[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


                         
             UPDATE ON THE FINANCIAL HEALTH OF FARM COUNTRY

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                        GENERAL FARM COMMODITIES
                          AND RISK MANAGEMENT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 2, 2015

                               __________

                           Serial No. 114-15
                           
                           
                           
                           
                           
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                        COMMITTEE ON AGRICULTURE

                  K. MICHAEL CONAWAY, Texas, Chairman

RANDY NEUGEBAUER, Texas,             COLLIN C. PETERSON, Minnesota, 
    Vice Chairman                    Ranking Minority Member
BOB GOODLATTE, Virginia              DAVID SCOTT, Georgia
FRANK D. LUCAS, Oklahoma             JIM COSTA, California
STEVE KING, Iowa                     TIMOTHY J. WALZ, Minnesota
MIKE ROGERS, Alabama                 MARCIA L. FUDGE, Ohio
GLENN THOMPSON, Pennsylvania         JAMES P. McGOVERN, Massachusetts
BOB GIBBS, Ohio                      SUZAN K. DelBENE, Washington
AUSTIN SCOTT, Georgia                FILEMON VELA, Texas
ERIC A. ``RICK'' CRAWFORD, Arkansas  MICHELLE LUJAN GRISHAM, New Mexico
SCOTT DesJARLAIS, Tennessee          ANN M. KUSTER, New Hampshire
CHRISTOPHER P. GIBSON, New York      RICHARD M. NOLAN, Minnesota
VICKY HARTZLER, Missouri             CHERI BUSTOS, Illinois
DAN BENISHEK, Michigan               SEAN PATRICK MALONEY, New York
JEFF DENHAM, California              ANN KIRKPATRICK, Arizona
DOUG LaMALFA, California             PETE AGUILAR, California
RODNEY DAVIS, Illinois               STACEY E. PLASKETT, Virgin Islands
TED S. YOHO, Florida                 ALMA S. ADAMS, North Carolina
JACKIE WALORSKI, Indiana             GWEN GRAHAM, Florida
RICK W. ALLEN, Georgia               BRAD ASHFORD, Nebraska
MIKE BOST, Illinois
DAVID ROUZER, North Carolina
RALPH LEE ABRAHAM, Louisiana
JOHN R. MOOLENAAR, Michigan
DAN NEWHOUSE, Washington
----

                                 ______

                    Scott C. Graves, Staff Director

                Robert L. Larew, Minority Staff Director

                                 ______

      Subcommittee on General Farm Commodities and Risk Management

             ERIC A. ``RICK'' CRAWFORD, Arkansas, Chairman

FRANK D. LUCAS, Oklahoma             TIMOTHY J. WALZ, Minnesota, 
RANDY NEUGEBAUER, Texas              Ranking Minority Member
MIKE ROGERS, Alabama                 CHERI BUSTOS, Illinois
BOB GIBBS, Ohio                      GWEN GRAHAM, Florida
AUSTIN SCOTT, Georgia                BRAD ASHFORD, Nebraska
JEFF DENHAM, California              DAVID SCOTT, Georgia
DOUG LaMALFA, California             JIM COSTA, California
JACKIE WALORSKI, Indiana             SEAN PATRICK MALONEY, New York
RICK W. ALLEN, Georgia               ANN KIRKPATRICK, Arizona
MIKE BOST, Illinois
RALPH LEE ABRAHAM, Louisiana

                                  (ii)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                             C O N T E N T S

                              ----------                              
                                                                   Page
Conaway, Hon. K. Michael, a Representative in Congress from 
  Texas, opening statement.......................................     3
Crawford, Hon. Eric A. ``Rick'', a Representative in Congress 
  from Arkansas, opening statement...............................     1
    Prepared statement...........................................     2
Walz, Hon. Timothy J., a Representative in Congress from 
  Minnesota, opening statement...................................     2

