[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





 

    HEARING TO EXAMINE THE ISSUE OF FEED AVAILABILITY AND ITS EFFECT
                ON THE LIVESTOCK AND POULTRY INDUSTRIES

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                     LIVESTOCK, DAIRY, AND POULTRY

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 14, 2011

                               __________

                           Serial No. 112-23


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

                   FRANK D. LUCAS, Oklahoma, Chairman

BOB GOODLATTE, Virginia,             COLLIN C. PETERSON, Minnesota, 
    Vice Chairman                    Ranking Minority Member
TIMOTHY V. JOHNSON, Illinois         TIM HOLDEN, Pennsylvania
STEVE KING, Iowa                     MIKE McINTYRE, North Carolina
RANDY NEUGEBAUER, Texas              LEONARD L. BOSWELL, Iowa
K. MICHAEL CONAWAY, Texas            JOE BACA, California
JEFF FORTENBERRY, Nebraska           DENNIS A. CARDOZA, California
JEAN SCHMIDT, Ohio                   DAVID SCOTT, Georgia
GLENN THOMPSON, Pennsylvania         HENRY CUELLAR, Texas
THOMAS J. ROONEY, Florida            JIM COSTA, California
MARLIN A. STUTZMAN, Indiana          TIMOTHY J. WALZ, Minnesota
BOB GIBBS, Ohio                      KURT SCHRADER, Oregon
AUSTIN SCOTT, Georgia                LARRY KISSELL, North Carolina
SCOTT R. TIPTON, Colorado            WILLIAM L. OWENS, New York
STEVE SOUTHERLAND II, Florida        CHELLIE PINGREE, Maine
ERIC A. ``RICK'' CRAWFORD, Arkansas  JOE COURTNEY, Connecticut
MARTHA ROBY, Alabama                 PETER WELCH, Vermont
TIM HUELSKAMP, Kansas                MARCIA L. FUDGE, Ohio
SCOTT DesJARLAIS, Tennessee          GREGORIO KILILI CAMACHO SABLAN, 
RENEE L. ELLMERS, North Carolina     Northern Mariana Islands
CHRISTOPHER P. GIBSON, New York      TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             JAMES P. McGOVERN, Massachusetts
VICKY HARTZLER, Missouri
ROBERT T. SCHILLING, Illinois
REID J. RIBBLE, Wisconsin
KRISTI L. NOEM, South Dakota

                                 ______

                           Professional Staff

                      Nicole Scott, Staff Director

                     Kevin J. Kramp, Chief Counsel

                 Tamara Hinton, Communications Director

                Robert L. Larew, Minority Staff Director

                                 ______

             Subcommittee on Livestock, Dairy, and Poultry

                  THOMAS J. ROONEY, Florida, Chairman

BOB GOODLATTE, Virginia              DENNIS A. CARDOZA, California,  
STEVE KING, Iowa                     Ranking Minority Member
RANDY NEUGEBAUER, Texas              DAVID SCOTT, Georgia
K. MICHAEL CONAWAY, Texas            JOE COURTNEY, Connecticut
TIM HUELSKAMP, Kansas                TIM HOLDEN, Pennsylvania
SCOTT DesJARLAIS, Tennessee          LEONARD L. BOSWELL, Iowa
CHRISTOPHER P. GIBSON, New York      JOE BACA, California
REID J. RIBBLE, Wisconsin            KURT SCHRADER, Oregon
KRISTI L. NOEM, South Dakota         WILLIAM L. OWENS, New York

              Michelle Weber, Subcommittee Staff Director

                                  (ii)


                             C O N T E N T S

                              ----------                              
                                                                   Page
Baca, Hon. Joe, a Representative in Congress from California, 
  prepared statement.............................................     4
Cardoza, Hon. Dennis A., a Representative in Congress from 
  California, opening statement..................................     2
    Prepared statement...........................................     3
Rooney, Hon. Thomas J., a Representative in Congress from 
  Florida, opening statement.....................................     1
    Prepared statement...........................................     2
Scott, Hon. David, a Representative in Congress from Georgia, 
  submitted article..............................................    67

                               Witnesses

Meyer, Ph.D., Steven Roger, President, Paragon Economics, Inc., 
  Adel, IA; on behalf of National Cattlemen's Beef Association...     4
    Prepared statement...........................................     6
Greene, Philip, Vice President, Foster Commodities and Foster 
  Poultry Farms, Fresno, CA; on behalf of American Feed Industry 
  Association....................................................    13
    Prepared statement...........................................    15
Seger, Ted, President, Farbest Foods, Inc., Huntingburg, IN; on 
  behalf of National Turkey Federation...........................    26
    Prepared statement...........................................    28
Welch, Michael A., President and Chief Executive Officer, 
  Harrison Poultry, Bethlehem, GA; on behalf of National Chicken 
  Council........................................................    31
    Prepared statement...........................................    32
Erba, Ph.D., Eric, Senior Vice President of Administrative 
  Affairs, California Dairies, Inc., Visalia, CA.................    37
    Prepared statement...........................................    39
Spronk, Randy, pork producer and Managing Partner, Spronk 
  Brothers III LLP and Ranger Farms LLP; Vice President, National 
  Pork Producers Council, Edgerton, MN...........................    41
    Prepared statement...........................................    43

                           Submitted Material

National Corn Growers Association, submitted statement...........    68


    HEARING TO EXAMINE THE ISSUE OF FEED AVAILABILITY AND ITS EFFECT
               ON THE LIVESTOCK AND POULTRY INDUSTRIES

                              ----------                              


                     WEDNESDAY, SEPTEMBER 14, 2011

                  House of Representatives,
     Subcommittee on Livestock, Dairy, and Poultry,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 1:37 p.m., in 
Room 1300, Longworth House Office Building, Hon. Thomas J. 
Rooney [Chairman of the Subcommittee] presiding.
    Members present: Representatives Rooney, King, Neugebauer, 
Huelskamp, DesJarlais, Gibson, Ribble, Cardoza, Scott, 
Courtney, Holden, Boswell, Baca, Schrader, Peterson (ex 
officio), and Costa.
    Staff present: Tamara Hinton, Josh Maxwell, Debbie Smith, 
Patricia Straughn, Lauren Sturgeon, Pete Thomson, Heather 
Vaughan, Suzanne Watson, Michelle Weber, Liz Friedlander, Mary 
Knigge, Anne Simmons, John Konya, and Jamie Mitchell.

OPENING STATEMENT OF HON. THOMAS J. ROONEY, A REPRESENTATIVE IN 
                     CONGRESS FROM FLORIDA

    The Chairman. This hearing of the Subcommittee on 
Livestock, Dairy, and Poultry for the purpose of examining the 
issue of feed availability and its effect on the livestock and 
poultry industries, will come to order.
    Good afternoon, and welcome to today's hearing to examine 
the issue of feed availability and its impact on livestock, 
dairy and poultry producers. I would like to begin by welcoming 
our witnesses and thanking them for taking the time out of 
their busy schedules to participate in this process and share 
their expertise.
    I would also like to thank Ranking Member Cardoza for his 
assistance in preparing today's hearing. We each represent a 
district that boasts substantial animal agricultural 
production, but that is far from the area that produces the 
bulk of the crops that are fed to those animals. As such, the 
issue we are examining today is of great important to the 
constituents we each represent.
    Our Subcommittee began this Congress with a series of 
overview hearings that gave us some perspective about the 
production practices and public policy challenges of the animal 
agriculture community. At each of these hearings, we heard a 
good bit about the issue of feed availability, and I am pleased 
that we have the opportunity today to examine that issue in 
greater detail.
    The U.S. livestock, dairy and poultry industries are 
confronting incredibly tight feed supply prospects. Because of 
the widespread drought throughout the Southwest and the 
Southeast, this problem is even more pronounced. Earlier this 
week USDA lowered its corn production estimates for the year 
even further, putting increased pressure on the growing demand 
for grain. For the animal agricultural sector, where feed costs 
account for the lion's share of their operating expenses, this 
presents significant difficulty. We are fortunate to have an 
experienced panel assembled here today to provide testimony 
about those challenges.
    Our witnesses today include representatives of each of the 
affected sectors, beef, pork, turkey, chicken and dairy, as 
well as a representative of the animal feed industry community. 
They have been asked to describe the feed situation from their 
perspective and discuss its implications for their industry.
    As the session proceeds, we will explore more topics in 
greater detail. I appreciate the interest and involvement of my 
colleagues regarding these matters and welcome everybody's 
input as we move forward.
    [The prepared statement of Mr. Rooney follows:]

   Prepared Statement of Hon. Thomas J. Rooney, a Representative in 
                         Congress from Florida

    Good afternoon, and welcome to today's hearing to examine the issue 
of feed availability and its impact on livestock, dairy, and poultry 
producers. I would like to begin by welcoming our witnesses and 
thanking them for taking time out of their busy schedules to 
participate in this process and share their expertise. I would also 
like to thank Ranking Member Cardoza for his assistance in preparing 
for today's hearing. We each represent a district that boasts 
substantial animal agriculture production but that is far from the area 
that produces the bulk of the crops that are fed to those animals. As 
such, the issue we are examining today is of great importance to the 
constituents we each represent.
    Our Subcommittee began this Congress with a series of overview 
hearings that gave us some perspective about the production practices 
and public policy challenges of the animal agriculture community. At 
each of these hearings, we heard a good bit about the issue of feed 
availability, and I am pleased we have the opportunity today to examine 
that issue in greater detail.
    The U.S. livestock, dairy, and poultry industries are confronting 
incredibly tight feed supply prospects. Because of the widespread 
drought throughout the Southwest and Southeast, this problem is even 
more pronounced. Earlier this week, USDA lowered its corn production 
estimates for the year even further, putting increased pressure on the 
growing demand for grain. For the animal agriculture sector--where feed 
costs account for the lion's share of their operating expenses--this 
presents significant difficulty, and we are fortunate to have an 
experienced panel assembled here today to provide testimony about these 
challenges.
    Our witnesses today include representatives of each of the effected 
sectors--beef, pork, turkey, chicken, and dairy--as well as a 
representative of the animal feed industry community. They have been 
asked to describe the feed situation from their perspective and discuss 
its implications for their industry.
    As the session proceeds, we will explore more topics in greater 
detail. I appreciate the interest and involvement of my colleagues 
regarding these matters and welcome everyone's input as we move 
forward.

    The Chairman. I would now like to recognize Ranking Member 
Cardoza for his opening statement.

 OPENING STATEMENT OF HON. DENNIS A. CARDOZA, A REPRESENTATIVE 
                  IN CONGRESS FROM CALIFORNIA

    Mr. Cardoza. Thank you, Mr. Chairman. I want to thank all 
our witnesses for traveling here today. And I want to give a 
special thank you to you, Mr. Chairman, for the gracious way 
that you have worked with us in conducting these hearings that 
we have participated in today. If all of Congress worked 
together as well as our two staffs and our Committee does, it 
would be a better Congress and a better place to work.
    In California, our producers are extremely vulnerable to 
increases in feed prices and overall feed availability. The 
West Coast model dictates that the majority of feed grain is 
shipped to California from other areas of the country where it 
is cheaper to grow. This leaves producers extremely susceptible 
to price fluctuations with few avenues available to control 
these input costs.
    Since 2007, producers have been questioning the very 
business model they have relied upon for years as they watched 
their costs skyrocket. I expect that we will hear today from 
these witnesses about the various causes of these price 
increases. But I also hope to hear about specific steps the 
Congress and this Committee should take to mitigate the crisis. 
This input is vital to crafting practical policies, moving 
forward, and I look forward to the hearing today.
    Now, every day when I go home, I pass cornfields in 
southern Maryland, and I know that hurricanes that have come 
through in the last few weeks have devastated a lot of those 
fields and are just going to cause that much more significant 
pressure on an already overtaxed industry back in my real home, 
which is California. I am very concerned about this. I heard 
from my poultry producers earlier this year that they thought 
that they might actually have to reallocate grain in order to 
keep their livestock alive for 2 to 3 weeks until the new 
harvest started coming in.
    These are big challenges, these are real issues, and I am 
grateful that you are having this hearing, and that we are 
going to try and get to the bottom of anything that we can 
possibly do about it.
    Thanks again for all of you attending. I look forward to 
your testimony.
    [The prepared statement of Mr. Cardoza follows:]

   Prepared Statement of Hon. Dennis A. Cardoza, a Representative in 
                        Congress from California

    Thank you Mr. Chairman, and thank you to our witnesses for 
discussing the topic of feed availability. I especially appreciate our 
witnesses who traveled all the way from California to be here today. 
Thank you.
    In California, our producers are extremely vulnerable to increases 
in feed prices and overall feed availability. The West Coast model 
dictates that the majority of feed grain is shipped to California from 
other areas of the country where it is cheaper to grow.
    This leaves producers extremely susceptible to price fluctuations 
with few avenues available to control these input costs.
    Since 2007, producers have been questioning the very business model 
they have relied upon for years as they've watched their costs 
skyrocket.
    I expect that we will hear today from our witnesses about the 
various causes of these price increases. But I also hope to hear about 
specific steps that Congress and this Committee should take to mitigate 
this crisis.
    This input is vital to crafting practical policies, moving forward, 
and I look forward to hearing from you today. Thank you.

    The Chairman. Thank you, Ranking Member Cardoza.
    The chair would request that other Members submit their 
opening statements for the record so the witnesses may begin 
their testimony and ensure there is ample time for questions. 
We are expecting a series of votes here within the next hour, 
so please keep that in mind as well.
    [The prepared statement of Mr. Baca follows:]

Prepared Statement of Hon. Joe Baca, a Representative in Congress from 
                               California

    Chairman Rooney and Ranking Member Cardoza:

    I am pleased to be here today to review important issues 
surrounding the cost and availability of feed--and to discuss how this 
negatively impacts the livestock, poultry, and dairy industries.
    I thank the Chairman and Ranking Member for convening this hearing 
and hope we will be able to gain valuable insight into this critical 
issue.
    I also want to thank our witnesses for coming here today--and 
taking time from their schedule to help us in Congress better 
understand this issue of critical importance.
    An affordable, reliable, and safe feed supply is absolutely 
essential to the well being of animal agriculture in America.
    Everyone on this Subcommittee is well aware of the impact that 
record-feed prices have had on production costs for our producers, and 
market prices for consumers.
    In my own Congressional District--in California's Inland Empire--
dairy is a significant agricultural and economic product.
    The dairy industry has been hit harder than most by the recent 
economic downturn--and continues to see production costs that are far 
too high.
    We must have a frank discussion about the continued use of ethanol 
subsidies and fuel mandates in America's energy policy.
    As Members of the Subcommittee on Livestock, Dairy, and Poultry, we 
owe it not only to our agriculture producers--but also to the American 
public at large, to ensure we always maintain a strong safety net for 
agricultural production.
    America's livestock, dairy, and poultry industries must remain 
strong and secure.
    I look forward to hearing from our witnesses today and again thank 
the Chairman and Ranking Member for their leadership.
    Thank you.

    The Chairman. I would like now to welcome our panel of 
witnesses at the table: Dr. Steven Roger Meyer, President of 
Paragon Economics, Adel, Iowa; Mr. Philip Greene, Vice 
President of Foster Farms, Incorporated, Fresno, California; 
Mr. Ted Seger, President of Farbest Foods, Huntingburg, 
Indiana; Mr. Michael Welch, President and Chief Executive 
Officer of Harrison Poultry in Bethlehem, Georgia; Dr. Eric 
Erba, Senior Vice President for Administrative Affairs, 
California Dairies, Visalia, California; and Mr. Randy Spronk, 
pork producer, Spronk Brothers, Edgerton, Minnesota.
    Dr. Meyer, please begin when you are ready.

  STATEMENT OF STEVEN ROGER MEYER, Ph.D., PRESIDENT, PARAGON 
  ECONOMICS, ADEL, IA; ON BEHALF OF NATIONAL CATTLEMEN'S BEEF 
                          ASSOCIATION

    Dr. Meyer. Mr. Chairman, Members of the Subcommittee, my 
name is Steve Meyer. I am President of Paragon Economics, 
Incorporated, a livestock and grain market analysis firm based 
in Adel, Iowa. I am here today on behalf of the National 
Cattlemen's Beef Association.
    I would like to tell you about the declining amount of 
grains available to livestock and poultry producers and the 
impact it is having on cattlemen in particular, and more 
general on livestock and poultry producers.
    Since 2000, the amount of corn used for ethanol has 
increased eightfold, with \3/4\ of that increase occurring 
since 2005. Since 2005, the use of corn for feed has fallen by 
20 percent.
    Let me be clear that I am not opposed to ethanol. I believe 
it to be a reasonable alternative to expensive and dwindling 
oil supplies, especially when those supplies are in many cases 
held by countries that, at best, are unsupportive to America's 
best interests, and at worst are enemies of our great nation.
    Further I realize that we cannot ``unring'' the bell on 
ethanol subsidies and tariffs. They have achieved their 
intended purpose of establishing a significant U.S. corn-based 
ethanol industry. But when you hear that the government should 
not be deciding on winners and losers, please realize that the 
government has already done so, with livestock and poultry 
producers being the primary losers.
    From 2007 to 2010, 30,510 cattle operations and 24,350 beef 
cow operations exited the industry. Most of them were small. 
During that same 5 years, 6,350 hog operations exited the 
industry, and 84 percent of them held 500 or fewer pigs in 
inventory.
    The amount of corn used for ethanol has increased at a much 
faster pace than has the output of corn, leaving less corn 
available for other needs. In my written testimony, Figure 2 
shows the amount of U.S. corn and other grains used for feed 
and residual usage for 2000 through 2012. That has declined 
20.7 percent since 2004 and 13.7 percent since 2007, when corn 
prices first reached this new higher plateau.
    The availability of dried distillers grains with solubles 
has indeed mitigated some of this decline, but it has not fully 
done so. Figure 3 in my testimony shows that the addition of 
DDGs to feed availability slows the downward trend, but it is 
still falling and this year will fall to 166.8 million metric 
tons, 5.4 percent lower than just 4 years ago.
    U.S. livestock producers have met this challenge by 
becoming more efficient, but lower feed availability will 
eventually mean still lower meat and poultry output and still 
higher meat and poultry prices.
    The big question remains, though, what happens when the 
United States faces a year of widespread drought in major corn-
producing areas? As can be seen in Figure 4 of my testimony, 
the last major drought in the Midwest occurred in 1988. The 
national average corn yield that year was 26 percent below the 
long-term trend. The 1988 shortfall did not cause major 
disruptions in U.S. livestock and poultry operations because 
U.S. farmers and the Federal Government held huge stocks of 
corn at that time. What would happen now if yields fell 26 
percent below trend, and we only have a 5.4 percent projected 
stocks-to-use ratio at the end of the coming crop year?
    Most agree that yields will not fall as much as they did in 
the 1980s because of improved varieties that we use in today's 
corn production. But even if the impact is half as large as the 
1988 decline, the resulting corn crop will be less than 12 
billion bushels in a world that needs 13 billion or 14 billion 
bushels.
    A completely free market would push prices to effectively 
ration the short supply, but today's corn market is not free. 
The Renewable Fuel Standard says that thou shalt use X gallons 
of ethanol and thus produce X gallons of ethanol, and thus use 
X divided by 2.8 billion bushels of corn. They cannot 
participate in that rationing.
    The brunt of rationing will fall on livestock and poultry 
producers, but they cannot shut down a production system 
quickly. Animals must be fed or destroyed. Feeding pigs and 
poultry means using grain. The cattle sector has more 
flexibility, but even there a forced reduction of corn usage 
would be very difficult to implement.
    If oil and gas prices happen to be high at that time, we 
would be using corn in the right way, but if they are low, the 
market would say that we should divert corn away from ethanol 
and toward livestock.
    I urge you to quickly adopt a plan that provides an 
automatic temporary reduction or waiver of the Renewable Fuel 
Standard when we face a pending crop failure and see relatively 
low oil and gas prices. I don't have a specific plan for you 
today, but I know there are members of the agricultural 
economics profession who would quickly devise alternatives for 
Congress should it show interest.
    I hope that all of this is just an exercise in futility, 
but I know that we are living on borrowed time from a sometimes 
fickle Mother Nature. We should honestly recognize that fact 
and prepare now for the day when calamity comes.
    [The prepared statement of Dr. Meyer follows:]

  Prepared Statement of Steven Roger Meyer, Ph.D., President, Paragon
   Economics, Inc., Adel, IA; on Behalf of National Cattlemen's Beef
                              Association

    Mr. Chairman and Members of the Committee, my name is Steve Meyer. 
I am President of Paragon Economics, Inc., a livestock and grain 
marketing and economic advisory company based in Adel, Iowa. I have 
analyzed and advised clients in the livestock and, by extension, 
poultry industries for the past 24 years since receiving my doctoral 
degree in agricultural economics from Iowa State University.
    I address you today with grave concerns regarding the ability of 
U.S. livestock and poultry industries to continue to provide 
affordable, high quality protein in the form of meat, poultry, eggs and 
dairy products to U.S. consumers as well as customers around the world. 
My concerns are ongoing but primarily center on what will happen to 
U.S. producers and their animals in the event of a significantly 
smaller-than-usual U.S. corn crop any year in the next decade.
    My comments today will be confined to the livestock and poultry 
meat segments since those are the ones with which I am most familiar. 
They apply equally, though, to the dairy and egg sectors which are also 
major users of corn.
    Though some make some interesting claims about the non-culpability 
of corn-based ethanol in the current record-high prices, I believe 
Figure 1 speaks for itself. While U.S. corn exports and food and 
industrial usage other than ethanol have remained relatively constant 
since 2000, the amount of corn used for ethanol has increased eight-
fold with \3/4\ of that increase occurring since 2005. Since 2005, the 
use of corn for feed has fallen by 20 percent.
    First, allow me to point out that I am not opposed to ethanol. I 
have often joked that I prefer ethanol to be aged in oaken casks or 
cooled in long-neck bottles. But I am not even opposed to fuel ethanol 
made from corn. I believe it to be a reasonable reaction to expensive 
and dwindling oil supplies, especially when those supplies are, in many 
cases, held by countries that we view as, at best, unsupportive of 
America's best interests and, at worst, enemies of our great nation.
    My difficulties with U.S. fuel ethanol policy arise from the 
provision of subsidies for the product's usage, protection against 
imports which have, until recently, been lower-cost that U.S.-produced 
ethanol, and, most of all a mandate that forces ethanol to be used 
regardless of the economic circumstances, especially those that pertain 
to competing users of corn.

We Cannot Go Back To Where We Were
    I realize that we cannot ``un-ring the bell'' on ethanol subsidies 
and tariffs. In combination with the promise of an ever-growing market 
through the Renewable Fuel Standard (RFS), these policy instruments 
drove the rapid construction of an ethanol production segment that has 
for several years been large enough to meet the ultimate 15 billion 
gallons of forced ethanol usage in 2015 contained in the RFS. The 
policies have achieved their intended purpose of establishing a 
significant U.S. corn-based ethanol industry.
    But there is no such thing as a free lunch. Subsidized ethanol has 
meant record-high corn prices, record-high costs of production for meat 
and poultry, resulting lower per capita meat and poultry output and, 
finally, record-high meat prices. The U.S. pork industry lost $6 
billion in equity from 2007 through 2009 but improved profitability did 
not stop the exodus of pork producers in 2010. From 2007 through 2010, 
6,350 hog operations exited the industry and 84% of them held 500 of 
fewer hogs in inventory. During that same 5 year, 30,510 cattle and 
calf operations and 24,350 beef cow operations exited the industry. The 
vast majority of these closures, too, was among small operations.
    And if you hear from anyone that ``The government should not be 
deciding on winners and losers,'' please realize that you have already 
done so. These policies have created a stream of winners who eventually 
lost the advantage that was handed to them. Ethanol plants were big 
winners early on when Methyl tert-butyl ether (MTBE) was banned as an 
oxygenate in gasoline. Plant builders were next as they reaped huge 
rewards during the pell-mell expansion. Corn farmers saw large profits 
next as corn prices rose in 2007 and 2008 but even those profits were 
short-lived as cash rents and input costs rose to take away the 
extraordinary profits or ``rents'' as we economists call them. Corn 
producer profits have returned in 2011 but they, too will be short-
lived as cash rents, land prices in input costs rise.
    David Ricardo taught us in 1817 that rents, or super-normal returns 
on capital, accrue to the holders of the scarce resources--those that 
cannot be duplicated. This chapter in American agriculture will be used 
for decades as an example of Ricardo's theory as the profits created by 
these policies accrue to landowners and to owners of non-duplicable 
technology such as patents and trade secrets. That does not mean that 
no one between these parties and the producers of ethanol made a 
profit. It only means that those profits were transitory while the 
rents accruing to landowners and patent holders will be relatively 
permanent.
    The damage has been done to other users of corn while the benefits 
from here forward will accrue almost solely to landowners and companies 
that have patents on various products and processes to provide inputs 
to corn farmers. Has that been a good deal for American society in 
general? Perhaps, but it has not been a good deal for those thousands 
of operations that have ceased producing cattle and hogs--and milk and 
chickens and turkeys and eggs. One principal of a fair society is that 
winners compensate losers when policies create winners and losers. 
There has been no fairness for livestock and poultry producers.

