is taking place.
    Mr. King. Thanks, and I will look forward to that response 
and I would just tell you, in 28 years in business and bidding 
on Federal contracts, if the Federal Government asked me what I 
was paying myself as a condition to bid the project, I would 
take a look at that and maybe reduce my spectrum of potential 
customers by one.
    So then I would turn our attention to--and the subject has 
been brought up of trade with China. I very much encourage, as 
emphatically as possible, an aggressive effort to open up that 
trade with China but also Korea, Colombia, and Panama. I have 
watched over the transition from the Clinton Administration 
through the Bush Administration to the Obama Administration, I 
give President Clinton significant credit for supporting trade 
agreements and holding Democratics together to get enough votes 
to actually pass them. Through the Bush Administration, I 
watched Democratics line up and incrementally start walking 
away from free trade, and now we have a President who, I will 
say for lack of a better term, is less than aggressive on free 
trade philosophy. Now, I am seeing that no free trade 
agreements appear to be moving anywhere. There may be slow 
walking going on but I don't think a commitment. Can you tell 
me what the position is of the Administration with regard to 
Korea, Colombia and Panama and whether there is any optimism 
there that we can open up that trade and help our pork industry 
as well?
    Mr. Scuse. Well, you understand that those negotiations and 
discussions are ongoing and continuing. The President has made 
it clear that we do support free trade, but we also want to 
make sure that it is not just free trade but fair trade. The 
Administration is going to take a very close look at these 
trade agreements as they come to pass to make sure that it is 
not only free trade but it is in fact fair trade.
    Mr. King. And as my clock ticks down, I would ask a couple 
questions all in one, and that would be: I would like to ask 
you to point out which country is the most likely to be defined 
as a free trade country that could have a bilateral trade 
agreement passed, but I would also ask this question about 
Canadian pigs. There are about six million pigs that are 
farrowed in Canada that come into the United States. About four 
million of them come to Iowa. These records are now about a 
year old because the dynamics of the market have changed. Have 
you been tracking the categories under country-of-origin 
labeling? Can you let this Committee know what is happening 
with those Canadian pigs now, and how that is affecting the 
market and the slaughter facilities that are available either 
in the United States or Canada for finished hogs of Canadian 
origin?
    Mr. Scuse. Well, there has been a sharp decline in the 
amount of pork that is coming across the border into the United 
States from Canada. In fact, this past year there was about a 
30 percent decline in those numbers. That is the only 
information that I have available at this time, Congressman.
    Mr. King. On that country that is most likely to see a free 
trade agreement passed with the United States?
    Mr. Scuse. I will pass on that.
    Mr. King. Mr. Chairman, I have abused the time limit 
although I appreciate the witness and the opportunity to 
question. I yield back.
    Mr. Boswell [presiding.] Thank you. Since I was the next in 
line over here before I took over the chair, I will take my 
moment here.
    First of all, Mr. Secretary, thank you for taking on the 
responsibility of farm services. It is a big item for 
producers, everybody in America, really, and I want to 
compliment you or pass on to you really the unsolicited remarks 
I am getting from farmers and different people across my 
district for the good job that John Whittaker is doing. So I 
thank him for his hard work out there being state director, and 
we appreciate it.
    Mr. Scuse. Thank you.
    Mr. Boswell. I am going to bounce around a little bit 
because you talk amongst your colleagues down there at the 
Department and the Secretary and so on, but some of the 
problems going on with pork producers are worrying us all. As I 
look at the loan rate, and we all know how capital intensive it 
is to put a crop in these days, and most, at least, if not all 
but at least most of the pork producers are raising their own 
grain, and the loan rate is basically $1.80. It costs them $4+ 
to produce a bushel of corn. It makes it pretty hard for them 
to go ahead and plan ahead and use that as a tool to get their 
next year acreage lined up. I would like to have that 
discussion with you or somebody down there sometime soon just 
as a sideline. You can comment if you want. But this is a 
serious problem out there for producers, and having been one, 
it is very important. So I would like for you just take note of 
that and hope we can talk some more.
    Mr. Scuse. The Under Secretary and I would welcome the 
opportunity, and as a grain farmer from Delaware just 2 hours 
east of here growing corn, soybeans and wheat, I would 
appreciate that discussion.
    Mr. Boswell. Okay. So we will ask that to take place. 
Another thing is, there is a lot of discussion going on and we 
will continue with the next panel and you may not be available 
to stay, but I would like to make this point. I was going to 
ask the Chairman to enter this into the record, but since I am 
now the chair it will go into the record. But it has to do with 
a report. As you know, Congressman King and others, we made a 
little trip over to Denmark not too long ago and we didn't 
learn a terrible lot in the sense of what to do, or what not to 
do on this ban. We came back with a lot of questions and so on, 
but since then, we have received this little report here. It is 
short. I am going to read it and then I am going to put it in 
the record, and it has to do--the title is Suspicious Rise in 
Danish Use of Pig Antibiotics. ``Use of antibiotics in Danish 
pig production increased 19 percent during 2001-2008, the 
report has shown, despite the fact that Danish law forbids the 
use of antibiotics for routine treatment of livestock. The ban 
on routine administration of antibiotics is intended to protect 
against the risk of antibiotic resistance in bacteria that can 
affect both animals and humans which is potentially life 
threatening. However, the recent Danmap (Danish integrated 
antimicrobial resistance monitoring and research program) 
report for 2008 showed that antibiotic use in pig production 
had gone up by 19 percent in 2001-2008, measured in daily pig 
doses per kilogram of pork. The findings were reported in the 
bimonthly Maskinbladet under the headline `indications of 
routine treatment with antibiotics.' According to the article, 
the increase relates primarily to the use of tetracyclines, 
which rose by 118 percent and 60 percent respectively in weaned 
and finishing pigs for the period of 2003 to 2008.'' I want to 
enter this into the record, because that discussion is going 
on, and one thing I think that Congressman King and I would 
agree on, that when we visit with the farmers, they would like 
for this ban to take place. We kind of caught a moment, and 
well, it would make them more competitive. So there is that 
concern there.
    [The document referred to is located on p. 63.]
    Mr. Boswell. Now, setting that aside, we can come back to 
that. I do have a question in the short time I have left. Is 
the use of Section 32 for pork purchase subject to OMB's 
administrative PACO?
    Mr. Scuse. No, Congressman, that fund is a fund set aside 
for the Secretary to use. There is approximately $250 million 
that the Secretary can use for bonus purchases as requested in 
the October 2nd letter.
    Mr. Boswell. Well, thank you very much. I am willing to 
yield back and go ahead and recognize Mr. Roe from Tennessee.
    Mr. Roe. Thank you, Mr. Chairman.
    Just a brief statement ahead of time. One, from what we 
know, H1N1 can't be transmitted through pork, and I think 
perception ends up being reality. I go back to 1976 when the 
last swine flu epidemic came through, and one of the scary 
parts for the public at that point was that the swine flu 
vaccine actually caused more problems than the swine flu did at 
that point. It caused a problem known as Guillain-Barre 
syndrome, which was a paralysis, and that still hangs around a 
little bit. But just to go ahead and dovetail with what Dr. 
Kagen said is that for people out there that don't understand 
immunology and immunizations, there is a thing called the herd 
immunity where if enough people get immunized, the virus has 
nowhere to spread, and so that is one of the things from a 
perception and reality standpoint. I would take--haven't had an 
opportunity yet but I am taking the H1N1 vaccine. I am a 
physician and I am going to take the vaccine and encourage my 
patients to do the same. Apparently when it does hit, it is a 
very devastating illness. It causes a problem called ARDS, 
adult respiratory distress syndrome, which is very difficult to 
treat. But the bottom line is, it is not the pork producers 
that are the problem. It is human-to-human transmission and we 
have to cover our mouths and wash our hands and do all the 
things we know to do. So I did want to get that out there and 
let people know from a doctor's standpoint that they need to be 
doing these things. So I would encourage folks in this room or 
people watching to go ahead and do that and do the things we 
already know we should do.
    Just to dovetail on what the Chairman was speaking of just 
a moment ago, I have done some reading on the antibiotic use in 
pork and don't know that that decision has been made. I know 
that the American Veterinary Association has asked for, at 
least from what I've read, a year to look at this issue because 
of what the EU is doing now, whether we are going to ban it in 
pork or not. Does the USDA have any position on that at all?
    Mr. Scuse. This is an issue that needs to be discussed 
within the industry as well as within FDA, USDA, but this is a 
decision that is going to take some time. There is some 
research that needs to be done with this. But it is not a 
decision that can just be made overnight. There are a lot of 
factors that the industry has to take into consideration. So it 
is an issue that is going to have to be looked at by all 
parties--FDA, USDA, the industry on what direction we want to 
go in.
    Mr. Roe. Well, it makes sense to me to let the experts--
they asked for a year to look at this and study this issue more 
and get some data. That makes sense to me to wait for that time 
and get the information so you are dealing with facts again, 
not perception.
    Mr. Scuse. Again, let us make decisions on sound science.
    Mr. Roe. Yes, absolutely. Another question I have for you, 
Secretary Vilsack was here not too long ago when we were 
discussing the cap-and-trade legislation, and we were all 
concerned about the increasing and ever-rising costs of energy 
as oil goes up to near $80 a barrel and how it affects--I am 
from a rural area in Tennessee and agriculture is really 
struggling there. There are dairy farmers, we have had numerous 
hearings on that, and our pork producers. Have you all studied 
how the effect of increased costs of energy, if they have any 
more costs--I can tell you, our farmers where we are, are going 
under, and we have had to deal with the drought, and we had to 
deal with a year ago $4.50 diesel fuel. We have done the 
experiment where carbon-based energy went up in price and it 
was devastating to our farmers. They haven't gotten over it 
yet. Have you all studied the impact of the current legislation 
on that?
    Mr. Scuse. I think that--and I agree with you. Our costs of 
production have increased, and fortunately for this year, much 
of our cost has come down from the highs of a year ago. That is 
one of the reasons why we need to look at the alternative 
energies, the biofuels, become more self-sufficient on energy 
and to look at what we can do to keep our energy costs low. 
Now----
    Mr. Roe. That is not what I am asking.
    Mr. Scuse. I know.
    Mr. Roe. I am asking--I agree with everything you just 
said.
    Mr. Scuse. You are asking about the issue on cap-and-trade. 
As far as cap-and-trade, I think that if you had the Secretary 
here testifying--last month you probably heard the Secretary 
say that we believe that agriculture will actually benefit from 
cap-and-trade legislation, especially the livestock sector. We 
believe that there will be opportunities for them to profit 
from this, just not be a financial liability but also be able 
to make additional revenues from their farming operations 
through the cap-and-trade.
    Mr. Roe. I may have a different opinion, but I appreciate 
what the FSA is doing in our area too, Mr. Chairman, also. 
Thank you.
    Mr. Boswell. Well, thank you, Dr. Roe, and on that note, 
some of things you were talking about I appreciate the 
discussion that you have had. I would hope that, and I think it 
will happen, that we are going to base our study on this 
situation, antibiotics, on science. I just call your attention 
to an Iowa State University study that estimated that a ban in 
the United States similar to Denmark's would raise the cost of 
production by $6 a hog, and $1 billion to industry. We have to 
apply science to this, and there are a number of variables that 
we don't have, animal ID and it just goes on and on, and also 
the scope of it, the size of it. So we have to turn to science. 
I think that not only the Department feels that way but pork 
producers feel that way too. So we have a lot of science 
available to us across this country, and if we commit to using 
that, why, in the end we will probably do the right thing.
    That completes--everybody has had an opportunity to talk to 
the Secretary. Does anybody else have a question? If not, we 
are going to bring this part to a close. Thank you for your 
time today and we look forward to Chandler getting a hold of 
you so we can have further discussions on some of these items, 
and I appreciate your work.
    Mr. Scuse. And I appreciate the opportunity to be here 
today. Thank you for the questions, very good questions, and I 
look forward to seeing you on the other issue.
    Mr. Boswell. We will be talking to you soon. With that, we 
will excuse you at this time with appreciation, and invite the 
second panel to join us.
    We would like to welcome our second panel witnesses to the 
table. I will just recognize each quickly before we start our 
discussion. Mr. Donald Butler, President of the National Pork 
Producers Council, Warsaw, North Carolina, thank you very much 
for being with us. Mr. Mark Greenwood, Vice President of Agri 
Business Capital, AgStar Financial Services, Mankato, 
Minnesota. Mr. Brian Buhr, Ph.D., Professor, Head and E. Fred 
Koller Chair in Applied Economics, University of Minnesota, 
nice to have you with us. Mr. Rod Brenneman, President and CEO 
of Seaboard Foods, Shawnee Mission Kansas, and from my state, a 
person I go to from time to time, Mr. Dave Moody, Public Policy 
Chairman and Past President, Iowa Pork Producers Association, 
Nevada, Iowa. With that, we recognized everybody and we will at 
this time start off with Mr. Butler. Please share with us what 
you want to share with us.

    STATEMENT OF DONALD P. BUTLER, PRESIDENT, NATIONAL PORK 
PRODUCERS COUNCIL; DIRECTOR OF GOVERNMENT RELATIONS AND PUBLIC 
             AFFAIRS, MURPHY-BROWN LLC, WARSAW, NC

    Mr. Butler. Good morning, Mr. Chairman. Thank you. Before I 
get into my remarks, I want to clarify something that was 
alluded to earlier, and that is that H1N1 is a respiratory 
disease and that both USDA and CDC have confirmed that pork is 
safe to eat and it cannot be transmitted through pork products. 
I just want to make that clear.
    I am a pork producer from North Carolina, and I am 
President of the National Pork Producers Council, and I 
appreciate the opportunity to come before you today and share 
and update on behalf of our industry.
    First, let me say that the U.S. pork industry represents a 
very significant part of the U.S. economy. We contribute about 
$35 billion annually to the gross national product and support 
550,000 jobs, mostly in rural areas across the country. We all 
know that we are in crisis today and we hope to find ways to 
stem the tide of foreclosures and bankruptcies for us to 
continue to contribute protein, the safest, most nutritious 
meat protein. We need to find a way out of this 2 year-old 
crisis. Producers have been averaging $23 per hog for every pig 
sent to market since September of 2007. These impacts are being 
felt in my home state as well as yours, states like Illinois, 
Indiana, Iowa, Kansas, Minnesota, Ohio, Oklahoma, Pennsylvania, 
Texas, Wisconsin and others, and there are many factors that 
contribute to the condition that we are in including the 
unwarranted bans on U.S. pork products by some of our trading 
partners, citing fears of H1N1 influenza. But the biggest 
reason, quite frankly, is higher input costs, higher feed cost. 
I want to make it clear that this crisis is not of our own 
making. It is not the result of over-expansion or 
overconfidence, and it is worse and fundamentally different 
than the downturn that we saw, the crisis we saw in 1998 and 
1999.
    So what can be done about it? First, we encourage the USDA 
to make additional purchases of pork products for various 
Federal food assistance programs. The Department, as you have 
heard, has recently purchased $55 million in pork products and 
we are very grateful for that assistance. We urge the Congress 
to reexamine the spending cap on USDA's Section 32 program, 
given the economic conditions of our industry. As I said, they 
are materially different today than they were during the farm 
bill debate when the cap on Section 32 funds was implemented. 
Also let me say that we are grateful to Mr. Walz, Mr. King and 
the other 61 Members of the House for sending a letter to 
Secretary Vilsack urging further support for our industry. We 
ask that Congress and the Obama Administration pressure U.S. 
trading partners, particularly China and Russia, to eliminate 
their barriers to U.S. pork products. We also strongly urge 
Congress to approve as soon as possible the pending free trade 
agreements with Colombia, Panama and South Korea. These trade 
agreements would be a great help to our producers. The U.S.-
Korea free trade agreement alone would add more than $10 per 
head to producers for each hog marketed.
    As the number one user of corn, we request that a study be 
conducted of the economic impact on the livestock industry of 
any expansion of corn ethanol production and usage. As you 
know, there have been calls for raising the cap on the blending 
rate for ethanol into gasoline to 15 percent from its current 
ten percent. All the facts should be on the table before any 
policy decisions are made on this important question.
    Additionally, NPPC has policy in place to support allowing 
the ethanol import tariff and Federal blenders tax credit to 
expire. These incentives promote ethanol production regardless 
of market demand which in turn creates additional competition 
for corn and hurts pork producers. NPPC supports as a safety 
net a WTO-compliant countercyclical payment for ethanol 
producers.
    We urge Congress to oppose any measures that would place 
undue burdens and any higher cost on U.S. pork producers such 
as restrictions on access to capital and contract arrangements 
that can sustain hog operations during this crisis, or any 
prohibitions on production practices such as a ban on certain 
animal products. On this point, we thank the Chairman, Chairman 
Peterson, Chairman Boswell, Ranking Member Lucas and other 
Members of the Committee for your interest on this subject. 
NPPC is grateful for all the Members of the House Agriculture 
Committee, USDA and other members of the Administration for all 
the efforts you have already made to help us weather this 
economic storm.
    As it did a decade ago when pork prices plunged to record 
lows, the U.S. industry will survive this crisis though no 
doubt we will be different, we will be smaller. Market forces 
will have their way. We are asking Congress and our government 
for some reasoned common sense help to help us get through what 
we are experiencing right now.
    Mr. Chairman, thank you for the opportunity to be here 
today.
    [The prepared statement of Mr. Butler follows:]