                               Witnesses

Kauffman, Ph.D., Nathan S., Assistant Vice President, Economist, 
  and Omaha Branch Executive, Omaha Branch, Federal Reserve Bank 
  of Kansas City, Omaha, NE......................................     4
    Prepared statement...........................................     6
Combs, Paul T., rice, soybean, cotton, corn, and wheat producer 
  and farm equipment dealer, Kennett, MO.........................    22
    Prepared statement...........................................    24
Verett, Steve, cotton, sorghum, and wheat producer, Lubbock, TX..    28
    Prepared statement...........................................    30
Brantley III, L. Dow, rice, cotton, corn, and soybean producer, 
  England, AR....................................................    34
    Prepared statement...........................................    36
Paap, Kevin, corn and soybean producer, Garden City, MN..........    39
    Prepared statement...........................................    40

 
             UPDATE ON THE FINANCIAL HEALTH OF FARM COUNTRY

                              ----------                              


                         TUESDAY, JUNE 2, 2015

                  House of Representatives,
         Subcommittee on General Farm Commodities and Risk 
                                                Management,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 1300, Longworth House Office Building, Hon. Eric A. 
``Rick'' Crawford [Chairman of the Subcommittee] presiding.
    Members present: Representatives Crawford, Lucas, 
Neugebauer, Rogers, Austin Scott of Georgia, LaMalfa, Allen, 
Bost, Abraham, Conaway (ex officio), Walz, Graham, Ashford, 
David Scott of Georgia, Costa, Kirkpatrick, and Peterson (ex 
officio).
    Staff present: Bart Fischer, Callie McAdams, Haley Graves, 
Jessica Carter, Matt Schertz, Mollie Wilken, Skylar Sowder, 
Faisal Siddiqui, John Konya, Anne Simmons, Liz Friedlander, 
Mike Stranz, and Nicole Scott.

    OPENING STATEMENT OF HON. ERIC A. ``RICK'' CRAWFORD, A 
            REPRESENTATIVE IN CONGRESS FROM ARKANSAS

    The Chairman. This hearing of the Subcommittee on General 
Farm Commodities and Risk Management regarding an update on the 
financial health of farm country, will come to order. During 
the farm bill debate, we heard a good bit about the relatively 
high prices farmers are receiving for their crops, and the 
suggestion was made by at least some folks that it was a good a 
time as any to discontinue the farm bill. Now that we are in 
year 2 of the farm bill, I thought it would be appropriate to 
take a look at the financial conditions in farm country today 
and assess what might have happened had those folks had their 
way.
    Farm prices for many crops have dropped dramatically since 
the farm bill debate. Input costs continue to rise. Mother 
Nature continues to wreak havoc on some regions of the country. 
Foreign competitors are sharply increasing their subsidies, 
tariffs, and non-tariff trade barriers, and sadly even the U.S. 
Government is adding hurdles for farmers and ranchers to 
overcome. The EPA is pushing new and costly regulations. Some 
in this country are standing in the way of critical tax relief, 
ranging from a permanent section 179 and bonus depreciation to 
repeal of the death tax. Some have even proposed to eliminate 
stepped-up basis, which is absolutely essential to passing on 
the family farm.
    Today's panel will provide valuable insights on how these 
and other factors are impacting America's farmers and ranchers 
and speak to the importance of U.S. farm policy. I am looking 
forward to hearing their testimony.
    [The prepared statement of Mr. Crawford follows:]

Prepared Statement of Hon. Eric A. ``Rick'' Crawford, a Representative 
                       in Congress from Arkansas
    This hearing on the financial health of farm country, will come to 
order.
    During the farm bill debate, we heard a good bit about the 
relatively high prices farmers were receiving for their crops, and the 
suggestion was made by at least some folks that it was as good a time 
as any to discontinue the farm bill.
    Now that we are in year 2 of the farm bill, I thought it would be 
appropriate to take a look at the financial conditions in farm country 
today and assess what might have happened had those folks had their 
way.
    Farm prices for many crops have dropped dramatically since the farm 
bill debate. Inputs costs continue to rise. Mother Nature continues to 
wreak havoc on some regions of the country. Foreign competitors are 
sharply increasing their subsidies, tariffs, and non-tariff trade 
barriers. And, sadly, even the U.S. Government is adding hurdles for 
farmers and ranchers to overcome. The EPA is pushing new and costly 
regulations. Some in this country are standing in the way of critical 
tax relief, ranging from a permanent section 179 and bonus depreciation 
to repeal of the death tax. Some have even proposed to eliminate 
stepped up basis, which is absolutely essential to passing on the 
family farm.
    Today's panel will provide valuable insights on how these and other 
factors are impacting America's farmers and ranchers and speak to the 
importance of U.S. farm policy. I am looking forward to hearing their 
testimony.
    But, before we get to our first panel, I would like to recognize my 
good friend, the Ranking Member, for any opening comments he may have.