How Have These Policies Impacted Feed Availability
    Since 2004, corn used for ethanol production increased from 1.378 
billion bushels to an estimated 5.05 billion bushels in 2010-2011. That 
is a total increase of 382% or an average of 65% per year. During that 
same period, total corn usage has increased by 24.8% or 6.1% per year. 
But corn production has increased by only 5.4% or 0.9% per year. To be 
fair, the 2004 corn crop was record large so it may not be the best 
base year to use for production growth. But comparing the average crops 
for 2008-2010 to the average for 2003-2005 still shows that corn 
production has increased by only 16.5% or an average of 2.7% per year.
    These differing rates of growth, which I argue were caused 
primarily by subsidies and a guaranteed market for ethanol which 
spurred a buildup far too fast to be supported, has caused carryout 
stocks to fall to unprecedented lows and forced the pricing system to 
ration potentially scarce corn supplies very early in crop years.
    They have also resulted in less and less corn and other feed grains 
being used (i.e., available) for feed. Figure 2 shows the amount, in 
million metric tons, of U.S. corn, wheat, barley, sorghum and oats used 
for feed and residual for 2000 through 2011-12 as estimated in August 
by USDA's World Agricultural Outlook Board. From 2000 through 2004-
2005, feed/residual usage was relatively stable. But everything changes 
in 2005-2006 and feed/residual usage has declined in every year but one 
since then. Projected feed/residual usage in the coming crop year is 
20.7% lower than in 2004-2005 and 13.7% lower than in 2007-2008 when 
corn prices first moved to this much higher plateau.
    The availability of DDGS from ethanol plants has indeed mitigated 
this decline but it has not done so fully by any means. Figure 3 shows 
the same data as did Figure 2 but has domestic DDGS availability (DDGS 
production less DDGS exports) added to the columns. The downtrend is 
slower but it is still a downtrend. Total grains plus net DDGS 
availability is projected to be 166.8 million metric tons in 2011-2012, 
5.4% lower than in 2007-2008.
    U.S. livestock and poultry producers have met this challenge thus 
far by becoming more and more efficient. While total feed/residual 
usage has declined 5.4% since 2007-2008, U.S. beef production declined 
only 0.4% from 2007 to 2010 while pork and chicken production INCREASED 
2.2% and 2.1%, respectively. But how long can such efficiency 
improvements continue? Lower feed availability will eventually mean 
lower meat and poultry output and still higher meat prices.
    There is a concern, however, that is much more immediate: What 
happens when the United States faces a year of widespread drought in 
major corn producing states?
    The United States has enjoyed an almost unprecedented run of good 
corn growing seasons. As can be seen in Figure 4, the last major 
drought in the Midwest occurred in 1988. That came closely on the heels 
of a major drought and heat induced crop failure in 1983. The national 
average yield in those years was 84.6 bushels per acre and 81.1 bushels 
per acre, respectively. Those yields were 26% and 22% below the 1960-
2010 trend yield for those years.
    But neither caused major disruptions in the U.S. livestock and 
poultry industries because U.S. farmers and the Federal Government had 
HUGE stocks of corn on hand (see Figure 5). Having 49% and 55% of an 
entire year's usage in grain bins around the land provided ample 
supplies and resulted in only slightly higher prices than were 
considered the norm for the time.
    What would happen if we had a national yield 22% or 26% below the 
trend yield now? Frankly, I would rather not contemplate the 
possibility. An 11% shortfall in 1995 pushed 1996 carryout stocks to 
only 4.9% of total usage and drove corn to then-record highs of just 
over $5.00 per bushel. A projected 5.2% yield shortfall this year 
(USDA's August estimate of 153 bushels/acre) has pushed projected year-
end stocks to 5.4% of total usage and resulted in corn futures well 
over $7.50/bushel.
    It is clear from Figure 4 that we have enjoyed an extraordinary 
stretch of good growing weather. Logically, that stretch must someday 
be punctuated by another drought. According to Dr. Elwyn Taylor of Iowa 
State University, the longest period between Iowa droughts in over 400 
years of tree ring data is 23 years. 2011 marks 23 years since the 1988 
drought and, while growing conditions were not perfect in Iowa this 
year, 2011 will certainly not be classified as a drought year. So, we 
are still counting and are now well overdue.
    2011-2012 will mark the third straight year in which total corn 
usage has exceeded 13 billion bushels. The 600 million gallon annual 
increases in ethanol blending prescribed by the RFS for each of the 
next 4 years will add 215 million bushels to the ethanol line for corn 
usage each year. If all other uses were to stay the same, it would mean 
we would need 14 billion bushels of corn in 2015. If harvested acres 
remain near 85 million, that crop would require a yield of 165 bushels 
per acre, a figure that can be reached if yield progress continues at 
the past trend and the weather is good.
    But what happens when a drought hits? That depends on many, many 
factors. Most agree that the yield reduction will not be as great as in 
the past due to the drought tolerance characteristics built into 
today's hybrids. But even if it was 12%, roughly half as large as the 
1980s declines, it would mean a corn crop of less than 12 billion 
bushels in a world that needs well over 13 billion bushels and may need 
as much as 14 billion bushels. How would the industry ration the demand 
for 1 to 2 billion bushels of corn?
    A completely free market would push prices high enough that the 
lowest value users would cease buying, reducing pressure on supplies 
and allowing the short crop to be used in its highest-value uses. But 
the corn market today is not free. The RFS decrees that ``Thou shalt 
blend XXX billion gallons of ethanol into gasoline or we will fine 
you.'' By extension that means that ethanol plants must produce XXX 
billion gallons of ethanol and use XXX/2.8 billion bushels of corn to 
do it. The ethanol sector is not free to participate in any rationing 
that must be done.
    Logically, exports would be next in line since corn should have a 
higher value before transportation than afterward. But in a world with 
a near-record low U.S. dollar and growing demand for meat and poultry 
in Asian markets, I don't believe this will be true. We witnessed 
record large exports in 2007 and have seen relatively strong--
considering the price is over $7 in the U.S.!--exports in 2011.
    A similar argument can be made for corn usage in high fructose corn 
syrup. Should a shortfall happen when sugar is expensive, as it is now, 
HFCS output would not fall by much, if any.
    That leaves feed/residual and feed users have a huge problem: They 
cannot shut down a production system quickly. Most animals--and this 
especially applies to pigs and chickens--are worth far less if they 
have to be sold prior to reaching market weight, if they can be sold at 
all. The hitch is that someone else has to have a place for them and 
the broiler and pork industries simply do not have a lot of empty 
facilities sitting idle. The cattle sector has more flexibility given 
the bovine's wondrous ability to utilize forages but even there, a 
forced reduction of corn usage would be very difficult to implement.
    The only way to effective short-circuit hog and chicken production 
systems to quickly reduce feed usages is to destroy the animals. This 
happened in the summer of 2008 when weaned pig values went to zero due 
to high feed prices, low hog prices and a strong Canadian dollar. There 
were rumors that it happened on a few occasions in the U.S. in the 
summer of 2009. Destroying chicks or poults is not an unusual 
occurrence in the broiler and turkey industries but the scale would be 
multiplied many times in the case of a drought-driven crop failure 
under these circumstances.
    Destroying animals runs against every fiber in a producer's being! 
It is wasteful and psychologically draining. Most would do about 
anything to avoid it but economic realities may force them to do it.

What Can Be Done?
    If oil and gasoline are expensive, there is nothing anyone can do 
without ordering the shutdown of ethanol plants. The market would tell 
us that corn is needed more for fuel than for other uses. The reason, 
of course, is that all of those subsidy-driven ethanol plants exist so 
this ``market driven'' situation is still a consequence of our past 
policies. But those cannot be undone so we must deal with facts: High 
oil prices would mean corn will be used for ethanol and livestock and 
poultry growers will have to either pay the price or destroy animals to 
reduce usage quickly.
    If oil and gasoline prices are low, however, there will be a 
conflict between what the market may say should be done and what 
current law says must be done. Low oil and gasoline prices would mean 
that corn has a lower value in use for ethanol and that less should be 
used there and more diverted to livestock feed. But the law does not 
allow that and the current waiver features put that decision in the 
hands of the Administrator of the Environmental Protection Agency. Will 
he/she want to reduce ethanol use and its alleged environmental 
benefits when gasoline is cheap and the incentive is there for 
motorists to burn more and thus add to carbon emissions? I think the 
answer is obvious.
    I urge your Committee and the House Agriculture Committee as a 
whole to quickly adopt a plan to provide an automatic waiver of the RFS 
in the circumstance of a pending crop failure in major corn growing 
areas and relatively low oil and gasoline prices. I would envision this 
``trigger'' to be a function primarily of supply indicators such as 
grain stocks, acreages and crop conditions which, when met, would allow 
the Secretary of Agriculture to take action regarding the RFS. I 
believe it is imperative to give the Secretary of Agriculture some 
authority in this matter since it is so important to our meat and 
poultry supply.
    I may be wrong, but ethanol blenders and, perhaps, manufacturers 
should support this idea. Do they really want to make and blend ethanol 
made from $8 or $9 or $10 corn when gasoline prices are cheap? Maybe 
they believe they will just pass the higher costs along. In that case, 
U.S. gasoline consumer should be VERY supportive of this idea.
    I do not have a specific proposal for you at this time. I know that 
several agricultural economists have worked on potential trigger 
mechanisms. I can assure you that some of the best minds in our 
profession can be assembled quite quickly to devise a plan or a few 
alternatives that will work.
    I sincerely hope that this is all an exercise in futility and that 
we never have another short corn crop. But I have studied statistics 
and probability and know that we are living on time borrowed from a 
sometimes-fickle Mother Nature. We should honestly recognize that fact 
and prepare for the day when that calamity comes.
                                 Charts
Figure 1
U.S. Corn Usage by Category


Figure 2
Grain Feed & Residual Usage, United States


Figure 3
Grain Feed & Residual Usage + Net DDGS Supply, United States


Figure 4
U.S. Corn Yield


Figure 5
U.S. Corn Price & Stocks/Use Ratio



    The Chairman. Thank you, Dr. Meyer.
    Mr. Greene.

STATEMENT OF PHILIP GREENE, VICE PRESIDENT, FOSTER COMMODITIES 
  AND FOSTER POULTRY FARMS, FRESNO, CA; ON BEHALF OF AMERICAN 
                   FEED INDUSTRY ASSOCIATION

    Mr. Greene. Chairman Rooney, Ranking Member Cardoza, 
Members of the Subcommittee, I am Phil Greene, Vice President 
of Foster Commodities, Fresno, California. Thank you for the 
opportunity to appear here today on behalf of the American Feed 
Industry Association, representing their interest of the U.S. 
animal feed industry and its suppliers.
    AFIA companies produce over 75 percent of the feed 
manufactured in the U.S. each year. Feed represents more than 
70 percent of the cost of producing meat, poultry, dairy and 
eggs. So, anything affecting the cost of feed directly impacts 
the costs of animals to the processor, retailer and ultimately 
to the cost of the food for the consumer.
    Foster Poultry Farms is a family-run poultry company 
employing about 12,000 people throughout the country. Foster 
Commodities, the division that I manage, is one of the largest 
feed companies in the western United States, with over 500 
livestock customers. We move over 4 million tons of feed 
production per year through our facilities.
    Today the feed industry, large or small, integrator or 
feedlot, faces a perfect storm of historically high supply/
demand price pressures. We are in a real crisis. Its 
consequences are both domestic and global, and it is worsening 
on a daily basis. The U.S. livestock and poultry industries are 
beginning massive consolidations as producers faced with record 
high prices and near record low feed availability liquidate 
herds and flocks.
    At the same time, the U.S. inflation rate is on the cusp of 
another upward explosion. Just this week the Census Bureau 
reported the following: The Consumer Price Index for all food 
stood at 5.4 percent in July, higher than last year. For meat, 
poultry, fish and eggs, CPI is 7.4 percent higher. All this is 
happening at a time when those living in poverty has reached 
the highest level in 46 years. Why? We fool ourselves that 
using corn for ethanol production doesn't drive up commodity 
prices, and we Congressionally mandate annual increases while 
protecting ethanol against imports. We stimulate demand through 
ethanol and export programs while we shrink farmable acres and 
keep in place an antiquated Conservation Reserve Program.
    Contrary to what we have been led to believe for 8 years, 
the U.S. annual production yield curves for corn and soybeans 
are flat, not increasing, and surplus grains are disappearing. 
We don't define and regulate position limits for institutional 
speculation or ag futures markets, preventing the bona fide 
hedgers the price protection they need on input purchases. And 
we do not put enough resources and emphasis on the development 
of more farmland, better yielding crops, and improved water 
resource conservation, along with irrigation development. We 
must increase our investment in ag research to find solutions 
to meet these production challenges.
    All of this is baffling. With the exception of growing 
global population and food demand, we can control every one of 
the challenges I have listed. Tyson Foods recently commented 
that corn at $7 a bushel reflects the doubling of the cost of 
slaughter-ready chickens to 45 cents per pound over the last 
decade.
    Smithfield Foods sees, and I paraphrase, looming problems 
for hog farmers, whose grain costs continue to eat away at an 
already thin profit margin. Eight dollar corn has scared 
people. Smaller producers are saying, ``I am not going do this 
anymore.'' The biggest culprit in these markets is Federal 
energy policy, or lack of a comprehensive Federal energy policy 
mandating the use of ethanol at annually higher levels while 
paying oil companies over $6 billion a year to comply with the 
Federal mandate.
    It makes no sense. Look beyond the $6 billion subsidy. If 
you consider the shift the industry has made from $2 corn to $7 
corn, then you understand the industry has absorbed $65 billion 
per year in additional production costs since 2006, or 
approximately this amount this year.
    You factor in the bean crop, and you can see that ethanol 
and institutional market speculation has created huge 
inflation. To date most of this inflation has been absorbed by 
the feed companies, livestock producers and export customers. 
The U.S. consumer has only begun to see the beginning of food 
inflation. Combining government-subsidized fuel production with 
the 2011 corn crop that will seriously miss earlier 
predictions, and you get this week's USDA supply and demand 
estimate setting 2011 ending stocks at just five percent, the 
equivalent of roughly 2\1/2\ weeks' supply of corn. A five 
percent ending stock signals to the market that USDA believes 
there isn't enough corn to meet demand, and price rationing 
must occur to keep the level at this minimum supply. The 
Department assumes price pressures will cut demand.
    How high will prices go? How much demand will we destroy? 
How many businesses will we close? How many jobs will be lost? 
How many people will move to the poverty level or join the 
ranks of the truly hungry?
    In the past 2 months, USDA has reduced the demand estimates 
from 13.5 billion bushels of corn on July 2nd to 12.76 billion 
bushels this week. A 750 million bushel reduction represents 
enough corn to sustain almost 20 poultry companies the size of 
Foster Farms. This number represents an amount equal to 16 
times the amount of China's anticipated import demand for this 
next year. The point is, this is a huge reduction in market-
desired supply that must be rationed to everyone except the 
ethanol user.
    The AFIA urges Congress to develop and require the 
Secretary of Agriculture to use a mechanism that recognizes in 
time of reduced production and ending stocks, the RFS mandates 
must be waived to ensure needed livestock/poultry feeds at 
reasonable prices. The AFIA urges the full House Agriculture 
Committee, as it writes the 2012 Farm Bill, to adopt policies 
that put arable farmland back into production, starting with a 
reinvented CRP that provides enrolled producers with the 
flexibility to opt out of the program without financial penalty 
when the U.S. faces yield reductions and stocks drop to the 
kind of levels predicted by the USDA this week.
    AFIA proposes the CFTC begin with position limit parity 
between the physically settled contacts and cash-settled ``look 
alike'' contracts. This meets the four objectives set forth in 
the Dodd-Frank Act for speculative position limits.
    In summary, here is what we believe Congress must do to 
sustain U.S. feed manufacturing and livestock and poultry 
production. We must ensure feed ingredient markets are driven 
by market demand, reworking Federal energy policy to remove the 
mandated use of food commodities from the list of eligible 
feedstocks for Federal tax credits in some biofuel production.
    Create a mechanism requiring the Secretary of Agriculture 
to waive the RFS in the event of stocks-to-use ratios falling 
below a certain amount or prices hit a specified level.
    Reinvent the CRP and other acreage-idling programs to get 
arable acres back into production and ensure these programs 
don't provide an economic incentive to idle arable acres. 
Farmers must be allowed an early opt-out option without an 
economic penalty.
    And hold the CFTC to the intent of the Dodd-Frank Act by 
defining and enforcing Federal speculative position limits for 
institutional speculators, including derivatives and over-the-
counter products. True hedgers must be protected from 
institutional speculators.
    Thank you, Mr. Chairman. I look forward to any questions.
    [The prepared statement of Mr. Greene follows:]

Prepared Statement of Philip Greene, Vice President, Foster Commodities 
    and Foster Poultry Farms, Fresno, CA; on Behalf of American Feed
                          Industry Association

    Chairman Rooney, Ranking Member Cardoza, Members of the 
Subcommittee, I am Philip Greene, Vice President of Foster Commodities, 
Foster Poultry Farms, Fresno, California.
    I thank the Subcommittee for the opportunity to appear today on 
behalf of the American Feed Industry Association (AFIA), Arlington, 
Virginia, the world's largest organization devoted exclusively to 
representing the business, legislative and regulatory interests of the 
U.S. animal feed industry and its suppliers.
    AFIA companies today produce over 75% of the commercial feed and 
pet food manufactured in the U.S. each year. AFIA members include more 
than 500 domestic and international companies, as well as state, 
regional and national associations. Member companies are livestock feed 
and pet food manufacturers--including complete feeds, premixes and 
supplements--integrated livestock and poultry producers, pharmaceutical 
companies, ingredient suppliers, equipment manufacturers and companies 
supplying products, services and supplies to the animal feed industry.
    The feed industry is also the single largest purchaser and user of 
all major classes of U.S. agricultural production, including feed 
grains, oilseeds and processed meals and coproducts. These commodities 
are critical inputs in the high-quality feeds American farmers and 
ranchers rely on to raise the safe, wholesome and affordable meat, 
poultry, eggs, milk and fish American consumers enjoy every day.
    Feed is the most critical component of livestock, poultry, dairy 
and egg production in the U.S. and around the world, both to insure 
animal health and well being, as well as contributing to growth and 
product quality.
    As this Subcommittee is well aware, feed as a component of 
production, represents more than 70% of the cost of producing U.S. 
meat, poultry, dairy and eggs. Anything--I repeat, anything--that 
affects the cost of producing feed for livestock and poultry, directly 
impacts the cost of animals to the processor, meat, dairy and eggs to 
the retailer, and ultimately, the cost of food to the consumer.
    This testimony identifies three primary factors negatively 
impacting the availability and hence the cost of feed to U.S. livestock 
and poultry producers, with its resultant negative impact on this 
nation's commercial feed industry. These are factors, other than the 
increasing global demand for food, that are all within our control. 
These challenges are as follows:

   A Federal bioenergy policy that continues to mandate that 
        food crops be used as feedstocks for biofuels at annually 
        increasing levels;

   Arbitrary and outdated acreage reduction programs that must 
        be reinvented to meet their original purpose, namely to 
        maximize U.S. feedstuffs production and minimize supply impacts 
        on feed-deficit areas of the country, and

   The need for the Federal Government to ensure commodity 
        futures markets are regulated in such a way as to ensure the 
        traditional ability of true hedgers to identify prices absent 
        institutional speculation distortion.

    AFIA also wishes to stress the current feed availability and cost 
challenges in the U.S.--reduced production and stocks exacerbated by 
biofuel and export competition, with futures market institutional 
speculation adding insult to injury--is not unique to the U.S. Our 
domestic situation has global ramifications for both food costs and 
availability.

Corn, Soybean Supply/Demand and the Commercial Feed Industry
    As stated, the U.S. livestock and poultry industry is the single 
largest domestic user of corn and soybeans, as well as their 
byproducts, through purchases of commercial feeds, through on-farm feed 
mixing and the use or supplements and premixes.
    Feed also represents one of the biggest on-farm costs to U.S. 
farmers and ranchers. U.S. total farm production expenditures were $289 
billion in 2010, up from $287.4 billion in 2009, according to the U.S. 
Department of Agriculture's (USDA) August, 2011, report from the 
National Agricultural Statistics Service (NASS). The four largest U.S. 
on-farm expenditures cumulatively totaled $134.4 billion and accounted 
for 46.5 percent of total expenditures in 2010. These percentages of 
total expenditure were feed, 15.7% percent, farm services at 12.4%, 
labor at 12.4%, and rent at 9%, all increases from the year before.
    Today--and for the foreseeable future if Federal policies do not 
change--the feed industry faces the ``perfect storm'' of influences 
that will weigh heavily on ingredient availability, with the cost of 
ingredients ratcheting higher due to artificial inflation of feedgrain 
and oilseed prices based on competition with U.S. biofuel production, 
record export demand, adverse growing/harvesting conditions, and 
commodity futures markets which continue to be plagued by speculation.
    More than 55% of corn produced in the U.S. historically has gone to 
animal feed uses for livestock and poultry--in 2012 USDA estimates this 
will drop to 37%--with less than 10% of the U.S. field corn crop used 
for direct domestic human consumption in corn-based foods such as corn 
meal, corn starch, and corn flakes, USDA reports. Beef production has 
the greatest feed use of corn, followed by poultry and swine. However, 
current USDA estimates show ethanol use of corn is now taking nearly 
40% of the domestic corn crop, and this increase in ethanol use shows 
no signs of abating. The other competitors are exports at 13.8% of use, 
forecast by USDA to drop to 12.9% in 2012, as well as seed, and other 
industrial uses.
    About 85% of the world's soybeans are processed annually into 
soybean meal and oil. Approximately 98% of the soybean meal that is 
crushed is further processed into animal feed, with the balance used to 
make soy flour and proteins. Of all soybean meal use for feed, the 
poultry industry demands 40-45% of available supplies, the swine 
industry takes another 26%, with beef and other feed uses--including 
pet food--making up the remainder of demand. Of the oil fraction, 95% 
is consumed as edible oil; the rest is used for industrial products 
including biodiesel, fatty acids, and consumer products.
    The convergence of these factors skews both cash and futures 
prices, and as feed prices are jammed upwards, our farmer/rancher 
customers in beef, dairy, poultry and swine production are forced to 
liquidate herds and flocks because they cannot afford to feed their 
animals based on the price processors are willing to pay.
    Tight domestic supplies of corn and soybeans--even given 
outstanding crop production last year--are pushing markets above the 
previously highest levels for corn seen since June 2008, and within a 
couple of dollars of the all-time high for soybeans. A number of 
factors, including a rapidly expanding world population, drought, 
flooding and other natural disasters and higher energy costs are all 
components of 2011 corn price spikes. But far and away the biggest 
impact on both corn availability and price is the use of corn as the 
feedstock of choice for ethanol, or as the industry views it, food has 
become fuel.
    The cost of feed to livestock and poultry producers doubled from 
2006 to 2008, retreated slightly in 2009, but resumed its upward march 
in 2009-2010 and through 2011 to date. While the Administration 
continues to assert only 4% of current corn price increases can be 
attributed to competition between feed/food use and ethanol use, 
independent studies show 30-40% of the spike in corn prices can be 
attributed to corn demand for ethanol.
    Last week's market rally saw corn move above $7 a bushel again, and 
reflected a doubling of the cost of slaughter-ready chicken to 45 cents 
per pound over the last decade, according to Tyson Foods Chief 
Executive Officer Donnie Smith's address to a Barclay Capital 
investor's conference. Smith called this a ``huge structural shift.'' 
In an interview last week with Bloomberg Businessweek, Larry Pope, 
chief executive of Smithfield Foods, said he sees ``looming problems 
for hog farmers as grain costs continue to eat away at already thin 
profit margins.'' Said Pope, ``We're seeing contraction . . . in terms 
of the published data that you can see, you can see the sow slaughter . 
. . has turned dramatically here, and then this $8 corn I think has 
scared people pretty substantially . . . there are smaller producers 
who are just saying `I'm not going to do this anymore.' ''
    The following chart illustrates the trend in corn demand likely 
will not shift without policy changes given the cost of production of 
ethanol and its world market price as a competitive fuel with 
petroleum.
USDA's Baseline Projections suggest that corn use by ethanol producers 
        will grow much faster than corn use by other industries
        
        
        Note: Feed and residual corn use is calculated by subtracting 
        the other three categories plus ending stocks from total 
        supply. Thus the term ``residual'' refers to a statistical 
        residual.
        Source: USDA Agricultural Baseline Projections to 2015.

    Given the feed/food competitors for corn--and their respective 
percentage of demand--will likely not shift dramatically over the near 
term, absent a sea change in the economics of ethanol production and 
marketing, ethanol corn demand will increase.
    However, the Subcommittee should also be aware that from a corn 
production standpoint, yield trends are misleading.
20 year corn and soybean yield trends look good . . . 


While 8 year yield trends tell a different story
Corn Yield Last 8 Years


Soybean Yield Last 8 Years


Energy Policy
    Through creation of the Renewable Fuel Standard (RFS) in 2005, 
Congress mandated oil companies use set amounts of ethanol in gasoline 
blending, with those mandates increasing on an annual basis. Congress 
also decided to provide a cash subsidy to oil companies to actually do 
what they're mandated to do. And, if such incentives and mandates were 
not enough, Congress imposed an import tariff to block import of 
foreign ethanol into the U.S. These actions--along with record world 
demand for U.S. commodities--have conspired to shove corn prices to 
levels never seen in the U.S.
    The RFS mandate, the blenders' credit and the import tariff have 
created an ethanol industry which now requires almost 40% of the 
overall corn crop to meet production mandates and to be profitable. Ten 
years ago, ethanol demand for corn was less than 5%. As these mandates 
increase, corn and soybean production capacity are unable to keep up 
with the rapid growth demanded by these government actions. 