    Prepared Statement of Donald P. Butler, President, National Pork
Producers Council; Director of Government Relations and Public Affairs, 
                      Murphy-Brown LLC, Warsaw, NC
Introduction
    The National Pork Producers Council (NPPC) is an association of 43 
state pork producer organizations and serves as the voice in 
Washington, D.C., of America's 67,000 pork producers.
    The U.S. pork industry represents a significant value-added 
activity in the agriculture economy and the overall U.S. economy. In 
2008, it harvested more than 116 million hogs, and those animals 
provided total gross receipts of $16 billion. Overall, an estimated $21 
billion of personal income from sales of more than $97 billion and 
$34.5 billion of gross national product are supported by the U.S. hog 
industry. Iowa State University economists Dan Otto and John Lawrence 
estimate that the U.S. pork industry is directly responsible for the 
creation of nearly 35,000 full-time equivalent jobs and helps generate 
an additional 515,000 indirect, mostly rural, jobs.
    The U.S. pork industry today provides about 20 billion pounds of 
safe, wholesome and nutritious meat protein to consumers worldwide.
U.S. Pork Industry Economic Crisis
    The U.S. pork industry is in the midst of the most severe economic 
crisis in its history. Over the past 24 months, U.S. pork producers 
have lost an average of nearly $23 on each hog marketed. Since 
September 2007, the industry has lost more than $5.3 billion or more 
than 66 percent of its equity as of Oct. 14, 2009.
    And things look bleak, going forward. October 13 closing Chicago 
Mercantile Exchange lean hogs, corn and soybean meal futures prices 
suggest that producer losses will exceed $30 a head for pigs sold for 
the remainder of this year and will be nearly $40 a head in November.
    Based on lower lean hogs futures prices, cash hog prices will be 
below the cost of production in all but 4 months through the end of 
2010, according to economist Steve Meyer, president of Paragon 
Economics in Adel, Iowa.
Origins of the Crisis
    Several factors have contributed to the U.S. pork industry's profit 
crisis, but primary among them is a surge in production costs due to 
higher feed prices. While corn and soybean meal prices have fallen from 
their record levels of 2008, they remain significantly higher than they 
were before 2007. (Figure 1 shows that corn prices have moved from a 
historical level of near $2 per bushel to a new ``normal'' range of $3 
to $4.20 per bushel.)
    These higher prices for feed, which accounts for 60 percent of the 
cost of raising a hog, are mostly the result of a significant increase 
in the production of corn-based ethanol, which has driven up corn 
demand and, thus, prices. (The price of soybean meal also has risen 
dramatically as the price of corn has increased.) The use of corn for 
ethanol production has more than tripled since 2004, and ethanol 
production is the only usage of corn that has grown significantly 
during that time period.
    NPPC has policy approved by delegates at its recent annual 
meetings--the National Pork Industry Forum--that calls for not renewing 
when they expire at the end of 2010 the tariff on imported ethanol and 
the Federal tax credit that the ethanol industry receives for blending 
ethanol into gasoline.
    U.S. biofuels policy, which provides tax incentives for the use of 
corn-based ethanol and mandates minimum usage levels for ethanol, has 
created a strong link between corn and crude oil prices (see Figure 2). 
That link was particularly strong in 2008 when corn rose almost in 
lock-step with record-high oil prices. Financial difficulties for 
ethanol producers and the prospects of an exceptionally large crop 
allowed corn prices to fall relative to oil this summer, but the recent 
rise in oil prices to their highest level in nearly a year has been 
accompanied by another jump up in corn prices--even as a record-large 
corn crop is being harvested. Oil prices will continue to be a major 
driver of corn prices, with ethanol plants increasing production 
because of higher ethanol prices--just under the price of oil--and with 
U.S. policy encouraging the use of corn-based ethanol.
    Higher feed prices have had a huge negative impact on animal 
protein sectors, all of which are shrinking this year. For the U.S. 
pork industry, the result is break-even hog production costs that are 
now in the low to mid-$60s on a carcass basis--roughly 20 to 30 percent 
higher than during the period from 1999-2007 (see Figure 3). While 
these cost levels now are much lower than the $80 per carcass 
hundredweight cost of the summer of 2008, the 28 percent increase in 
costs from now through 2010 over the 1999-2006 period must at some 
point be covered by the price of market hogs to return the pork 
industry to profitability.
    It is important to note that this year's hog prices, which have 
been disappointing since the 2009 novel H1N1 influenza outbreak began 
in late April, had they been what they averaged between 1999 and 2006, 
would not have been low enough to cause producers to lose money until 
September. The biggest reason pork producers have lost money in 22 of 
the past 24 months is that production costs have been higher. And 
futures markets indicate they will remain so through the end of 2010.
    The current economic crisis is not the result of over-expansion 
driven by selfishness or overconfidence, and it is fundamentally 
different from the economic catastrophe of 1998-1999. That situation 
was caused by rapid expansion of the U.S. breeding herd in the mid-
1990s and a rationalization of excess U.S. packing capacity in the 
1980s and early 1990s. The closure of a major packer in July 1998 that 
fall caused a processing capacity restriction that, when combined with 
significantly higher hog numbers, drove prices to record-low levels.
    Once the industry emerged from that crisis, U.S. pork producers 
from February 2004 through September 2007 increased the size of their 
breeding herd by only 3.1 percent while enjoying the longest period of 
profits on record. That rate of breeding herd increase (0.8 percent per 
year) did not even keep pace with the growth of the U.S. population. 
Further, U.S. producers began reducing the size of the breeding herd in 
June 2008--after less than 1 year of losses--in response to the 
prospects of long-term higher production costs.
    The ultimate irony of the current crisis is that even producers' 
efforts to take better care of their animals and increase their 
operating efficiencies have worked against them. Technology, disease 
control and better diagnostics have improved the overall health of the 
U.S. hog herd and have increased productivity. The best example of this 
is the impact of circovirus vaccines on productivity.
    Porcine circovirus contributed to the poor performance and/or death 
of millions of pigs during the decade prior to 2007. The disease took a 
terrible toll on animal well-being and the morale of owners and workers 
as well as the financial performance of hog production enterprises. 
Animal health companies responded to this challenge, introducing 
effective circovirus vaccines in late 2006. By mid-2007 these vaccines 
were available to all producers, and their adoption improved pig 
survival rates so dramatically that hog slaughter in the fourth quarter 
of 2007 was nearly eight percent higher than 1 year earlier--from a sow 
herd only two percent bigger.
    Since late 2008, productivity increases have slowed (because year-
over-year changes involved comparisons to a vaccinated, healthier 
population) but have remained significant. Preventing the immune-
suppressing impacts of porcine circovirus has enabled pigs to more 
effectively fight other diseases, improving growth rates and, most 
importantly, driving average litter sizes higher by two percent or more 
for each quarter of the past 2 years. The productivity increases have 
resulted in enough market-weight pigs to nearly offset the 4.8 percent 
decrease in the U.S. sow herd since December 2007.
    Certainly, the global economic slowdown that began in the fall of 
2007 and the resulting ``recession,'' which dramatically increased the 
value of the dollar and reduced foreign demand for U.S. products, also 
have had a negative effect on the U.S. pork industry, as well as on 
many other sectors of the economy.
    More recent factors contributing to the industry's economic crisis 
have been higher-than-expected U.S. hog slaughter numbers, especially 
since late July, and, most importantly, higher slaughter weights, which 
have been as much as 6 pounds per head higher this past summer due to 
unusually cool temperatures that caused pigs to eat more and grow 
faster.
2009 Novel H1N1 Influenza
    While higher production costs have been the main culprit for the 
U.S. pork industry's losses over the past 2 years, they have been only 
part of the problem since late spring. Hog prices have been 
disappointing relative to the levels expected back in late April just 
prior to reports on the 2009 novel H1N1 flu, which the media insisted 
on calling ``swine'' flu. In fact, actual prices since then have 
resulted in a $1.3 billion reduction in producer revenues--and an 
average loss of nearly $23 per market hog--from the level they would 
have been had prices been what were suggested by the Chicago Mercantile 
Exchange lean hogs futures prices in late April.
    The 2009 novel H1N1 influenza caused a short-term reduction in 
domestic pork demand that hurt prices in May. While this demand decline 
was short-lived, according to research conducted by the National Pork 
Board, the negative publicity generated by ``swine'' flu stories has 
had a lasting effect on some consumers.
    Additionally, 2009 novel H1N1 caused some significant disruptions 
in exports, most notably to Mexico--the No. three market for U.S. 
pork--in May and June due to lower pork demand as Mexican consumers 
shied away from pork from any source. Exports also fell when some U.S. 
trading partners implemented H1N1-related bans on pork imports from 
North America.
    At the peak on May 5, official and unofficial bans on pork from the 
United States were in place in 27 countries, including China--the No. 
two export market for U.S. pork in 2008--and Russia--the No. five 
market. (Currently, seven countries, including China, maintain an H1N1-
related ban on U.S. pork imports.) The prohibitions were put in place 
despite statements issued by the World Health Organization, the World 
Animal Health Organization and the World Trade Organization that import 
bans on pork due to 2009 novel H1N1 would be unjustified in light of 
the fact there was no evidence to indicate the virus could be 
transmitted by handling or consuming pork.
    NPPC is appreciative of the efforts of the U.S. Department of 
Agriculture (USDA), the Office of the U.S. Trade Representative (USTR) 
and other agencies to keep export markets open to U.S. pork. Many of 
the countries that had H1N1-related bans rescinded their prohibitions 
within a few weeks of instituting them.
    The industry again will be counting on USDA, USTR and other 
agencies to reassure U.S. trading partners that pork is safe to eat and 
handle and that the 2009 novel H1N1 flu is not transmitted through pork 
now that some pigs in Minnesota have tested positive for the 2009 novel 
H1N1 virus.
    The unwarranted bans on U.S. pork imports have left two to three 
percent more pork on the U.S. market, and the extra supply has driven 
domestic prices downward.
Export Issues
    Until the H1N1-related bans were imposed, exports for some time had 
been a bright spot for the U.S. pork industry. Indeed, 2008 was the 
17th consecutive record year of U.S. pork exports and, in fact, exports 
saved the U.S. pork industry's bacon (pardon the pun) last year, when 
producers exported more than 2 million metric tons of pork--about 20 
percent of total U.S. production--worth nearly $5 billion. That added 
about $48 to the value of each hog marketed and significantly tempered 
producer losses in 2008.
    That said, exports of U.S. pork could have been even higher except 
for some nagging issues--in addition to the H1N1-related bans--with 
several U.S. trading partners.
    China, which accounts for 47 percent of world pork consumption, 
serves as a good example. The Asian nation has a ban on imports of U.S. 
pork produced with ractopamine hydrochloride, a protein synthesis 
compound that significantly improves efficiency in pork production. In 
recent years, China has ``delisted'' or placed under review numerous 
U.S. pork plants because of the detection in U.S. pork imports of 
ractopamine hydrochloride. But ractopamine was approved for use in U.S. 
pork production after an extensive review by the U.S. Food and Drug 
Administration and is approved for use in 25 countries around the 
world, including several countries in Asia. As a further indication of 
the safety of the product, the U.N. Codex Alimentarius is in the final 
stages of an eight-step process for establishing a recommended maximum 
residue level (MRL) for ractopamine in pork production.
    China began delisting U.S. pork plants because of the detection of 
ractopamine in 2006. In addition to the loss of exports from those U.S. 
plants that have been delisted due to ractopamine, China's arbitrary 
delisting policies throw a great deal of uncertainty into trade for 
plants that remain eligible to export to China.
    China's delisting of U.S. pork plants due to ractopamine use is 
without health or scientific justification. In fact, its ractopamine 
policy reflects the Chinese Government's interest in strictly 
controlling imports to help support domestic pork prices.
    Additionally, to curb imported pork products, Chinese authorities 
have over the past 2 years introduced a number of new subsidy programs 
aimed specifically at its pork producers. The most recent program is 
the National Hog Price Alert System, which is designed to ensure 
profitability and expansion of China's hog production. In addition, the 
Chinese pork industry derives significant benefits from a full 
exemption from the corporate income tax and a partial exemption from 
the country's value-added tax.
    The United States is able to produce pork at a much lower cost than 
China. In mid-2008, it cost about 55 cents a pound to produce a live 
hog in the United States compared with 84 cents in China. With its 
competitive cost advantage--even with the recent rise in hog production 
costs--the United States would be a huge supplier of pork to China in 
the absence of the Chinese import restrictions and subsidy programs.
    How big? China's pork imports in 2008 accounted for about one 
percent of total domestic consumption. (This compares with, for 
example, Japan's 50 percent, South Korea's 30 percent and Australia's 
22 percent.) If China were to open its market to allow imports to 
account for 25 percent of total consumption, pork imports to the 
country would be 11.6 million metric tons. Even if the United States 
captured just a 25 percent share of that--compared to the 60 percent 
share it had in 2008--this would translate into U.S. pork exports to 
China of 2.9 million metric tons, an amount equivalent to 27 percent of 
total U.S. pork production. (Remember, in 2008 the U.S. pork industry 
exported to all countries 20 percent of production; it exported about 
five percent of production to China.) This would represent more than a 
doubling of U.S. pork exports to the entire world in 2008. A surge in 
U.S. pork exports of this magnitude would generate enormous benefits 
not only for the U.S. pork economy but for the U.S. rural economy.
    The U.S. pork industry also has dealt with over the past 2 years a 
number of other trade issues that have dampened exports, including, for 
example, the arbitrary and non-science-based ``delisting'' of U.S. pork 
facilities by Russia and a change in that country's quota system for 
imported pork. Government officials in the country publicly have stated 
that they want to limit the amount of imported pork as a way to protect 
their domestic pork industry.
    From 2005--the year the U.S. and Russia signed a meat agreement--
through 2008, U.S. pork exports to Russia grew at an explosive pace, 
increasing in volume terms by more than 400 percent and in value by 
nearly 600 percent.
    But over the past year and a half, Russia has ``delisted'' or 
failed to relist more than 30 U.S. pork production, processing and 
storage facilities, meaning more than 50 percent of U.S. pork 
production is ineligible for export to the country.
    Russia did not identify any health or sanitary reasons for its 
actions, which are contrary to obligations contained in a 2006 side 
agreement that is part of World Trade Organization bilateral 
negotiations between Russia and the United States. The agreement 
established specific criteria and methods for Russian approval of U.S. 
pork plants. The actions also are inconsistent with the WTO's Sanitary 
and Phytosanitary (SPS) Agreement, which requires WTO trading partners 
to recognize the SPS measures of other countries as equivalent to their 
own. (Russia does not adhere to the WTO principle of equivalence and 
approves U.S. meat facilities on a plant-by-plant basis.) The U.S. 
Government and the U.S. pork industry have demonstrated to Russian 
Government officials the effectiveness of the U.S. pork plant 
inspection system in ensuring a high level of product safety.
    On the quota issue, last year the Russians demanded that the ``out-
of-quota'' tariff on pork imports be raised. Consequently, in December 
2008 the U.S. and Russia renegotiated the 2005 meat agreement, with 
Russia increasing the 2009 out-of-quota tariff from 40 percent to 75 
percent. In return, the U.S. pork ``in-quota'' amount--the quantity of 
pork subject to a lower tariff--was raised.
    Russia currently is insisting on another renegotiation of the pork 
quotas with the intention of further reducing the U.S. quota and 
restricting U.S. pork imports. These demands are unacceptable to U.S. 
pork producers. It is ironic that a country that seeks U.S. support for 
its WTO accession and that wants Congress to grant it Permanent Normal 
Trade Relations status is restricting rather than expanding access to 
its market.
    The plant delistings coupled with its limited H1N1-related ban and 
the uncertainty surrounding the quotas have resulted in a 39 percent 
decline in U.S. pork exports to Russia in the first 8 months of 2009.
    The result of all of the restrictions on U.S. pork exports--and 
undoubtedly of the global economic slowdown--has been a drop of 11 
percent in U.S. pork exports from January through August 2009 compared 
with the same period in 2008. U.S. pork exports to China are down 50 
percent through August and to Russia 39 percent.
    NPPC urges Congress and the Obama Administration to pressure China 
to lift its H1N1-related ban on U.S. pork, to drop its objections to 
ractopamine and to eliminate its hog and pork subsidies; and it urges 
the U.S. Government to maintain the current U.S. country allocation for 
pork under Russia's global pork tariff rate quota at a level of market 
access equal or greater to that in 2008, to insist that Russia relist 
all U.S. pork facilities and to pressure Russia to agree to accept the 
U.S. meat inspection system as equivalent to its system and accept pork 
from all USDA-approved facilities. Russia should not be given special 
treatment but rather should be required, like China and Vietnam when 
they were joining the World Trade Organization, to memorialize with the 
U.S. the WTO principle of equivalence.
    NPPC was heartened to hear that the Obama Administration's trade 
agenda has as a top priority enforcement of existing trade agreements, 
and it asks Congress to support the Administration on this. China and 
Russia should be at the top of the list.
    While enforcement is important, exports have increased dramatically 
because of free trade agreements, starting in 1994 with implementation 
of the North American Free Trade Agreement and in 1995 with the 
conclusion of the Uruguay Round of the then-General Agreement on 
Tariffs and Trade. As a result of those and subsequent trade deals, 
U.S. pork exports have grown by more than 750 percent in value terms 
since then.
    Given that result and the U.S. pork industry's current economic 
crisis, it is imperative that Congress approve as soon as possible the 
pending free trade agreements with Colombia, Panama and South Korea, 
which would add greatly to U.S. pork producers' bottom line. The U.S.-
Korea FTA alone would add $10 to the price producers receive for each 
hog marketed, according to Iowa State University economist Dermot 
Hayes.
Regional Effects
    Obviously, the effects of the current economic crisis are somewhat 
regionalized, affecting the pork-producing states clustered in the 
Midwest and those in the mid-Atlantic (mostly North Carolina, 
Pennsylvania and Virginia) more than other states.
    North Carolina, for example, is one of the nation's leading pork-
producing states. Its pork industry provides jobs, pays taxes and 
supports civic and social groups. The pork industry's economic impact 
is widely felt in local communities, especially rural communities, 
across the state. The state's farm families and production companies 
operate some 2,200 farms.
    The income from these farms was North Carolina's second leading 
source of gross farm income in 2007 (the most recent year for which 
data is available). Hogs generated slightly more than 22 percent of all 
North Carolina farm receipts. Looking beyond cash farm receipts, the 
combined effects of swine production and pork packing and processing in 
North Carolina in 2007 were estimated at more than $7.2 billion in 
sales, $2.25 billion in value-added income and 46,657 jobs--more full-
time jobs than North Carolina's entire Research Triangle Park provides.
    Simply put, the pork industry is important to all of North Carolina 
and most especially, eastern North Carolina. But the industry is facing 
a crisis that could cause large-scale output reductions with a 
resulting loss of farm family producers and associated businesses and 
jobs.
    At least three North Carolina hog producers have filed for 
bankruptcy or are in the process of doing so (Triangle Business 
Journal). The extended period of deep losses has drained the equity of 
all hog producers. As producers try to cut supply to increase pork 
prices, barns are being left empty. Similar events have been occurring 
over the past year in the broiler and turkey sectors in North Carolina. 
Some farmers faced foreclosure on broiler houses when a major producer 
went bankrupt. The implications extend throughout the rural communities 
in North Carolina, which are supported by these farming and meat-
processing operations. Reduced production means lost income, lost 
employment, lost capital investment, lost tax base and lost economic 
activity throughout the local and state economy. Hog production 
represented 22.1 percent of North Carolina cash receipts from 
agriculture in 2007. Broilers (28.5 percent) and turkeys (5.9 percent) 
along with pigs account for 56.5 percent of North Carolina cash 
receipts from agriculture, so losses in these sectors have major 
effects in the state.
    North Carolina has marketed about 18 million pigs or more per year 
over the last decade. National average losses of nearly $23 per head 
marketed mean about $828 million of equity lost in North Carolina over 
the past 2 years. Each dollar of lost income in hog production is 
estimated to result in 80 cents lost elsewhere in the North Carolina 
economy, so the state has lost an estimated $662 million in additional 
income. The combined effects of the pork sector crisis are estimated at 
$1.5 billion in lost income in North Carolina over the past 24 months 
with further losses anticipated over the next several months. State and 
local taxes based on income and sales are directly affected.
    Job losses also result from reduced hog production. An estimated 
8,000 full-time jobs existed in hog production in North Carolina in 
2007. With an estimated five percent reduction in hog production in the 
state, about 400 full-time jobs have been lost. Each job in hog 
production is estimated to support 2.43 jobs elsewhere in the North 
Carolina economy. The loss of 400 jobs in hog production resulted in an 
estimated 970 jobs lost elsewhere in North Carolina, for a combined 
loss of 1,370 jobs in the state.
    Capital losses due to reduced hog production include the loss of 
capital invested in buildings, land improvements and equipment. 
Buildings and equipment dedicated to hog production were estimated to 
have a depreciated value of $500 million in 2007. Abandoning five 
percent of that capacity resulted in a loss of $25 million in capital 
and property tax base.
    Reduced hog production also reduced pork packing and processing. 
North Carolina experienced reductions in pork processing capacity over 
the past year. Further reductions are possible if hog production is 
further reduced in the state and regionally. The North Carolina pork 
processing sector was estimated to employ 11,686 people and generate 
$450 million per year in (value-added) income in 2007. The five percent 
reduction in pork packing and processing is estimated to have caused a 
loss of 584 full-time jobs and $22.5 million in annual income in North 
Carolina. Each job and $1 of income in pork processing are estimated to 
support 0.565 jobs and 59 cents of income, respectively, elsewhere in 
the North Carolina economy. So the five percent reduction in pork 
processing is estimated to have cost the rest of the state's economy 
330 full-time equivalent jobs and $13.3 million of income.
    Suffice to say, when added to the losses imposed on the state's 
broiler and turkey industries by higher feed prices, the effects of the 
current economic disaster in the U.S. pork industry are particularly 
severe in North Carolina. But North Carolina is by no means unique. The 
economic crisis is being felt by producers in Georgia, Iowa, Kansas, 
Minnesota, Oklahoma, Pennsylvania, Texas, Wisconsin, and, in fact, in 
all pork-producing states, with some hog farmers going out of business 
and others on the brink of bankruptcy.
Pork Industry Efforts
    For its part, the U.S. pork industry has been working over the past 
2 years to help pork producers deal with the economic crisis. NPPC has 
worked closely with the previous and with the present Administration to 
keep export markets open.
    NPPC officers and staff, for example, have worked with their 
counterparts in Canada and Mexico to keep pork trade flowing to those 
important U.S. markets and have collaborated with the Office of the 
U.S. Trade Representatives (USTR) to resolve trade issues with 
Australia, Mexico and the Philippines.
    Of course, the organization has been a strong and consistent 
supporter of additional free trade agreements--including the pending 
FTAs with Colombia, Panama and South Korea--which historically have 
boosted U.S. pork exports.
    When the 2009 novel H1N1 flu outbreak occurred in late April, NPPC 
worked closely with the National Pork Board and the Obama 
Administration to communicate to the media, the public and U.S. trading 
partners that pork is safe to eat and that the 2009 novel H1N1 virus is 
not transmitted through food, including pork.
    NPPC also has asked the U.S. Department of Agriculture to provide 
assistance to struggling producers.
    In April 2008, with no signs of the then-6-month-old crisis 
abating, NPPC officers met with then-Agriculture Secretary Ed Schafer 
to ask that the Department make a supplemental purchase of pork. (USDA 
annually buys pork and other products for various Federal food 
programs. It bought $62.6 million of pork in 2008, for example.) They 
also asked that the Secretary implement emergency programs and loan 
guarantees to help producers purchase feed, consider allowing early 
release without penalty of non-environmentally sensitive Conservation 
Reserve Program acres back into crop production and support pork 
exports through USDA's Market Access Program and Foreign Market 
Development Program. The Bush Administration May 1, 2008, agreed to 
purchase up to $50 million of pork products.
    At the beginning of 2009 and once more just after the 2009 novel 
H1N1 flu outbreak in late April, NPPC again asked USDA to lend 
assistance to the U.S. pork industry, each time urging Secretary Tom 
Vilsack to make additional supplemental purchases of pork. USDA in late 
March agreed to buy $25 million of pork.
    Finally, in August of this year, NPPC yet again urged USDA to take 
immediate action to address the continuing pork industry economic 
crisis, asking that the agency to:

   Purchase immediately an additional $50 million of pork for 
        various Federal food programs, using fiscal 2009 funds.

   Use Section 32 funds to purchase pork. Section 32 uses 
        customs receipts to buy non-price-supported commodities for 
        food-assistance programs.

   Buy on Oct. 1 a minimum of $50 million of pork, using fiscal 
        2010 funds.

   Use $100 million of the $1 billion appropriated for 
        addressing the 2009 novel H1N1 virus for the swine industry, 
        including $70 million for swine disease surveillance, $10 
        million for diagnostics and 2009 novel H1N1 vaccine development 
        and $20 million for industry support.

   Work with USTR to open export markets to U.S. pork, focusing 
        on the countries, including China, that continue to impose 
        unwarranted H1N1-related bans on U.S. pork.

   Study the economic impact on the livestock industry of an 
        expansion of corn-ethanol production and usage. The U.S. 
        Environmental Protection Agency has proposed raising the cap on 
        blending ethanol into gasoline to 15 percent from its current 
        ten percent.

    In early September, USDA agreed to purchase $30 million of pork, 
using fiscal 2009 funds.
    NPPC is grateful to USDA for its assistance and strongly urges the 
Department to make additional pork purchases. It also is grateful to 
the Members of Congress who signed onto a letter circulated by 
Congressmen Tim Walz, D-Minn., and Steve King, R-Iowa, to Sec. Vilsack, 
asking that USDA make additional purchases of pork.
    NPPC now asks that Congress reexamine the spending cap placed on 
Section 32 funds as part of the 2008 Farm Bill. NPPC believes such 
action is warranted given that economic conditions in the livestock, 
dairy and poultry industries now are materially different than they 
were during most of the farm bill debate. While it understands that 
lifting the Section 32 cap is a long-term goal, the U.S. pork industry 
is prepared to work with Congress to achieve this outcome.
Conclusion
    The U.S. pork industry is an integral part of the U.S. economy, 
generating more than half a million jobs, adding nearly $35 billion to 
the gross national product, contributing to a positive agriculture 
balance of trade and providing consumers around the globe with the 
safest, most nutritious meat protein in the world.
    The industry, so far, has weathered the now 2 year-old economic 
crisis, which is not of its own making but is the result of forces 
mostly beyond its control, through the perseverance of the producers 
who every day provide the best care possible to their hogs, use animal 
health products judiciously and responsibly, protect the environment, 
watch out for the safety of their workers and contribute to the 
communities in which they live and work.
    As it did a decade ago when pork prices plunged to record lows, the 
U.S. pork industry will survive the current economic crisis--though, no 
doubt, as a much smaller sector. But U.S. pork producers are in need of 
lawmakers' continued assistance, and that means:

   Making additional purchases of pork for Federal food-
        assistance programs.

   Working with U.S. trading partners to get them to keep open 
        or, if they've closed them, re-open their export markets.

   Passing free trade agreements, including the pending ones 
        with Colombia, Panama and South Korea.

   Allowing the ethanol import tariff and Federal blenders' tax 
        credit to expire.

   Studying the economic effects on the livestock industry of 
        an increase in the amount of ethanol blended into gasoline to 
        15 percent from the current ten percent.

   Approving regulations and legislation that promote pork 
        producers' ability to run their operations.

   Opposing regulations and legislation that would place an 
        undue burden and higher costs on U.S. pork producers such as a 
        ban on certain antibiotics.

    With a little help, the U.S. pork industry will bounce back and 
continue to provide safe, nutritious pork products to consumers 
worldwide.
                                Figures
Figure 1
Cash Corn Price, Omaha, Weekly


Figure 2
Oil and Corn Prices Link



    Mr. Boswell. Thank you for your testimony.
    Mr. Greenwood.

  STATEMENT OF MARK GREENWOOD, VICE PRESIDENT, AGRI BUSINESS 
              CAPITAL, AgStar FINANCIAL SERVICES,
                          MANKATO, MN

    Mr. Greenwood. Thank you, Members of the Subcommittee, for 
inviting me to present testimony today regarding the 
availability of credit for the swine industry. My name is Mark 
Greenwood. I am Vice President of commercial lending for AgStar 
Financial Services headquartered in Mankato, Minnesota. AgStar 
Financial Services is a cooperative owned by our client 
stockholders and is one of 95 institutions that together 
comprise the Farm Credit System. AgStar is one of the larger 
farm credit associations serving more than 23,000 clients and 
managing nearly $8 billion in loan and lease assets. My 
testimony today represents the views of AgStar and does not 
represent the views of the entire Farm Credit System.
    My role at AgStar is managing the swine portfolio, which 
represents $1.4 billion in loan and lease volume, serving 
nearly 1,200 clients throughout the United States. I 
exclusively handle swine loans and leases with producers of all 
sizes. I was born and raised on a hog farm in southern 
Minnesota. I have been involved in the swine industry for my 
entire business career.
    I can clearly tell you that the current financial situation 
the industry is facing is the worst I have ever seen in 28 
years in working with swine producers. In October of 2007, the 
loan portfolio of swine producers that I worked with was in the 
best shape ever. Average owner equity was close to 70 percent. 
Working capital was abundant and most producers were in a very 
strong financial position. Most of these producers believed 
that they could handle some adversity for the future. Many 
producers I worked with had no debt and had a cash surplus. Now 
many of these same producers face dire financial circumstances.
    I am going to show a couple slides here. It just talks 
about volatility and cost of production from where we saw it, 
basically, back in 2006. In August of 2008, cost of production 
was actually 145 percent greater in 2008 than it was back in 
2006. This year it was 121 percent greater than it was back in 
2006. And the other point to make is just volatility in the 
marketplace. Just in this past year, it is unprecedented. I 
received an e-mail from a market advisor in Chicago and he said 
I have never seen this in 25 years. We have seen costs of 
production from September 2007 to today actually increase by 15 
to 20 percent. This is a span of 6 to 7 weeks. This is 
unprecedented.
    The next point is just looking at owner equity decline, and 
this is where I see the industry. We are currently at about 30 
percent owner equity, and the scenarios that we have seen in 
many swine producers, from a lender's perspective, when the 
owner equity is approaching 30 percent, the risk in the credit 
increases dramatically. The borrower is likely to have tapped 
all their cash reserves and now you are at a crossroads, and 
that is where I see the industry today. We are truly at a 
crossroads both for the producer and the lender. From a 
lender's perspective, the last thing we ever want to do is put 
people out of business. However, it does not make sense for us 
to keep funding losses forever. The outlook for the next 6 
months shows that more loses are coming. Without clear 
indications this down spiral in equity will change, prudent 
lenders and producers face difficult decisions about whether 
the best choice is to exit the business.
    The economic stresses facing the pork industry have far-
reaching impacts on towns, small businesses and families in the 
heart of rural America and beyond, because money generated by 
pork production circulates many times in the economy. When a 
pig owner is in financial trouble, it affects many people. 
Young and beginning farmers that are contract growers for the 
pig owners now have empty barns and no source of revenue to 
service their debt. That producer used to generate sales for 
local feed dealers, equipment suppliers, veterinary services 
and other local business, all which are now being affected 
because the producers are getting out of the industry. The 
volatility of this industry will impact capital availability, 
going forward. Lenders will not be willing to lend into an 
industry that has lost money unless there is a stronger linkage 
with a financially strong supplier, going forward. Remember, we 
had producers with no debt in 2007 that are now insolvent. 
Under the current system, pigs are being bought. Lenders and 
producers are not going to be in the same position to have this 
happen again.
    In conclusion, the pork industry needs your help. Offering 
higher FSA loan limits would help lenders deal with the risk of 
continuing to provide credit to the industry. The current loan 
is simply too low for many family farmers. USDA should 
aggressively help by purchasing pork for use in Federal food 
programs. We thank you for your past support. Also, helping on 
the export and free trade would also be a benefit. The success 
has led to the industry to the brink of economic collapse for 
being the best in the world at what we do. The industry needs 
your help and support. As a lender, rest assured we are doing 
all that we can to stay with the industry and our borrowers, 
but we can't put the institution at risk by doing so.
    I thank you for holding this important meeting today and I 
would be glad to answer any questions that you may have for me. 
Thank you.
    [The prepared statement of Mr. Greenwood follows:]