    The Chairman. But before we go to our first panel, I want 
to recognize my good friend, the Ranking Member, my friend from 
Minnesota, Mr. Walz, for any comments he may have.

OPENING STATEMENT OF HON. TIMOTHY J. WALZ, A REPRESENTATIVE IN 
                    CONGRESS FROM MINNESOTA

    Mr. Walz. Well, I thank the Chairman and thank the Chairman 
of the full Committee, Mr. Conaway, again for holding these 
important hearings. I would like to welcome all our witnesses 
here today, and thank you for taking time out of your busy 
schedule to engage in this and help us understand.
    I would like give a special thank you and shout out to my 
friend and constituent, Kevin Paap, from southern Minnesota. If 
you want to talk about dedication to being here today, it is 
Kevin and Julie's anniversary today, and in 2 days his son Andy 
is getting married.
    So I don't envy you when you go back home, Kevin. But thank 
you so much. You are dedicated to getting this done.
    One thing is clear; it is something that we all can agree 
on: When the farm economy is healthy, Main Street economy is 
healthy. As lawmakers, we rely on boots-on-the-ground expertise 
to help us navigate the proper course for ag policy. We write 
the farm bill for the bad times, not the good. The tough part 
is that farming is not monolithic and one size fits all. When 
commodity prices are down, livestock prices may be up, and 
other things go in that direction also.
    The financial health of the sector is also significantly 
influenced by external factors. Drought, flood, disaster, and 
disease all have an impact which ripples through our entire 
economy, especially our rural economy. In the Midwest, and in 
Minnesota specifically, we are facing a calamity right now with 
the onset of avian flu. This outbreak places a financial and 
emotional strain on the producers impacted. And you don't even 
have to have a flock test positive on this. The stress created 
by the possibility of loss is out there. I heard one producer 
say it is like living in a constant tornado warning every 
single day. We will continue to fight to ensure the resources 
are in place to combat this and other disasters coming up.
    When addressing the financial health of farm country, I do 
think there are a few universal themes we can broadly apply. 
First and foremost, risk management is the key. Without robust 
and effective programs, the industry will falter. Second, we 
need to do everything we can to promote the next generation of 
farmers by providing strong risk-management programs, readily 
available credit, and world-class research and education.
    Finally, the sustainable health of our soil and resources 
is paramount. Farmers are some of the best conservationists in 
this regard. It just makes good business sense. We must 
continue to provide the tools to maintain the health of our 
resources.
    With that, I would like to thank the Chairman again for 
holding these important hearings, and I really look forward to 
hearing from our witnesses.
    I yield back.
    The Chairman. I thank the gentleman.
    I would recognize full Committee Chairman, Mr. Conaway, if 
he has any opening remarks.

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE 
                     IN CONGRESS FROM TEXAS