    Despite the Administration's continued assertion only 4-5% of 
current livestock/poultry production cost increases--and resulting 
consumer food price inflation--are due to ethanol competing with the 
feed/food industries for corn, it cannot be denied the significant 
increase in corn demand, driven in large part by this biofuel mandate 
and a prospective crop that will miss previous predictions and bring 
ending stocks to lows not seen since the mid-1990s, means the corn 
prices will inevitably continue to rise throughout 2012 and beyond.
    It should be noted a 5% ending stock signals the market that USDA 
believes there is not enough corn or soybeans to meet demand, and that 
price rationing must occur to keep the level at this minimum supply. 
USDA will adjust demand in its estimates to ensure 5% is maintained; to 
do otherwise would be to admit that we have a critical food shortage. 
In the past 2 months USDA has reduced its demand estimate from 13.5 
billion bushels in its July 12, 2011 report to 12.76 billion bushels in 
the Sept.12, 2011 report--a precipitous fall of 5.5% in demand is 
required to keep us from running out of corn this year. Demand has not 
been reduced in a significant way yet, and this may signal the market 
may test all time price highs as it works to rationalize the declining 
availability of corn and other feedstocks.
    AFIA supports a comprehensive Federal energy policy, including 
energy research to find alternative non-food crop biofuel feedstocks, 
as well as legislative initiatives to end the blenders' tax credit and 
import tariff protections for corn-based ethanol. However, until these 
actions are taken, AFIA remains concerned about the impact of the 
Administration's corn-ethanol policy and the potential additional 
adverse effects any expansion or extension of policy, e.g., increasing 
the 10% ethanol blend limit for gasoline to 15%, will have on the 
domestic livestock and poultry industries.
U.S. Annual Ethanol Production



    Corn prices have doubled in the last year, now bouncing around $6-
$8 a bushel--``the new normal,'' as some call it. The overall concern 
over this fall's grain supply has some speculating corn prices could 
reach $10-$12 a bushel. PorkNetwork reported last week that more than 
4,500 call options in the CME Group's corn market at a strike price of 
$11 and $12 a bushel were held by traders, 15% higher than a month ago. 
More conservative analysts don't deny $9-$10 corn is possible this fall 
if yields continue to shrink and fewer acres are harvested.
    The impact of $10 a bushel corn on livestock and poultry producers 
would be disastrous; herds and flocks would be further liquidated to 
avoid losses, cutting both producer income and seriously--and 
negatively--impacting feed companies, farmer-owned cooperatives, 
exporters and consumer food prices. This market has only one certainty: 
Ethanol refiners and speculators will continue to be the two interests 
moving to buy massive ownership positions in corn.
    What the poultry and livestock industry predicted in 2005, is now 
coming to pass. When the RFS was debated and ultimately enacted, 
poultry and livestock interests warned lawmakers all it would take to 
create market price chaos, herd/flock liquidations and serious consumer 
food price inflation going through the roof would be ``one bad crop 
year, one drought, one major disaster.''
    In a Sept. 9, 2011, Feed Grain Market Report, Bloomberg News 
reported the consensus estimate of 30 private analysts surveyed was 
that ``difficult growing conditions this spring and summer and the 
hottest summer since 1955 in parts of the Midwest, have significantly 
eroded corn yields.'' Bloomberg's survey now sees a crop of about 
12.554 billion bushels, down almost 3% from USDA's August prediction of 
12.914 billion bushels, and nearly 1% less than produced last year.
    This leads to the lowest ending corn stocks since 1996 at likely 
just over 5.2%, according to the latest World Supply & Demand Estimate 
issued Sept. 12, 2011, by USDA. Analysts say the crop could get 
smaller, putting even more pressure on prices to move higher, and 
predicted supplies will be tight for at least another year, putting a 
premium on adding acreage to produce a crop sufficient to replace 
inventories.
    The University of Illinois reported last week it expects to see 
greater use of lower-quality wheat and other less-than-preferred 
commodities to replace corn in livestock rations. Corn prices are not 
expected to drop--again because of incentives needed to get farmers to 
shift acres to corn production in the face of increasing ethanol and 
export demand. Unfortunately, as the industry seeks alternative feed 
ingredients, we're confronted with the fact U.S. production of feed 
crops has declined for the past several years
    AFIA supports letting the free market determine where our corn and 
soybean supplies are utilized, and urges Congress to take action to 
remove mandated biofuel competition from the market for corn for feed 
use. Absent that resolve, AFIA urges Congress to develop and implement 
a mechanism that recognizes in times of reduced production and ending 
stocks, RFS mandates are to be waived to ensure needed commodities at 
reasonable prices for livestock and poultry feeds.
Modernize Conservation Programs
    One Federal program in need of significant reinvention is the 
Conservation Reserve Program (CRP) and programs related to it which 
take arable acreage out of production. CRP was intended to take truly 
environmentally fragile land out of production to preserve that land. 
However, CRP has morphed into what it was never intended to be, namely 
a program by which farmers can collect checks for simply idling land--
any land--and for some, the program is actually little more than a 
government-paid annuity.
    For more than a decade, AFIA has joined with other like-minded 
commodity organizations and companies to prevail upon USDA to allow 
farmers enrolled in CRP to take an early-out option without the 
prescribed penalty if they wished to move enrolled acres back into 
production. For more than a decade, USDA has turned either a deaf ear 
or flatly refused to exercise this administrative option open to the 
Secretary.
    As recently as spring of this year, AFIA joined several national, 
state and regional organizations in providing to USDA yet another 
private study supporting the Secretary taking action to allow CRP-
enrolled producers an early-out option without penalty.
    The most recent study concludes the world may be short of grain 
supplies going forward, must take action now, and plan for the long-
term impact of multiple grain-deficit years. The study recognizes the 
U.S. hasn't competed to produce additional supplies of grains and 
oilseeds for several years, keeping millions of acres of land idled in 
the CRP. This has left the U.S. unable to respond to market conditions 
that would normally direct more plantings to fill grain and oilseed 
needs for feed companies, processors, livestock and poultry producers 
and others. The major conclusions of the study include the following:

   Over the last 10 years, the price index for energy 
        commodities has tripled;

   Global trade is strong; China imports soybeans equal to 
        production on 48 million acres or one row in every four planted 
        in the U.S.;

   Acreage expansion, including that envisioned in CRP changes, 
        could be an effective hedge against risks of climate change 
        variability;

   A 5% reduction in yields would force prices to further 
        ration demand, and

   In the last 140 years, there's been a 25% chance of a yield 
        decline of at least 5% in any given year.

    AFIA urges the full House Agriculture Committee as it moves through 
its process of identifying program and policy priorities affordable 
under the 2012 Farm Bill, to actively consider and adopt a revamped CRP 
that provides enrolled producers with non-environmentally sensitive 
acres in the program, with the flexibility to opt out of the program 
without financial penalty when the U.S. faces yield reductions and 
stocks drop.



Foster Commodities' Experience
    I'd like to use my company's experience to illustrate the current 
feed availability situation.
    The Subcommittee knows not all regions of the country produce all 
the corn and soybeans they need to feed local livestock and poultry, 
nor do they enjoy and abundance of these feed ingredients from which 
finished feeds can be manufactured. So-called feed deficit regions of 
the U.S. include the Southeast and Deep South, New England, and states 
west of the Rocky Mountains to the Pacific Ocean and into the Pacific 
Northwest. Commodities--either raw or processed--must be moved by truck 
or train into these regions for feeding.
    Due to our unique customer combination, the Foster Commodities 
division is one of the largest feed companies in the western U.S. We 
have over 500 livestock customers, and move over 4 million tons of feed 
production per year through our facilities. The business breaks into 
two different areas of responsibilities: (1) The largest customer is 
Foster Poultry Farms, and (2) 500 feed customers, including dairies, 
farmers and livestock producers. Our merchandising and purchasing teams 
also procure ingredients and manage the logistics for Foster Farms 
chicken and turkey feed mills throughout the country. Our feed plants 
manufacture, transload and sell livestock feed, feed ingredients, 
liquid feeds, and feed supplements to our 500+ dairy and other 
livestock customers in California and the western U.S.
    California has about 1,800,000 milking cows and a significant beef 
cattle herd. We estimate cattle in California consume over $3 billion 
worth of feed in annually. For us to service these producers, we rely 
upon strategic rail access to 100 car unit trains. With the combined 
demand of our internal requirements and our external sales we better 
utilize the numerous assets we have constructed to facilitate rail and 
truck traffic. We regularly receive and store corn, soybean meal, dried 
distillers grains (DDGs), canola, wheat and other primary livestock 
feed ingredients.
    We seasonally purchase, when available, locally grown corn and 
wheat at all of our feed mill locations. We also bring in numerous 
other rail and truck-load products. Seven days a week Foster 
Commodities ships about 170 truckloads of products to customers 
throughout the western U.S.
    On average my company has approximately 1,600 cars (100 tons each) 
of corn and soybean meal moving to its California operations monthly 
from sources across the country. Our biggest volumes are in train loads 
of corn, soybean meal, canola, soy pellets, DDGs and other bulk rail 
commodities we buy for our own use and sell to outside accounts. These 
trains come from as far away as Nebraska, Iowa and Minnesota. In some 
cases we receive products, such as canola, from Canada. Wheat generally 
comes from local sources, but can be quoted from Canada and/or cargo 
ships. The Subcommittee should be aware soybean meal from South America 
is being offered at the port of Stockton, California. With current crop 
shortages and higher grain prices, we are beginning to get inquiries as 
to Foster's ability to take container ships of imported grains into 
West Coast. To my knowledge, these are offerings only at this time.

Grain Procurement Challenges
    Like most commercial feed companies and cooperatives in the U.S., 
Foster Commodities has grain merchandisers trading in futures markets.
    The conventional practice of the industry used to be to buy 
according to nearby needs, generally using the futures market as the 
price discovery mechanism. Quotes contrasting futures and cash prices 
would allow a company to decide on a supplier, give the supplier the 
futures contract and convert the transaction to a cash sales contract. 
The markets don't operate that way anymore.
    Today a buyer must consider the cost of waiting for/hoping for 
price drops, a game that can be expensive. We saw corn prices last year 
on Sept. 14, 2010, at $4.66, only to watch them skyrocket to $7.99 on 
June 10, 2011. Some decided to buy ahead, but were hit with margin 
calls, as some experienced during the March market collapse. At that 
time prices went from a high of $7.34 on March 4, 2011, to a low of 
$6.08 on March 16, 2011. What I'm illustrating is that while commodity 
markets have always been volatile, we have never seen the type of 
volatility we are seeing today.
    Often dairy customers want a contract that gives them what we call 
a ``clock,'' an annual contract for feed generally signed in the fall. 
However, if hedged sales are used for a customer, there is the risk the 
customer will default on the agreement if the market price falls. If a 
hedged ingredient purchase is put on with a farmer, the risk is he or 
she will be unable or unwilling to deliver against the account. Then 
there is the risk of increased margin calls. A market position may be 
perfectly hedged, but find you find yourself in an unsustainable cash 
flow drain that ultimately causes liquidation and default.
    These situations are occurring with greater frequency, creating 
significant stress on our feed business, and we know we are not alone 
as this is a national problem faced by the broad feed industry, as well 
as those integrators attempting to lock in prices for their own 
ingredient needs.
    In the past few years speculators have entered the agricultural 
commodities markets creating another significant challenge. Feed 
companies and others seeking to hedge real inventory needs must now 
compete for commodity purchases against institutional investors who 
offset our trades and extract their profits. These speculators have no 
interest in owning the commodity; their goal is to get in front of 
commercial traders like us by bidding up the price of a contract, 
taking the profit out of our losses. This environment has created 
weekly price moves that used to take a year to achieve.
    This unregulated speculation is exacerbating the impact of ethanol 
competition for corn.

AFIA and Market Speculation
    AFIA is well aware the House Agriculture Committee has confronted 
the impact of unregulated speculation on legitimate users of futures 
markets. We applaud this Committee's leadership in this area, but want 
to restate for the record the U.S. feed industry's position on pending 
rulemakings which impact the cost of our ingredients and the 
profitability of our businesses.
    The commercial feed industry, as I've illustrated, is a major user 
of agriculture-based derivatives markets, including both exchange-
traded futures contracts as well as over-the-counter products. AFIA has 
been an active participant in efforts to convince the CFTC of the need 
to revisit its position limit regulations, as well as its definitions 
of speculator activity.
    Participation in the agriculture-based derivatives markets allows 
our member companies not only to hedge their exposure to price 
fluctuation in these commodities, but also to determine the prices of 
inputs and goods produced. When input prices, as reflected in futures 
markets, either (a) become distorted and fail to accurately reflect 
true supply and demand, or (b) become unduly volatile, the pain is felt 
not only by AFIA members, but throughout the supply chain to the 
consumer.
    Futures contracts on agriculture commodities were established to 
provide commercial producers and bona fide end-users of critical goods 
with an efficient mechanism to manage risks and determine fair prices. 
Our industry is very concerned with the current Commodity Futures 
Trading Commission (CFTC) proposal to permit speculators in financial 
contracts, who hold no positions in the core agricultural commodities 
futures contracts, to hold up to five times a core contract's spot 
month limit, while also holding up to 25% of the core agricultural 
commodity futures contract's deliverable supplies.
    This CFTC proposal is contrary to the guidance set forth in the 
Dodd-Frank ``Wall Street Reform and Consumer Protection Act'' for 
setting position limits, in that it will not accomplish the following:

   Diminish, eliminate or prevent excessive speculation;

   Deter and prevent market manipulation, squeezes and corners;

   Ensure sufficient market liquidity for bona fide hedgers, 
        and/or

   Ensure the price discovery function of the underlying market 
        is not disrupted.

    Spot market position limits are the most important tool in 
maintaining the utility and integrity of commodity futures contracts as 
essential financial instruments for bona fide users of agricultural 
commodities. For bona fide end-users, the spot month is an important 
time for rolling, liquidating or making/taking delivery of contracts. 
The proposed expansion of spot month limits for speculators in 
financial contracts would negatively impact the conditional spot month 
limits by increasing volatility, potentially reducing liquidity, 
possibly increasing costs and reducing the options available to bona 
fide end-users during these critical spot month periods.
    Further, the CFTC offers no data, qualified information or analysis 
in support of this proposal to significantly increase financial 
speculative position limits, which could increase the volatility, 
encourage price manipulation and interfere with the critical price 
discovery function that bona fide end-users depend on. The Commodity 
Exchange Act (CEA) made this purpose explicit, stating the goal of this 
law is to serve the ``national public interest'' in these markets ``as 
a means for managing and assuming price risks, discovering prices, or 
disseminating price information through trading in liquid, fair and 
financially secure trading facilities,'' and included the specific 
mission ``to deter and prevent price manipulation or any other 
disruptions to market integrity.''
    AFIA proposes the CFTC begin with position limit parity between the 
physically settled contract and the cash-settled ``look alike'' 
contract. This would meet the purpose of the CEA and the four 
objectives set forth in Dodd-Frank for speculative position limits.
    Absent this type of adult supervision of speculators, the 
legitimate hedger will continue to suffer by not being able to analyze 
market trends and make informed market moves. During the past 3 years 
we have seen numerous accounts go broke, downsize and or suffer 
greatly.

Global Food Implications
    In 2009, the Food & Agriculture Organization (FAO) of the United 
Nations, warned that by 2050, the world will need to produce 70% more 
food than it does today in order to feed an expected 2.3 billion 
additional people worldwide. This is a 33.3% increase in the world's 
population. The biggest challenges are more efficient use of scarce 
natural resources (acreage) and adapting to climate changes.
Population estimates and projections 1950-2050, world regions according 
        to development level (millions).

        
        
        Source: United Nations 2008

    On Aug. 8, 2011, FAO reported world cereal grain production in 
2011--even though expanded from 2010--is insufficient to halt the 
continuing precipitous drop in global stocks. Said FAO, ``Among the 
major cereals, the maize (corn) supply situation is a cause for 
concern, and is a factor already reflected in high international maize 
prices . . . 36% higher than in August, 2010.'' Of all global cereal 
inventories, only rice stocks are expected to rise significantly, with 
corn inventories dropping to their lowest levels since 2007.
    The U.S. feed industry is highly competitive--with no one company 
dominating the industry--and it's broadly accepted the only expansion 
of feed production in the U.S. is predicated upon expansion in 
livestock and poultry numbers, notably through export market expansion. 
Simply stated, increased livestock and poultry product exports 
translates to larger domestic herds and flocks, which translates to 
greater feed purchases, which translates to a profitable U.S. feed 
industry.
    Given shifting and increasing food demand by developing economies 
is generally characterized by an increased demand for animal protein, 
this should bode well for the global livestock and poultry sector, 
including the feed industry. However, as feed price and availability 
impacts hit foreign producers of livestock and poultry--arguably less 
able to withstand such economic pressures over the long term--will 
there be an affordable U.S. supply to take advantage of these markets?
    If cost of production increases in the U.S. lead to expected herd 
and flock liquidations, the livestock and poultry producer is hit with 
a double whammy--lost domestic sales AND lost export markets. The feed 
industry suffers along with its customers.

Conclusion
    The current economics of the commercial feed industry and its 
livestock and poultry producer customers are driven by three primary 
challenges: The lack of an overall comprehensive Federal energy policy, 
but a current Federal bioenergy policy that continues to allow the use 
of food crops for biofuel feedstocks. Exacerbating this competition 
between feed/food use of corn and biofuel demand, the government 
maintains archaic land-idling programs Congressionally authorized to 
enhance conservation of environmentally fragile lands, but which, in 
reality, take desperately needed arable, environmentally non-sensitive 
acres out of production, compounding supply challenges during times of 
low yield, high demand and dwindling end stocks. Further, continued 
unfettered speculation in futures markets by institutional investors 
robs futures markets of their purpose of providing true hedgers an 
ability to minimize price risk on necessary agricultural inventories.
    AFIA urges Congress to take bold steps to help the feed industry 
and its farmer/rancher customers to mitigate these challenges. Actions 
to be actively and seriously considered include the following:

   Return agricultural commodity markets to operations driven 
        by market demand by reworking Federal energy policy to remove 
        the mandated use of food commodities from the list of eligible 
        feedstocks for Federal assistance in bioenergy development. 
        Absent that, ensure there is a mechanism in place which 
        requires the Secretary of Agriculture to waive the RFS in the 
        event stocks-to-use ratios fall below a prescribed amount or 
        prices hit specified levels;

   Reinvent the CRP and related government acreage-idling 
        programs to ensure such programs do not provide an economic 
        incentive take much-need non-environmentally sensitive arable 
        acres out of production, while allowing idled acres to be 
        planted without an economic penalty to the producer, and

   Hold CFTC to the true intent of the Dodd-Frank Act by 
        defining and enforcing Federal speculative position limits on 
        ag commodities futures markets, including derivatives and over-
        the-counter products. At the same time, true hedgers should be 
        protected from the price impact of institutional speculators.

    These policy decisions must be made in the context of both domestic 
and global industry economic health. Such actions not only help to 
preserve independent farming and ranching in the U.S., they will 
mitigate what's now estimated to be annual consumer food cost inflation 
of 4-6% for the next several years.
    Given the increasing demand across the planet for animal protein, 
it's only common sense we would act to assist our domestic industries 
in remaining competitive both at home and abroad by removing from the 
production equation arbitrary and controllable negative cost-of-
production influences.
    Thank you for consideration of our views.

    The Chairman. Thank you.
    The chair would ask the witnesses to try to keep their 
testimonies within 5 minutes as we are going to be called to 
vote here shortly. I want to try to get as much done before we 
recess.
    Mr. Seger.

    STATEMENT OF TED SEGER, PRESIDENT, FARBEST FOODS, INC., 
    HUNTINGBURG, IN; ON BEHALF OF NATIONAL TURKEY FEDERATION

    Mr. Seger. Good afternoon, Chairman Rooney, Ranking Member 
Cardoza and Members of the Subcommittee. I want to thank you 
for the opportunity to testify today. My name is Ted Seger, and 
I am President and part owner of Farbest Foods, Incorporated, 
in Huntingburg, Indiana. I am also past Chairman of the 
National Turkey Federation.
    Farbest is a vertically integrated turkey company that 
raises more than 9.3 million turkeys from about 150 contract 
growers, and we employ more than 850 employees. Nationally the 
turkey industry produces more than 5 billion pounds of ready-
to-cook turkey meat from 244 million turkeys annually, with an 
estimated wholesale value of more than $16 billion.
    For the turkey industry this hearing could not have come at 
a more important time. We have serious, immediate concerns 
about the availability and cost of feed ingredients caused by 
the mandated use of corn-based ethanol. Feed accounts for 70 
percent of the cost of raising a turkey, and corn is the major 
ingredient in most turkey feed rations.
    I testified before this Committee in 2007 that the corn 
stocks-to-use ratio for 2007 and 2008 would fall to levels last 
seen in 1995 and 1996, when weather problems increased corn 
prices and forced cutbacks in turkey production. Those 
predictions were accurate, as 2007 and 2008 corn prices reached 
a record of $8 per bushel, and turkey production dropped 11 
percent. Until 1995/1996, 2007 and 2008 was a record crop year, 
and the massive diversion of corn from food and feed to ethanol 
was to blame.
    When Congress created the Renewable Fuel Standard in 2005, 
corn traded for about $2 per bushel, and the turkey industry 
raised around 249 million turkeys that produced 5.5 billion 
pounds of turkey meat. Corn prices began increasing in late 
2006, but favorable overall economic conditions and strong 
turkey meat prices spurred an expansion of industry production 
that continued through the end of 2007. For a time the industry 
was able to use the futures market as a hedge, but by 2008 corn 
prices were flirting with $8 per bushel. Agriculture economist 
Tom Elam calculated the RFS already had cost the industry more 
than $1 billion in additional feed costs.
    In 2008, three turkey plants either closed their doors or 
temporarily suspended operation, and more than 3,000 people in 
the industry lost their jobs. High export demand driven by the 
low value of the dollar was the only bright spot during that 
time of record high grain prices. The turkey industry was 
forced to cut back production roughly 11 percent between mid-
2008 and 2010. Effectively the industry wiped out 3 years of 
production increases in an 18 month period and reduced 
production to the lowest levels in more than 20 years.
    The current situation remains highly volatile. A tight corn 
supply and elevated prices are the new normal. Any weather 
event could put someone out of business.
    Our company this year has purchased a large quantity of 
wheat because we were worried there may not be enough corn. We 
are actually doing that as we speak today because of the late 
planting season and the fear of this late harvest. As we speak, 
in Indiana our harvest is coming in about 10 to 20 percent less 
than what they had been projecting.
    The ethanol policy caused grain and other commodity prices 
to increase by reducing the supply of grains available for food 
production. Even including DDGs, that ethanol production added 
back to U.S. feed supply, the net U.S. feed grains available to 
non-ethanol producers has declined precipitously since 2007.
    Since ethanol production is protected by the RFS, feed and 
food users have been forced to adjust to lower net grain 
supplies. Absent alterations in the U.S. biofuels policy, U.S. 
food production costs will likely continue to increase, and 
production will decline further. This means job loss in rural 
America.
    Congress should reevaluate the corn-based RFS schedule for 
2012 through 2015. A balanced approached would give increased 
weight to food production cost and food security and less to 
biofuel production. The VEETC, or blender's credit, is no 
longer needed to support ethanol and should expire this year. 
Farbest Foods, the National Turkey Federation strongly support 
reducing dependence on foreign oil, but hopes to do so through 
ever-increasing corn yields is short-sighted and does not fix 
the problem. The turkey industry is seeking ethanol policy 
reform through the creation of a safety net that ensures corn 
availability and that prices will be less volatile.
    Finally, we have grave concerns about any new Federal 
investment in infrastructure for ethanol. Moving from one 
Federal support structure to another only exacerbates financial 
problems, and after 30 years of Federal support, the ethanol 
industry should stand on its own.
    Fixing the low cornstocks problem is a complex challenge, 
but Congress must do something to protect livestock and poultry 
producers from the excessively high corn prices and volatile 
availability. Requiring an ethanol policy that takes half of 
the current supply away from food and feed is a good place to 
start. Corn prices today are 200 percent higher than the 
average costs from when the mandate was created in 2005. More 
poultry companies will go bankrupt, more jobs will be lost, and 
more industry consolidation will occur if high prices persist. 
When a company goes bankrupt, more than the company and its 
employees lose; the community churches, the hardware stores, 
and even the grocery stores all are impacted.
    In closing, I would like to thank the Committee for 
allowing me to testify today on the most important issue to the 
turkey industry, and I look forward to answering questions as 
we wrap it up. Thank you.
    [The prepared statement of Mr. Seger follows:]

   Prepared Statement of Ted Seger, President, Farbest Foods, Inc., 
        Huntingburg, IN; on Behalf of National Turkey Federation

    Good afternoon, Chairman Rooney, Ranking Member Cardoza and Members 
of the Subcommittee, I want to thank you for the opportunity to testify 
today. My name is Ted Seger and I am President and part owner of 
Farbest Foods, Inc., located in Huntingburg, Indiana. I am also past 
Chairman of the National Turkey Federation (NTF) and currently sit on 
the association's Executive Committee. For nearly 30 years I have 
served in various capacities at Farbest, from sales manager to 
President. Farbest, the fourth largest U.S. turkey producer in the 
United States, is an integrated turkey company involved in grain 
procurement, feed manufacturing, growing, processing and marketing of 
turkey meat around the world. Our company raises more than 9.3 million 
turkeys from about 150 contract growers, which produces 374 million 
pounds of processed turkey meat in our plant, and we employ more than 
850 people.
    The National Turkey Federation represents the interests of all 
segments of the U.S. turkey industry, including producers, processors, 
breeders, hatchery owners, contract turkey growers and allied 
companies. The turkey industry raises 244 million turkeys annually, 
which produces 7.2 billion pounds of live weight per year, with an 
estimated wholesale value of more than $16 billion annually.
    On behalf of the U.S. turkey industry, Mr. Chairman, this hearing 
could not have come at a more important time as we have real problems, 
and immediate and legitimate concerns about the availability and cost 
of feed ingredients due to the mandated use of corn-based ethanol.
    I first testified before this Committee in 2007 about this very 
subject, and unfortunately wish I could report that everything we 
predicted that day had not come to pass. For example, I mentioned in my 
testimony that the corn stock ratio for 2007-2008 would fall to levels 
last seen in 1995-1996 when corn prices reached a record $5 per bushel 
and turkey production fell by more than ten percent. In 2007-2008, 
predictions came true, corn prices reached a new record of $8 and 
turkey production fell by 11 percent. In 1995-1996 the feed price 
increase was caused by weather, but in 2007-2008, in a record crop 
year, it was because of the Federal ethanol mandate. It has been clear, 
from the minute the government chose to subsidize corn as an energy 
source, livestock and poultry interests have taken a back seat to an 
ethanol industry. Until recently, was steadily gaining favor with the 
Federal Government as it promoted American corn-based ethanol as a way 
to have less reliance on foreign oil. The interesting thing is we are 
no less dependent on that oil today and we are now jeopardizing our 
food supply in the process.
    It is my hope that these comments can paint a more complete picture 
since I last testified in 2007 of the impact the Renewable Fuels 
Standard (RFS) and other renewable fuel programs have had on our 
poultry production and the livelihoods of thousands of farm families 
and processing employees involved in turkey production in rural 
America.