  Prepared Statement of Mark Greenwood, Vice President, Agri Business 
            Capital, AgStar Financial Services, Mankato, MN
    Thank you Chairman Scott, Ranking Member Neugebauer, and Members of 
the Subcommittee for inviting me to present testimony today regarding 
the availability of credit for the swine industry.
    My name is Mark Greenwood. I am Vice President of Commercial 
Lending for AgStar Financial Services, headquartered in Mankato, Minn. 
AgStar Financial Services is a cooperative, owned by our client-
stockholders, and is one of 95 institutions that together comprise the 
Farm Credit System. We provide a broad range of financial services and 
business tools for agricultural and rural clients in Minnesota and 
northwest Wisconsin. AgStar is one of the larger Farm Credit 
associations, serving more than 23,000 clients and managing nearly $8 
billion in loan and lease assets. My testimony today represents the 
views of AgStar and do not necessarily represent views of the entire 
Farm Credit System.
    My role at AgStar is managing the swine portfolio, which represents 
over $1.4 billion in loan and lease volume serving nearly 1,200 clients 
throughout the United States. I exclusively handle swine loans and 
leases with producers of all sizes. I was born and raised on a hog farm 
in Southern Minnesota and have been involved in the swine industry for 
my entire business career. I can clearly tell you that the current 
financial situation the industry is facing is the worst I have ever 
seen in 28 years of working with swine producers.
    In October of 2007, the loan portfolio of swine producers that I 
worked with was in the best shape ever. The average owner equity was 
close to 70%, working capital was abundant, and most producers were in 
very strong financial position. Most of these producers believed that 
they could handle some adversity for the future. Many producers I 
worked with had no debt and had a cash surplus. Now, many of these same 
producers face dire financial circumstances.
    In the past 24 months, volatility in both the cost of production 
and in the revenue producers receive has increased dramatically. In 
2008, the average cost to raise a hog was approximately $165 a head and 
revenue was close to $140 a head. While this was one of the better 
years recently in terms of revenue, because of higher costs, most 
producers lost on average close to $25 per head. Producers that raised 
the majority of their own corn fared better because the cost to raise a 
bushel of corn was significantly less than producers who had to buy 
their corn. The best estimate for producers that raised their own corn 
actually broke even in 2008, but in 2009 since the cost to raise a 
bushel of corn increased significantly, their losses have been larger 
than producers that were buying a majority of their corn.
    During 2009, the average loss per head has been about $25 per head, 
just as it was in 2008. Considering this level of losses over the past 
24 months, the overall losses for producers are now approaching $5 
billion. If you relate this to an average family farmer, assume a farm 
has 1,200 sows and they finish all of the animals. They had total 
assets of $3 million and in October of 2007, they had a net worth of 
70% which equals $2.1MM. Again, if we assume the farm has lost $25 per 
head for the past 24 months, their total losses would equal $1,200,000 
and their owner equity will have fallen to 30% from the 70% it was 2 
years ago. This scenario is the norm for what we are seeing on many 
swine operations. From a lender's perspective, when the owner's equity 
is approaching 30%, the risk in the credit increases dramatically 
because the borrower is likely to have tapped all of their cash 
reserves and you now are at a crossroads. This is where I see the swine 
industry today; we are truly at a crossroads both for the producer and 
the lender. From a lender's perspective, the last thing we ever want to 
do is force people out of business. However, it does not make sense for 
us to keep funding losses forever. The outlook for the next 6 months 
shows that there are more losses coming. Without clear indications that 
this downward spiral in equity will change, prudent lenders and 
producers face difficult decisions about whether the best choice is to 
exit the business.
    The economic stresses facing the pork industry have far-reaching 
impacts on towns, small businesses, and families in the heart of rural 
America and beyond, because money generated by pork production 
circulates many times in the economy. When a pig owner is in financial 
trouble, it affects many other people. Young and beginning farmers that 
are contract growers for the pig owners now have empty barns and no 
source of revenue to service their debt. That producer used to generate 
sales for local feed dealers, equipment suppliers, veterinary services 
and other local businesses all of which are now being affected because 
the producers are getting out of the industry.
    The volatility of this industry will impact capital availability, 
going forward. Lenders will not be willing to lend money into an 
industry that has lost money unless there is a stronger linkage with a 
financially strong supplier, going forward. Remember we had producers 
with no debt in 2007 that are now insolvent, under the current system 
pigs are being bought. Lenders and producers are not going to be in the 
same position to have this happen again.
    We are seeing producers cut back, but it is taking time for this 
process to impact the marketplace. The industry, according to many 
economists, needs to shrink by 8-10 million head or something must be 
done to stimulate that much more consumption. If the only alternative 
is to shrink production, this will result in significant job loss in 
rural America and will also affect many main street rural businesses.
    In conclusion, the pork industry needs your help. Offering higher 
FSA loan limits would help lenders deal with the risk of continuing to 
provide credit to the industry. The current loan limit is simply too 
low to help many family farmers. USDA should aggressively help by 
purchasing pork for use in various Federal food programs. The U.S. pork 
industry has proven it is the best in the world at raising pork from a 
competitive standpoint. That success has led the industry to the brink 
of an economic collapse. The industry needs your help and support. As a 
lender, rest assured, we are doing all that we can to stay with the 
industry and our borrowers but we can't put the institution at risk by 
doing so.
    I thank you for holding this important hearing today, and I am glad 
to answer any questions that you may have for me.
                               Attachment


    Boswell. Thank you.Dr. Buhr.

  STATEMENT OF BRIAN BUHR, Ph.D., PROFESSOR, HEAD AND E. FRED KOLLER 
   CHAIR IN APPLIED ECONOMICS, UNIVERSITY OF MINNESOTA, ST. PAUL, MN

    Dr. Buhr. Mr. Chairman, Members of the Subcommittee, thank you for 
inviting me here today. I am Brian Buhr, Professor, Head and E. Fred 
Koller Chair of Applied Economics at the University of Minnesota. My 
specialization is agriculture commodity marketing and price analysis 
with an emphasis on the livestock and meat sector. I received a Ph.D. 
at Iowa State University in 1992.
    The U.S. pork industry is undergoing the longest and deepest 
economic loss in the past 20 years. Records complied by the University 
of Minnesota Center for Farm Financial Management show losses over $13 
and over $10 per head sold in 2007 and 2008, respectively. Multiplying 
these per-head losses by the 250 million head of hogs marketed in 2007 
and 2008 indicates a total pork industry farm loss of $2.5 billion in 
those 2 years. Producers are expected to lose another almost $31 per 
head in 2009 for another annual loss of $3 billion. This would bring 
the total 3 year losses to $5.5 billion.
    It is likely losses will continue well into 2010. With current corn 
prices at $3.50 a bushel in April 2010, lean hog futures trading at 
$65, producers will just break even on these pigs, assuming they buy 
all their feed needs for finishing right now. However, significant 
concern is that cost increases will again undermine profitability. 
Crude oil prices are rising with December crude oil futures moving from 
$66 a barrel in September to nearly $80 a barrel in October. With the 
link to crude oil through ethanol, December 2009 corn futures have also 
rallied from $3 a bushel to $3.80 a bushel in October. Any further 
increases will deepen the pork industry's losses and extend their 
length.
    With large losses in 2009, pork producers are expected to reduce 
production by about 2.5 percent. However, my estimate suggests that the 
pork industry will need to reduce production another seven percent to 
reach sustained profitability. This will result in as much as a 30 
percent increase in retail pork prices at a time of economic distress 
for consumers as well. Still, with 2 years of losses, one has to ask, 
why didn't pork producers reduce production sooner? Are pork producers 
responsible for mismanaging their production levels? The answer is no. 
Looking back at futures prices demonstrates why. For the entire period 
of 2007 through 2010, the June lean hog futures price averaged $76 per 
carcass hundredweight. These prices were easily observed by producers, 
and using these values and other production cost results in a break-
even corn price of $4.90 a bushel, well above the average corn price of 
$3.90 a bushel. Producers rightfully formed economic expectations that 
hog prices would follow cost increases and pork production would be 
profitable. Unfortunately, national cash hog prices, the price that 
producers actually receive when hogs are sold, averaged only $62 per 
carcass hundredweight for the period, $15 below the average futures 
price. Why was there this discrepancy between expectations and 
outcomes? While producers observed higher feed prices and higher lean 
hog futures prices, very few anticipated the global financial crisis 
causing a dramatic run-up in the dollar, reducing export demand, or the 
public relations disaster of the H1N1 flu virus being misnamed swine 
flu and the resulting importer restrictions on U.S. pork, or the 
productivity boosting benefits of new porcine circovirus vaccine or the 
prolonged economic downturn resulting in increased unemployment and 
lower personal income that will likely continue to reduce demand. In 
short, unlike other hog cycles where producers' own actions may have 
had a significant role in determining the best and worst outcomes, this 
hog cycle has much to do with conflicting market signals and several 
broader economic events outside the fundamentals of the pork industry 
that arguably victimized otherwise good producers.
    In conclusion, the pork industry is under severe financial 
distress, having lost over $5.5 billion in the past 3 years. Among many 
potential policy responses I would like to suggest five possible 
actions. One, provide increased capital to agricultural lenders to 
support their balance sheets and maintain credit to high-quality 
producers; two, promote risk and business management education programs 
we have heard about earlier; three, support additional farm mediation 
resources for producers under stress; four, increase pork purchases in 
response to increased need for food assistance programs due to rising 
unemployment and declining personal incomes; and fifth, support opening 
international markets and reducing unsubstantiated barriers to U.S. 
pork imports.
    Mr. Chairman, thank you for the opportunity to present this 
testimony. I look forward to hearing your questions.
    [The prepared statement of Dr. Buhr follows:]

 Prepared Statement of Brian Buhr, Ph.D., Professor, Head and E. Fred 
 Koller Chair in Applied Economics, University of Minnesota, St. Paul, 
                                   MN
Situation
    The U.S. pork industry is undergoing the longest and deepest 
economic losses in the past 20 years. Farm records compiled by the 
University of Minnesota Center for Farm Financial Management (CFFM) 
(www.cffm.umn.edu) show losses were $13.40 per head sold in 2007 and 
$10.27 per head sold in 2008. Estimates from Iowa State University 
suggest losses have been even greater: $14.55 per head in 2007 and 
$21.99 per head in 2008. The deeper losses estimated by Iowa State are 
because they assume that only prices impact profits. However, actual 
farm records likely demonstrate that producers respond to lower prices 
by trying to change production practices thereby reducing costs and 
providing some mitigation.
    CFFM data shows losses for the industry, which had a federally 
inspected market hog harvest of more than 104 million head in 2007 and 
111 million head in 2008, total about $1.4 billion in 2007 and more 
than $1.1 billion in 2008. This total of more than $2.5 billion in 
losses since 2007 is greater than the estimated $2.4 billion losses in 
1998, which according to CFFM records was a 1 year event followed by 
positive profits typified by the usual hog cycle.
    Based on year to date numbers, 2009 is shaping up to be even worse 
than 2007 and 2008 making this the longest continuous stretch of losses 
for the modern pork industry. My projections, based on cost parameters 
from CFFM and hog, corn and soymeal prices from January 2009-September 
2009, estimate losses of $30.85 per head for 2009. For any individual 
producer, this number will be higher or lower depending on when and at 
what price they purchased feed inputs and marketed hogs, and how they 
marketed hogs (for a negotiated price or under some form of contract). 
The losses are more dependent than normal on these factors because of 
the extraordinary volatility the pork industry has faced during the 
past 2 years. For example, the 27 percent of producers that sell under 
``other market formula'' or ``other purchase arrangements'' instead of 
on a ``negotiated'' basis or a ``swine/pork market formula'' basis, 
sold hogs at an average of $6 per hundred pounds of carcass weight 
higher. If a producer purchased a significant share of corn in fall 
2006 for 2007 feeding needs, the producer paid about $2.40 per bushel 
for corn. If corn was purchased throughout 2007 or 2008 a producer paid 
an average $3.39 to $4.78 per bushel for corn and if the producer 
purchased at the high of 2008, as many ethanol plants did out of 
concern for even higher projected prices, the producer paid as much as 
$5.47 per bushel. In short, this hog cycle has much to do with 
conflicting market signals and some key decisions that may be as much 
about luck as about management, arguably victimizing otherwise good 
producers.
    It is likely losses will continue well into 2010. Pigs born in 
October 2009 will be sold in April 2010. With current corn prices at 
$3.54 per bushel and April 2010 Lean Hog futures prices trading at 
about $65 per carcass hundredweight, producers will just break-even on 
these pigs assuming all feed needs for finishing are purchased now. 
However, corn prices are once again rising and delay break-evens 
further into the future. The period between October and April will be 
worse, with average losses between $10 and $23 per head. At current 
market hog harvest rates about 2.5% less than 2008, the total expected 
loss for 2009 will be about $3 billion. This will bring the 3 year 
total losses to over $5.5 billion since the beginning of 2007.
How Did the Pork Industry Get Here?
Non-Pork Sector Causes
    How did the pork industry get into this situation? There is one 
very direct reason the pork industry had losses beginning in 2007--high 
corn and soybean meal prices that began in August 2006. Figure 1 shows 
the prices of corn and soybean meal back to 1996. In August 2006 there 
was a sharp increase in prices of all crops; this dramatic change did 
not allow pork producers to respond with reduced production.
    What was the cause of higher crop prices? Figure 2 shows total corn 
demand by type of use. There has been an increase in corn use for food, 
feed and industrial uses which includes ethanol. Part of this increased 
use was due to renewable fuel standards, but it's unlikely that this 
was the sole cause of the dramatic price increases. Another factor was 
the rapid global economic growth and declining dollar which led to 
increased demand for commodities including oil and grains, and also an 
increase in meat demand that itself increased demand for feed grains 
and oilseeds. This rising global growth, coupled with rising demand 
affecting broader commodities is a key factor in the pork industry's 
lack of immediate response.
    All indications in 2006 and even into 2007 were that global demand 
for agricultural commodities would continue to rise. Although a forward 
looking pork producer was concerned about rising grain prices, the 
reasonable expectation was that hog and pork prices would eventually 
follow. Essentially, like much of the rest of the world, including 
Federal Reserve Chairman Bernanke (WSJ, 7/16/08), pork producers 
expected growth to continue and prices to rise--allowing global growth 
to pull them out of the looming cost price squeeze.
    The expected potential for price improvement is shown by the 
dramatic increase in pork exports in Figure 3. In hindsight, this chart 
also shows how much exports have declined since the highs, although 
pork exports remain on long run trend in recognition of the overall 
strength of demand for U.S. pork.


 Weekly Omaha no. 2 corn and Decatur 48% protein soybean meal (1996-
present).

 Total corn disappearance by type of use. Source: USDA, ERS Feedgrains 
Database.