    Mr. Conaway. No opening remarks. I just want to thank the 
witnesses for being here and look forward to their testimony.
    The Chairman. I thank the Chairman.
    I would remind Members that they will be recognized for 
questioning in order of seniority for Members who were present 
at the start of the hearing. After that, Members will be 
recognized in order of their arrival. I appreciate Members' 
understanding.
    I want to introduce the panel really quick. I am going to 
go through four, and then I would defer to Mr. Neugebauer for 
just a minute. We have a great panel today. I think we are 
going to get some great insight as to what is happening at home 
with regard to the implementation of the farm bill.
    First, let me welcome Dr. Nathan Kauffman, Assistant Vice 
President and Omaha Branch Executive, Federal Reserve Bank of 
Kansas City, Omaha, Nebraska.
    Thank you, sir, for being here.
    Mr. Paul T. Combs from Kennett, Missouri. He is a rice, 
soybean, corn, and wheat producer in addition to being a farm 
equipment dealer.
    Thank you, Mr. Combs, for being here.
    Mr. Dow Brantley is from my district. I am pleased to have 
him here. He is a very diversified producer from England, 
Arkansas, producing cotton, corn, soybeans, and rice.
    And, finally, Mr. Walz, I would defer to you to introduce 
your constituent if you would like.
    Mr. Walz. Well, as I said, Kevin is a long-time producer 
out in Garden City, Minnesota, in southern Minnesota, Blue 
Earth County; has been a leading voice in ag; and is also our 
current Minnesota Farm Bureau President.
    So, thank you, Kevin.
    The Chairman. And, finally, Mr. Neugebauer, I would 
recognize you to make an introduction.
    Mr. Neugebauer. Well, I thank you, Mr. Chairman, and thank 
you for having this hearing.
    The title of this hearing is Update on the Financial Health 
of Farm Country, and I can't think of anybody that knows more 
about the financial health of farm country than my good friend 
and constituent, Steve Verett. Steve has been the Executive 
Vice President of the Plains Cotton Growers for 18 years, but 
he has been farming for 38 years and plants all of the major 
crops in our area, cotton, sorghum, wheat, sunflowers.
    There is one little trivia note here that is something that 
Steve and I have in common, and that is that we both received a 
degree from Texas Tech in accounting. So I am glad to have 
Steve here today, and I appreciate him taking time out of his 
busy schedule because what you don't know is it has been 
raining nonstop in Lubbock, Texas, and in Texas, and this is 
planting time. So Steve is taking valuable time away from his 
planting time to come up here and testify, and I appreciate 
that.
    The Chairman. Wow, we have at least four CPAs in the room. 
Mr. Combs is also a CPA. Our Committee Chairman is a CPA. I 
don't know what to do with all these tax guys in the room at 
one time.
    Thank you, members of our panel. We appreciate you being 
here.
    Just one quick note, just as a reminder, you have 5 
minutes. Our lights should be working. Once you see the yellow 
light, it is just like when you are driving, step on the gas. 
And when you see red, stop. We will do that in the interest of 
making sure all of our Members have time to ask questions, and 
we want to get as much information from you as possible.
    So, with that, I will introduce our first panelist, Dr. 
Nathan Kauffman, Assistant Vice President, Omaha Branch 
Executive, Federal Reserve Bank of Kansas City.
    Dr. Kauffman, you are recognized.

    STATEMENT OF NATHAN S. KAUFFMAN, Ph.D., ASSISTANT VICE 
PRESIDENT, ECONOMIST, AND OMAHA BRANCH EXECUTIVE, OMAHA BRANCH, 
         FEDERAL RESERVE BANK OF KANSAS CITY, OMAHA, NE