The Role of Corn in the Turkey Industry
    Before fully analyzing the effect of the U.S. biofuels policy on 
the turkey industry, it is important to understand the vital role corn 
plays in turkey production. Feed accounts for 70 percent of the cost of 
raising a turkey, and corn is the major ingredient in most turkey feed 
rations. For the average turkey, it takes about 2.5 pounds of feed to 
produce 1 pound of turkey live weight. Therefore, increases in the 
price of corn have a significant impact on the price of raising a 
turkey. It also is important to understand that a change in the price 
of one commodity used in feed rations tends to affect the price of 
other commodities used in a ration. So, when corn prices rise, so does 
the price of soybean meal, the second-largest ingredient in turkey 
rations.
    Prior to the creation of the original RFS and its expansion, 
elected leaders from NTF, including myself, warned Congress of the 
potential severe impact this could have on the turkey industry. In July 
2005, Jim Mason of the Virginia Poultry Growers' Cooperative told the 
House Agriculture Committee during a hearing that creating a RFS would 
begin tightening the corn supply and forcing feed prices up. By March 
of 2007, when I testified before the same Committee, corn prices 
already were more than 20 percent higher than their pre-RFS level. And, 
early this year Paul Hill of West Liberty Foods told this Committee 
that corn prices had increased to more than $7 per bushel with record 
low carry over stocks. Since earlier this year, corn prices have 
continued to skyrocket, ultimately topping out at $8 per bushel, while 
corn stock levels plummeted to record lows, below five percent carry 
over. This spring, farmers planted the second-largest crop since World 
War II, but high temperatures have significant deteriorated the harvest 
projections. This troubling news can be seen in the latest corn report 
released 2 days ago. USDA cut its corn yield estimates almost 5 bushels 
per acre from August. Additionally, cutting corn use by 400 million 
bushels and reporting ending stocks down 42 million bushels from last 
month.

Impact on the Turkey Industry
    Many factors play a role in corn pricing, however the only one that 
the Federal Government can ultimately control is the one that it put in 
place back in 2005 and expanded in 2007. While hindering profitability 
almost from it's inception, the RFS' did not begin crippling the turkey 
industry until 2008. That year was a perfect example of what happens 
when you have a tight corn supply based in large part on a Federal 
mandate. It led to a downsizing of turkey production to a level that is 
not likely to change significantly for several years--roughly 11 
percent.
    In 2005, the turkey industry produced 249.6 million turkeys that 
produced 5.5 billion pounds of ready to eat turkey meat. Favorable 
economic conditions and strong prices for turkey meat spurred an 
expansion of industry production that continued through the end of 
2007. As earlier stated, corn and feed prices began to rise during this 
period, but most turkey companies--like all livestock and poultry 
companies--use the commodity markets and other instruments to lock-in 
long-term corn supplies and to hedge against market volatility. This 
insulated most companies from the full impact of feed-price increases, 
but not all. By 2008, as corn prices flirted briefly with $8 per 
bushel, Dr. Tom Elam, an agricultural economist, calculated that the 
industry had paid more than $1 billion in additional feed costs. 
Regardless of what anyone says, these increased costs cannot be passed 
along easily and that was reflected in the largest chicken company 
going bankrupt that year. Also, in 2008, three turkey plants either 
closed their doors or temporarily suspended operations, and more than 
3,000 people involved in the industry had lost their jobs. The industry 
no longer could sustain production at levels originally planned for the 
year. Cutbacks began in mid-year and continued throughout 2009. High 
domestic product demand and export demand, driven by the low value of 
the dollar, is really the only thing that has helped the industry 
survive during these record high grain prices
    Turkey production cannot be turned off with the flick of a switch 
or the shutting of a valve. Once a poult--baby turkey--is placed in a 
growout facility, it takes as long as 20 weeks to bring it to market 
weight. Factoring the time it takes to incubate the eggs and the lead 
time necessary to place orders for eggs, it generally takes 6 months or 
longer for a company to implement a major cutback in production. So 
while production overall increased by about 2.5 percent from 2007 to 
2008, original economic indicators had been for a larger expansion. 
Meanwhile, 2008 saw consumer purchasing of meat and poultry plummet and 
significant losses ensued in the turkey business as a result of the 
higher corn prices. Since then turkey production has declined by 11 
percent to about 244 million turkeys raised in 2010. Effectively, the 
industry wiped out 3 years of production increases in an 18 month 
period and reduced production to the lowest levels in more than 20 
years. Initial forecasts indicate turkey production will remain largely 
unchanged in 2011. This means the turkey industry will likely not 
increase production or ultimately be able to create new jobs.
    The general economic recession obviously exacerbated the situation. 
Softening consumer demand depressed prices for the most valuable cuts 
of turkey (as it did for all other meat proteins), and that made it 
even more difficult to sustain production during a period of extremely 
high feed prices. But, just as use of various hedging tools slowed the 
impact of higher feed costs, those same tools delayed the inevitable of 
lower demand. Most turkey companies did not enjoy any benefits of lower 
feed prices until well into 2009. More importantly, since 2005, when 
the RFS was created, corn prices are 64 percent higher than the average 
cost from when the mandate was created.
    The facts of the impact to turkey production costs are as follows:

    (1.) Industry Turkey Live Weight Slaughter for 2010 was 
        approximately 7.2 billion pounds:

      At average feed conversion of 2.5 pounds of feed per pound live 
            weight, industry consumption of feed is approximately 18 
            billion pounds of feed or 9 million tons annually.

      Corn is approximately 52 percent of the ration, or 4.68 million 
            tons, which equates to 167 million bushels of corn

                 2010 Average Price of Production: $901.8 
                million at $5.40/bu

                 2011 Projected Price of Production: $1.085 
                billion at $6.50/bu

      Soybean Meal is approximately 20 percent of the ration, or 1.8 
            million tons

                 2010 Average Price of Production: $621 million 
                at $345.00/tn

                 2011 Projected Average Price of Production: 
                $666 million at $370.00/tn

    The current situation for corn is unlike any other in the history 
of this commodity. Usually high prices are a result of a poor weather 
that limits production for just 1 year and the next year production 
rebounds. However, the current dilemma is that the demand side of the 
equation for corn is far outstripping the supply side, and the demand 
side is continuing to grow at a rapid pace. Meanwhile, there is limited 
opportunity for continued growth in supply and no one knows what Mother 
Nature might do to the potential crop. The reality for my company and 
many other turkey companies is that there is no economically feasible 
substitute for a grain-based diet. Feeding more wheat, barley, sorghum, 
milo or soybean meal is no advantage because wheat and soybeans trade 
at energy equivalent values similar to corn. All the commodities 
eventually find their economic value based on the strongest commodity, 
which is corn. This has placed a premium on improved feed conversion 
with companies continuing to try new feed improvements such as the use 
of enzymes in feed rations to help cut down on waste. But it is 
unlikely that these relatively new innovations can do enough to offset 
the corn-based ethanol factor. In fact, just a couple of months ago, 
our company purchased a large quantity of wheat to replace corn, simply 
because we were worried that the local supply of corn may not even be 
enough to sustain us until this year's later than usual harvest.

Ethanol Policy and its Impact on the Food Sector
    I would like to discuss further the impact of ethanol on the food 
sector. How did ethanol policy cause grain and other commodity prices 
to increase? The policy has reduced the supply of grains available for 
food production. Including the tonnage of distiller's grains (DDGs) 
production added back to the U.S. feed supply, net U.S. feedgrain 
production available to users other than ethanol plants, has declined 
precipitously since 2007. From the 2007 total U.S. feedgrain crop there 
was a net of 298 million metric tons (mmt) of grain and DDGS left after 
ethanol use. From the 2010 crop alone there was only 250 mmt left for 
all users after ethanol production. The United States is covering a 
portion of that 48 million tons of loss volume by drawing down the 
feedgrain stocks from 48 million tons last year to only 21 million on 
Sept. 1, 2011. That 21 million ton figure is barely enough to keep the 
grain supply system running, and is the basic reason that corn prices 
are more than $7 per bushel, and extremely volatile. At these prices it 
is likely that more poultry companies will struggle with potential 
plant closures and layoffs are highly possible.
    Since the use and production of ethanol enjoys the protection of 
the RFS, feed and food users have been forced to make the entire 
adjustment to lower net grain supplies. USDA is forecasting that 2011-
2012 U.S. feedgrain and soybean supplies will remain very tight, and 
prices high and volatile. Absent alterations in the U.S. biofuels 
policy, U.S. food production costs will likely continue to increase and 
production is likely to decline further. Once again, this means job 
loss in rural America. We have actually reached a point where any 
significant weather issues that would affect the 2011 U.S. grain crops 
will only dig deeper into the projected poor harvest this fall. The 
U.S. reserve stocks are depleted with stocks-to-use ratio being in the 
3-4 percent range, new record low, which is dangerous, uncharted 
territory. The United States cannot fall back on reserves this year and 
projections for next year are just as bad or worse. Meanwhile for 2012, 
there is another increase in the corn-based ethanol RFS, which can be 
summed up very easily by saying everything better go right and Mother 
Nature better not mess with next year's corn harvest or we're in a 
world of trouble.
    Limited acreage expansion capability for corn production together 
with the expanded RFS has driven net feed supplies and stocks available 
for uses other than ethanol to critically low levels. In light of the 
realities of grain supply and demand, Congress should reevaluate the 
corn-based RFS schedule for 2012 through 2015. A fair and balanced 
approach for the overall good of the U.S. economy would give increased 
weight to food production costs and food security, and less weight to 
biofuel production. The Volumetric Ethanol Excise Tax Credit (VEETC), 
or blender's credit, is not required to support ethanol production and 
it should simply go away at the end of the year. It was nice to see 
that Congress is now moving in the right direction and it would be our 
hope that Congress finally do away with the VEETC once and for all. It 
will help with corn prices but is also just good government.
    Farbest Foods and the National Turkey Federation strongly support 
the reduction of dependence on foreign oil. However, we believe the 
goal of achieving less reliance on foreign sources simply through 
increased corn yields is short sighted and in reality does not fix the 
problem alone. If we as a country are truly interested in reducing our 
dependence on foreign oil, then please tell me why the ethanol industry 
will be allowed to export nearly 1.0 billion gallons of ethanol. Why 
are the U.S. taxpayers subsidizing another country's dependence on oil? 
What the turkey industry is looking for is reform of the existing 
ethanol policy by providing a safety net that ensures that corn prices 
and availability will be less volatile in the future.
    Finally, we have grave concerns about any new Federal investment in 
``infrastructure'' for ethanol. It is hard to believe that the Federal 
Government would entertain such a venture when it is having trouble 
paying its bills and would put another taxpayer funded program on the 
books. To move from one Federal support structure to another only goes 
to exacerbate financial problems and it is time for Federal Government 
to stop supporting this more than 30 year old industry. With a 
guaranteed market for their product, it would seem reasonable that the 
ethanol industry should be profitable enough to begin developing its 
own infrastructure.
    While no one item is a silver bullet to fixing the low corn stocks 
problem, we must do something to protect livestock and poultry 
producers from the excessively high corn prices due to the fact that 
the government has mandated the use of half of the corn supply in the 
nations fuel supply. Within just the last 3 years, 22% of the broiler 
chicken industry volume was sold to foreign owned companies because the 
United States companies went bankrupt. More poultry companies will go 
bankrupt, more jobs will be lost, and more consolidation will happen if 
these high prices persist. Once a company goes bankrupt it is not just 
them that are the losers, so are the community churches, the hardware 
stores and even the grocery stores all get impacted.
    In closing, I would like to thank the Committee for allowing me to 
testify today on this most important issue to the turkey industry, and 
I hope that I have been able to enumerate the impact on feed and food 
prices for you. I look forward to answering any questions.

    The Chairman. Thank you, Mr. Seger.
    Mr. Welch.

 STATEMENT OF MICHAEL A. WELCH, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, HARRISON POULTRY, BETHLEHEM, GA; ON BEHALF OF NATIONAL 
                        CHICKEN COUNCIL

    Mr. Welch. Good afternoon, Chairman Rooney, Congressman 
Cardoza and Members of the Subcommittee. Thank you, Chairman 
Rooney, for the opportunity to participate in this critically 
important and very timely hearing on the issues of feed 
availability. Permit me to suggest that a more appropriate 
title of this hearing would be ``Feed Unavailability.''
    My name is Michael Welch, and I am the President and Chief 
Executive Officer of Harrison Poultry in Bethlehem, Georgia. 
Harrison Poultry is a small, privately held company operating 
one slaughter plant producing a variety of products. More than 
1,000 outstanding, dedicated employees work diligently every 
day to make Harrison Poultry successful. Also, over 125 family 
farmers contract to grow broilers, and an additional 40 family 
farmers contract to produce hatching eggs for the company-owned 
hatchery.
    You have heard the statistics from the witnesses, and I can 
assure you they are true. Broiler companies have increasingly 
been squeezed throughout the past corn crop year between rising 
feed costs and declining prices for chicken products. This 
cost/price squeeze continues and may get worse before it gets 
better. A number of companies have already succumbed to the 
severe cost/price squeeze by ceasing operations or having to 
sell their assets at fire sale values.
    Broiler companies can no longer withstand the storm of high 
feed costs and low chicken prices. Companies are trimming their 
production plans, which means family farms who grow broilers 
will receive fewer chicks to grow market-ready broilers, and 
processing plant work shifts are being reduced or even 
eliminated. With less work time, more and more workers are 
being laid off. As a result, not only will hundreds or 
thousands of workers lose their jobs, but more and more 
contract broiler growers are losing their poultry farming 
income, which they use to repay mortgages on their grow-out 
houses. Banks and other lending institutions are moving to 
foreclose on these farms.
    Family farms who have contracted to grow broilers for 
decades now find it very difficult, if not impossible, to sign 
on with another company since essentially all companies are in 
a retrenching mode.
    During 2011, it is estimated that over 1 billion gallons of 
corn-based ethanol will be exported by the United States to a 
number of foreign companies. This 1 billion gallons is the 
equivalent of over 350 million bushels of corn. The National 
Chicken Council questions whether it was the intent of 
Congress, when it passed the Energy Independence and Security 
Act of 2007, to annually have 350 million bushels of corn 
indirectly exported in the form of ethanol. If this is the law 
intent for the United States to move toward greater energy 
independence, why is energy being exported?
    Picking one market as the winner at the expense of the 
loser should not be the function of government. Mandating the 
use of ethanol, subsidizing its cost, and protecting ethanol 
from competition is triple overkill. Greater energy 
independence is a worthy goal for the United States, but the 
negative and unintended consequences of moving too far too fast 
with corn-based ethanol have become abundantly clear.
    I have outlined several problems in my written statement. 
It is now time for the United States to shift from a policy of 
abundance in agriculture to a policy of shortage. None of these 
issues, however, is more paramount than the very unfortunate 
situation being forced on family farmers who have or will be 
losing their contracts to grow broilers. Disrupting or ceasing 
financial flow generated by the contract payments results in 
not just broiler operations being jeopardized, but in many 
cases results in the entire family farm being put in jeopardy. 
I suggest that if you would ask these family farmers if current 
ethanol policy is good policy, you would not be able to find a 
supporter of the program.
    Equally and critically important are the tremendous number 
of good people that the chicken industry employs. We have all 
been hearing that the upcoming national elections are themed 
all about jobs, job, jobs. If the intent is to create more 
jobs, why then is our government continuing policies and 
programs that are causing Americans to lose their jobs?
    Thank you, Chairman Rooney, Congressman Cardoza, Members of 
the Subcommittee, for the opportunity to share thoughts, 
comments and recommendations of the National Chicken Council.
    [The prepared statement of Mr. Welch follows:]

 Prepared Statement of Michael A. Welch, President and Chief Executive 
Officer, Harrison Poultry, Bethlehem, GA; on Behalf of National Chicken 
                                Council

    Good afternoon, Chairman Rooney, Congressman Cardoza, and Members 
of the Subcommittee. Thank you, Chairman Rooney, for the opportunity to 
participate in this critically important and very timely hearing on the 
issues of feed availability. Permit me to suggest that a more 
appropriate title of the hearing would be ``Feed Unavailability.''
    On behalf of the National Chicken Council, I appreciate your 
invitation to provide comments and recommendations regarding the 
precarious position of feed supplies confronting the chicken industry. 
Chicken producer/processors will certainly need the Subcommittee's 
strong support and wisdom if the industry is to successfully overcome 
the increasingly difficult issues and challenges that I will outline in 
my statement. As a point of clarification, I will use the word 
``broiler'' and ``chicken'' interchangeably in my statement.
    My name is Michael Welch and I am President and Chief Executive 
Officer of Harrison Poultry in Bethlehem, Georgia. I have been 
President of Harrison Poultry since 1992. Harrison Poultry is a small, 
privately held company operating one slaughter plant producing a 
variety of products that are carefully and specifically tailored to our 
end-customer requirements. More than 1,000 dedicated employees work 
diligently every day to make Harrison Poultry successful. Also, over 
125 family farmers contract to grow broilers and an additional 40 
family farmers contract to produce hatching eggs for the company-owned 
hatchery. Each week Harrison Poultry processes more than 6 million 
pounds of broilers on a liveweight basis. Some of Harrison Poultry 
growers have been growing broilers since Harrison Poultry became 
vertically-integrated more than 40 years ago, even though the company 
contract is considered a flock-to-flock arrangement. Harrison Poultry 
and other companies in the chicken industry provide good, steady income 
for family farmers across the United States where broilers are 
produced.
    Harrison Poultry is a proud member of the National Chicken Council; 
and I, as a former Chairman of the organization, am pleased to present 
this statement on behalf of the National Chicken Council. More than 95 
percent of the young meat chicken (broilers) produced and processed in 
the United States come from the Council's members.
    Mr. Chairman, it is becoming much more difficult to secure an 
adequate and dependable supply of feed ingredients that can be procured 
at a cost that is both manageable and predictable. The more than 40 
vertically-integrated chicken companies that comprise the broiler 
industry have financially struggled for the past four calendar 
quarters. Broiler companies have increasingly been squeezed throughout 
the past corn crop year between rising feed costs and declining prices 
for chicken products. A number of companies have succumbed to the 
severe cost/price squeeze by ceasing operations or having to sell their 
assets at fire-sale values.

National Chicken Council's Feed Security Priorities
    Shortly after USDA reported in October last year that there would 
be a significant shortfall in the corn crop, the National Chicken 
Council formed a ``Feed Security Task Force''. This group of top 
broiler executives identified actionable policy and program changes to 
better address the precarious situation for feed. Needed actions 
identified by the Task Force are as follows:

   Elimination of the Volumetric Ethanol Excise Tax Credit 
        (VEETC) and import duty on ethanol.

   Have a partial or full waiver of the Renewable Fuels 
        Standard (RFS) by filing a legal challenge with the 
        Environmental Protection Agency or have legislation passed to 
        permit individual states to opt-out of the Federal ethanol 
        mandate and/or legislation mandating a stocks-to-use trigger 
        mechanism for the RFS.

   Minimize or prohibit further government subsidies and 
        Federal grants funding the building and expansion of 
        infrastructure that encourages the manufacturing, distribution, 
        and selling of corn-based ethanol.

   Remove without penalty non-environmentally sensitive 
        cropland from USDA's Conservation Reserve Program (CRP).

    As you will note, the actions or priorities include efforts 
impacting the demand and supply for corn. To achieve success for the 
Task Force's plan it will be necessary to convince USDA, other 
appropriate Departments of the Administration, and Congress that 
current policies and programs must now be thoroughly re-evaluated and 
significantly changed. Continuing to pursue these outdated policies and 
programs are devastating the poultry, livestock, and other sectors of 
animal agriculture. The facts evidenced by the situation since 2006 
should be enough to convince policy-makers that it is time to change 
the policies and programs. We are not naive, however. We understand and 
realize that the facts and hard evidence are not enough to elicit 
change. Putting additional, artificial demand on corn at a time when 
there is not an adequate and assured supply of corn is simply the wrong 
policy, especially when there is no viable relief valve available for 
the artificial demand. At the same time, new policies and programs are 
needed that recognize there is not an over-abundance of basic 
agricultural commodities, but rather there will be an ongoing continued 
tight supply of grain and oilseeds, not just in the United States but 
also globally. Encouraging productive American agriculture to produce 
to its capacity must be one of the primary threads that weave the new 
fabric of policies and programs.

``What's Driving Food Prices In 2011?'' Report
    The National Chicken Council was most pleased to see that a recent, 
well-done and well-documented study supports our call for change. This 
issue report, ``What's Driving Food Prices in 2011?'', was conducted by 
the Farm Foundation and confirms the National Chicken Council Task 
Force's thinking and plans.
    Permit me to quote from the report, ``U.S. agricultural policy has 
primarily been a `policy of abundance', designed to reduce supply, 
restrict land use and increase demand to help increase and stabilize 
farm incomes. That policy was developed because the United States has 
generally been blessed with the ability to produce more than could be 
consumed at profitable prices for producers. A shift to a ''policy of 
shortage`` would emphasize programs that stimulate supply and do not 
subsidize demand with taxpayer funds or political mandates.'' I ask 
this Committee to support this well-reasoned conclusion of the report.
Economic Difficulties Confront the Broiler Industry
    Broiler companies, since last October when the sudden, unexpectedly 
run-up in corn and other feed ingredient costs occurred, have tried to 
weather the storm of very high, very volatile corn prices. Companies, 
however, can no longer withstand the storm. Companies are trimming 
their production plans, which means growers will receive fewer chicks 
to grow to market-ready broilers and processing plant work shifts are 
being reduced or even eliminated. With less work time, more and more 
workers are being laid-off. A broiler company in Georgia this summer 
announced 300 workers will no longer be needed. Also, this summer, a 
fourth-generation family broiler company in Delaware filed for 
bankruptcy and in assets has been purchased by a foreign company. 
Further, another company in Arkansas has consolidated two processing 
plant operations into one location and similarly has combined two 
hatcheries into a single facility. This consolidation will result in 
223 jobs being eliminated. The company in its announcement indicated 
that eliminating these jobs will give it a better chance to survive. 
Earlier in 2011 this same company eliminated about 300 jobs in an 
attempt to stay in operation. In May this year, a third-generation 
broiler company with a complex in North Carolina and another complex in 
Arkansas succumbed to the financial stress of high feed costs. The 
result in this case is that its complex in North Carolina is now owned 
by a foreign company and the Arkansas complex is now owned by another 
broiler company that not only had the borrowing capacity to purchase 
the assets but the reserves that will undoubtedly be necessary to carry 
financial loses until the broiler market improves to at least a 
breakeven position. Ironically, the foreign company that purchased the 
North Carolina is ceasing operations at the end of this month with 
apparently no opportunity to allow for alternative ownership. As a 
result, not only will hundreds of workers lose their jobs, contract 
growers are in jeopardy of losing their poultry farming income which 
they use to repay mortgages on their growout houses. Undoubtedly, banks 
and other lending institutions will move to foreclose on these farms. A 
third-generation company in Mississippi closed its doors earlier this 
year as the corn cost/chicken price squeeze became intolerable. Jobs 
have been and are being lost. Family farms who have contracted to grow 
broilers for decades now find it very difficult, if not impossible, to 
sign-on with another company, since essentially all companies are in a 
re-trenching mode.
    I would like to tell this Committee that the above noted situations 
are the end of the broiler industry's financial problems. I cannot tell 
you that conclusion because there are a number of other companies on 
the financial bubble. Banks and other lending institutions are telling 
these companies, ``enough is enough,'' meaning sell your assets and 
repay your outstanding debt. What some analysts say about the broiler 
industry survivors being only ``ten companies in 10 years'' may become 
a reality, and perhaps, sooner than in a decade.

Track Record of Increasing Production Is History
    Over the past 5 decades broiler production has only decreased on an 
annual basis only three times: 2 years in the mid-1970s and again in 
2009. With this very steady track-record of ever-increasing production, 
the industry's growth has offered increased opportunities for growers 
to expand their operations and build the incomes and net worth of their 
family farms. That strong track record of growth is in very serious 
jeopardy because an over-abundance of corn is being diverted to fuel 
production and thus squeezing-out corn that should be available for 
feed.
    In 2010 almost 50 billion pounds, liveweight, of chickens were 
produced using more than 55 million tons of feed for broilers and the 
broiler breeder flocks that provide the fertile eggs for hatching. Of 
the 55 million tons of feed, over 36 million tons or about 1.3 billion 
bushels of corn or corn products were mixed into the finished feed. The 
average cost of chicken feed before the corn price began to rapidly 
escalate in mid-October, 2006 was $139.20 per ton. This month 
(September 2011) the same ton of feed is costing over $325 per ton, a 
more than doubling of cost since the second Renewable Fuels Standard 
became mandatory. The vast majority of the run-up in feed costs was the 
result of corn more than tripling in price since 2006. Last year (2010) 
the chicken industry's feed bill was almost $13.0 billion compared with 
total feed costs in 2006 of less than $7.0 billion. On a cumulative 
basis with the higher feed costs, the chicken industry has had to pay 
about $$22.5 billion more for feed since October 2006.
Cumulative additional cost to the broiler industry in broiler feed 
        ingredient expense since October 2006:
Total over the last 253 weeks $22,481,473,423



Do DDGs Help?
    Some supporters of ethanol point to dried distillers grains with 
solubles (DDGs) as a feed ingredient that can provide relief from high 
corn prices. The facts are, however, that the majority of the feed 
energy has been removed by the ethanol manufacturing process. The co-
product (DDGs) is low in energy and high in fiber. It does have 
reasonable protein value and competes in the feed ration more with 
soybean meal than with corn. The broiler industry does use some DDGs 
but it is not a preferred ingredient due to the nature of its 
composition. Inclusion of DDGs in a broiler feed ration is usually 
limited to five percent of the total ration.
    USDA in its World Agricultural Supply and Demand Estimate report 
does footnote in the corn supply and use data table that the 
Department's World Agricultural Outlook Board's estimate for corn 
allocated for ethanol also includes ethanol's by-products. 
Statistically, such a footnote is correct, but at the same time, 
provides little, if any, solace to traditional uses of corn who find 
DDGs prices essentially the same as corn when adjusted for the feed 
value while adding to the complications of running a feed mill.

Corn-Based Ethanol Exports: Why?
    During 2011 it is estimated that over 1 billion gallons of corn-
based ethanol will be exported by the United States to a number of 
foreign countries, including such markets as Brazil, European Union, 
and other destinations. The 1 billion gallon is the equivalent of over 
350 million bushels of corn. The National Chicken Council questions 
whether it was the intent of Congress when it passed The Energy 
Independence and Security Act of 2007 to annually have 350 million 
bushels of corn indirectly exported in the form of ethanol. If this 
law's intent is for the United States to move toward greater energy 
independence, why is energy being exported?