     U.S. total net pork exports and pork exports to selected countries.
Part of this brief run-up in exports was due to global economic 
conditions and illustrated by the dramatic fluctuations associated with 
the dollar shown in Figure 4. As shown, pork exports increased as the 
value of the dollar decreased more rapidly beginning in 2002 and 2003. 
Exports, especially to China, react in tandem with the currency 
exchange rate primarily because the Chinese yuan does not freely float, 
so that a declining dollar or increasing dollar almost impacts the cost 
of pork to China on a one-for-one basis. This has again created global 
volatility difficult for pork producers to respond to, and which is not 
driven solely by the supply and demand factors fundamental to the pork 
sector. This trade relationship is also impacting other protein sectors 
such as dairy products.
Pork Industry Fundamental Causes
    Certainly fundamental aspects of pork markets have played a role in 
the current crisis. Figure 5 shows annual September hog inventories. 
The overall trend for breeding herd is declining, primarily due to the 
increased productivity for each sow in the breeding herd. The 
productivity contrast is shown by the sharply increasing market hog 
inventories. This productivity increase has allowed producers to 
maintain a reasonably valued pork product for consumers, even in light 
of rising feed costs. The large relative increase in market hog 
inventories in 2007-2008 is due to a new porcine circovirus vaccine 
that reduced hog mortalities. This was another factor (economic shock) 
not anticipated by pork producers when making production decisions. 


 Trade weighted dollar exchange rate index and net pork export 
relationship. 

     Hog inventory trends and increasing productivity per sow.Higher 
inventories resulted in both higher slaughter and production levels 
during 2007 and 2008 as shown in Figure 6. The rising production levels 
relative to slaughter (narrowing gap between slaughter and production) 
are due to higher slaughter weights in hogs. This is again due to 
production efficiency improvements where hogs can be fed more cost 
effectively to heavier weights using less feed.


     Federally inspected hog slaughter and pork production.As shown in 
Figure 5, the pork industry is now responding to the sharply 
deteriorating market conditions experienced in 2009 by reducing 
breeding herd and market hog inventories by about 2.5 percent. However, 
using an equilibrium model of the pork industry that allows for 
simulation of quantity and price relationships, it is estimated that 
the total reduction in pork supplies to achieve the 21 percent increase 
in prices necessary to reach break-even is about ten percent--or an 
additional 7.5 percent reduction in hog and pork supplies. This 
dramatic reduction in pork production will also result in a nearly 30 
percent increase in retail pork prices, increasing food prices at a 
time of rising unemployment and declining personal income.
    The demand side of the pork fundamentals is somewhat mixed. Figure 
7 shows a scatter plot of pork demand with a linear trend line fit to 
represent price quantity trade-offs by consumers. Points approaching 
the origin represent weaker demand and points moving up to the right 
represent stronger demand--that is, consumers willing to consume more 
pork at higher prices. Domestic pork demand has been low relative to 
historical levels ever since 2005. This has been offset by very strong 
export demand for U.S. pork and these points also belie the fact that 
total consumption is at record levels, because it is affected by total 
population. Still, maintaining pork demand is a key concern as the 
economy weakens, unemployment rises, and personal incomes decline 
(Figure 8). Surprisingly, 2009 has been relatively strong (higher 
quantity consumed at slightly higher prices) compared to 2008 
especially in light of concerns regarding the effects of H1N1 on 
consumer perceptions regarding pork safety. The Food Industry Center in 
Applied Economics at the University of Minnesota has created a 
``Consumer Food Safety Tracker'' to track consumer knowledge about 
media information on food safety events. On April 29, 2009 they began 
tracking consumer response to H1N1. Within 3 weeks 99.3 percent of 
consumers had heard of H1N1. More importantly, in the first 13 weeks, 
3.6 percent of respondents said they would avoid eating pork and 2.5 
percent said they would avoid eating pork in the last 5 weeks (ending 
late September). It is not clear what impact this has had on actual 
demand, but it illustrates the importance of communication and 
effective information on these issues that could adversely affect 
demand. In summary, two key external factors--weakening consumer 
purchasing power and H1N1 also are likely to negatively impact pork 
demand.


     Retail pork demand, 1990-present.Many unforeseen factors including 
food and grain price inflation brought on by global economic growth, a 
declining U.S. dollar and rising oil prices placed cost pressure on 
pork production. This was followed by the global economic crisis that 
dramatically increased the value of the dollar and reduced foreign 
demand for U.S. pork products. Domestically, a new vaccine to reduce 
circovirus death loses increased supplies while rising unemployment and 
the emergence of H1N1 influenza softened domestic consumer demand for 
pork. 


 U.S. unemployment rate and personal income levels, 1990-2010.Why 
        Didn't Pork Producers Reduce Production Sooner?
    With 2 years of loses, why didn't pork producers reduce production 
sooner? Are pork producers responsible for mismanaging their 
production? The answer is no. Figure 9 shows a continuous series of 
futures prices for the June Lean Hog futures contract for the period 
2006-current. These are the hog prices a pork producer would look at in 
making production decisions.
    For the entire period of 2007 through 2010, the June Lean Hog 
futures price averaged $76.06/carcass cwt. These prices were easily 
observed by producers, and accounting for soybean meal prices ($310/
ton), weaned pig prices ($35/head) and other costs, result in a break-
even corn price of $4.86/bushel. Therefore, producers rightfully formed 
expectations that hog production would be profitable. Unfortunately, 
Figure 9 also shows that national cash hog prices (the price actually 
received at delivery) averaged $62/carcass cwt. for the period, $15/
carcass cwt. below the average futures price, and most likely due to 
the external economic shocks described earlier.
    June has on average the highest seasonal price of the year. 
However, a similar result emerges for December hogs which tend to 
average about 10% lower than the overall annual average for hogs. 
Figure 10 shows the average December futures price of $65.64 was closer 
to the average cash price of $62.53, but most producers would look at 
this futures price as a seasonal low anticipating that the average for 
the rest of the year would be higher. Even assuming this price, the 
break-even corn price with $310 per ton soybean meal would have been 
$3.54/bushel, only about $0.40 below the average price of corn the past 
several years.


 Continuation series of June Lean Hog futures prices 2007-2010.

     Continuation series of December Lean Hog futures prices 2007-2010.O
bviously, corn prices were rising during this period, so it is possible 
that producers should have cut back if they expected losses due to 
rising costs. Figure 11 shows the hog-corn price ratio for June Lean 
Hog futures and July Corn futures as a proxy for profit margins. The 
results again show that for all but mid-2008 when corn prices spiked 
dramatically, pork producers could expect hog production to be 
profitable. Again, as market conditions eroded for hogs more than corn 
the actual cash prices received resulted in much lower returns than 
anticipated and likely forestalled more rapid and decisive reductions 
in the herd.


     Hog-Corn price ratio comparison of expected profit margins.This 
illustrates that while profitability remained negative, producers were 
reasonable in expectations from a theoretical standpoint that higher 
feed costs would eventually lead to higher hog prices. The observed 
futures markets provided real evidence that the theory was supported by 
traders and one could argue that futures traders also bought into that 
theory. However, very few anticipated the global financial crisis 
causing a dramatic run up in the dollar reducing export demand; the 
public relations disaster of the H1N1 flu virus being misnamed swine 
flu; the productivity boosting benefits of a new circovirus vaccine; 
and the prolonged downturn in employment and personal income that will 
likely reduce demand.
    Even with these unanticipated shocks, why didn't pork producers 
lock in profits when they had the opportunity to do so? The primary 
reason is the extreme volatility during this period. During periods of 
rapidly changing markets, locking in prices can be as risky as just 
staying in the open market expecting that hog prices would follow corn 
prices as described earlier. The ethanol industry provided a dramatic 
illustration of what could happen if proper hedges weren't placed. In 
addition, the use of hedges or options becomes more costly during these 
periods as hedge margin requirements increase and option premiums can 
be very high due to high volatility. Figure 12 shows the implied 
volatility of corn from 2005 to 2009. Implied volatility is calculated 
based on option premiums for underlying futures contracts. A higher 
volatility implies more risk and option premiums are higher to account 
for this risk. From 1997-2004, the annual average implied volatility 
was 23.64 percent, since 2004 it has averaged nearly 33 percent and 
recently it has hovered between 40 and 50 percent, making it difficult 
to execute risk mitigation strategies.


     Corn implied volatility.The concern, going forward, is that this 
economic scenario of high volatility and rapid cost increases will 
repeat itself. Crude oil prices are again rising, moving from $66/
barrel in September to nearly $80 per barrel in mid-October for 
December Crude Oil futures. With the link to ethanol, December 2009 
corn futures have also rallied from near $3/bushel in September to near 
$3.80 in October. Further increases will deepen the pork industry's 
losses and extend their length.
    Producers are beginning to respond with lower production, primarily 
because they have eroded their equity base in production and can no 
longer simply hope that markets improve as has been anticipated. As 
described earlier, by mid-2010 there should be a rise in pork prices 
and profitability. There is potential, given the deep economic 
distress, that the liquidation will be extreme, on the order of ten 
percent of total production. A disorderly and extreme liquidation will 
ultimately harm consumers, also under economic distress, by increasing 
retail pork prices by as much as 30 percent.
What Are Some Possible Policy Responses?
    The pork industry functions as a relatively competitive market with 
mostly secondary benefits from price and income stabilization programs. 
However, given the short term nature of this problem it is possible to 
provide some support to producers that can help mitigate the crisis.

    1. Provide capital or loan guarantees to agricultural lenders to 
        support competitive pork producers. While many community and 
        local banks have withstood the credit crisis relatively well 
        compared to the global banking community, the ability to 
        continue to carry significant losses on their balance sheet is 
        limited. Providing capital to lenders allows for them to work 
        with producers and counsel them on strategies, going forward, 
        while helping to provide a more stable transition.

    2. Financial mediation for pork producers. Anecdotally, farm 
        mediators in Minnesota are being overwhelmed with new cases. 
        Many veteran mediators who may have retired from extension 
        service or other agencies are being called back. There is a 
        real need to train and attract more professionals to serve as 
        farm mediators. The Extension Service is one possible conduit 
        to provide mediation support services to help producers make 
        good decisions under financially stressful circumstances. This 
        should also include family counseling on stress.

    3. Expand educational programs in marketing and business planning. 
        As the report demonstrates, there were ample opportunities for 
        producers to lock in profits using futures or other risk 
        management strategies. Those who have the necessary marketing 
        skills have done quite well, however, those who do not, have 
        had substantial loses. Increasing support of educational 
        programs on risk management can benefit pork producers. Greater 
        sophistication is needed with greater systemic volatility.

    4. Pork purchasing programs for school lunch and food shelf aid. 
        According to the Minnesota Department of Human Services, the 
        number of households using food stamps increased 30 percent 
        from 2008-2009 and visits to Minnesota food shelves were 
        greater than two million for the first time (Star Tribune, 9/
        28/09). At a time of high demand for food assistance programs, 
        it seem natural to purchase pork to help support unprecedented 
        needs based on nearly 10% unemployment rates and declining 
        personal income.

    Mr. Boswell. Well, thank you, Dr. Buhr.
    Before we move on, I would like to recognize that Mr. Moran 
has joined us. He is not part of the Subcommittee, but he is 
certainly part of the full Committee, and my working partner on 
the risk management side of it. I have consulted with Mr. 
Goodlatte and we decided we would like to have you have full 
participation in the Committee today.
    Mr. Moran. Mr. Chairman, thank you very much for allowing 
me to join you, and I would ask unanimous consent that I be 
allowed to join the panel today.
    Mr. Boswell. You just heard it was given.
    Mr. Moran. It is two for two. Thank you very much, Mr. 
Chairman.
    Mr. Boswell. With that, I would like to pass on to our next 
witness, Mr. Brenneman.

  STATEMENT OF ROD K. BRENNEMAN, PRESIDENT AND CEO, SEABOARD 
                 FOODS LLC, SHAWNEE MISSION, KS

    Mr. Brenneman. Mr. Chairman, Ranking Member and Members of 
the Subcommittee, thank you for the honor and privilege to 
appear before you today. My name is Rod Brenneman and I am the 
President and CEO of Seaboard Foods. I have provided the 
Subcommittee with lengthier testimony for the record, so I will 
limit my comments this morning to 5 minutes in keeping with the 
rules.
    Mr. Chairman, there are many challenges facing the economic 
viability of the pork industry including higher input costs for 
feed and energy, an overabundance of supply in the domestic 
market, weakening demand and international trade barriers. 
Higher feed and energy prices shape production decisions and 
prices paid for feed doubled from 2006 to 2008, mainly due to 
higher corn and soybean meal prices. By mid-2008, corn prices 
were nearly 150 percent higher than prices were in 2007, and 
soybean meal prices reached record levels during this same time 
period.
    While there are various reasons for the increase in feed 
prices, certainly one of them has been the determined 
government policies to promote the use of corn for ethanol. 
This effort, while seeking a desirable goal, which is to lower 
the U.S. reliance on fossil fuels, has had an unfortunate, 
unintended consequence to the U.S. meat industry and ultimately 
to consumers. In my opinion, this policy must be reevaluated.
    Increase in energy prices has also affected the pork 
sector. Meat products require energy-intensive refrigeration 
and pork supplies in cold storage at the end of 2009 were 
estimated to be 517.9 million pounds, which is three percent 
higher than last year at this time and over 19 percent higher 
than the 5 year average. To keep pace with rising feed and 
energy prices, product pricing must also rise. However, prices 
have not risen at an adequate rate as supply has outpaced 
demand.
    From a supply side, the productivity of U.S. hog production 
has continued to increase, and while the long-term trend is up 
approximately 1\1/2\ percent per year, the past number of years 
have seen an even greater increase in productivity. Granted, 
the total volume of pork produced is lower in 2009 than it was 
in 2008, but the reduction is still not enough to return pork 
producers to profitability. We will need to right-size the 
industry by either a further reduction in supply, an increase 
in demand or, more likely, some of both.
    From a demand standpoint, this past summer's economic data 
on prices paid for hogs and pork continues to languish. 
Economic factors facing both domestic and foreign consumers in 
a recessionary period can be pointed to as one reason for low 
hog and pork prices and lower export demand.
    Another major reason for the drop in hog and pork prices 
was the outbreak of the novel H1N1 influenza. Despite the fact 
that it was a human illness and not a swine illness, this 
outbreak in April of 2009 had a significant and immediate 
impact on the domestic and international pork markets. While 
the initial media frenzy misnamed and mischaracterized this as 
a food safety issue, this is not a food safety issue at all but 
rather a human health issue. If projected out to the end of 
2009 and beyond using the futures prices in effect the day 
prior to the announcement of H1N1, which was on April 24, the 
true cost of this to the pork industry may well exceed $2 
billion.
    The outbreak of the H1N1 virus led to the enactment of new 
trade barriers. Of the 17 countries that banned pork and pork 
products from the United States, most notably were Russia and 
China. Before the ban, China was one of our fastest growing 
markets for pork exports. Until this year the United States had 
enjoyed 17 straight years of growth in pork exports. The United 
States pork industry is extremely competitive in the world 
markets and we must work hard to maintain open access to all 
markets and expand into new ones. In my opinion, the government 
should not try to address this issue by promoting subsidies to 
producers as the industry must downsize and the markets will 
force this to occur. We cannot allow trade barriers to be put 
in place against U.S. exports, and similarly, we should not 
take a protectionist posture against our trade partners. We 
need to let the markets work.
    In conclusion, I want to recommend two areas for the 
Subcommittee to pursue immediately. Number one, to encourage 
and work with the Secretary of Agriculture to immediately make 
Section 32 funds available for additional purchases of pork for 
various Federal food programs. An emphasis should be placed on 
purchasing meat from sows with an objective to reduce breeding 
stock and correspondingly reduce market hog numbers. And 
second, to encourage and work with the U.S. Trade 
Representative to open export markets to U.S. pork, 
particularly China, which continues to impose non-science-based 
restrictions on U.S. pork since the outbreak of novel H1N1.
    Thank you for the opportunity to appear before the 
Subcommittee, and I will be happy to respond to any questions 
that you may have regarding my testimony.
    [The prepared statement of Mr. Brenneman follows:]