Just Cope: We Have Been Here Before
    In the 1970s it took more than 2.25 pounds of feed to produce a 
pound of liveweight chicken. Today the feed conversion is better than 
1.9 to 1.0, with many companies having conversion ratios of better than 
1.8 to 1.0. Even very efficient feed conversion rates cannot mitigate 
the high corn prices and the significant impact on the cost of 
producing chicken. Based on commodity futures prices that reflect 
essentially only, at best, a pipeline quantity of corn available as 
carryover stocks at the end of this current crop year, it appears there 
will be further escalation in corn prices. Higher feed costs are most 
likely for the rest of this year and the year beyond. Also, not only 
will corn prices most likely be higher, the volatility in corn prices 
will be much greater.
    If corn prices increase to double digit dollars per bushel, as a 
number of agricultural commodity analysts have predicted, and if other 
companion feed ingredient cost escalate in tandem with corn, the cost 
to produce chicken will increase more than 25 percent. This higher cost 
will have to be passed on to consumers at some point so that broiler 
companies can stop losing money and begin to at least break even.
    Certain analysts have suggested that ``we have been here before.'' 
That is, animal agriculture, including the broiler industry, has 
weathered high prices for feedgrains/oilseeds in years past and, for 
the most part, has survived. It is true that there have been high feed 
costs before now and, at certain times, the quick run-up in prices have 
come upon the market unexpectedly. In the past, the problem has been a 
1 year or so supply problem. But now, however, the situation is not 
only supply-driven but also demand driven. U.S. animal agriculture has 
not been here before. Government policy for corn-based ethanol that 
subsidizes, mandates, and protects it from competition has 
significantly changed how the demand for corn for ethanol reacts to 
normal market forces and how it is put to the head of the line when 
competing for corn. Corn used for ethanol for the 2005/06 crop year was 
1.6 billion bushels or 14 percent of total usage. For 2011/12 USDA is 
estimating 5 billion bushels or a share approaching 40 percent of total 
corn usage and, for the first time in history, the ethanol usage will 
exceed that quantity used for feed. The increase in the usage of corn 
for ethanol over these 6 years has more than tripled.
    Also, the international demand for U.S. agricultural commodities 
must now more seriously and fully take into account the China factor. 
Chinese Government trade policy is often difficult to predict. 
Nonetheless, China's rapidly growing need for more agricultural imports 
seems somewhat evident. Many, if not most agricultural commodity 
analysts, believe China is poised to become a large net importer of 
corn on a consistent going forward basis.
    An ever increasing demand for corn is being placed on a limited 
supply of corn, at least for the foreseeable future. Corn stocks will 
likely in the next few years continue to hover around minimum pipeline 
requirements. There is no cushion, no extra bushels in inventory to 
carry the needs of the users of corn through to the next harvest in 
2012. To assume that an adequate number of acres will be planted to 
corn next year and the next few years and to further assume favorable 
weather conditions for crops next year and for the next few years are 
not assumptions the U.S. chicken industry is prepared to make, nor 
should prudent U.S. Government policymakers be willing to make.

Time to Stop Picking Winners and Losers
    Since October 2008 when corn prices escalated to record high 
levels, it has become more and more evident that the national policy 
regarding corn-based ethanol has been heavily tilted toward using more 
and more corn for fuel rather than allowing for a level playing field 
of competition. The need to re-balance the policy is long overdue. 
Picking one market for corn to be the winner at the expense of losers 
should not be the function of government. Mandating the use of ethanol, 
subsidizing its cost, and protecting ethanol from competition is triple 
over-kill. Greater energy independence is a worthy goal for the United 
States, but the negative and unintended consequences of moving too far 
too fast with corn-based ethanol have become overly clear. For the 
chicken industry, like other animal agriculture producers, fewer pounds 
of product have been produced and will continue to not be produced in 
the foreseeable years. Consumers who have sufficient incomes to devote 
to cover the higher costs of food will reach deeper into their 
pocketbooks and pay the higher food prices. Consumers in this country 
and around the world who do not have an adequate income and, therefore, 
cannot continue to afford animal protein in their diets will have to 
shift to other foods, and in some cases, no food. With land being a 
limiting factor in the production of food, it is most likely all foods, 
not just corn, will be higher in price and tighter in supply, whether 
of animal origin or not.

New Plan-of-Action Needed
    Foremost is the need for a credible, equitable, and workable plan-
of-action to adroitly address the significant shortfalls in the back-
to-back corn crops and the great likelihood there will be an ongoing 
tightness in grain and oilseed supplies. Unless there are near-perfect 
crop conditions next year and the years beyond to plant, grow, and 
harvest a record quantity of corn and other feed crops, animal 
agriculture will continue to experience major disruptions while ethanol 
producers will continue to outbid non-subsidized buyers of corn.
    With the weakened U.S. dollar, overseas buyers of U.S. commodities, 
like corn, see these commodities as being relatively more affordable 
than domestic U.S. buyers. Thus, it can reasonably be argued that U.S. 
animal agriculture is the most vulnerable corn buyer the supply of corn 
has a shortfall. It is highly unlikely the current shortfall crisis 
will be a 2 year problem. The essentially non-existent stocks of corn 
means more and more acres of corn will be required as will higher and 
higher corn yields for the next few years or more. More acres are 
needed, not just for corn, but also for soybeans, wheat, cotton, and 
other crops that compete with corn for acreage.
    While there are many critical issues impacting the viability of the 
chicken industry, I suggest no issue is more critical than having an 
adequate supply of grain and oilseeds at reasonable costs.
    The rules of the game should be re-balanced and the playing field 
should be leveled to permit chicken producers and other animal 
agriculture producers to more fairly compete for the limited supplies 
of corn this year and in the next few years. Included in this effort 
must be a safety-valve to adjust the Renewable Fuels Standard when 
there is a shortfall in corn supplies. In addition, a plan should be 
implemented to allow a reasonable number of good, productive cropland 
to opt out of the Conservation Reserve Program on a penalty-free basis. 
These provisions must be acted upon as soon as possible. Congress will 
very quickly have to make a choice between corn for food or fuel. We 
are now at the point where, annually, there is not enough corn for both 
uses.

Conclusion
    The National Chicken Council, its members, and the many allied 
industry companies that support poultry production, processing, and 
marketing look forward to working more closely with the Committee and 
others in Congress so that poultry producers have a better opportunity 
to successfully manage the increasingly difficult challenges and 
issues. Improving the viability of the poultry industry not only helps 
poultry companies and poultry farmers but, perhaps, more importantly 
will allow consumers of poultry products to continue to enjoy an 
ongoing, adequate supply of animal protein at reasonable prices.
    I have outlined several critical problems, but none is more 
paramount than the very unfortunate situation being forced on the 
family farms who have or are now losing their contracts to grow 
broilers. Disrupting or ceasing the financial flow generated by the 
contract payments results in not just the broiler operations being 
jeopardized, but in many cases results in the entire family farm being 
put in jeopardy. I suggest that if you ask these family farmers if 
current ethanol policy is good policy you would not be able to find a 
supporter of the program.
    Thank you, Chairman Rooney, Congressman Cardoza, and Members of the 
Subcommittee, for the opportunity to share the thoughts, comments, and 
recommendations of the National Chicken Council. I request that my 
statement be entered into the record of the hearing and I look forward 
to your questions and comments.

    The Chairman. Thank you, Mr. Welch.
    Dr. Erba.

    STATEMENT OF ERIC ERBA, Ph.D., SENIOR VICE PRESIDENT OF 
 ADMINISTRATIVE AFFAIRS, CALIFORNIA DAIRIES, INC., VISALIA, CA

    Dr. Erba. Chairman Rooney, Ranking Member Cardoza, and 
Members of the Subcommittee, good afternoon. My name is Dr. 
Eric Erba, and I hold the position of Senior Vice President of 
Administrative Affairs for California Dairies, Inc., whom I am 
representing here today. California Dairies is a full-service 
milk-processing cooperative owned by approximately 450 
producer-members located throughout the State of California. 
Our producer-members collectively produce almost 42 percent of 
the California milk supply and about nine percent of the total 
U.S. milk production.
    We appreciate your willingness to convene a hearing to 
gather information on feed availability, and hopefully leave 
you with a sense of the cost of feed, which is a topic which 
resonates strongly with our producer-members.
    The basic theme of the dairy producers since 2009 has been 
one of survivability, and a huge piece of the equation is cost 
of production. These costs represent almost 65 percent of the 
cost of producing milk, and the skyrocketing cost of feed since 
2007 have caused many dairy producers to question the very 
manner in which they operate their dairies.
    Let me explain what I mean by that. The hallmark of 
dairying in California is a western style of dairying in which 
dairy producers buy a high percentage of the feed in bulk 
instead of growing the feed on or near their dairies. This 
model for dairying relies heavily on almost all grains and some 
of the forages shipped into California from other states, where 
they can be grown more cheaply than they can in California.
    Most California dairy producers do grow a high percentage 
of corn, but that corn is for silage, not for grain. This model 
has been in place for decades. It has worked very well until 
just recently. High-priced land and lack of affordable water in 
California's agricultural areas represent insurmountable 
obstacles that prevent dairy producers from becoming even more 
diversified as crop farmers in addition to being dairy 
producers.
    From our point of view, the problem is not feed 
availability, it is the price of feed. Application of 
elementary economic principles suggests that the two are 
intertwined. As the supply of feed decreases, the price 
increases. Applied to what we see in the California dairy 
landscape, that basic principle can be refined to an axiom that 
suggests that feed has been and continues to be available, but 
not necessarily at prices which make good financial sense for 
dairy producers.
    There truly has been an issue, however, with the 
availability of hay no matter what the price. In California we 
have seen tremendous decreases in the alfalfa acreage in just 
the last 2 years. Alfalfa hay has been a staple for many dairy 
rations, representing 10 to 15 percent of the mixed rations fed 
to dairy cows. We have heard alarming reports that hay fields 
are being torn out and replaced with higher-value crops such as 
cotton, tomatoes, and fruit and almond orchards. These crops 
may be able to provide some marginal value to dairy producers 
through feed by-products, but they are in no way a substitute 
for what alfalfa hay means to the dairy industry.
    There is no one cause for high feed prices, which affects 
how much feed is available at prices which will sustain dairy 
farms. High feed prices may be the result of unfavorable 
weather patterns, high energy prices, speculation in feed 
markets, a weak dollar, and high demand for feed from other 
countries. One very conspicuous disruption to the demand side 
of feed is the Federal ethanol program. USDA forecasts that 
soon more corn will be consumed by ethanol plants than by 
livestock, a spectacular change in historical trends.
    We have heard alternative energy proponents suggest that 
the impact on the ethanol industry and corn prices is minimal. 
It is economically illogical to suggest that almost half the 
supply of any commodity can be removed from the market from a 
relatively new, large and defined demand source without any 
impact on price. It just doesn't make any sense. Other studies 
suggest the impact of Federal ethanol program on corn prices 
may be increases in the range of 20 percent to 40 percent.
    The California Department of Food and Agriculture collects 
and publishes costs of feed data obtained from California dairy 
producers. California dairy producers paid an average of $300 
per ton for rolled corn and $275 per ton for alfalfa hay in 
2011. From 2000 to 2008, those same commodities averaged $125 
per ton and $160 per ton respectively, which computes to an 
increase of 145 percent in the corn price and 70 percent in the 
price for alfalfa hay.
    Dairy producers are critical of the Federal policy that 
favors fuel over food because of evidence that these policies 
put animal agriculture at tremendous risk for higher production 
costs with no guarantee of higher milk prices. In addition, 
feed markets, particularly the corn market, have become very 
sensitized to forecasts and reports on plantings, stocks and 
yields. Markets that are so tightly bound to informational 
releases have a tendency to overreact, making volatile markets 
even more difficult to navigate through.
    Thank you for inviting me to present this testimony today. 
I look forward to your questions.
    [The prepared statement of Dr. Erba follows:]

   Prepared Statement of Eric Erba, Ph.D., Senior Vice President of 
     Administrative Affairs, California Dairies, Inc., Visalia, CA

    Chairman Rooney, Ranking Member Cardoza and Members of the 
Subcommittee:

    Good afternoon. My name is Dr. Eric Erba and I hold the position of 
Senior Vice President of Administrative Affairs for California Dairies, 
Inc. (``California Dairies''), whom I am representing here today. 
California Dairies is a full-service milk processing cooperative owned 
by approximately 450 producer-members located throughout the State of 
California. Our producer-members collectively produce almost 42% of the 
milk supply in California and 9% of the total U.S. milk supply. Our 
producer-members have also invested over $500 million in large 
processing plants at six locations in California.
    We appreciate your willingness to convene a hearing to gather 
information on feed availability and hope to leave you with a sense of 
the feed costs, which is a topic that resonates strongly with our 
producer-members.

Feed and the California Dairy Industry
    The basic theme for dairy producers since 2009 has been one of 
survivability, and a huge piece of the equation is cost of production. 
Feed costs represent almost 65% of the cost of producing milk, and the 
skyrocketing costs of feed since 2007 have caused dairy producers to 
question the very manner in which they operated their dairies. Let me 
explain what I mean. The hallmark of dairying in California is a 
Western style of dairying, in which dairy producers buy a high 
percentage of feed bulk quantities instead of growing the feed on or 
near the dairy. This model for dairying relies heavily on almost all of 
the grains and some of the forages being shipped into California from 
other states, where they can be grown cheaper than they can in 
California. Most California dairy producers do grow a high percentage 
of corn but it is for silage, not grain. This model has been in place 
for decades and worked very well until relatively recently. High priced 
land and lack of affordable water in California's agricultural areas 
represent insurmountable obstacles that prevent California dairy 
producers from becoming more diversified as crop farmers in addition to 
being dairy producers.

Feed Availability or Feed Price?
    From our point of view, the problem is not feed availability; it is 
the price of feed. Application of elementary economic principles 
suggests that the two are intertwined--as the supply of feed decreases, 
the price increases. Applied to what we see in the California dairy 
landscape, that basic principle can be refined to an axiom that 
suggests that feed has been and continues to be available . . . but not 
necessarily at prices that always makes good financial sense for dairy 
producers.
    We note that there has been more competition recently for U.S. 
grown feed from other countries, particularly for the high quality hay 
that is usually sold to dairy producers. For example, some of the 
countries have concluded that it makes more sense to buy hay from the 
U.S. than to use their own resources, particularly water, to grow their 
own hay, even if those countries must pay a little more for U.S. grown 
hay.
    Let me take the example of alfalfa hay a step further. The specific 
matter of feed availability is most easily and directly applied to this 
feed, where there truly has become an issue with the availability of 
hay, no matter what the price. Part of this is from increased demand 
for hay from both domestic and international buyers, but a large part 
of what is affecting the hay availability issue has to do with supply. 
In California, we have seen a tremendous decrease in the alfalfa 
acreage in just the last 2 years. Alfalfa hay has been a staple of many 
dairy rations, representing ten to fifteen percent of the mixed 
rations. We have heard alarming reports of hay fields being torn out 
and replaced with higher valued crops, such as cotton, tomatoes, and 
fruit and almond orchards. California pioneered the use of feed 
byproducts as ancillary ingredients for dairy rations, but byproducts 
have a significant downside--they are typically available only 
intermittently. They may be useful when they are available, but ration 
consistency is a key for ideal milk production. Simply put, cows like 
consistency in rations, not variety. So while byproducts may be 
available from these higher valued crops, they are in no way 
substitutes for alfalfa hay.

Ethanol and Feed Prices
    There is no one cause for high feed prices, which affects how much 
feed is available at prices that will sustain dairy farms. High feed 
prices may be the result of unfavorable weather patterns, high energy 
prices, speculation in feed markets, a weak dollar and high demand for 
feed from other countries. One very conspicuous disruption on the 
demand side of feed is the Federal ethanol program. USDA's Crop 
Production and Supply/Demand Report forecasts that more corn will be 
``consumed'' by ethanol plants than by livestock, a spectacular change 
in historical trends. Is there an impact on corn price because of the 
Federal ethanol policies? We have heard alternative energy proponents 
suggest that the impact of the ethanol industry on corn prices is 
minimal. It is economically illogical to suggest that almost half of 
the supply of any commodity can be removed from the market from a 
relatively new, large and defined demand source without any impact on 
price. It just doesn't make sense. Other studies suggest that the 
impact of the Federal ethanol program on corn prices may be increases 
in the range of 20% to 40%. These results seem to be more consistent 
with current corn prices and our producer-member experiences. 
Alternative energy proponents also point out that ethanol production 
results in a new feed source, dried distillers grain (DDG). That is a 
hollow argument. DDG is a lower quality feed that lacks the starch that 
corn contains and making corn such an important ingredient in dairy 
rations. Also, the conversion rate is horrible--dairy producers give up 
3 pounds of corn and get back 1 pound of DDG. Finally, current DDG 
prices are about the same as for corn, even though DDG must be 
supplemented by other starch and energy sources to be used effectively 
as a livestock feed.
    The California Department of Food and Agriculture (Department) 
collects and publishes cost of feed data obtained from California dairy 
producers. The data reveals that California dairy producers' cost of 
production is dominated by feed costs, responsible for 65% of the cost 
of producing milk. Prior to 2008, the cost of feed made up less than 
50% of total milk production costs. The recent price increases for 
rolled corn and alfalfa hay are even more dramatic. California dairy 
producers paid an average of $300 per ton and $275 per ton for rolled 
corn and alfalfa hay, respectively, in 2011. From 2000 to 2008, the 
same commodities averaged $125 per ton and $160 per ton, respectively, 
which computes to an increase of 145% in the corn price and an increase 
of 60% in the price for alfalfa hay.

Alternative Feed Rations
    With the prevailing high prices in the corn and hay markets, there 
may be some question as to why producers do not attempt to seek 
alternative feed rations that are far less dependent on corn and hay as 
the foundational ingredients. The reality is that nutritionists have 
tried repeatedly to find alternative rations with very limited success. 
Bear in mind that prices for almost all feeds have increased 
simultaneously, the so-called ``sympathetic'' price increases that are 
evident across all feedstuffs when the price of one major commodity 
increases suddenly. This effect limits the ability of dairy producers 
to substitute away from higher priced feeds. Notably, commodities like 
whole cottonseed, soybeans and wheat have been nearly priced out of 
consideration by many dairy producers who must purchase feeds for their 
dairy cow rations. Even substituting more lower-priced roughage for 
concentrates may have the unwanted consequence of lowering milk output 
and altering milk component levels. In other words, there may be no 
change in dairy farm profitability if the feed substitutes that appear 
to be less expensive result in decreased milk production or decreased 
milk components or both.

Concluding Remarks
    Dairy producers are critical of the Federal policy that favors fuel 
over food because of the evidence that policies put animal agriculture 
at tremendous risk for higher production costs with no guarantee of 
higher prices for product produced. In addition, feed markets, 
particularly the corn market, have become very sensitized to forecasts 
and reports on plantings, stocks, and yields. Markets that are so 
tightly bound to informational releases have a tendency to overreact, 
making volatile markets even more difficult to navigate through. In 
combination with already high feed prices, a new challenge has been 
presented for dairy producers--developing some proficiency with hedging 
and forward contracting in feed markets that are characterized by 
extreme price volatility. Needless to say, inexperience and lack of 
knowledge when making decisions in these kinds of markets are principal 
ingredients for disastrous results. But there is no avoiding the issue, 
and dairy producers will need to develop the skills necessary to 
navigate through unpredictable feed markets. No producer can count on 
corn or any other feed price returning to more stable and predictable 
levels anytime soon.
    Thank you for inviting me to present this testimony to you today, 
and I look forward to your questions.

    The Chairman. Thank you, Dr. Erba.
    Mr. Spronk.

          STATEMENT OF RANDY SPRONK, PORK PRODUCER AND
MANAGING PARTNER, SPRONK BROTHERS III LLP AND RANGER FARMS LLP; 
 VICE PRESIDENT, NATIONAL PORK PRODUCERS COUNCIL, EDGERTON, MN

    Mr. Spronk. Good afternoon, Chairman Rooney, Ranking Member 
Cardoza, and Members of the Subcommittee. I am Randy Spronk, a 
pork producer from Edgerton, Minnesota, where I own and operate 
with my brother and son the same farm I grew up on. In addition 
to my family, my farm also employs about 20 workers, and we 
finish about 125,000 head of pigs a year, farm about 2,000 
acres of corn and soybeans, and our pigs are sent to markets in 
Minnesota and South Dakota.
    As Vice President of the National Pork Producers Council, I 
appreciate the opportunity to testify on behalf of the NPPC and 
America's 67,000 pork producers.
    I would like to talk about some of the struggles producers 
like me are having with the current feed grain situation, and 
the impact tight supplies and high prices have on the ability 
to feed our animals and satisfy the world's demand for pork 
products.
    Pork is by far the favored protein of consumers around the 
globe. As long as we have sufficient supply of feed grains, the 
U.S. pork industry will continue to be the lowest-cost 
producers of pork in the world, continue to meet global demand, 
and continue to help generate nearly $35 billion of U.S. gross 
national product, and to support the more than 550,000 mostly 
rural American jobs. However, in the past year a combination of 
bad weather and bad policy has created a situation today where 
we are questioning whether there will be an adequate supply of 
feed.
    For a hog farmer like me, feed comprises approximately 60 
to 70 percent of the cost of raising a hog, primarily fed a 
mixture of corn and soybean meal. Some producers like me also 
have begun to include in feed rations dried distillers grain 
with solubles, DDGs, a by-product of ethanol production. But be 
aware, DDGs is not without issues. On my farm we routinely have 
problems handling DDGs. They don't flow from trailers and feed 
bins as easily as corn and soybeans, causing feed outage 
issues. In addition, because of their impact on meat quality, 
we have to be careful about the level of DDGs we include in our 
rations.
    Today the pork industry, like all livestock groups, stand 
at the edge of a frightening precipice. We face a feed supply 
situation worse than the one we have been warning Congress and 
the Administration about the last several years. After a year 
in which we have been hit with historic record low year-end 
stocks of corn, just 17 days' worth, we are now looking at an 
even smaller supply next year. Following the cold, wet spring, 
the droughts in the South and Southeast, the record heat this 
summer, projections for this fall corn crop are not good.
    On Monday, the USDA dropped its corn yield estimate to 
148.1 bushels an acre, down from 153. And with a prediction of 
an early frost in some parts of the Corn Belt--in particular on 
my farm it is supposed to reach down to 29 tonight--that 
number could go lower.
    The other time we faced a grain shortage of this magnitude 
was back in 1996. Back then my mill simply did not have enough 
grain on hand, and we couldn't source it locally to feed out 
the pigs. I was forced to hire two semi trucks and send them on 
a 540 mile round trip to Blunt, South Dakota, to secure that 
grain.
    Thankfully it appears that most producers heeded early 
warnings and secured a supply of corn to get them through this 
year's harvest. For next year, however, there simply may not be 
enough corn to go around in the livestock industry, and pork 
producers such as me and my family will suffer.
    It is a real possibility that next year's corn will need to 
be rationed, and NPPC believes that the rationing ought to be 
applied equally to all corn users, including the ethanol 
industry.
    Please be aware I am not here to attack the ethanol 
industry. In fact, the U.S. pork industry always has been a 
strong supporter of the ethanol production as a way to reduce 
our dependence on foreign oil. But the ethanol industry is 
using more and more of the nation's corn supply. This year it 
is expected to overtake the livestock and poultry producers as 
the largest user of corn, but its growth has been driven almost 
entirely by the Renewable Fuel Standard mandate, which--and 
this is the most important point that I am going to make here 
today--makes no provision for rationing or a short corn crop.
    The U.S. livestock and poultry industries will bear almost 
100 percent of the risk of a short corn crop. We cannot easily 
switch our production on and off. We can't simply not feed 
animals. Ethically and morally I must care for my livestock.
    America's pork producers are asking Congress to consider 
all policy options in order to address the looming feed grain 
supply challenges. In particular, we encourage you to, first of 
all, require the ethanol industry to bear some of the same risk 
from the corn market supply and price shocks that pork 
producers and others do; second, adopt measures to assist 
livestock and poultry producers who suffer losses because of 
corn rationing. Even with policy changes designed to deal with 
the inflexibility in ethanol's demand for corn, i.e., the 
mandate, other corn users still bear a disproportionate share 
of the supply risk that is associated with weather and other 
factors; and last, adopt policies that would fairly and 
smoothly transition the U.S. ethanol industry to full reliance 
on the private market for its supply signals and away from 
signals provided by the government through the Renewable Fuel 
Standard and the subsidies.
    Thank you again very much for allowing me to testify. I 
would be happy to answer any of your questions.
    [The prepared statement of Mr. Spronk follows:]

     Prepared Statement of Randy Spronk, Pork Producer and Managing
Partner, Spronk Brothers III LLP and Ranger Farms LLP; Vice President, 
             National Pork Producers Council, Edgerton, MN

Introduction
    The National Pork Producers Council (NPPC) is an association of 43 
state pork producer organizations and serves in Washington, D.C., as 
the voice for the nation's pork producers. The U.S. pork industry 
represents a significant value-added activity in the agriculture 
economy and the overall U.S. economy. Nationwide, more than 67,000 pork 
producers marketed more than 110 million hogs in 2010, and those 
animals provided total gross receipts of $15 billion. Overall, an 
estimated $21 billion of personal income and $34.5 billion of gross 
national product are supported by the U.S. pork industry. Economists 
Dan Otto and John Lawrence at Iowa State University estimate that the 
U.S. pork industry is directly responsible for the creation of 34,720 
full-time equivalent pork industry jobs and generates 127,492 jobs in 
the rest of agriculture. It is responsible for 110,665 jobs in the 
manufacturing sector, mostly in the packing industry, and 65,224 jobs 
in professional services such as veterinarians, real estate agents and 
bankers. All told, the U.S. pork industry helps generate more than 
550,000 mostly rural jobs in the United States.
    Exports of pork continue to grow. New technologies have been 
adopted and productivity has been increased to maintain the U.S. pork 
industry's international competitiveness. As a result, pork exports 
have hit new records for 17 of the past 19 years. In 2010, the United 
States exported more than $4.8 billion of pork, which added $56 to the 
price that producers received for each hog marketed. (That amount 
represents about \1/3\ of the total price producers receive for each 
hog.) Net exports last year represented about 20 percent of pork 
production. The U.S. pork industry today provides 21 billion pounds of 
safe, wholesome and nutritious meat protein to consumers worldwide, 
making it the No. 1 exporter of pork.
    The demand for meat protein is on the rise in much of the world. 
Global competitiveness is a function of production economics, 
regulations, labor costs and productivity. The U.S. pork industry can 
continue to be a leader in food production and meet the needs of 
increased consumer demands as long as exports continue to grow, 
producers are allowed to operate without undue legislative and 
regulatory burdens and feed grains are available. It is that last point 
that is of concern to producers now.