  Prepared Statement of Rod K. Brenneman, President and CEO, Seaboard 
                     Foods LLC, Shawnee Mission, KS
    Mr. Chairman, Ranking Member, and Members of the Subcommittee, 
thank you for the honor and privilege to appear before you today. My 
name is Rod Brenneman and I am the President and CEO of Seaboard Foods. 
Seaboard Foods would like to express our appreciation to the 
Subcommittee for holding this hearing on the economic conditions facing 
the U.S. pork industry.
    Seaboard Foods is a vertically integrated pork producer and 
processor, producing and selling fresh, frozen and processed pork 
products to further processors, foodservice operators, grocery stores, 
retail outlets and other distributors in the United States. 
Internationally, Seaboard sells to those same types of customers in 
Japan, China, Mexico, Russia, Korea and many other foreign markets. In 
2008, the U.S. pork industry exported almost 20 percent of the total 
pork produced and Seaboard's amounts were in excess of this overall 
average at approximately 25 percent.
    Seaboard Foods' live production facilities are located in Oklahoma, 
Kansas, Texas and Colorado, and are supported by our six centrally 
located feed mills. These facilities consist of genetic and commercial 
breeding, farrowing, nursery and finishing buildings. Seaboard Foods 
produces approximately four million hogs each year, making Seaboard the 
second largest hog producer in the United States. Our facilities 
consume more than 40 million bushels of corn and milo and over 350,000 
tons of soybean meal per year.
    Mr. Chairman, Seaboard Foods has experienced the current economic 
conditions facing the pork sector first-hand at the production, 
processing, marketing and international trade level. As the Members of 
this Subcommittee know, there are many challenges facing the economic 
viability of the pork sector including higher input costs for feed and 
energy, an over-abundance of supply in the domestic market, weakening 
demand and international trade barriers.
Input Costs
    Higher feed and energy prices shape production decisions and prices 
paid for feed doubled from 2006 to 2008, mainly due to higher corn and 
soybean meal prices. Corn is estimated to account for upwards of 70 
percent of feed grains in pork production and soybean meal accounts for 
another 20 percent of the feed. By mid-2008, corn prices were nearly 
150 percent above year earlier prices. In addition, soybean meal prices 
reached record levels during this same time period. While some will say 
that corn prices have declined in 2009--and that is true--they are 
still very high when compared to historical levels. While there are 
various reasons for the increase in feed prices, certainly one of them 
has been the determined government policies to promote the use of corn 
for ethanol. This effort, while seeking a desirable goal which is to 
lower the U.S. reliance on fossil fuels, has had an unfortunate 
unintended consequence to the U.S. meat industry and ultimately to 
consumers. Given not only the inefficient results of converting corn to 
ethanol but also the impact on food costs and ultimately world hunger, 
this policy needs to be re-evaluated and in my opinion, completely 
changed. When roughly \1/3\ of the corn crop is used to produce fuel 
(ethanol) instead of food, it is difficult for anyone to argue that it 
has not had an impact on food prices. In the current year, USDA is 
estimating the corn crop to be the second largest crop in the history 
of the U.S., yet the current prices for corn are at levels well above 
historical trends. The immediate impact has been a significant cost 
increase to hog producers, but the ultimate impact will be a food cost 
increase to all consumers.
    The increase in energy prices has also affected the pork sector by 
increasing costs on producers, processing plants, further processors, 
and retailers. As you know, meat products require energy-intensive 
refrigeration. USDA statistics show total pork supplies in cold storage 
at the end of August 2009 were estimated to be 517.9 million pounds. 
That number is significant as it is three percent higher than last year 
at this time and--over 19 percent higher than the 5 year average. To 
keep pace with rising feed and energy prices, product pricing must also 
rise. However, prices have not risen at an adequate rate as supply has 
outpaced demand.
Supply
    From a supply side, the productivity of U.S. hog production has 
continued to increase and the long-term trend is up approximately 1.5 
percent per year. In recent years this trend has been even higher. We 
are producing too much pork to match up with the demand has been 
weakened due to a number of factors which I will discuss below. While 
the total volume of pork produced is lower in 2009 than it was in 2008, 
the reduction is still not enough to return pork producers to 
profitability. This imbalance between supply and demand has created 
what some might call ``the perfect storm'' for pork producers. We will 
need to ``right size'' the industry by either a further reduction in 
supply, an increase in demand, or more likely, some of both.
Demand
    From a demand standpoint, this past summer's economic data on 
prices paid for hogs and pork cuts continued to languish at year-over-
year lower levels at a time of year when prices are typically trending 
upwards with higher demand. There are several key reasons for these 
depressed prices. Economic factors facing both domestic and foreign 
consumers in a recessionary period can be pointed to as one reason for 
low hog and pork prices and lower export demand. USDA's Estimated Pork 
Carcass Cutout for July showed U.S. wholesale pork prices to be almost 
18 percent below prices in July 2007 and nearly 27 percent below prices 
in July 2008. You can imagine the impact on prices when you combine an 
over-supply of pork with decreased demand and closed market access 
around the world. The result is a significant increase in products to 
be consumed in the domestic market and a corresponding significant 
amount of downward pressure on pork prices.
H1N1
    Another major reason for the drop in hog and pork prices was the 
outbreak of the novel H1N1 Influenza. Despite the fact that it was a 
human illness and not a swine illness, this outbreak in April 2009 had 
a significant and immediate impact on the domestic and international 
swine and pork markets. Fueled by confusion between a public health and 
an animal health issue, swine prices dropped and consumers questioned 
the safety of the pork products they were eating; however, Novel H1N1 
is not a flu that was caused or spread by pig production nor is this 
virus transmitted to humans by consuming pork. In short, this is not a 
food safety issue at all--but rather it is a human health issue.
    Media reports were alarmist and frequently used the inaccurate term 
``swine flu'' to describe this particular strain. And while the novel 
strain has some genetic markings derived from swine, it also has 
significant human and avian genetic fingerprints. Unfortunately, early 
media coverage left that impression, and this was and continues to be 
disruptive to hog producers and pork processors.
    Since April 24, the date Novel H1N1 was made public, the losses 
incurred by pork producers, processors and retailers has totaled in the 
hundreds of millions of dollars. Experts are saying that if we project 
these losses to October 2009, the total will be well over $1 billion. 
And, if projected out to the end of 2009 and beyond using the futures 
prices in effect the day prior to the announcement to today, the true 
cost of this will not only exceed $1 billion but may very well exceed 
$2 billion.
Trade Barriers
    Not only has this issue affected the domestic markets, but the 
impact of that erroneous association between the novel H1N1 2009 virus, 
live hogs, and pork products also lead to the enactment of new trade 
barriers. Of the 17 countries that banned pork and pork products from 
the U.S., most notably were Russia and China. Russia banned pork and 
pork products from 16 states while China banned pork and pork products 
from the entire U.S. Before the ban, China was our fastest growing 
market for pork exports, importing $268 million in 2008, $147 million 
in 2007 and $55 million in 2006. China continues to ban U.S. pork and 
has only imported $47 million in the period of January through August 
of 2009 compared to $247 million during the same period in 2008.
    Russia banned pork and pork products from 16 states and all but 
Florida can now ship pork products, depending on the eligible shipping 
date. The 15 states that were once banned began to get re-listed for 
exports in June and July. Russia was also a good export market for pork 
and pork products, taking $390 million in 2008, up from $184 million in 
2007. In 2009, U.S. pork and pork product exports to Russia were only 
$143 million in the period of January through August, compared to $261 
million in the same period of 2008.
    Total U.S. pork exports world-wide in 2008 reached $4.4 billion, up 
from $2.8 billion in 2007. In the period of January to August 2009, 
exports were down 13 percent, at $2.5 billion compared to $2.9 billion 
in 2008. Until this year, the U.S. had enjoyed 17 straight years of 
growth in pork exports. U.S. pork producers, processors and further 
processors are extremely competitive in the world markets, and we must 
work hard to maintain open access to all markets and expand into new 
ones. We need to let the markets work. The government needs to approach 
this crisis in the pork industry from the standpoint of enhancing 
demand through purchases of products with and for government programs 
and work to open market trade access around the world. The government 
should not approach it by promoting subsidies to producers as the 
industry must ``right size'' and the markets will respond and this will 
occur.
    I want to strongly urge each Member of this Subcommittee to 
continue to work to keep open the markets we currently have, re-open 
the markets that we previously exported products to that are currently 
closed, and seek to open up trade channels with new countries around 
the world. We cannot allow trade barriers to be put in place against 
U.S. exports and similarly, we should not take a ``protectionist'' 
posture against our trade partners.
Conclusion
    Many factors are influencing the current state of affairs in the 
pork sector and I am confident that we can address these problems and 
make the industry stronger than ever. Two areas I would recommend that 
this Committee pursue immediately are:
    To encourage and work with the Secretary of Agriculture to 
immediately make available Section 32 funds for additional purchases of 
pork for various Federal food programs with a maximum emphasis on 
purchasing meat from sows with the objective to reduce breeding stock 
to reduce hog numbers; and
    Encourage and work with the U.S. Trade Representative to open 
export markets to U.S. pork, particularly China, which continues to 
impose non-science-based restrictions on U.S. pork since the outbreak 
of Novel H1N1.
    I know many Members of this Subcommittee and of the full 
Agriculture Committee have been working on both of these 
recommendations and I would like to thank you for your effort's and 
encourage you to stay the course. Also, I would like to commend 
Congress for recently taking the steps necessary to end the ban on 
allowing USDA to perform a risk analysis and issue a final rule on 
processed poultry products from China that has been included in recent 
Agriculture Appropriations bills. China has continuously pointed to 
this ban as a reason not to revisit opening their market to our pork 
products and now that issue has been addressed. Chairman Scott, I am 
aware of your position on this issue and of the letter you wrote to 
Appropriators urging them to address this issue and--I am grateful for 
your support.
    Thank you for the opportunity to appear before the Subcommittee. I 
am happy to respond to any questions that the Member's of the 
Subcommittee may have regarding my testimony.

    Mr. Boswell. Thank you, and now the chair recognizes Mr. 
Moody.

          STATEMENT OF DAVID MOODY, CHAIRMAN AND PAST
         PRESIDENT, PUBLIC POLICY COMMITTEE, IOWA PORK
               PRODUCERS ASSOCIATION, NEVADA, IA

    Mr. Moody. Thank you for the invitation to this hearing. My 
name is David Moody. I am the Public Policy Chairman and Past 
President of the Iowa Pork Producers Association. I am a pork 
producer from Nevada, Iowa. I want to thank Chairman Scott and 
Ranking Member Neugebauer and their staff for taking a 
leadership role and fellow Iowans' Representatives Boswell and 
King for bringing attention to the financial struggles of the 
pork industry.
    The rapid increase and decrease in input costs and farm 
gate income has resulted in tremendous stress amongst farmers, 
lenders, grain merchandisers, consumers and others. During 
2008, our losses were not because of low prices. In fact, 
prices received by pork farmers in 2008 were near record. But 
our input costs rose substantially. Please keep in mind, 
producers' business plans were developed and implemented based 
on a historic normal production cost. Now in 2009, our input 
costs are down slightly but the market has slumped. The market 
drop has been caused by the flu events, lower exports, flat 
domestic demand, a drop in the U.S. and world economies, and 
last, increase in pork production efficiencies.
    For pork producers, financial losses have been staggering. 
Since September of 2007, $5.3 billion have been lost and 
forecasts show only 4 profitable months between now and the end 
of 2010. While owners of the pigs have withstood the largest of 
these economic losses, other segments of our industry will also 
be impacted, specifically contractual producers, also known as 
contract growers. Most economists indicate that we will need to 
trim the herd by about nine million market pigs. Assuming a 
typical wean-to-finish facility, this means roughly 450 million 
spaces of finishing capacity need to be eliminated. On a 
typical Iowa farm site of two 1,200 head barns, that equates to 
approximately 1,900 fewer pig farms. Iowa alone might stand to 
lose 600 to 700 of these pig-finishing farms.
    Unfortunately, many of these farms have been built by new, 
younger farmers of families trying to bring sons or daughters 
back into the farming operation. The next wave of losses will 
be from Main Street businesses, fewer equipment companies, 
fewer insurance sales and even fewer truckers, in other words, 
the ripple effect on Main Street will follow.
    We all know there is no simple solution. I have three 
suggestions for this Subcommittee to consider. The first is to 
continue work on international trade. Much has been done. 
However, Congress should approve international trade 
agreements, especially the Korean free trade agreement because 
it is very valuable to pork sales. The value has been estimated 
at $10 per head of pigs produced in the United States. That 
would make an important step toward improving the economic 
crisis of the pork industry.
    Second, pork producers appreciate all the pork purchases 
that have been made by the Department using Section 32 funds. 
We also appreciate the Members of this Subcommittee and of the 
full Agriculture Committee who have recently signed onto a 
letter circulated by Representatives King and Walz urging USDA 
to make another pork purchase in the immediate future. It would 
be a good opportunity for the USDA to purchase an additional 
$100 million worth of pork products with Section 32 funds. I 
realize there is a spending-cap issue on these funds. I would 
encourage this Committee to review this policy in light of the 
current conditions.
    Last, I ask Members of Congress and the media to be 
vigilant about continuing to name the novel H1N1 influenza 
virus by the correct name. Our industry has taken on added 
economic pain and direct financial losses from the improper 
naming of H1N1 flu.
    In summary, our farmers have struggled for some time and 
the financial outlook in the coming year is somewhat bleak. We 
have had tremendous loss of equity, little or no profit for 
almost 2 years, but our organization will be continually 
working to bring solutions that help bring this industry back 
into profitability. We stand ready with this Subcommittee and 
other policymakers to find solutions to this financial 
situation.
    Thank you, and I would be happy to answer any questions.
    [The prepared statement of Mr. Moody follows:]

Prepared Statement of David Moody, Chairman and Past President, Public 
     Policy Committee, Iowa Pork Producers Association, Nevada, IA
    Thank you for the invitation to this hearing. My name is David 
Moody and I am the Public Policy Chairman and Past President of the 
Iowa Pork Producers Association. I am a pork producer from Nevada, 
Iowa. I want to thank Chairman Scott, Ranking Member Neugebauer and 
their staff for taking a leadership role with other Representatives to 
bring attention to the financial struggles of the pork industry.
    We've all heard about ``perfect storms''. Most of the agricultural 
community and pork producers specifically are in the midst of a perfect 
economic storm and many in agriculture are being forced to respond to 
issues beyond their control.
    The rapid increase and decrease in input costs and farm gate income 
has resulted in tremendous stress amongst farmers, lenders, grain 
merchandisers, consumers and others. To say the past couple of years 
has been a wild rodeo ride in agriculture is an understatement. During 
2008 our losses were not because of low prices. In fact prices received 
by farmers in 2008 were a near record, but our input costs rose over 
20%. Please keep in mind, producer business plans were developed and 
implemented based on normal production costs.
    Now in 2009, our input costs are down slightly, but the market has 
slumped. The market drop has been caused by the April 24th flu event, 
lower exports, flat domestic demand, a drop in the U.S. and world 
economies, and lastly increased pork production efficiencies.
    For pork producers, financial losses have been staggering. The 
total equity loss for pork producers since losses began in September 
2007 amounts to $5.3 billion. Furthermore, based on recent economic 
forecasting, cash hog prices will be below cost of production in all 
except 4 months through the end of 2010. That means, on average, pork 
producers have lost approximately \2/3\ of their equity since September 
2007.
Other Affects:
    While the owner of pigs has stood the largest of these economic 
losses, other segments of our industry will also be impacted. 
Specifically, contractual producers, also known as contract growers 
will also be affected. Most economists indicate it will take about a 9% 
to 10% drop in hog production to see a return of profitability. 
Assuming we need to trim the herd by about nine million market pigs and 
assuming typical wean to finish facilities, means that roughly 4.5 
million spaces of finishing capacity will also be reduced. That equates 
to 3,750 fewer finishing barns needed or about 1,900 fewer pig farms. 
Iowa alone might stand to lose 600 to 700 pig finishing farms. 
Unfortunately, many of these farms have been built by new younger 
farmers of families trying to bring a son or daughter back into the 
farming operation.
    The next wave of losses will be from main street businesses such as 
fewer feed dealers and cooperatives, equipment companies, 
veterinarians, insurance sales and even truckers. In other words, the 
ripple effect on main street will follow. And this will increase 
consolidation and concentration of the pork industry with fewer farmers 
raising more pigs.
Potential and/or Partial Solutions:
    We all know there is no `simple or perfect solution', but there are 
a few things mentioned which could improve the economic situation. I 
have three suggestions for this Subcommittee to consider.
    First, policy makers and the Administration must continue to 
pressure for greater export access to other countries for our 
agricultural products. While much has been done, we need to continue to 
pressure our trading partners to eliminate non-tariff trade barriers. 
Also, Congress should approve international trade agreements, 
especially the Korean Free Trade Agreement because it is very valuable 
to pork sales. The value has been estimated to be up to $10.00 per head 
produced in the United States. That would make an important step 
towards improving the economic crisis in pork production.
    Second, our producers appreciate all of the pork purchases that 
have been made by the Department using Section 32 funds to help get the 
surplus product off the marketplace. I appreciate the Secretary's 
support on these purchases. I also appreciate the Members of this 
Subcommittee and of the full Agriculture Committee who recently signed 
on to a letter circulated by Representative King and Representative 
Walz urging USDA to make another pork purchase in the immediate future. 
It would be a good opportunity for USDA to purchase an additional $100 
million worth of pork products with Section 32 funds for various 
Federal food programs.
    In regards to Section 32 funds, I understand there was a cap placed 
in the 2008 Farm Bill to achieve savings for the bill to help get 
consensus on the overall price tag. Given the changes in the livestock 
sector and other sectors of agriculture who utilize these funds, we 
would appreciate it if you and your colleagues on the Agriculture 
Committee would reexamine the cap to see if there is anything to be 
done in the future to lift the cap or provide more flexibility for USDA 
to be able to utilize the Section 32 funds in the coming years.
    Last, I ask Members of Congress and the media to be vigilant about 
continuing to name the Novel H1N1 Influenza virus by the correct name. 
Our industry has taken on added economic pain and direct financial 
losses from the improper naming of the H1N1 flu. Back home I hear from 
many pork producers about the improper name and it is perceived by them 
to be adding insult to financial injury. Ironically, producers are and 
should be more concerned about humans giving the virus to our pigs. We 
all should be talking about the new human flu virus that may be given 
to pigs.
    In summary, our farmers have been struggling for some time and the 
financial outlook in the coming year looks somewhat bleak. We've had 
tremendous loss of equity, little or no profits for almost 2 years, but 
our organization will be continually working to bring solutions that 
help bring this industry back into profitability. We stand ready with 
the Subcommittee and other policy makers to find solutions for this 
financial situation.
    Thank you.

    Mr. Boswell. Well, thank all of you. It has been a great 
presentation. I am just curious from anybody or all of you, do 
you have anything that you can reflect back on that happened in 
the last financial crisis that you did or that we did that 
helped recovery in the markets, anything that you can pull back 
from that that you can share with us? Anybody?
    Mr. Greenwood. Can you repeat the question again? I am 
sorry. We couldn't hear you.
    Mr. Boswell. Well, I guess what I am saying is, that the 
industry, the swine industry in the last financial crisis did 
different things, things happened, and as you reviewed that I 
am sure many times over, particularly on the academic side, 
that maybe there are some things we are overlooking that might 
be a lesson learned that we haven't picked up on. Is there such 
a thing?
    Mr. Butler. Mr. Chairman, I will take a crack at that. I 
don't know if it is any one specific action that could be 
pointed to except the United States' promotion of international 
trade. That has been tremendously helpful to our industry over 
the past 15 years. It was not in reaction to that particular 
crisis that you alluded to, but the growth in international 
markets has been a terrific stimulus to our industry, and we 
have seen recently that the closure of those international 
markets have a pretty severe impact if and when they occur. 
Beyond that, I can't think of a specific action that the 
government took in 1998 or 1999 that made any difference.
    Mr. Greenwood. I was lending in 1998 and 1999 and I am here 
today. I can clearly tell you that what we are going through 
today is much more difficult that what we saw in 1998 and 1999. 
I think just a couple thoughts, I am not sure if there are 
answers for you there. I would say in 1998 and 1999 it was much 
more short-lived. It was a shorter period of time and the 
market kind of corrected itself. The issue that has been for 
the last 2 years is really market volatility with commodity 
prices that went up exponentially, and that has caused a great 
amount of economic pain. Also back in 2006 we were having some 
disease issues. We developed a porcine circovirus vaccine that 
had a dramatic improvement on mortality, and from an animal 
welfare standpoint, that was absolutely the right thing to do. 
But what it did in terms of reducing mortality across the 
United States in the operations I worked with was probably 
three percent. Well, three percent will equate to about three 
to four million extra hogs that ended up hitting the market 
from an animal health standpoint. You know, that is what it 
did. That was a little bit unprecedented. Also, if we look at 
the industry today and back in 1998 and 1999, the producers 
that are left, they are committed to the industry. They don't 
want to go out of business. It is their livelihood. It is what 
they--I mean, family farms across the United States, they don't 
want to go out. And back in 1998 and 1999 people probably had a 
little more flexibility on what decisions they wanted to make 
but the people today, they are really committed to the 
industry.
    Mr. Boswell. Well, thank you very much. I think in the 
interest of time I am going to move on and recognize Mr. 
Goodlatte. We have been called for a vote but we have some time 
so maybe we can finish this. We will go to Mr. Goodlatte and 
then Mr. Moran and then we will see where we are at.
    Mr. Goodlatte. Well, thank you, Mr. Chairman. I want to 
welcome all the members of the panel. I will move through with 
these questions as quickly as I can.
    I will start with Mr. Butler. In your view, has mandatory 
country-of-origin labeling provided any positive benefits to 
U.S. pork producers?
    Mr. Butler. The short answer, Congressman, is no. We 
believe that country-of-origin labeling has added cost to our 
industry and we receive no benefit from it.
    Mr. Goodlatte. As you know, legislation has been introduced 
in the House that would severely limit the use of antibiotics 
in food animal production, and the Administration apparently 
without consulting the Department of Agriculture has indicated 
their support for that. Would this legislation have an adverse 
effect on the profitability of pork producers?
    Mr. Butler. Yes, it would. We have heard earlier today 
about the Denmark experience. And an across-the-board ban on 
the use of animal health products would likely have the exact 
opposite of the intent. We believe that it is important to keep 
animals healthy as opposed to treating them after they become 
ill. So some people who are proposing a ban on animal health 
products for whatever set of reasons are wrongheaded about 
that.
    Mr. Goodlatte. Well, I agree and I really appreciated the 
piece that the Chairman introduced regarding what has happened 
in Denmark where they ostensibly have a ban on the use of it. 
They are using even more of it and I suspect it is because they 
have to contain these problems that they don't keep under 
control in the first place.
    Mr. Greenwood, under existing conditions, does your 
institution find independent or contract growers to be 
preferable borrowers?
    Mr. Greenwood. I think the best way for me to answer that 
question is, we work with producers of all types. To give you 
an example, we have big owners that own the pigs and they might 
own a facility, but then they work with other independent 
producers that help raise those pigs. From a production 
standpoint, and I call it producers really working together, 
that system has worked very, very well for this industry. The 
issue is now, I call it the cause and effect when you have a 
pig owner that is struggling financially and all the 
ramifications that it has with other independent producers that 
have a direct linkage. They might not own the livestock but 
they are raising that livestock. It puts all those loans at 
risk that we are working with today, because many of those pig 
owners have multiple contract growers that are also, probably, 
our clients of our association and it puts everything at risk.
    Mr. Goodlatte. Thank you.
    Mr. Brenneman, since your company exports a greater 
proportion of its products than the U.S. pork industry does, 
you must be even more sensitive to trade policy. In your view, 
what effect has the recent decision to impose tariffs on 
Chinese-made tires had on our prospects to improve pork exports 
to that nation?
    Mr. Brenneman. Yes, you are right. We are very dependent or 
more dependent on the export markets than maybe the industry on 
average is. I will tell you any kind of trade barriers that are 
put up, and I think that is a good example of one that has been 
placed recently, it is problematic. Every time the Chinese 
refer to the poultry issue that is getting resolved, that is 
something they point to as a reason why they are not opening 
back up due to H1N1, and I think that is just an excuse. I 
think they are looking at any types of trade barriers we are 
putting up and using those as reasons not to open trade back up 
for pork products.
    Mr. Goodlatte. Thank you. And your testimony discusses the 
adverse effect of government policies on the costs of feed and 
energy. Roughly what portion of the cost of raising hogs is 
feed and what portion of the cost of processing, refrigerating 
and transporting pork products is energy?
    Mr. Brenneman. That is a very good question. The feed side 
is easy. It is roughly 65 percent of the cost of raising a hog 
is feed. On the energy side, that is a little more difficult. 
If you look just at the processing part of it, the energy used 
in just the processing plant for refrigeration and everything 
else is roughly seven to eight percent. If you add in all the 
transportation costs, that number would go up higher, closer to 
probably 15 to 20 percent. The energy portion of that is hard 
to----
    Mr. Goodlatte. Mr. Chairman, my time is just about expired. 
I have other questions. Perhaps we could submit them and ask 
for answers in writing. I have some for Dr. Buhr and Mr. Moody 
that I would love to have them answer if time would permit.
    Mr. Boswell. We can do that.
    Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you to you and Mr. Goodlatte 
for allowing me to join you here today. I feel badly intruding 
upon your time, although I have been told that this first vote 
is being held open for up to 30 minutes for an Afghan briefing, 
and we will not have that vote until that briefing is 
concluded, so perhaps we have a bit more time than what we are 
aware of.
    Mr. Boswell. We will check that out.
    Mr. Moran. Thank you, Mr. Chairman.
    I am pleased to be with you and this is an important issue 
in Kansas and the country and agriculture, and I welcome the 
panel. I appreciate having the opportunity to have heard all of 
their testimony, and I especially welcome Mr. Brenneman from 
Seaboard Foods. I smile as I want to compliment Seaboard Foods 
as a Kansas company. No one would think a company called 
Seaboard would be located in Kansas, but we are delighted that 
you are. You are an important component of our economy and have 
made significant improvements in the economy in the 
Congressional district that I represent.
    Mr. Brenneman. Thank you.
    Mr. Moran. It is a pleasure to have the opportunity to ask 
these questions, although I am sorry the circumstances are so 
difficult for our pork producers. I want to follow up on a 
statistic that I saw recently, and perhaps this is for the 
active addition doctor. Retail pork prices, according to USDA, 
in the third quarter fell as compared to the third quarter of 
last year, 1 year comparison, fell 2.33 percent while pork 
prices paid to the farmer fell 31.68 percent. And I am not a 
conspiracy guy particularly, but what is the explanation for 
that, what seems to me to be a very dramatic difference in the 
reduction of prices between the retail and the wholesale 
sector?
    Dr. Buhr. Well, to stay with economics for a minute, one of 
the technical issues is, there are some concerns about USDA's 
reporting of retail prices. For example, they don't adequately 
include featuring and coupon values that happen in retail so 
that actual retail price that the consumers pays is often quite 
different than that price decline as just as a technical 
matter. But beyond that, we do tend to see it economically 
change in the farm price, given a change in production, changes 
much more dramatically than do retail prices. Retail prices 
just tend to be stickier and they take a longer time to move 
into that supply chain. So some of those quick time changes 
like that and changes in production could affect that 
difference as well.
    Mr. Moran. What that suggests is that the elasticity, the 
relationship between price and demand and price and supply are 
significantly different at the retail and the wholesale level?
    Dr. Buhr. Right. The farm level tends to be the most 
elastic response.
    Mr. Moran. And are those numbers any different than any 
other sector of the livestock side of beef prices or chicken 
prices, poultry prices? Is there a difference between these?
    Dr. Buhr. There is a difference, but for the most part that 
is relatively consistent, that you do see retail prices change 
less than you do farm prices. Farm prices do tend to change 
more whether it is beef, pork or poultry.
    Mr. Moran. So no particular policy suggestion or 
recommendation related just to that fact other than you would 
suggest that USDA needs to change their calculation of price?
    Dr. Buhr. I haven't thought about that much quite honestly 
and I am not sure where you are driving. I have a sense you are 
going somewhere with that. But, there are questions, of course, 
with margins and concentration of the industry, branding, 
promotion issues and so on out there in industry. My take on 
that, I look a good deal at antitrust issues and these 
competition issues that people looked at, and there is very 
little evidence to support noncompetitive pricing practices in 
the pork industry, and changes to competition policies would 
very likely adversely affect the pork industry from the ability 
to execute things like vertical integration, coordination and 
pricing. So from that perspective, that may be where the 
concern is coming from. I do tend to chalk these changes up to 
what I was talking about, the normal price responsiveness of 
the pork industry between farm level, wholesale level and 
retail level.
    Mr. Moran. I was not taking that any other place than the 
normal question that I, as a Member of Congress, have: what can 
I do? I think what you are telling me is, the market is at work 
here and it is doing its function.
    Dr. Buhr. Right.
    Mr. Moran. Thank you.
    Mr. Brenneman, you indicated in your testimony that 
government should not approach this problem by promoting 
subsidies to producers as the industry must ``right size and 
the markets will respond and this will occur.'' I think often 
we have the suggestion that government needs to do something. 
Subsidies are often one of the first suggestions. I wanted to 
give you the opportunity to expand upon your thoughts about why 
we should not do that.
    Mr. Brenneman. Thank you. Yes, and my concern is, that what 
we would see as a solution would be many of the comments made 
here in terms of focusing on the demand side and opening up new 
markets, reopening markets that were open and are now closed 
and continuing to enhance demand. What our fear is, and I will 
speak from Seaboard's standpoint, would be subsidies that 
continue to promote more and more production, we have mentioned 
that there is a supply problem and we need to get supply down 
and demand back into equilibrium, if you will, to get prices to 
where they can be sustainable for producers in the long term, 
and that was the essence of my comments. If subsidies are a way 
of dragging out and continuing to keep supply at too high a 
levels in relation to the demand, then that will be problematic 
for us and it will drag on this challenge for producers for a 
long, long time.
    Mr. Moran. And my impression is that the witnesses, all of 
you are in general agreement. Mr. Butler, I assume that is the 
case for the pork producers?
    Mr. Butler. It is, yes, sir.
    Mr. Moran. Thank you, Mr. Chairman.
    Mr. Boswell. Well, thank you, and thank all of you, and I 
see that Audrey is in the audience so we are going to have some 
questions submitted, Mr. Goodlatte will do that. And there is a 
vote going on. We can't confirm that it is going to be delayed 
so we will probably not--unless I'm getting ready to get some 
information here. I think that since we can't confirm that, 
rather than hold you here for a couple hours and then 
reconvene, we will submit those questions, unless some of you 
object to that. No objections, I see. Well, we can't thank you 
enough for your coming and sharing your expertise, and we have 
heard clearly that we want the Department to continue their 
purchases. We have heard clearly that we need to advance trade. 
I know that Mr. Goodlatte and some of the rest of us were in 
Korea last December and we certainly discussed this on the beef 
side, but we also had discussions on the pork side, be assured 
of that. So we hope we can move forward on that. Those of us 
that are producers, quite a few of us are on this panel, on 
this full Committee, we understand the pain, and we won't stop 
and we will do anything we possibly can that is reasonable to 
do. So thank you again for coming and being with us. We 
appreciate it very much.
    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 of the panel.
    The hearing of the Subcommittee on Livestock, Dairy, and 
Poultry is now adjourned.
    [Whereupon, at 11:45 a.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
   Submitted Article by Hon. Leonard L. Boswell, a Representative in 
                           Congress from Iowa
Informa Economics Policy Report

                         dated October 16, 2009

Miscellaneous . . .
Suspicious Rise in Danish Use of Pig Antibiotics
    Use of antibiotics in Danish pig production increased by 19 percent 
between 2001 and 2008, a report has shown, despite the fact that Danish 
law forbids the use of antibiotics for routine treatment of livestock.
    The ban on routine administration of antibiotics is intended to 
protect against the risk of antibiotic resistance in bacteria that can 
infect both animals and humans, which is potentially life-threatening.
    However, the recent Danmap (Danish integrated antimicrobial 
resistance monitoring and research program) report for 2008 showed that 
antibiotic use in pig production had gone up by 19 percent in 2001-
2008, measured in daily pig doses per kilogram of pork.
    The findings were reported in the bimonthly Maskinbladet under the 
headline: ``Indications of routine treatment with antibiotics.'' 
According to the article, the increase relates primarily to the use of 
tetracyclines, which rose by 118 percent and 60 percent respectively in 
weaned and finishing pigs in the period 2003-2008.
                                 ______
                                 