Feed Grains Situation
    Feed comprises 60-70 percent of the cost of raising a hog to market 
weight (about 260-280 pounds). Primarily, hogs are fed corn and soybean 
meal--each market pig consumes approximately 10.5 bushels of corn and 4 
bushels of soybeans in the form of meal. Some producers include dried 
distillers grains with solubles (DDGS, a by-product of ethanol 
production) in rations. In certain areas of the country--generally 
outside the Corn Belt--hog rations may include other grains such as 
wheat, milo or barley. But corn is used in hog production in nearly 
every state that has production.
    An adequate corn supply is critically important to the U.S. pork 
industry. So the current feed grains situation has pork producers 
understandably very nervous.
    It now appears that the 2011 U.S. corn crop could be smaller than 
the U.S. Department of Agriculture's initial projection of 12.914 
billion bushels. Preliminary certified acreage data released by USDA's 
Farm Service Agency (FSA) suggests that planted acres fell short of 
USDA's National Agricultural Statistics Service (NASS) estimate of 
92.282 million acres. Summer weather conditions have dropped USDA's 
U.S. average corn yield to 148.1 bushels per acre, according to the 
agency's Sept. 12 grain report, from its initial forecast of 153 
bushels. The new project would be the lowest yield since the 2005-2006 
crop year. Chris Hurt, an agriculture economist at Purdue University, 
estimates an average yield of just 147 bushels an acre; Pro Farmer 
analysts estimate the yield at 147.9 bushels. (Estimates from other 
sources range from 146.3 to 151 bushels; USDA will release new 
production forecasts Oct. 12.) The final FSA acreage data, along with 
any additional information from the monthly NASS surveys, will be 
incorporated in the October production forecast. History suggests that 
the October yield forecast will be reasonably close to the final 
estimate.
    USDA's initial forecast of 41.4 bushels an acre for the U.S. 
average yield for soybeans was relatively small. Additionally, August 
weather was not favorable for soybean crop development, and FSA acreage 
data suggests that planted acres may have been less than the 74.958 
million estimated by NASS. Recent prices suggest that the market is 
expecting a smaller crop than the current USDA forecast of 3.085 
billion bushels.
    [USDA's yield forecasts are based in part on crop conditions. For 
the week ending Sept. 4, the agency downgraded the conditions for corn 
and soybeans. It reported 52 percent of the corn crop in good or 
excellent condition compared with 69 percent a year ago at the same 
time; it rated 21 percent of the crop in poor or very poor condition 
compared with 11 percent at this time last year. For soybeans, USDA 
reported 56 percent of the crop in good or excellent condition compared 
with 64 percent a year ago and 16 percent of the crop in poor or very 
poor condition compared with 12 percent a year ago.]
    The 2011-2012 corn numbers are coming after a 2010-2011 marketing 
year that, while the third largest harvest on record, saw year-end 
stocks of just 17 days. That's a historic low. The last time the 
carryover was that small--fall 1996--corn was so scarce in Iowa--the 
No. 1 corn-producing state--it had to be shipped in from Texas, and 
other areas suffered similar shortages.
    If the 2011-2012 grains forecasts prove true, corn and soybean 
consumption will need to be reduced. Indeed, USDA is projecting 
supplies for 2011-2012 to be their lowest since 2006-2007. Based on the 
most recent USDA projections and the assumption that year-ending stocks 
should be maintained at or above five percent of consumption, corn use 
would need to be reduced by about 30 million bushels, or 0.2 percent, 
during the 2011-2012 marketing year. Soybean consumption would need to 
be reduced by 122 million bushels, or 3.7 percent. The actual 
reductions will depend on the final consumption estimates for the 2010-
2011 marketing year, the 2010-2011 crop inventories on Sept. 1 and the 
size of the 2011 harvest.
    Some of the reductions in corn and soybean consumption during the 
2011-2012 marketing year may occur as a result of weaker demand, which 
may be prompted by a generally weak economy and continued high 
unemployment that likely would weaken demand for meat and poultry 
products; by the current abundance of competitively priced wheat that 
could be substituted for corn and soybean meal in livestock feed 
rations; by lower energy prices that would weaken demand for biofuels; 
and by larger South American crops in response to the current high 
grain prices.
    But, depending on the size of the 2011 harvest and on the crop 
inventories at the beginning of the 2011-2012 marketing year, weaker 
demand may not be enough to ration supplies. Grain prices may need to 
go even higher. The market clearly is expecting a substantial reduction 
in the forecast for the 2011-2012 marketing year corn supplies. Corn 
futures traded at the Chicago Mercantile Exchange (CME) already have 
climbed to the highest levels in more than 3 years. Futures indicate 
prices will remain above $7 a bushel through at least the middle of 
next year. Recently, traders held more than 4,500 call options in CME 
Group's corn market at strike prices--the price at which the option can 
be bought--of $11 and $12 a bushel. The number of such positions was up 
15 percent from a month earlier, an indication of growing concern that 
this year's harvest will fall short of projections.
    Last fall, $10 corn call options traded for the first time, with 
large firms such as JPMorgan Chase & Co. and MF Global Holdings Ltd. 
among the buyers of those calls, and analyst Kevin Van Trump, of Farm 
Direction, in Kansas City, Mo., says $9 or $10 corn could happen.
    If corn goes to $10 a bushel or higher, there could be an 
unprecedented contraction in the pork industry, with many producers 
forced to liquidate herds as losses grow. Corn at $10 ``will put a lot 
of sows in packing plants,'' University of Missouri agriculture 
economist Ron Plain told one publication. In fact, producers have 
reduced the breeding herd by more than six percent over the past 2 
years--although higher productivity has mitigated the impact of that 
reduction on pork output.
    The pork industry has seen the effects of tight grain supplies 
before, most recently just a few years ago. Despite (at the time) a 
record harvest in 2007, increasing demand saw prices for corn begin a 
rapid ascent, increasing from about $3.50 a bushel in mid-2007 to a 
peak of nearly $7.90 a bushel in mid-2008. While corn prices moderated 
over the next year and a half, falling back to around $3.50 a bushel, 
they began rising again as oil prices rose. The result was soaring 
costs of production. Total industry losses from October 2007 through 
January 2010 were more than $6 billion, and the average farrow-to-
finish operations lost nearly $23 for each animal marketed. More than 
6,300 pork operations went out of business. This financial disaster 
occurred despite near-record hog prices in 2008 and hog prices in 2009 
high enough to have provided profits at the average production-cost 
levels that prevailed from 1999 to 2006.
    Certainly, since early 2010 producers have been profitable, with 
hog prices recently at nearly historic highs. But a major reason for 
those higher prices is lower production relative to just 3 years ago, 
the result of producers' responses to sharply higher costs of 
production. Costs for typical farrow-to-finish producers will average 
about $87 per hundred pounds carcass weight for 2011 based on corn and 
soybean meal futures on Aug. 31. That is 27 percent higher than last 
year and 66 percent higher than the average for 1999-2006. These costs 
are now being passed along to consumers in the form of higher retail 
pork prices, which set six record monthly highs during 2010 and are 
almost certain to set new highs this year. Indeed, USDA in its April 25 
food inflation forecast projected that retail meat prices will rise six 
to seven percent this year, the largest jump since 2004. Further, 
because of the continued high feed grain prices and weak economy, hog 
prices have started to moderate. Pork producers now are projected for 
next year to see production costs above hog prices, with average losses 
of around $10 a head.
    While other factors are pushing up meat prices, including increased 
global demand for protein--as developing countries switch from grain-
based diets--and higher transportation costs because of higher fuel 
prices, production costs are the main driver--and, as stated above, 60-
70 percent of those costs are feed grains. And grain prices, like 
almost all commodities, are set by supply and demand.

U.S. Biofuels Policy's Role In High Corn Demand
    While a number of factors combined to affect the profitability and 
competitiveness of the pork industry from October 2007 through January 
2010, including the overall worldwide financial crisis, the relative 
value of the U.S. dollar and the emergence of the H1N1 flu and its 
associated trade impacts, the effects of drastic changes in grain 
markets that are in large measure driven by the increase in demand for 
corn from the ethanol industry have had the most significant impact on 
the pork industry.
    Following passage in the fall of 2007 of the Energy Independence 
and Security Act (EISA), which included a Renewable Fuels Standard 
(RFS2) that quickly accelerated the mandated production of corn 
ethanol, pork producers struggled to adjust to rapidly escalating 
prices and increased volatility in grain markets, which resulted in a 
reduction in hog production. An effort to include a safety valve that 
would have adjusted the RFS2 in the event of a short-term crop shortage 
failed in the Senate as the EISA was being debated. Recently, debate 
over renewable fuels and their government-supported mandates and 
subsidies has intensified, with efforts to eliminate tax subsidies 
gaining significant support. In 2010, as the Volumetric Ethanol Excise 
Tax Credit (VEETC) was expiring, the ethanol and corn industries fought 
for a 5 year extension of the subsidy. Congress approved a 1 year 
extension, which expires Dec. 31, 2011. At the same time, the ethanol 
industry has sought to allow blends of up to 15 percent ethanol in 
motor vehicle fuels and subsidies to finance construction of ethanol 
pipelines, storage and other infrastructure.
    USDA estimates that corn use for ethanol production increased 
following passage of the EISA from 1.603 billion bushels during the 
2005-2006 marketing year to 5.05 billion bushels during the 2010-2011 
marketing year. It is expected to absorb 5.15 billion bushels in the 
2011-2012 marketing year. Ethanol use accounted for approximately 14 
percent of total corn use in 2005-2006, was more than 37 percent in 
2010-2011 and is expected to grow to about 39 percent in the current 
marketing year. Over the same period, use of corn for feed fell from 
about 55 percent to about 37 percent and exports dropped from almost 19 
percent to about 13 percent.
    Those bushels of corn going to ethanol production could be put to 
better use. Economist John Lawrence of Iowa State University has 
calculated that a 100 million gallon ethanol plant creates about 80 
jobs. But the same number of bushels needed to create that much ethanol 
support 800 pork industry jobs.
    Furthermore, if ethanol is supposed to be the answer, or at least 
an answer, to how the United States reduces its dependence on foreign 
oil--ethanol displaces about 4.6 percent of ``pure'' gasoline--why did 
the ethanol industry export nearly 400 million gallons last year, a 
four-fold increase over 2009? And with tight world sugar supplies 
(other countries use sugar cane to produce ethanol), many analysts 
expect demand for the U.S. ethanol exports to strengthen.
    The passage of EISA and the associated increase in the RFS-driven 
demand for corn are reflected in the breakout of the costs to produce 
hogs, with corn prices at levels about $10 per carcass hundredweight 
higher than historical averages would have suggested. This increase 
occurred despite a significant increase in the use of DDGS by the pork 
industry.
    The higher corn cost premium is directly attributable to the 
ethanol demand for corn, the price of which now is largely a function 
of the price of petroleum, which is set by the demand for gasoline and 
diesel. A very strong case can be made that, as a result of the RFS and 
the ethanol blender's tax credit (VEETC), higher corn yields will have 
less of an effect on corn prices and instead will lead to greater 
ethanol production. Starting shortly after the advent of the modern RFS 
program in the middle part of this decade, the price of corn has 
closely tracked its energy value. As long as the market expects an 
expansion of ethanol production, there will be a symbiotic relationship 
between ethanol and the price of corn. And as long as the ethanol 
industry is receiving strong signals from the Federal Government that 
growth in the industry will be sustained, higher corn yields are not 
going to provide the level of relief in the form of lower prices to 
feed-grain users such as pork producers. Larger corn crops from 
increasing yields will instead lead to greater flows into ethanol 
plants.
    So U.S. pork producers are understandably concerned about the 
impact on their industry of the increased use of corn for ethanol 
production. The U.S. pork industry strongly believes the country needs 
a vigorous renewable energy sector, but it cannot come at the expense 
of the U.S. livestock and poultry industries. Reducing the use of 
imported oil--becoming energy independent--and focusing on renewable 
fuels are laudable, but markets must be neither distorted by subsidies 
and taxes nor compelled--or constrained--by mandates to the point where 
they cannot send effective price signals.
    Where mandates and subsidies are allowed to exist, it is 
unconscionable that long-established laws would be ignored to drive 
greater ethanol production. But this is the path the Obama 
Administration has taken in response to demands to allow an increase to 
15 percent (E15) from the current ten percent in the amount of ethanol 
that can be blended into gasoline. Despite the clear language in the 
Clean Air Act that fuel additives be safe in--that is, not harm--all 
vehicles, the U.S. Environmental Protection Agency approved E15 for 
2001 and newer model year vehicles. NPPC and other stakeholders filed 
suit against EPA over its decision. Pork producers obey the rule of 
law, and they expect the U.S. Government to do the same.
    Additionally, it is NPPC's contention that the United States must 
invest in research and development for other energy alternatives, such 
as using animal manure and fat and biomass, including switchgrass and 
corn stover. The U.S. pork industry wants to emphasize that the right 
balance is needed to meet the needs of fuel and feed security.
Dried Distillers Grains with Solubles (DDGS)
    It was noted above that pork producers are including more DDGS in 
their feed rations. But that product does little to allay the concerns 
of pork producers about the future cost and availability of feed grains 
and, consequently, the well-being of animals and the cost of pork to 
U.S. consumers.
    The ethanol industry has claimed that feed problems created by its 
use of a substantial portion of the nation's corn supply are irrelevant 
because of the production of DDGS.
    But there are several issues with feeding DDGS to pigs. They are 
inconsistent from ethanol plant to ethanol plant and even within a 
plant. There is variability in their nutrient content--protein, fat, 
phosphorus. If the fermentation or drying process for DDGS is changed 
or varies from batch to batch, it can have an impact on the 
digestibility of nutrients. Additionally, corn can contain mycotoxins 
that are, in some instances, detrimental to pig performance. The 
presence of mycotoxins varies by growing season, location and 
environmental factors. Since the ethanol production process removes the 
starch (\2/3\ of the volume) from corn, DDGS produced from mycotoxin-
contaminated corn will have three times the level of mycotoxin that was 
present in the corn itself. Depending on the percentage of DDGS fed and 
which toxins are present, pigs can experience multiple problems, 
including immune challenges, abortion and feed refusal. This is a 
severe limit on the widespread use of DDGS in gestation and lactation 
diets.
    As pigs are fed increasing levels of DDGS, the corn oil present 
(also at three times the concentration as in corn grain) can increase 
the iodine value, leading to soft fat, of the carcass. This can result 
in belly slicing problems and possible rancidity or shelf-life issues. 
A higher percentage of DDGS in the diet also can have a negative effect 
on carcass weights, most likely because of the increased fiber content 
of the DDGS.
    DDGS are far more useful in diets for beef and dairy cattle than 
they are for pork and poultry. This affects pork producers in two ways, 
both of them bad. First, DDGS will not be a cost-effective substitute 
for corn because beef and dairy producers will pay more for DDGS, 
preventing the products' use in swine diets. This already is happening. 
Second, the cost of producing beef and dairy products using DDGS will 
be lower relative to pork, providing a market advantage to those two 
sources of protein.
    There also are handling issues with DDGS--humidity tends to make it 
clump, making it stick in railcars and feed bins--concerns over 
increased phosphorous levels in finishing hogs fed DDGS and issues with 
``pelleting'' DDGS at feed mills. Additionally, the amount of DDGS 
returned to livestock producers as feed has been overestimated by USDA.
    Finally, it should be noted that the ethanol industry is exporting 
DDGS. In 2010, it exported 9 million metric tons, a 60 percent increase 
over the amount exported in 2009 and double what was exported in 2008.
Tight Grain Supplies + Ethanol Corn Demand + Weather = Disaster
    Any difficulties with the 2011-2012 U.S. corn and soybean crops 
could be disastrous for U.S. pork producers. Ethical care of animals 
requires producers to feed their hogs even when feed prices are high. 
But if there are feed shortages, livestock producers cannot simply turn 
a light switch to stop production and cannot stop feeding their 
animals. Taking animals to market before they reach market weight 
really isn't an option. Such an action likely would severely depress 
livestock prices, hurting producers' bottom line, and would make it 
harder to rebuild the U.S. swine herd. Producers will do all in their 
power to secure feed to care for their animals.
    Producers may or may not adjust to higher feed-grain prices, but 
there's not much they can do about a lack of available feed supplies. 
While NPPC has faith in the American farmers' ability to produce feed 
grains sufficient to meet demand, it is concerned about factors beyond 
their control, particularly the weather.
    The last real drought in the major corn-growing states happened in 
1988, 23 years ago. Texas is experiencing the worst drought in its 
history--81 percent of the state has the worst drought classification--
and there have been reports of widespread crop failures in the state 
because of it. Oklahoma, Kansas and parts of the Southeast also have 
drought conditions that are affecting crops. Of course, too much rain 
also can cause problems. Flooding along the Mississippi and Missouri 
rivers earlier this year inundated millions of acres of cropland. 
Should the Corn Belt suffer a weather event that reduces the harvest, 
there will be regional shortages of feed.
    Some weather experts are forecasting an earlier-than-usual frost 
for some parts of the corn growing regions, including the Eastern Corn 
Belt, something farmers don't need after being hampered by a cold, wet 
spring and extreme heat over the summer. In a Sept. 1 report, Jack 
Scoville, an analyst with Price Futures Group in Chicago, said: ``Corn 
losses are certain this year from the hot and dry weather seen in July 
and the poor spring weather that hurt planting.''

Corn Yields and Weather
    The advent of hybrid corn varieties has revolutionized corn 
production in the United States and has supported the profitable growth 
in feed grain-using sectors such as the pork industry. Yield increases 
have been strong and give many indications that they will continue, and 
some of the yield growth appears to be directly attributable to greater 
drought tolerance or resilience. But the empirical evidence is mixed on 
this matter, and it may be just as plausible that the sustained growth 
in yields since the mid-1990s has as much to do with favorable growing 
conditions as it does with corn genetics. University of Illinois 
agriculture economists Darrel Good and Scott Irwin in a recent analysis 
said that a significant portion of the sustained growth in yields may 
be because of better-than-average growing conditions or because there 
simply has been too little variability in weather since the 1990s to 
effectively test the hypothesis that the newer corn genetics have 
created effectively greater drought and bad weather tolerance.
    Looking at the long record of corn data, it is clear that yields 
and total production could be highly vulnerable to severe and 
widespread drought. In fact, yield decreases from recent trends would 
not even need to be as large as they were in 1988 to cause major 
disruptions for the livestock and poultry industries. A yield decrease 
of only ten percent would be very disruptive not only to those 
industries but to export markets and other corn consumers--other than 
the ethanol industry. And, as estimated by Irwin and Good, a poor 
weather scenario, with a 1-in-10 chance of occurrence, would result in 
a yield reduction of about 14 percent, with corn use by livestock 
dropping more than 16 percent and corn prices rising in excess of $6.44 
a bushel, possibly higher than $7 per bushel.

Other Factors to Consider
    Another factor that could affect U.S. feed-grain supplies is a 
major corn purchase by another country. According to the U.S. Grains 
Council, China's corn reserves are 10 million to 12 million metric tons 
lower than previously estimated, and it is expected to import an 
additional 2 million to 3 million metric tons before the end of the 
current crop year. Such a major purchase would make tight U.S. supplies 
even tighter.
    Changes in the cost structure of the U.S. pork industry and other 
factors have affected pork producers' ability to adapt to shocks to the 
feed grain supply. Modern confinement buildings, which have enabled so 
much progress in achieving economies of scale and in using inputs and 
energy more efficiently, have added greatly to the pork sector's fixed 
costs even while allowing producers to reduce their variable costs. It 
is now far more difficult for a pork producer to temporarily cut back 
on production given the need to continue to make payments on those 
fixed assets. Furthermore, production systems do not allow producers to 
shift animals quickly out of production. So while poultry producers may 
be able to adjust their supply in a matter of a few months in response 
to sustained higher corn prices and beef producers can move cattle to 
relatively more forages and pasture, pork producers have a more or less 
fixed supply of pigs for 9 months, unless pregnant sows are slaughtered 
or baby pigs are euthanized. But, as noted above, the ethical and 
humane treatment of animals requires that producers maintain care even 
if producers are losing money, and the result is huge equity losses in 
pork operations that could lead to widespread bankruptcies and major 
disruptions in pork supply and prices.
    In addition to the challenges of higher input costs, the dramatic 
increase in price risk and market volatility have made historic risk 
management tools less effective and more expensive. Changing grain 
demands and higher transportation costs have increased basis levels and 
basis risk. When using hedges to offset actual grain price risk, 
producers are facing significant margin calls as prices have moved far 
beyond their historic normal ranges. These margin calls have, in turn, 
added to short-term credit issues with lenders. In addition, the 
capital needed simply to fund the increased cost of producing a pig has 
increased by more than 50 percent, resulting in significantly greater 
working capital requirements.
    [As an aside, under the Dodd-Frank Wall Street and Consumer 
Protection Act, livestock and poultry producers using hedges to lock in 
feed grain prices could be regulated as swap dealers. This will only 
make it more difficult for producers to manage their risks. Another 
risk-management tool currently used by producers also is in jeopardy. 
USDA has proposed a regulation that could limit livestock and poultry 
marketing contracts, which allow producers to lock in prices for their 
animals. The GIPSA rule, if approved as proposed, would devastate the 
livestock and poultry industries.]
    The increased need for capital comes at a time when there exists a 
serious credit crunch in the United States. The government's response 
has been to provide funding for the nation's largest banks, most of 
which have little or no presence in agriculture. Most of the banks that 
were provided Federal Troubled Asset Relief Program (TARP) funds and 
that are lenders to the swine industry appear to be interested in 
reducing their exposure in agriculture and in middle-market credits 
(which comprise the majority of livestock businesses).
    In a business environment where input price risk is dramatically 
increased for the foreseeable future and where U.S. lenders have a 
significantly smaller appetite for production agriculture and middle-
market credits, the amount of capital available to the U.S. pork 
industry will be less and will only be obtained at a higher cost. Some 
producers have been unable to finance and sustain their operations, 
with the result being many otherwise profitable and highly performing 
producers exiting the business. For those producers who have been able 
to maintain the necessary levels of equity to stay in business, this 
will dampen their ability to invest in the next generation of genetics, 
technology and other improvements necessary to maintain the U.S. pork 
industry's world leadership position.
    U.S. agriculture has provided significant benefits to this country 
and the world. It is often noted that because of the productivity of 
the U.S. farmer and food system, Americans pay on average less than ten 
percent of their personal income on food. Hidden in this average is the 
fact that the working poor, the lowest 20 percent in personal income, 
pay more than 30 percent of their annual incomes for food. The food 
price increases that already have occurred are falling 
disproportionately on them. As lower-income people adjust their diets 
to reduce meat consumption, less healthy substitutes such as low-cost 
starches and carbohydrates likely will fill the place previously 
occupied by meat on the dinner plate, raising the specter of reduced 
health and increased health care costs.

Conclusion
    The U.S. pork industry is the lowest-cost producer and No. 1 
exporter of pork in the world, and U.S. pork producers continue to 
produce the most abundant, safest, most nutritious pork in the world. 
They have proved very resilient, most recently weathering financial 
crises in 1998-1999 and 2007-2009 as well as the vagaries of a free 
market economy, all while investing in and adopting new technologies 
that have promoted animal health, protected the environment and added 
thousands of jobs and billions in national income to the American 
economy.
    But the rapid development of the corn-based ethanol industry--
prompted mostly by Federal subsidies and policy mandates--coupled with 
weather issues and economic conditions, have created challenges for 
pork producers. The potential long-term impacts have threatened the 
U.S. pork industry's competitiveness and the survivability of 
producers. The markets have rationalized demand for corn over time, but 
the potential for short-term dramatic price swings, as well as 
localized feed shortages, is jeopardizing the industry's 
competitiveness and reliability as a domestic food supplier and as an 
exporter.
    Should the U.S. pork industry--and the beef and poultry industries 
as well--need to contract more than it has over the past few years, not 
only will consumers around the globe be affected through higher retail 
prices, but corn growers no doubt also would feel the effects of the 
corresponding drop in feed demand.
    NPPC has asked USDA to address potential feed-grain shortages, 
requesting that non-environmentally sensitive farm acres enrolled in 
the Conservation Reserve Program be released early and without penalty 
so that they may be planted to crops. Additionally, it asked the agency 
to consider allowing farmers to plant crops after they have received 
``prevented-planting'' insurance payments. It also has requested that a 
contingency plan be developed should corn demand exceed supply. USDA 
has yet to take action to address the potential feed-grain crisis.
    NPPC asks that Congress consider all policy options to help address 
and mitigate some of the unintended consequences of the transition to 
greater reliance on domestic renewable energy sources, including:

   Requiring the ethanol industry to bear some of the same 
        risks that pork producers and other corn users bear from market 
        supply and price shocks. It is bad public policy to force users 
        of corn except the ethanol industry to bear almost 100 percent 
        of the rationing that must occur if there is a short corn crop. 
        Policies are needed that require the ethanol industry to share 
        directly in this supply risk beyond simply the increase in 
        prices paid for the raw material. With government mandates in 
        the form of the RFS, the increase in ethanol feedstock costs 
        can be passed on to consumers, but that is not possible for the 
        U.S. pork industry.

    [Such a policy would be for dealing with relatively extreme market 
        conditions, where corn is in relatively short supply and price 
        increases are substantial if not at near-historic levels. The 
        policy would simply lead to a greater sharing of the rationing 
        in corn use among all users. Returns to corn producers with a 
        crop to market in these circumstances would remain very 
        substantial.]