                          Submitted Questions
Response by Michael T. Scuse, Deputy Under Secretary, Farm and Foreign 
        Agricultural Services, U.S. Department of Agriculture
Question Submitted by Hon. Collin C. Peterson, a Representative in 
        Congress from Minnesota
    Question. In your testimony, you discussed two risk management 
programs available to swine producers: Livestock Gross Margin and 
Livestock Risk Protection. Also according to your testimony, the 
programs have low participation rates among swine producers. Under 
section 523(b)(10) of the Federal Crop Insurance Act (7 U.S.C. 
1523(b)(10)), it appears that the cost of conducting these programs is 
capped at $20 million for each fiscal year. Does this account for the 
low participation rates? How much of the $20 million available for FY 
2009 was unused?
    Answer. You are correct that section 523(b)(10) of the Federal Crop 
Insurance Act (7 U.S.C. 1523(b)(10)) authorizes, on a yearly basis, $20 
million to pay the expenses of the Federal Crop Insurance Corporation 
(FCIC) to conduct two or more livestock insurance pilots. These 
expenses include administrative and operating subsidy to approved 
insurance providers to administer the plans, and producer subsidy. For 
Fiscal Year 2009, approximately $1.5 million was expended. Therefore, 
the limitation on the amount to be expended has not had any impact on 
participation.
    With regard to the livestock pilot programs, RMA contracted for an 
evaluation of the livestock products in 2007 requesting that the 
contractor specifically review the reasons for low participation in the 
livestock plans of insurance. The evaluation cited several reasons for 
the low participation rates and commented that these low participation 
rates are unlikely to change. Some of the reasons for low 
participation: (1) Agents used to selling crop insurance are unfamiliar 
with a financial based product like the livestock products; (2) The 
cost of the LRP insurance program was higher than the comparable 
options contracts; (3) The complexity of the LGM plan has made it 
difficult for agents to understand and market the product; (4) The 
perception, following RMA pulling the product in response to the first 
Bovine spongiform encephalopathy identification is that the product may 
be pulled from the market at any time; and (5) The limited sales 
period. Because these are derivatives of exchange traded contracts, the 
sale of the livestock products occurs after the commodity markets are 
closed.
    With regard to the unfamiliarity and complexity of the products, 
several targeted training initiatives have taken place to assure a 
better understanding by producers and those involved in the sales and 
service of the Livestock insurance products.
Questions Submitted by Hon. Frank D. Lucas, a Representative in 
        Congress from Oklahoma
    Question 1. China had been a growing market for pork, buying $268 
million in 2008, $147 million in 2007, and $55 million in 2006. This 
year exports to China are off $200 million over the same period last 
year. Recently, the Obama Administration placed a 35 percent tariff on 
tires imported from China, which can only further dampen hopes for 
improvement. Did the Department of Agriculture participate in that 
decision?
    Answer. Yes, as an active member of the Administration's formal 
interagency trade policy process (Trade Policy Staff Committee (TPSC)), 
USDA participated with other agencies in discussing options for this 
policy area. In that process, trade ramifications were among the 
concerns discussed.

    Question 2. Recently, your Administration testified before the 
House Rules Committee in favor of H.R. 1549, which would severely 
restrict the use of antibiotics in food animal production. Did the 
Department of Agriculture have any input into that position? Has the 
Department done any economic analysis of the adverse economic impact on 
pork producers of this legislation?
    Answer. The Administration has not taken a position on H.R. 1549.
    USDA is working collaboratively with FDA on the issue of 
antibiotics. Antimicrobial drugs are critical agents for treating 
infectious disease both in humans and animals. We know that many 
livestock producers use antibiotics judiciously and want to preserve 
the effectiveness of these important drugs. We also know that 
antibiotic resistance is real and is a public health concern. The issue 
of antibiotic resistance requires close collaboration between Federal 
agencies, Congress, state health departments, and the agricultural 
community. We look forward to working closely with Congress on this 
issue in the future.
    USDA's Economic Research Service has analyzed evidence on the 
extent of antibiotic use in U.S. hog production, alternatives to 
growth-promoting antibiotics, the farm-level effects of restriction on 
use, and the likely farm-level costs and consumer responses to a 
restriction.

    Question 3. Observers have offered that a Free Trade Agreement with 
Korea would expand markets for pork producers and benefit them $10 per 
head. What priority is the Obama Administration placing on this FTA and 
FTAs with Columbia and Panama?
    Answer. As President Obama stated after his recent summit meeting 
with President Lee, the Administration is committed to working together 
to move the KORUS FTA forward. This will involve working through a 
number of outstanding issues, including on autos, beef and non-tariff 
measures. The Administration is consulting with stakeholders and 
working to identify the most effective approaches for dealing with 
these concerns and those outstanding with the other pending FTAs. 
Successfully addressing these concerns will be an important step in 
determining when, in close consultation with the Congress and as part 
of the President's broader trade policy framework, these agreements 
should be considered by the Congress.

    Question 4. I understand that the USDA has announced they will work 
with the U.S. Department of Justice on a series of workshops next year 
that will examine competition issues in the livestock industry. I think 
my colleagues would agree that while the livestock sector is 
struggling, it might not be the best time for the government to tinker 
with industry structure. Could you take a few minutes to outline the 
process the Secretary intends to follow and what outcomes do you 
anticipate with this effort?
    Answer. USDA and the Department of Justice plan to hold workshops 
to explore competition issues affecting the agricultural sector and the 
appropriate role for antitrust and regulatory enforcement. On November 
13, USDA and the Department of Justice announced the schedule of 
workshops as follows: March 12 in Ankeny, Iowa to discuss general 
producer issues, including seed technology, vertical integration, 
market transparency and buyer power; May 21, 2010 in Normal, Alabama to 
discuss concentration and buyer power in the poultry industry; June 7, 
2010 in Madison, Wisconsin to discuss concentration and vertical 
integration in the dairy industry; August 26, 2010 in Fort Collins, 
Colorado to discuss concentration in the livestock industry; and 
December 8, 2010 in Washington, D.C., to discuss price discrepancies 
between prices received by farmers and the prices paid by consumers. We 
do not have specific outcomes for these workshops at this time. We are 
interested in engaging in a dialogue among interested parties and 
foster learning with respect to the appropriate legal and economic 
analysis of these issues as well as to listen and to learn from parties 
with real-world experience in the agricultural sector.

    Question 5. In these troubled economic conditions for the pork 
industry, who is generally fairing better, independent producers or 
producers who have aligned with packers?
    Answer. We have no information about how well independent producers 
are currently fairing versus producers who are aligned with packers. 
However, based on 2008 data from USDA's Agricultural Resources 
Management Survey, the financial performance of hog farmers with 
production or marketing contracts tended to fair better, on average, 
than the performance of independent producers.

    Question 6. The Administration was a very strong advocate of cap-
and-trade legislation earlier this year. Has the Department conducted 
an analysis of this legislation regarding the economic impact 
specifically on pork producers? Is there anything in the House bill 
that will help pork producers with their current economic problems?
    Answer. On July 22, the Department published a report, ``A 
Preliminary Analysis of the Effects of H.R. 2454 on U.S. Agriculture'' 
detailing the projected effects of the Waxman-Markey bill on U.S. 
agriculture. (http://www.usda.gov/oce/newsroom/archives/releases/
2009files/HR2454.pdf). Because of provisions in H.R. 2454 that reduce 
the impact of the bill on fertilizer costs, the short-run (i.e., 2012-
2018) costs are estimated to be small and largely covered by offset 
markets. Over the medium and long terms, costs increase but it is 
estimated that the benefits to agriculture from offsets will increase 
more.
    In 2005, greenhouse gas (GHG) emissions from U.S. livestock 
operations totaled 258.6 Tg CO2. Hog production accounted 
for 21.0 Tg CO2 eq., or 8.1 percent of all livestock related 
emissions. Waste management accounted for 91.1 percent of all GHG 
emissions related to hog production--this included methane emissions of 
18.65 Tg CO2 eq. and nitrous oxide emissions of 0.48 Tg 
CO2 eq. Methane emissions from enteric fermentation 
accounted for the balance of GHG emissions from hog production (or 1.92 
Tg CO2 eq.). Given these sources, the major opportunities to 
reduce GHG emissions from hog operations will lie in changes in waste 
management systems. Covering open storage facilities (such as pits, 
ponds, and lagoons) and flaring the methane gas, switching to daily 
spread systems, and installing anaerobic digesters all offer potential 
opportunities for particular hog production facilities to significantly 
reduce their GHG emissions. Anaerobic digesters also have a number of 
other benefits that include reductions in odor, generation of 
electricity and heat for on-farm use, and (in some cases) bedding 
material. H.R. 2454 does not identify the set of agricultural practices 
that would be eligible to supply offsets but does stress the importance 
of any such offsets to be real, permanent, additional, and verifiable. 
In general, meeting these criteria are relatively straight forward for 
emissions reductions associated with changes in waste management 
systems.

    Question 7. It is my understanding that the Administration has the 
statutory authority to suspend or alter the Renewable Fuels Standards 
in the event it creates adverse economic conditions? Has the 
Administration conducted any analysis about how such a decision could 
provide relief to the livestock sector generally or for pork producers 
specifically?
    Answer. The Renewable Fuel Standard (RFS) program, which requires 
the use of renewable fuels in the U.S. transportation sector, was 
originally adopted by Congress in the Energy Policy Act of 2005. This 
program was modified by Congress in the Energy Independence and 
Security Act of 2007 (EISA). The RFS program provides that the 
Administrator of the Environmental Protection Agency (EPA), in 
consultation with the Secretaries of Agriculture and Energy, may waive 
the national renewable fuel volume requirements, in whole or in part, 
if the Administrator determines that implementation of the requirement 
would severely harm the economy or environment of a state, region, or 
the United States (see Clean Air Act section 211(o)(7)(A)).
    On April 25, 2008, the Governor of the State of Texas requested a 
fifty percent waiver of the national volume requirements under the RFS 
mandate for the time period from September 1, 2008 through August 31, 
2009. Texas based its request on the assertion that the RFS mandate is 
unnecessarily having a negative impact on the economy of Texas, 
specifically, that increased ethanol production is contributing to 
increased corn prices which are negatively affecting its livestock 
industry and food prices. EPA published in the Federal Register a 
notice of receipt of this request and invited public comment on all 
issues relevant to making a decision.
    On August 13, 2008, EPA published in the Federal Register a Notice 
of Decision on the State of Texas request for a waiver of a portion of 
the RFS. In that Notice, EPA stated that, ``[B]based on a thorough 
review of the record in this case, EPA finds that the evidence does not 
support a determination that implementation of the RFS mandate during 
the time period at issue would severely harm the economy of a state, a 
region, or the United States. EPA is therefore denying the request for 
a waiver.''
    In reaching its decision, EPA evaluated the information submitted 
by the State of Texas and other commenters, and, in addition, EPA 
conducted its own analysis. In consultation with the U.S. Department of 
Agriculture and the U.S. Department of Energy, EPA reviewed several 
economic models and chose a model created by researchers at Iowa State 
University (ISU model) to analyze the impact of the RFS on corn, 
ethanol, and gasoline prices based on uncertainty in key variables such 
as crop yields and crude oil prices. For additional information 
regarding EPA's decision, see the following website: http://
www.epa.gov/fedrgstr/EPA-AIR/2008/August/Day-13/a18738.htm. I am not 
aware of any more recent analysis that the Administration has conducted 
on suspending or altering the RFS and the potential impacts on 
livestock producers.

Questions Submitted by Hon. Steve King, a Representative in Congress 
        from Iowa
    Question 1. Could you please confirm or deny the information 
alleging that an Administration request for salary and benefits 
compensation data for the executives of meat processors or suppliers as 
a condition for consideration of bids to supply sow meat to the USDA?
    Answer. For all recent cooked pork patty invitations to bid issued 
by USDA, offers from eligible contractors have been received that far 
exceed the amount needed to fill the contract demand. USDA is not 
imposing and does not plan to impose salary disclosure requirements on 
contractors or potential contractors for any of its purchases under the 
current funding authorizations, see section 1512 of ARRA and Federal 
Acquisition Regulation 52.204-11. That being said, USDA recently 
purchased pork products using funds authorized by the American Recovery 
and Reinvestment Act (ARRA) that required salary disclosure for a 
contractor under specific conditions. However, none of the firms 
awarded USDA pork product contracts using ARRA funds met the threshold 
requirements for salary disclosure.

    Question 2. Does the USDA have the authority to require this 
information as a condition for considering bids? If so, please cite the 
statute, rule, constitutional provision(s), or precedents that you 
believe grant the basis for such a request.
    Answer. See answer to Question 1 above.

    Question 3. If this is your practice, how long has it been in 
effect and why was it implemented?
    Answer. See answer to Question 1 above.

    Question 4. Please attach the current USDA application requirements 
for the suppliers of sow meat and note any changes in requirements that 
have been implemented within the last year.
    Answer. See attachment that follows.

    Question 5. In addition, please attach a report of USDA sow meat 
purchases within the last year, by month of purchase.
    Answer. In the past fiscal year, AMS has purchased approximately 
12.2 million pounds of finished products produced from sow meat at a 
cost of $22.1 million. This was one purchase in September 2009.
                              Attachments


    Question. In your prepared testimony, you discuss how current 
economic conditions will lead to contraction in the national herd. 
There has been some talk advocating a specific policy to reduce the 
number of sows in the United States--but not much in the way of details 
have been mentioned. Do you have any thoughts on this idea?
    Answer. While the pork industry has been losing money for 2 years, 
most of the loss has been caused by things outside the producer's 
control. In 2008 the industry received nearly record income for our 
pigs but had extremely high input costs, mostly due to high feed costs. 
Since the April 24, 2009 flu event and the economic recession, the 
demand for pork has dropped world wide. This had brought the pork price 
down because of supply and demand factors.
    However it has been a shorter time period of the reduced market 
price, which would indicate we need to reduce the sow herd. Most 
producers would like the market to dictate the herd size not a new 
government program. This thought was supported by Iowa Pork Producers 
Association's annual member survey. We had a question asking if 
producers would support a specific program to help with prices by 
reducing the sow herd with a government program and the answer was 
overwhelmingly `no'.
    Producers would much prefer that the government use existing 
government programs to purchase pork products for food programs. This 
could include purchases of sow meat, which would be cheaper and 
incentivize market driven herd reductions. The other item Congress and 
the Administration could do is continue work on trading with other 
countries and passing free trade agreements. Thank You.
Response by Mark Greenwood, Vice President, Agri Business Capital, 
        AgStar Financial Services&*
---------------------------------------------------------------------------
    *&There was no response from the witnesses by the time this hearing 
went to press.
---------------------------------------------------------------------------
Questions Submitted by Hon. Frank D. Lucas, a Representative in 
        Congress from Oklahoma
    Question 1. Under existing conditions, does your institution find 
independent or contract growers to be preferable borrowers?

    Question 2. In your testimony you call for higher FSA loan limits. 
Could you expand on the specifics of that? Where are we now? Where 
should we move to? What discretion does the Department of Agriculture 
have in that area?
Response by Brian Buhr, Ph.D., Professor, Head and E. Fred Koller Chair 
        in Applied Economics, University of Minnesota&*
Questions Submitted by Hon. Frank D. Lucas, a Representative in 
        Congress from Oklahoma
    Question 1. Would it be fair to summarize your testimony by saying 
that individual producers were making the right decisions with respect 
to market signals, but that those market signals turned out to be 
wrong? Do you have any suggestions how they might prevent this from 
happening again?

    Question 2. During discussions of the current economic crisis for 
the pork sector, we frequently hear the term ``hog cycle''. Could you 
take a few minutes to explain the context of this term and offer some 
observations about how it relates to today's situation?


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