   Providing relief to U.S. livestock and poultry producers for 
        losses suffered because of high grain prices that were prompted 
        by severe weather conditions or other natural disasters. Even 
        with policy changes designed to reduce the inflexibility in 
        ethanol's demand for corn, pork producers and other corn users 
        still will bear a disproportionate share of the corn supply 
        risks associated with weather and other forces. Pork producers 
        and consumers (especially lower-income consumers) are also 
        bearing a disproportionate share of the societal costs of 
        helping to transition to less reliance on imported fossil 
        fuels.

   Adopting mechanisms that would fairly and smoothly 
        transition the ethanol industry to full reliance on the private 
        marketplace for its supply signals and away from the signals 
        provided by the public sector through the RFS, the VEETC and 
        the ethanol import tariff. While such public-sector mechanisms 
        may have been essential during its initial phases in the late 
        1970s, the ethanol industry now is a mature industry.

    The Chairman. Thank you, Mr. Spronk.
    The chair would like to remind Members that they will be 
recognized for questioning in order of seniority for Members 
who were here at the start of hearing. After that, Members will 
be recognized in order of their arrival. I appreciate Members' 
understanding. In the interest of time, I will reserve my 
questions until other Members of the Subcommittee have had a 
chance to ask theirs.
    I now recognize Mr. Cardoza.
    Mr. Cardoza. Thank you, Mr. Chairman.
    Mr. Greene, with the huge increases in the costs of corn in 
just the last year, how do companies plan to survive these cost 
increases, and can the cost of chicken and turkey go up enough 
to cover the costs? 
    Mr. Greene. Thank you.
    It is going to be very difficult for many companies to 
survive this next year with these higher grain prices. I 
imagine the smaller under-capitalized companies won't survive, 
they won't be able to. We already see negative equity coming 
out of dairies, we see negative equity in the poultry industry 
with many of the poultry companies, and we see a tight lending 
environment. So those things all appear to be coming together 
in a way that makes it very difficult for many producers to 
survive.
    I think, in addition, as far as increased costs, the 
poultry industry has been producing chicken on average at 
5 cents to 15 cents per pound below cost this past year. So if 
you were to put that into--if you were to just gain that, you 
were almost looking at a 15 percent increase in poultry prices 
coming forward this next year, and that would be to just bring 
it back to even, not to moving it forward. So our expectation 
would be that significant food inflation is on its way.
    Mr. Cardoza. Dr. Erba, in your testimony you discussed 
western-style dairying and its inherent vulnerability to feed 
scarcities and, therefore, fluctuating prices. Do you think it 
is even possible that California dairymen could or should 
consider other business models? And is it practical or 
economical to ask them to do so?
    Dr. Erba. I think it is very unlikely. I think the model 
that has been built has been established decades ago. That 
change may come. It will not come easily, it will not come 
quickly. I think with the availability of land, high-priced 
land, the availability of water, these are issues that are just 
simply insurmountable. If anything, we will see a contraction 
of the California dairy industry.
    Mr. Cardoza. Yes. When we already have 20 percent 
unemployment in those regions, you reduce the poultry and dairy 
production in those areas, unemployment will be even higher.
    Mr. Chairman, I am going to yield back my time in 
recognition of the fact that we do have votes coming up.
    The Chairman. Thank you, Mr. Cardoza.
    Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    A couple of you mentioned DDGs, what percent of DDGs can be 
used in feed rationing for the different groups that are 
represented here, livestock and poultry? Is there a mix when 
you are looking at that of how much DDGs you can use? 
    Mr. Seger. Well, just speaking for the turkey industry and 
our operation----
    Mr. Neugebauer. Push your button there, please.
    Mr. Seger. I am sorry, I thought I did.
    For the turkey industry it is fairly low, as we are using 
around five percent right now. So that is all that is available 
to us nutritionally.
    Mr. Neugebauer. Just as a follow-up, I want to go--what 
would the ration be for corn? What percentage of your ration 
would be corn?
    Mr. Seger. Corn?
    Mr. Neugebauer. Yes.
    Mr. Seger. Corn is 50 percent of the ration.
    Mr. Neugebauer. So----
    Mr. Seger. Soybean meal is 20 percent.
    Mr. Neugebauer. So when you don't have corn, the DDGs don't 
really provide much of a substitute----
    Mr. Seger. For the turkeys it does not create any type of 
significant opportunity for us.
    Mr. Neugebauer. Dr. Meyer.
    Dr. Meyer. For beef cattle, DDGs are by far better feed for 
beef cattle than any other species. The content of low-quality 
protein and a lot of soluble fiber is very easily used by 
ruminants, so it fits in the feedlot applications, it fits into 
cow/calf operations. Probably the beef industry is the industry 
that can use them best.
    There has been one thing about it is a lot of the cattle 
aren't where the DDGs are, though, so you have substantial 
transportation costs in many cases on that.
    There has been some growth of beef feedlot business back 
into Iowa and southern Minnesota, and that is probably going to 
continue to grow some. It is not by any means going to displace 
the southern Plains as the beef cattle-feeding area, but 
probably this product fits the beef industry better than any 
others.
    Mr. Neugebauer. So in the pricing structure of the DDGs, 
are they priced appropriately as a substitute when you are 
looking at the future ration?
    Dr. Meyer. Yes, the price of DDGs over the long run is 
based off the price of corn. There is some fluctuation. It runs 
on an equal volume basis between \8/10\ and \9/10\ of the price 
of corn. At one time when DDGs were in less supply, in the 
wintertime, we would price DDGs out of the diets of other 
species because they are such good cattle feed. Basically cow/
calf operations and feedlots would drive up the price of DDGs 
relative to corn and price them away from everyone else. That 
hasn't happened the last 3 years, and I don't think it will 
happen because we have plenty of DDGs available, and they will 
priced relative to the value of corn.
    Did you want to----
    Mr. Greene. I would make a comment because I bring in large 
trainloads of DDGs at times in the California market for the 
dairy industry and for the poultry industry. And it is a good 
feed for the dairymen, and they use quite a bit of it.
    For the poultry industry we can use a small amount. But we 
don't really see that as a replacement for corn so much as a 
replacement for soybean meal. It is not a high-energy product. 
All the energy has been pulled out that you would get out of 
the corn, which is typically what you are buying that for. It 
is really more of a protein. You can only put it in at a small 
levels, but you can use it. If it is priced right, it will 
move. For the dairymen, they do like that product.
    Mr. Neugebauer. Who is our pork guy?
    Mr. Spronk. For the swine industry actually the limiting 
factor has actually been from the packer side of it. I have 
sold to three different packers in the Upper Midwest, and they 
are actually limiting the amount of DDGs that I can put in my 
rations due to harmful characteristics that happen with the 
meat quality. So we are going to be limited to 20 percent, and 
so from then on we would need to use corn. So it is from a 
quality standpoint that we have been limited.
    Mr. Neugebauer. Dr. Erba, did you want to----
    Dr. Erba. Yes. I wanted to follow up on Mr. Greene's 
comment on using DDGs as a dairy--dairy rations. It can be used 
sparingly, but it has to be supplemented on both the starches 
which are removed, which are very important for the quality of 
milk, and also be supplemented for energy. So it is a 
substitute, but I consider it to be a lower-quality substitute 
that corn itself.
    Mr. Neugebauer. I want to talk about availability. In 
Texas, we have had a huge drought, and we have folks thinning 
their herds, and their feed supply is diminished substantially. 
We are going into the wintertime. What are you hearing about 
hay availability? I am not hearing good things about hay 
availability. And the price, it seems to--people are trying to 
decide whether to hold gold or hay right now, and some people 
are saying hay may be a better investment.
    Dr. Meyer. It is not as easily stored.
    Mr. Neugebauer. Good answer.
    Dr. Meyer. Yes. Hay availability is going to be an issue. I 
grew up in Oklahoma and have relatives that live there and lots 
of friends in Texas. One friend told me last week, he said, 
``Well, we have already used this winter's hay supply to get 
them through the summer.'' That is probably a little bit of an 
overstatement, but not much.
    And so we are going to see haystocks get very tight through 
the end of the year. You have already seen hay prices go up 
dramatically during the summer months. That is one of those 
weather-induced kind of things that I fear is going to happen--
the same kind of thing could happen to corn if we get a short 
crop at some point, given this usage base that we have built 
and the fact that a user of--the largest user of that corn 
doesn't really have any flexibility.
    Mr. Neugebauer. Thank you.
    The Chairman. Thank you, Mr. Neugebauer.
    The gentleman from California, Mr. Costa, who is also not a 
Member of this Subcommittee, has joined us today. I have 
consulted with Ranking Member Cardoza, and, without objection, 
we are pleased to welcome him and to join in the questioning of 
witnesses when his turn comes around. Welcome.
    Now we will proceed to Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    You know, I represent Georgia, and in my state is the 
leading poultry-producing region in the whole world, not to 
just mention the United States. The poultry industry is by far 
the largest contributor to Georgia's agriculture economy, and 
agriculture is the biggest part of our state's economy. So 
anything that affects the health of the poultry industry is 
very dear to me and certainly needs to be examined very 
closely, and especially the issue of the feed prices and the 
competition with corn and ethanol.
    So I am pleased, very pleased, to see and have with us Mr. 
Michael Welch, who is the CEO and President of the Harrison 
Poultry Company from Bethlehem, Georgia. I certainly want to 
welcome him, and certainly appreciate having his perspectives 
on the poultry industry and this particular issue and its 
impact on Georgia and throughout our nation.
    And with that, Mr. Chairman, I also would like to seek 
unanimous consent to enter into the record an article that we 
have here from the Atlanta Journal-Constitution of last week, 
which is entitled, Higher Corn Prices Pluck Georgia's Poultry 
Farmers. I would like that entered into the record.
    The Chairman. Without objection, so ordered.
    Mr. Scott. Thank you very much, Mr. Chairman.
    [The document referred to is located on p. 67.]
    Mr. Scott. Mr. Chairman, I was contacted back in February 
by Mr. Mike Giles, who heads up the Georgia Poultry Federation. 
And also, Mr. Welch, Mr. Giles asked me to say hello to you as 
well. I let him know you were here. But back in February, Mr. 
Giles told my staff and I that the University of Georgia's 
economist predicted that Georgia's poultry farmers will pay an 
extra $454 million above and beyond their normal costs in 2011 
alone just for corn due to the price increase between 2009 and 
early 2011. And unfortunately, as we all know, the price of 
corn has risen even more since then.
    So, Mr. Welch, I would like to start with you. Can you tell 
the Committee how much extra money you have had to spend this 
year for fuel, for feed, and what changes, if any, have you had 
to make to your operation in order to free up that extra cash?
    Mr. Welch. Representative Scott, thank you for the 
question. At our company I guess we haven't calculated it, but 
it would be easy to calculate. If we use approximately 7 
million bushels of corn a year, and we are a small company, 
multiply that times whatever you call the price increase of 
corn, whether it was--as stated earlier by one of the 
witnesses, a few years ago it was $2, and now it is almost $8, 
or if it was last year's price in the $4. And so take any 
dollar number you want and multiply it times seven million and 
that becomes the increased cost to us, and that is just on the 
corn side.
    So if you pick a number of 3 million--$3 or $4 a bushel 
increase, you would have $20 million to $30 million that it has 
just affected us as a small company.
    Industry-wide it has been studied and said that, since 
2006, it has raised the price of the entire industry $22 
billion or something like that. And so it is a significant 
number, and that is just the corn alone.
    Any grain affects the price of any other grain, and so the 
soybean used in our production, all of the energy we purchase 
to run all of our trucks to deliver the feed, and pick up the 
chickens, and haul the product to the dressed markets are all 
critically impacted by this as well.
    Mr. Scott. Let me ask you, it would be very helpful for us 
to know, at what corn price would it have to be for you to 
consider simply closing up your business?
    Mr. Welch. Well, the price is there now if the exact same 
circumstances happen over for an elongated period of time. One 
of the colleagues here said earlier, I think it was Mr. Greene, 
that maybe 15 percent. We think that poultry prices are going 
to raise 20 to 25 percent to get to a level of break-even or 
slight profitability, which that in and of itself, besides if 
the industry is able to right itself, provides a tremendous tax 
on the consumer, the user of product. It is a latent tax based 
primarily on the government policy.
    Mr. Scott. I would like to see if we could get a price on 
that, what that price would be before firms like yours and 
others would just simply have to close the door.
    Let me ask you, Dr. Meyer, you are an economist on that. 
You have heard what Mr. Welch has said. In your own opinion, 
what corn price would it be, do you think, that would make a 
profit-obtaining poultry operation unattainable? When do you 
predict we might get to that point?
    Dr. Meyer. Well, I am not terribly familiar with the 
specific economics of the chicken operation. I can tell you 
this, that the corn price is already unprofitable given the 
price situation and the price situation in the poultry 
business, and it has been since last fall. This industry has 
been making major cutbacks in egg sets and chick placements 
since the early summer months to try to reduce supplies and 
push prices up.
    You know, one thing we always need to remember is these are 
commodity businesses. We don't get to go out and tell people 
what the price is going to be. We have to adjust our supply in 
order to get prices there, and you have seen reductions in all 
of these species. You are going to see major reductions in the 
beef industry over the next year and a half in order to push 
prices higher to cover costs of production. In the case of 
chickens, they are already below break-even, so I could argue 
that the corn price is already too high for them. In the case 
of pork, we have had some profits this year, but this corn 
price, where it is right now in my models, has losses projected 
for the next year.
    The beef cattle industry is a little more flexible than 
that because we can feed roughages. You have sectors of the 
beef industry that don't use very much grain, those that are 
very grass based, but the feedlot industry has seen their 
average cost of production go up 20 percent in the last 2 
years, and so that has to be covered. And I can tell you that 
some of those cattle are coming out at losses now as well.
    So it all--it changes not weekly, but very frequently, but 
there are some of these businesses already seeing corn prices 
that are too high to be sustainable.
    Mr. Seger. Congressman Scott, if I could weigh in on the 
answer to that question, I think a good testament to that is 
what has happened in the broiler industry just in the last 3 
years where three major companies have filed bankruptcy, and 22 
percent of the equity of the broiler industry is now foreign 
owned because of that. So the answer to the question is we are 
already there for a certain sector.
    Mr. Scott. Thank you very much. Very good information. 
Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Mr. Scott.
    Mr. Gibson.
    Mr. Gibson. Thanks, Mr. Chairman, and to our panelists.
    I will keep this very brief. I want to associate myself 
with the remarks of the panelists and would just urge that we 
take action consequent to what we are hearing and certainly 
what we are all hearing back home among our farmers. I look 
forward to--hope this is a bipartisan effort to do so and yield 
back.
    The Chairman. Thank you, Mr. Gibson.
    Mr. Boswell.
    Mr. Boswell. Well, thank you, Mr. Chairman, and thank you 
for holding this hearing. It comes at a unique place for me. I 
am on both sides of the issue. I am a livestock producer and 
over the years have raised a lot of corn, and I was still in 
uniform when we had the first fuel crisis. Some of you have 
heard that story and witness what people just like us in this 
room do when they can't get fuel, and I realized back in those 
days, that was the early 1970s, that we were in kind of a 
bondage to OPEC. I have tried pretty hard to be part of trying 
to get out of that and think of things we can renew and grow 
out of the ground and turn into fuel and so on. I have been 
involved in that for a number of years.
    I think we are going to have a vote here in a little bit. I 
will try to get to the point here. I don't feel personally that 
I have tried to be on both sides of it. We have a livestock 
operation and raised a lot of corn. When I was drafted and went 
off to the Army, my dad was getting basically $2 corn. Some of 
you remember that. Guess what it was when I came back? Still $2 
corn.
    I don't know, how many years did we subsidize corn so that 
folks in the commodity side of it on food packaging made a 
profit? Quite a long time. That information is there, too. I 
still think it is somewhere around--the percentage of the cost 
of food ingredient that goes to the farmers is like 19 percent 
or less. And so I have listened to producers, and I have been 
part of it, complaining about not having any parts of the 
value-added side of it for years, years, years. Then, along 
came the prospect of renewable fuels and a chance to do that, 
ethanol, and here was a chance to do it, and science has not 
gone as far as it can possibly go.
    Then we learned what to do with the distilled grain. We 
find out that it is good feed. Yes, it costs to transport it, 
but maybe some of those transportation costs or some of those 
livestock operations would come to where the grain is, help 
something, or where the ethanol plant is.
    So, we have to think carefully what we are thinking about 
doing here. I have a long memory about what happened when I 
watched what people were doing when they couldn't get fuel for 
their car or their delivery truck, good people, and it is a 
serious situation. We don't want to go there. So we ought to 
have this dialogue.
    I don't think that ethanol is causing the problem. I 
haven't seen how it is yet. You know, 12.5 billion bushels of 
corn this year, that is probably the third--some said, I think 
you said, the third largest in our history. I am not so sure it 
is the problem, and I would like to hear from you, if I could, 
what data leads you to claim that the high prices are directly 
tied to ethanol consumption and not market speculation. I would 
like to hear any of you speak to me about that if you would, 
please.
    Mr. Greene. Well, I guess I would say that I think it is 
tied to both market speculation and to ethanol, and you can 
draw that conclusion when you look and you say, as you did, 
that the price of corn was $2, $1.80 to $2.50, for this period 
of time, maybe 20 years or so. Yields improved during that 
period of time, but that seemed to be the stable price.
    We introduced the ethanol program in 2006, and we took that 
$2 to $2.50 corn, and we now have a corn market that last year, 
a year ago was $4. We are now at a $6 to $7 market, and as I 
stated in my testimony, if you do the numbers, the math on 
that, that is effectively a $60 billion cost to the public for 
this upcoming year. So when we think about that $6 billion 
subsidy, the real cost is $60 billion more, and I do that by 
taking this $5 spread, $2 to $7, taking that $5 times the 13 
billion bushels, and I get to a number like that.
    Because we haven't controlled the speculative interests as 
well as we should have, and that money, much of it, leaves this 
country, I think the speculator has jumped on to the ethanol 
program now that we have made corn part of the energy process, 
and he is in there playing. So since ethanol is mandated, what 
we have done is we have actually made--we have made a product 
within the corn sector that is willing to pay and will pay any 
price for corn. It is not constrained because the mandate says 
you must use it. So it doesn't matter if the price of corn is 
$5, $10, $20 a bushel, you still have to use corn for ethanol. 
You don't have to use it for feeding livestock.
    So what we are seeing, if you look at the latest USDA 
report, the latest USDA report shows that ethanol moves ahead 
of feeding livestock. The reductions the USDA made in this 
week's report were reductions in livestock feeding, reductions 
in exports, and only very slight reduction in ethanol. So what 
we have done because of the mandate is we have created a 
situation where one component of the corn demand sector has a 
demand, and a growing demand, mandated by the government and 
insensitive or not sensitive to any prices whatsoever.
    Mr. Seger. And I think, if I could add to that----
    Mr. Boswell. Just a moment. My time is about up, and I know 
the Chairman is going to--it is already up. I am sorry.
    Well, if I could close, Mr. Chairman, if I could, just this 
comment. I respect your being here and presenting to us, and we 
need to have this dialogue, but I am not convinced that there 
are facts before us that ethanol is the cause of this. I think 
there are many, many other factors, and this process, Mr. 
Chairman, will probably bring that out and will give us a 
chance to decide what we need to do. And I thank you for the 
time and yield back.
    The Chairman. Mr. Boswell--Mr. Seger, were you answering, 
were you going to address----
    Mr. Seger. Yes, just as another aside to his question on 
how do we know that it is a real market as opposed to 
speculation. I can tell you from a local basis level on what 
procurement people pay for corn, for example, this year in our 
area where normally the local basis might be 40 cents under a 
December board price, this year we are 10 cents under and 
really can't buy the local corn. So that tells me that the 
local corn just isn't there. Irregardless of what Chicago is 
bidding up on a board price, locally it is just not there in 
any type of quantity that it used to be.
    Dr. Meyer. Mr. Chairman, may I respond to Congressman 
Boswell?
    The Chairman. Please do.
    Dr. Meyer. Thank you.
    Congressman Boswell, I guess I would refer you first to 
Figure 1 in my written testimony. If you look at that, the 
usage of corn for feed and residual is lower than it has been--
is lower now than it was 5, 10 years ago. If you look, non-
ethanol food and industrial usage is roughly the same. Exports 
goes up and down, but generally on a level playing field as 
well.
    The only one of the four major uses of corn that has gone 
up is ethanol, and it has gone up eightfold, and 75 percent of 
that in the last 5 years. At the same time, the corn crop has 
gone up, but not nearly by the amount of these usages.
    Now, given all the others are the same, we have more corn 
to work with, and ethanol is the one that has gone up by a 
factor of eight, who is driving the market? I mean, I don't 
think there is any question that it is ethanol.
    Now, does speculation play a part of it? It certainly did 
in 2008 and 2009, but speculators like the market to go up and 
down, and if we look at the market this year, it has just gone 
up and stayed up. It is not a speculator's playground other 
than day trading, which is always going on.
    And so I would happen to agree. I think we need to put 
tighter limits on speculative positions. Hedging against 
inflation, you should be having--if you are going to be counted 
as a hedger and thus be exempt from limitation, position 
limits, you should be hedging against the commodity in 
question, not against some general inflation or moving the 
economy.
    But still I don't think there is any question that ethanol 
has been the driver here, and the real question is what happens 
when we don't have enough corn, and are we going to allow and 
require ethanol to participate in the rationing? That is my 
biggest fear is that one of these years we are not going to 
have it, and you remember 1983 and 1988 in Iowa, it was pretty 
ugly. If we hit one of those, given our policy at the present 
time, it is going to be a very, very bad situation.
    The Chairman. Thank you.
    Just for information, we have been called for a vote. We 
are going to try to not go into recess. I am going to try to be 
substituted by Mr. King. I know Mr. Ribble and Mr. Costa are 
awaiting questioning, so I am going to yield to Mr. Ribble for 
his questions, and hopefully Mr. King returns in time so we 
don't have to go into recess and come back.
    Mr. Ribble.
    Mr. Ribble. Thank you, Mr. Chairman, I will be very brief.
    My question is specifically for Dr. Erba. Welcome. I am 
from Wisconsin, where we have happy cows. My question 
specifically, so we can get right to it, what changes would you 
suggest to our current ethanol policy with respect to the food 
versus fuel debate, and do you believe that we need to look 
more broadly even at the Renewable Fuel Standard as well?
    Dr. Erba. I think so. I think these gentlemen who have 
joined me today have outlined some very good programs which 
would mirror what we would suggest in the dairy industry, and 
that is a good, hard look at the ethanol policy in the U.S., 
the RFS, all of us have mentioned in one form or another, as 
being a driver behind it. Even if you address the tax credits 
and the tariffs, you still have the RFS, which drives 
everything. If you don't address that, you may not really solve 
anything at all. So, it has to start there. There may be more 
comprehensive programs as well, but I think that is the low-
hanging fruit that is before us right now.
    Mr. Ribble. Okay. Thank you very much.
    We have been called for votes. Mr. Chairman, I will go 
ahead and yield back the remainder of my time.
    The Chairman. Thank you, Mr. Ribble.
    I will go ahead and ask a question to try to give Mr. King 
enough time to get back here. It has been touched on a bit, but 
I think that it is important for me to ask this on behalf of my 
constituents, that I think it is important for all of us to 
consider that this is not a problem that is felt uniformly 
across the country or by all livestock producers in the same 
way. Florida, like Mr. Cardoza's California, and New England, 
is a feed-deficit region. My constituents feel a particular 
vulnerability during our current feed availability conditions. 
Mr. Greene and/or Dr. Erba, can you please shed some light on 
the additional challenges that folks in our part of the nation 
have to wrestle with today?
    Mr. Greene. Thank you. I will be glad to.
    In these feed deficit areas, it becomes difficult to manage 
the supply chain when our supply chain is not hours or even a 
day or 2. We have to manage a supply chain that deals with rail 
logistics, which often can be challenging; weather, as far as 
weather getting in the wintertime in particular. So that supply 
chain for us runs approximately 10 days, can run 8-12, and to 
manage around that we have to spend capital for increased 
storage infrastructure. We rely upon other people to store. We 
bring in trainloads of 100 rail cars at a time to help manage 
that supply. So it is much more capital-intensive when you 
bring in 100 rail cars instead of 25 or 5, as many other people 
do, so it is very much a challenge.
    When we get into a period of time like we have this year, I 
would say, the feed companies in California have done a great 
job in making sure that the customers were able to have a 
pretty reliable supply chain, but I would tell you behind the 
scenes, we put grain in storage in the Midwest. We have never 
done that before. We put grain in storage in other terminals 
throughout California, which we typically do not do during the 
summer months. We brought in and used wheat at a level that we 
have never used before. We have--and even with all those 
actions, we have multiple facilities, we found it necessary for 
both corn and soybeans to truck between facilities to make sure 
that the supplies are where they need it when they need it. So 
it has been very much of a challenge, and I expect with short 
crops and short supply chains, those challenges will do nothing 
but increase over time.
    The Chairman. Thank you, Mr. Greene.
    Mr. King. This is what happens when you have a rookie 
Chairman, but we are doing our best. Mr. King, thank you.
    Mr. King [presiding.] Thank you, Mr. Chairman. I ran back 
from voting here, and I do appreciate the testimony from all 
the witnesses, and I had a brain full of things when I ran over 
there. Now I will see if I can recover some of that now.
    I just want to reflect that, as I listen to the testimony, 
I am hearing from different perspectives, whether it be from 
hogs or cattle or dairy or turkeys, and I happen to live in the 
middle of a lot of this, as you all know. And I know I was 
asked up here am I for feed or fuel, and I said both. And I 
happen to represent the district that is number one in pork, 
that is number one in eggs, it is number one in renewable 
energy of all kinds, and I have lived through the farm crisis 
when your land values were dropping so fast, you couldn't sell 
it fast enough to get rid of it. I watched as people's hope and 
opportunity dimmed and the sparkle that was in their eyes, and 
I watched it destroy some people's lives along the way. We have 
recovered from that. We have come back.
    The ideas on ethanol took place in the 1970s, the 
foundation from it, really building the network, followed 
through in the 1980s during the farm crisis years. One of the 
things that I have seen in the cycle, when things are bad, when 
things are hard, you start to generate new ideas to try to 
solve that situation. Ethanol was one of those. So when I hear 
kind of a broadside against ethanol from each of you, from each 
of your perspectives, I wonder if you have actually stepped 
back and looked at this.
    And I would make this point, that the real question that is 
before us is not specifically how does it--how does ethanol 
affect feed prices for poultry or hogs or cattle, any of the 
other feed sources that might be out there, but we are really 
dealing with an equation here that is the global equation of 
energy and food. What is the cost of that production, what are 
the market forces that move that, and what are the subsidies 
and government incentives that adjust those market forces which 
turn out to be more or less supply depending on how the 
producers and the consumers react to that? That is the 
equation.
    So I don't want to posture myself as I am in here looking 
at it through a particular lens, and I don't think any of you 
have proposed it in that way, but I would just take you back to 
something, I am just here kind of doodling and dusting off a 
memory, and that would be in the year 2009, we produced 13.1 
billion bushels of corn, and of that we exported 2.5 billion 
bushels. That is more than we had ever exported before. We 
converted 3.1 billion bushels into ethanol, and of that you 
have to add half of that back in as feed value, and so we ended 
up with 9.1 billion bushels of corn available for domestic 
consumption in that year, from the crop year 2009.
    And so I thought, okay, what then would be the corn 
available for domestic consumption in the years prior to that 
in the decade, which would be clearly representative, and that 
number comes up to be 7.5 billion bushels would be the average 
available for domestic consumption.
    So we saw more domestic consumption, more bushels of corn 
available to the tune of 1.6 billion more bushels available 
than the average of the previous years in that 2009 year.
    I know I picked the best year we have had for corn, but we 
have still seen high market prices, we have--and I am watching 
as each industry goes through its own pains. I recall some 
numbers that we saw that showed that food prices went up 4.6 
percent, and that was pointed to as food versus fuel, that 
ethanol had brought that about, but energy prices in the same 
period went up over 18 percent. And so about 24 percent of the 
gallons of fuel that go through the nozzle into a gas-burning 
car in America of the domestic--of a domestic source are 
ethanol.
    So that tells you a little bit about some of this bigger 
equation that we have. And I understand that--one of the 
gentlemen mentioned that we exported 350 million bushels of 
corn through the course of the 1 million gallons of ethanol 
that we exported. That was the gentleman from Georgia Mr. 
Welch. And so are you also concerned about the corn that we 
export from our domestic market, Mr. Welch? Because that 
competes also with your feed supply.
    Mr. Welch. Yes, United States, you are very correct, 
exports corn also. The U.S. exports a lot of chicken, and as 
one of the Secretary of Agricultures used to say, chicken is 
merely condensed corn. And so the question becomes is it 
exporting food, is it exporting fuel? What are the 
ramifications thereof?
    The interesting--just on Labor Day weekend, in The Wall 
Street Journal, the Chairman of Nestle had come up with an 
article that was written about, and the title was Can the World 
Still Feed Itself? And the thing it said that people do not 
understand between the food market and energy market, there is 
a close link. That link is the calorie. And so if you take 
calories in whatever form to feed people or to fuel our cars or 
the balance in between, your mathematics are correct as to the 
crop has increased.
    I would disagree somewhat with the dried distillers grains 
is going back as a feed. The others commented, I know, in the 
chicken industry DDGs don't work very well and for a variety of 
reasons. Some of it is the logistics, the moving the material 
and so on. Others is just the nutritional value.
    The nutritional value, when the computer least-costs the 
feed, and you offer it DDGs, are they priced appropriately? 
Well, the marketplace has decided the price, so apparently we 
don't discount what the marketplace says. Apparently enough 
DDGs are exported that it works better out of the country than 
it does in the country, and it is removing the energy from the 
feed product. And so what does the chicken industry do if you 
use DDGs? You turn right around and add chicken fat back. You 
pull out energy to turn right around and put the energy right 
back in. It seems somewhat inefficient.
    Mr. King. Well, thank you, Mr. Welch, and you have 
characterized a lot of this correctly in that transportation 
hasn't adjusted itself to the different supply, and producers 
find themselves in places where they are at a disadvantage.
    I am also watching, as Dr. Meyer said, watching some of the 
cattle feeding industry come back into the corn country where 
it can take advantage of the DDGs that are there, and I am 
watching a lot of my neighbors mow and bail the ditches it 
didn't before, and I am watching them feed cornstalks that 
never bailed them before. All of that is an added value. I am 
watching them reduce their corn as a grain ration going into 
cattle. All of that is part of this equation we are talking 
about.
    But I would turn to Dr. Erba, our dairyman here, and ask 
you, you talked also about high grain prices, and we saw raw 
milk prices nearly double over the last 3 years, if I recall. 
And when it was down around $10, what would corn have had to be 
to break even at $10 raw milk prices?
    Dr. Erba. I think free probably would be the answer there. 
You know, corn is a major component of dairy rations, but I 
don't know that you could get the corn price low enough to deal 
with the $10 milk price. There was a time that maybe that was 
possible, but those days are past us now. There would have to 
be an extremely low feed price, not just corn, but all feed 
across the board, to get to anything that looks like a break-
even at $10 milk prices. It is really astronomically under what 
cost production really is.
    Mr. King. So you would agree, I would think, that even 
though grain prices at that time were about what they are now, 
2008 until 2011, milk prices are about double what they were. 
So the grain prices didn't affect the--well, they did affect 
the corn price perhaps, but I guess I would ask you to put that 
into the--or, excuse me, the milk prices were affected to some 
degree by grain prices because you had people get out of the 
industry, but that is the part I didn't hear you say. Is that 
really the substance of it, there is less production now 
because of low prices 3 years ago, and that is why we have 
prices that are up?
    Dr. Erba. Milk production is kind of a funny thing, 
Congressman. It moves up and down. Milk production this year, 
2011, has been some of the best we have had on record, 
particularly in California. We are back to where we were a 
couple years ago in terms of record milk production, and at the 
same time we have record high feed prices, particularly for 
corn.
    So back in 2009, the year you talked about, corn prices, I 
wouldn't say they were low, but they were a heck of a lot lower 
than they are right now. There is an equation here that we have 
become very familiar with in the dairy industry, and that is 
margin. It is not necessarily the price of milk, it is not 
necessarily the price of feed, it is the difference between the 
two, the margin.
    Even though milk prices are very high right now, the margin 
is very small. Even when our milk prices were at tremendous 
levels, as people have already pointed out, we still have 
producers that simply can't make it and are going out of 
business this year.
    Mr. King. Did I hear you in your testimony, though, say 
that almost half of the corn crop goes to ethanol?
    Dr. Erba. That is out of USDA's report. I don't know if it 
is this year or next year, I am not sure which one, but the 
report is that over half the corn crop will go toward ethanol, 
not toward livestock. More of it will go toward ethanol than 
livestock.
    Mr. King. I could calculate that this 2.5 billion bushel 
crop here, there is only going to be 6.25 billion bushels 
available for domestic consumption as opposed to the 9.1 
billion that was available in 2009?
    Dr. Erba. I will take your word for it. I am not that 
familiar with those numbers.
    Mr. King. Let me state that I couldn't calculate that, and 
you know that, but you just have to add back in, again, whether 
it is transportation or not, as Mr. Welch said, half the value 
of that going back in more to Dr. Meyer's feedstock than it is 
to poultry or to pork. But I just thought we should clarify 
that.
    And then I am going to pose this question to Dr. Meyer 
since he is an Iowan, and he knows that I am fair game anyway, 
and I feel him leaning forward here, an opportunity to respond 
to that, and then also asking this question: we saw $2 corn 
here not that long ago, and now we saw corn that was $6.75 this 
morning in Dennison, Iowa, which is the closest market to where 
I live. Was that lower corn price from the decade or a little 
more ago, 2001 and 2002, for example, was that price 
subsidized, and was that part of the reason why it was so low, 
Dr. Meyer?
    Dr. Meyer. In my opinion, absolutely it was. I mean, we 
were paying loan deficiency payments. We had a whole system of 
payments that were going to corn farmers at the time and other 
grain farmers as well, not just corn, and users of corn 
benefited from those subsidies.
    I would point out that producers of corn were not damaged 
by those subsidies, though, and in that case those subsidies 
were offered to make them whole, or we wouldn't have had $2 
corn because they wouldn't have produced as much corn. So in 
that case a subsidy did not damage someone else. It did help 
livestock producers. In the case we are talking about now, 
subsidies are damaging one group while they are helping 
another, Congressman.
    I would also challenge your assertion that half of this 
comes back in as feed. Fifty-six pounds of corn goes into a 
distillery; 17 at best comes out of the distillery as DDGs. 
That is about \1/3\. The data that I see from clients and I 
hear from Dr. Wisner at Iowa State is really it is closer to 15 
pounds that comes out. So it is not that big.
    I would challenge your numbers on feed availability. I have 
calculated them, they are in my testimony. I can provide you 
the numbers that are behind those charts if you would like. I 
think your number is a little high on that.
    So no question about it, it did help the livestock 
industry. I would argue that it did not hurt the corn farmer in 
that case.
    Mr. King. And I would come back to you and rebut the 
statement on--in Iowa, if it is 17 pounds of feed value coming 
back in afterwards, you have 56 pounds to start with, but when 
you put that feed into livestock, you have the \1/3\ that is 
CO2. Does that get converted to anything that has 
value, or does it go into the atmosphere whether you turn it 
into ethanol or whether you feed it to cattle?
    Dr. Meyer. I don't know. The CO2 goes into the 
atmosphere as far as I know, but that doesn't help us at all.
    Mr. King. Right, but it distorts the equation that you have 
delivered to me, because if you start with 56 pounds of corn, 
and if you split it \1/3\, \1/3\, \1/3\, I will go to your 17 
and say that is just a little less than \1/3\ of the 56 pounds. 
If \1/3\ of it is CO2, you lose it anyway, and if 
you have \2/3\ that is left, \1/2\ of \1/3\ is a number just 
very close to 17. So I will say \1/2\ that by weight, \1/2\ 
that by energy, it is a good round number to work with, but it 
is not off by \1/3\.
    Dr. Meyer. Well, we only end up with 17 pounds of feed. I 
don't care what thirds you are talking about.
    Mr. King. Well, I want this record to understand, to know 
that corn is \1/3\, \1/3\, \1/3\. It is \1/3\ starch, \1/3\ 
protein, \1/3\ CO2, and whether the corn is fed to 
livestock, turned into ethanol, the CO2 escapes into 
the atmosphere, and it is not a measurable quantity. When I add 
back in \1/2\ the value of that feed, that discounts the 
CO2, whether it is used as feed or whether it is 
used as ethanol.
    I thank all the witnesses here, and I would yield back the 
balance of my time.
    The Chairman [presiding.] I would like to thank Mr. King 
for bridging the gap there and the witnesses for putting up 
with the vote called in the middle. Hopefully you will 
appreciate that we didn't have to recess and come back, which 
will be better in the end.
    I would like to now yield to Mr. Costa.
    Mr. Costa. Thank you very much, Mr. Chairman, for the 
privilege of sitting in with the Subcommittee. This is an issue 
that I think all of us feel has--that we have an opportunity to 
revisit the policy that was implemented a number of years ago.
    I am one who believes that ethanol in some fashion ought to 
be a part of our future, but I am not so sure that corn-based 
ethanol is our future after looking at the impacts that have 
taken place on a whole list of our feed-based industries which 
are represented here today; whether some forms of cellulosic 
fuel down in a second- or third-generation development of 
ethanol could well be applicable and be a part of our long-term 
energy plans.
    I, first of all, want to thank the Chairman for having a 
number of California witnesses, Dr. Erba from Visalia, but 
especially my friend and one of the leading agriculturalists in 
California Mr. Greene, who I have known for many years, and who 
I think has done a terrific job on this panel this afternoon.
    Let me begin by following up on Mr. King's comments just a 
moment ago. Do any of you there disagree--he talked about \1/
3\, \1/3\, \1/3\--that whether the corn that is used for 
ethanol is actually close to 25 percent, and when that is 
factored in, do you include the DDGs? I mean, is there a 
consensus among you?
    Dr. Meyer. I will address that. The corn used for ethanol 
in this crop year is going to be about 42 percent of the total, 
used for feed and residuals is going to be about 40. Ethanol 
usage is larger, it is not quite \1/2\, but it is 42 and 40 I 
believe are the percentages. I can get those exactly for you, 
Mr. Costa.
    Mr. Costa. Please get those to the Committee.
    I don't know if anyone else cares to comment.
    I would also like to get a sense, do you expect grain 
exports to increase in the next 5 years, and if so, by how 
much? I am not asking you to put your speculator's hat on, but 
you know about the poultry industry, the beef industry, the 
pork industry, and the other demands on corn.
    Mr. Greene. I believe that the numbers last year in 2011, 
the 2011 crop year, about 5 billion bushels went to ethanol, 
and 5 billion went to livestock feeding, and that was as of the 
last USDA report. This next year the USDA has kept ethanol at 
about 5 billion and has now moved livestock feeding down to 4.7 
billion. So 3 million bushels has to go away from feeding 
livestock, and you have to recognize that means--and part of 
the reason why this problem is so severe--that means that 
amount of business has to go away. That amount of feeding of 
animals needs to go away. That amount of jobs needs to be lost. 
That amount of foreclosures need to happen. So you have that.
    The second thing that you have, you also have exports 
reducing. So one of the other challenges that this Committee 
and the Congress now has is do you start to--how aggressively 
do you take on exports? Because if you continue down this path 
where you are taking more and more of the corn towards fuel and 
another piece of it towards--you try to preserve what you can 
for feeding of livestock, then the only other option is to 
start freezing exports, something that I know this 
Administration is not keen on, but it is--fundamentally you 
only have so much to work with.
    Mr. Costa. Well, and then there is--I mean, I understand, 
and the flip side of that, of course, is to try to incentivize 
this industry. We have created three incentives. I mean, it is 
just not the subsidy, but it is the tariff on the Brazilian 
imports, and of course it is also the requirement. And it seems 
to me that I think incentives can work in a number of 
instances, especially in new industry. But, I mean, it is one 
of the reasons my position is part of that effort to look at 
repealing that effort in terms of the subsidy.
    Mr. Erba, the LGM-Dairy is a set program that looks at feed 
prices as a way to protect margins on new programs that are 
being discussed, and to focus on the margins instead of the 
price of milk alone. What is your sense of this? Do you think 
this is a way in which the dairy industry can protect itself?
    Dr. Erba. I think the focus probably does need to be on 
margins. I am not so sure that there is actually a program out 
that can do that very effectively. I have heard about the 
discussion draft that was released earlier this year by 
Representative Peterson. There are some elements of that that 
contain that same logic of a margin protection, a margin focus. 
I believe that is probably the right way to go from now on, 
because we do have the issue of costs which are not as stable 
as they used to be and prices which are not as stable as they 
used to be.
    Mr. Costa. Okay, I have another quick question. My time is 
running out. Mr. Greene, what part of this volatility do you 
think is associated in the increased prices of corn to 
speculation?
    Mr. Greene. We have looked at that quite a bit, and we 
really estimate that about 30 percent of this is speculative 
driven. And, one of the things that is important for people to 
think about when they think about speculative interests and how 
that is impacting the price, that speculative money, the money 
that is gained as a speculator tries to move in front of the 
end-users and extract profits: I believe that many of those 
profits do not come back into the United States, that many of 
those profits are being kept overseas, and it is money that is 
being lost here. So not only is it damaging and causing 
inflation and inflationary pressures, it is causing volatility 
in a way that we have a very difficult time dealing with it. 
You see volatility in a week that we used to see in a year.
    Mr. Costa. Right.
    Mr. Greene. So if you make the wrong call, you make a wrong 
judgment there, you can really be negatively impacted.
    Then, like I said, this speculative interest in these ag 
commodities where these index funds are being treated as 
hedgers rather than being treated as the speculators and 
thereby getting around these speculative requirements that the 
CFTC has, this is very disruptive to the marketplace.
    Mr. Costa. Well, and I appreciate that, and although my 
time has expired, I think the volatility and the speculation 
also takes place in gas prices, where we see oil prices 
dropping, yet we see the price of gas per gallon not following 
the same track on per-barrel prices.
    And I have a number of other questions, Mr. Chairman, I 
would like to submit to the witnesses. I will do that in 
writing.
    I guess, with the Chairman's consideration, do you think 
there is any protection on that speculation on the Dodd-Frank 
regulations that they are going to impact and what impact it 
might have? This gentleman here does a great deal of purchasing 
in the markets, both for the poultry--they are diversified--and 
for their dairy feeds needs, so Mr. Greene has a lot of 
experience in this area.
    Mr. Greene. Yes. I think the Dodd-Frank regulations, if 
they are followed, do provide some security for agricultural 
markets in speculation. We made comments of that in the AFIA's 
documents that I have submitted, and you can follow up on 
those. They do help to enforce.
    I think an important thing to think about there is up until 
recently the Chicago Mercantile Exchange was not a publicly 
traded company. It was privately held. And now that it is 
publicly traded, its objective is to bring forth maximum volume 
of business; and by bringing forth maximum volume of business, 
there has been a new proposal just recently introduced to allow 
even larger speculative interests into the final month of a 
contract, and this is very disruptive to the market. This won't 
bring about what we are supposed to see, which is convergence 
in the marketplace in that final month. This will actually 
bring about additional volatility, additional risks, and higher 
potential for certain people to take very large positions that 
could be very disruptive to the marketplace.
    Mr. Costa. Thank you very much, Mr. Chairman, for your time 
and allowing me to sit in on the Subcommittee, and I want to 
thank all the witnesses. I am sorry I didn't get a chance to 
ask all of you questions. I have a lot of them. But I will 
submit them for the record and look forward to continuing to 
work with all of you.
    The Chairman. Thank you, Mr. Costa.
    Before we adjourn, I would like to thank all the Members of 
the Subcommittee and especially the Ranking Member, Mr. 
Cardoza, and Mr. Costa for joining us today, all the witnesses 
for taking the time to address this very important issue, as 
well as all the staff for all your hard work in getting us 
ready for this hearing.
    We are going to keep doing these hearings to try to 
continue to educate our Members, and with that, 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 
question posed by a Member.
    This hearing of the Subcommittee on Livestock, Dairy, and 
Poultry is adjourned.
    [Whereupon, at 3:14 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
  Submitted Article by Hon. David Scott, a Representative in Congress 
                              from Georgia
The Atlanta Journal-Constitution
Higher corn prices pluck Georgia poultry farmers
September 7, 2011
David Markiewicz
    Two numbers stick in Georgia poultry executive Tom Hensley's head: 
the price of feed corn in 2010 and the price today.
    ``Last year it was $4 a bushel,'' he said. ``Now, it's $8 a 
bushel.'' During that time, he said, the price of chicken ``hasn't gone 
up commensurately.''
    But don't be surprised if it does. Producers say it's the only way 
they can make money.
    The whopping increase in the cost of feed corn, on top of higher 
prices for fuel and lower prices for chicken, is making the poultry 
business a money-losing venture, they said.
    ``The current financial picture for poultry is as serious as any 
the industry has faced in recent memory,'' said Mike Giles, President 
of the Georgia Poultry Federation.
    Industry representatives said they are not aware of any related 
layoffs, farm closings or bankruptcies in the state.
    But there are signs of distress. Sanderson Farms, one of the 
nation's largest poultry producers, said it lost $56 million in its 
most recent 3 month period, despite higher sales. The company cited ``. 
. . significantly higher costs for corn and soybean meal, our primary 
feed ingredients, compared with the same period a year ago.''
    Tyson Foods remained profitable even with ``extremely volatile 
input costs and market prices at or near historical lows.'' The company 
said its chicken segment likely will lose money in the fourth quarter.
    The poultry business is critical to Georgia, employing 100,000 
people, directly or indirectly, and contributing an estimated $13 
billion to the economy each year. The state has 3,800 poultry farms and 
is the largest poultry producer in the U.S.
    The only solution to the problem, poultry industry executives 
suggest, is to cut supply by putting less chicken on the market. That 
will cause prices to rise, restoring profitability.
    ``Production has got to go down. They can't continue to operate at 
a loss, and right now their costs of production are significantly 
greater than what they can get for the product at the grocery store,'' 
said Mike Lacy, head of the poultry science department at the 
University of Georgia.
    Hensley, President of Baldwin-based Fieldale Farms, expects that 
U.S. production of chicken, now about 160 million head processed each 
week, will be trimmed to less than 150 million. When that happens, he 
said, the wholesale price of chicken will jump from the current $1.55 
per pound. Last year, the price topped $2. Overall, food prices have 
increased during the same period.
    If poultry prices don't rise, Hensley said, ``every chicken company 
will go broke.''
    Even if that does happen, it will take time to affect the retail 
market. One reason is that consumer demand for chicken drops off in 
cool weather months, so the lower supply won't quickly prompt prices to 
rise.
    Brenda Reid, a spokeswoman for Publix Super Markets, said, ``We 
anticipate that our cost of chicken will go up slightly. However, our 
retail price for customers will remain the same through the end of the 
year. We will not be able to forecast our pricing into 2012 until we 
get closer to the end of this year.''
    Lacy said he is reluctant to label the current problem facing the 
poultry industry a crisis, but he is concerned.
    ``These things do go in cycles,'' he said. ``But this one has been 
extremely difficult because of the perfect storm of the downturn in the 
economy, the unprecedented feed costs, the rising fuel prices and 
problems with some of the export markets (for poultry).''
    Poultry industry representatives said corn prices are up because of 
demand for use in ethanol. Drought conditions in growing regions also 
cuts crop production and boosts prices.
    Several other factors contribute to poultry producers' pain. Higher 
diesel fuel prices boost costs producers who may use thousands of 
gallons a day.
    Also, demand for chicken, while still strong in general, is 
uncertain in some export markets such as China and Russia, although it 
has picked up in other markets including Mexico and the Middle East.
    Still, the cost of corn, by far the main feed stock for poultry, 
remains the biggest problem.
    ``There's no good substitute for corn,'' Hensley noted.

    Georgia Poultry Facts:

   Georgia is the number one poultry producing state in the 
        nation.

   If Georgia were a country, it would be the sixth-largest 
        poultry producing nation in the world.

   Georgia produces approximately 1.4 billion chickens 
        annually.

   On an average day, Georgia produces about 26 million pounds 
        of chicken.

        Source: Georgia Poultry Federation.
                                 ______
                                 
        Submitted Statement by National Corn Growers Association
    The National Corn Growers Association (NCGA) appreciates the 
opportunity to provide testimony as part of the Subcommittee's hearing 
to examine feed availability and its effect on the livestock and 
poultry industries. NCGA represents 35,000 corn farmers from 48 states, 
as well as the interests of more than 300,000 growers who contribute 
through corn checkoff programs in their states. Corn fuels nations 
around the world, as a food ingredient, a feedstock, a fuel, a fiber, 
an ingredient in building materials and beyond. It is possibly the most 
versatile crop in the world, and demand is at an all-time high.
    Historically corn farmers have understood that they have the 
ability to supply growing ethanol and livestock producers 
simultaneously without negatively impacting either as a valued 
customer. With advances in both seed and farming technologies, U.S. 
corn producers have increased average yield substantially in the past 
few decades.
    On September 12, 2011, the United States Department of Agriculture 
(USDA) released a report confirming that the United States is still on 
track to produce the third-largest corn crop on record, estimated to 
total 12.5 billion bushels of corn. Despite U.S. corn farmers facing 
several major weather events that negatively impacted much of the 
production acreage, causing national average yield estimates to drop to 
148.1 bushels per acre, the world corn stocks projection has increased, 
more than offsetting the reduction projected for the country.
    This spring, rain and flooding delayed planting in much of the Corn 
Belt, while flooding and blown levies along the Mississippi and 
Missouri rivers caused growers to lose planted acres. In Texas and much 
of the South, scorching heat and drought devastated the crop while 
abnormally high temperatures in July and August impacted a large area 
of the Corn Belt to a lesser extent. As harvest approached, many farms 
along the Atlantic Seaboard were devastated as Hurricane Irene pounded 
the operations with strong winds and heavy rain. On top of all this, 
hail and high winds impacted thousands of acres in the Midwest during 
the growing season.
    Even in light of these events, it is important to keep the final 
production estimates in perspective, realizing that a 12.5 billion 
bushel harvest would still be the third-largest on record. Only 10 
years ago, the average yield nationally was 138 bushels per acre and 
production totaled only 9.5 billion bushels. The decade before that, 
the average yield reached only 107 bushels per acre nationally and 
production totaled only 7.5 billion bushels. Even as estimates are 
revised down to account for the damage done to the 2011 crop by 
weather, the strides made through innovative technology and techniques 
continually allow growers to excel even under difficult circumstances.
    World corn ending stocks are projected up 2.9 million tons from 
August, with increases in South America and Europe more than offsetting 
the reduction projected for the United States. Further, distillers 
grains from ethanol production provides a high-quality, high-value feed 
product for livestock producers, displacing almost 1.2 billion bushels 
of corn in livestock rations this marketing year in the United States 
and abroad.

Improved Economic Conditions Since RFS Expansion
    On August 5, 2011, NCGA released a study conducted by Texas A&M 
University and Doane Advisory Services to compare input price changes 
on representative livestock operations before and after the Energy 
Independence and Security Act of 2007. Researchers demonstrated that 
economic conditions have improved for beef and dairy farmers since the 
implementation of the expanded Renewable Fuel Standard (RFS) in 2007.
    The study, which utilized Texas A&M University's Agricultural & 
Food Policy Center's premier farm-level modeling system and data from 
the University of Missouri's Food & Agricultural Policy Research 
Institute, determined that net cash farm incomes for representative 
beef-cow/calf and dairy operations had increased since provisions of 
the biofuels mandate went into effect. This conclusion verifies NCGA's 
position that increased ethanol production has not negatively impacted 
the profitability of key livestock markets.
    The study was written in response to ongoing allegations that 
increased ethanol production resulting from the expanded RFS had caused 
financial insecurity in livestock and dairy operations by spurring an 
increase in feed prices. Researchers looked at changes in input and 
output prices in January 2007 and January 2011 for beef-cow/calf and 
dairy operations in 12 states, with consideration given to overall 
market changes. The final analysis concluded that while higher feed 
costs do exist, the profitability of all operations examined had 
increased over the 4 year period as a result of increased output 
prices.
    While it is easy to reiterate artificial arguments against the use 
of ethanol, NCGA believes this study clearly illustrates the fallacies 
on which they are often based. In reality, we do not have to choose 
between using corn for food or fuel.

                                  
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