    Dr. Kauffman. Good morning, and thank you, Mr. Chairman, 
and Members of the Subcommittee.
    My name is Nathan Kauffman, and I am an Economist and Omaha 
Branch Executive with the Federal Reserve Bank of Kansas City, 
a regional reserve bank that has long devoted significant 
attention to U.S. agriculture. In my role, I lead several 
efforts to track the agricultural and rural economy, including 
a regional agricultural credit survey and the Federal Reserve 
System's Agricultural Finance Databook, a national survey of 
agricultural lending activity at commercial banks. I am pleased 
to share with you the following information on recent 
developments in the financial conditions in U.S. agriculture. 
Before I begin, let me emphasize that my statement represents 
my view only and is not necessarily that of the Federal Reserve 
System or any of its representatives.
    The outlook for the U.S. agricultural economy has shifted 
significantly over the past 2 years following several years of 
historically high farm income, primarily driven by strong 
demand for agricultural products and high commodity prices. 
Farm income has dropped considerably since 2013. According to 
the U.S. Department of Agriculture, net farm income in 2015 is 
projected to be about 43 percent less than the record high set 
in 2013.
    The drop in farm income has primarily been due to lower 
prices of major U.S. row crops combined with production costs 
that have remained persistently high. For example, corn prices 
are currently about 50 percent less than in 2013, and soybean 
prices have dropped more than 30 percent during the same 
timeframe. Despite the lower commodity prices, however, input 
costs have remained relatively high, causing profit margins to 
weaken notably over the past 2 years.
    Quarterly surveys of agricultural banks conducted by 
regional Federal Reserve banks have also pointed to reduced 
farm income. According to the Kansas City Fed's survey, farm 
income has declined in every quarter since mid-2013 when 
compared with the same quarter in the preceding year. Bankers 
surveyed by other Federal Reserve districts have reported 
similar reductions in farm income despite extraordinarily high 
profit margins in U.S. cattle, hog, and dairy sectors in 2014.
    Weaker farm income and reduced cash flow, particularly in 
the crop sector, have also caused farmland prices to deadline 
from their recent record highs. After posting annual gains of 
25 to 35 percent between 2010 and 2012, Federal Reserve surveys 
show that farmland values have steadily decreased over the past 
year in Iowa, Illinois, Nebraska, and Minnesota, and these are 
four states that collectively account for more than \1/2\ of 
total U.S. corn production.
    Ongoing declines in farm income and reduced levels of 
working capital have caused the financial conditions of crop 
producers to worsen recently. Federal Reserve surveys show that 
farm loan repayment rates at commercial banks have steadily 
weakened since 2013 in states concentrated in row crop 
production. In a March 2015 survey of agricultural credit 
conditions conducted by the Federal Reserve Bank of Kansas 
City, more than 60 percent of responding banks reported a 
modest deterioration in the financial conditions of crop 
producers relative to the previous year.
    As cash flow has declined, more producers have also needed 
external financing to pay for operating expenses and capital 
purchases. The Federal Reserve's Agricultural Finance Databook 
included with my written testimony shows that the volume of new 
short-term farm loan originations has increased by an annual 
average of 20 percent since the beginning of 2014. Increased 
loan demand has also been supported by livestock loans for the 
purchase of feeder cattle where prices remain near historical 
highs.
    To briefly summarize, the risk associated with agricultural 
production in the U.S. appears to have increased since 2013 and 
through 2014, particularly in row crop production. Farmers with 
especially high production costs and high levels of debt will 
likely face additional financial stress in the coming months if 
the current environment in crop sector profit margins persist. 
Although a farm crisis on the scale of the 1980s seems unlikely 
at this point, there does appear to be growing concern among 
agricultural lending institutions that the level of financial 
stress in the sector overall may intensify over the next 6 to 
12 months.
    This concludes my formal remarks, and I would be happy to 
answer any questions at the appropriate time. Thank you.
    [The prepared statement of Dr. Kauffman follows:]

    Prepared Statement of Nathan S. Kauffman, Ph.D., Assistant Vice 
President, Economist, and Omaha Branch Executive, Omaha Branch, Federal 
                 Reserve Bank of Kansas City, Omaha, NE
    Thank you, Mr. Chairman, and Members of the Subcommittee. My name 
is Nathan Kauffman, and I am Assistant Vice President and Economist at 
the Federal Reserve Bank of Kansas City, a regional Reserve Bank that 
has long devoted significant attention to U.S. agriculture. In my role, 
I lead several efforts to track the agricultural and rural economy, 
including a regional agricultural credit survey and the Federal Reserve 
System's Agricultural Finance Databook, a national survey of 
agricultural lending activity at commercial banks. I am pleased to 
share with you the following information on recent developments in the 
financial conditions in U.S. agriculture. Before I begin, let me 
emphasize that my statement represents my view only and is not 
necessarily that of the Federal Reserve System or any of its 
representatives.
Farm Income Conditions and Farmland Values
    The outlook for the U.S. agricultural economy has shifted 
significantly over the past 2 years. Following several years of 
historically high farm income, primarily driven by strong demand for 
agricultural products and high commodity prices, farm income has 
dropped considerably since 2013. According to the U.S. Department of 
Agriculture, net farm income in 2015 is projected to be about 43 
percent less than the record high set in 2013.
    The drop in farm income has primarily been due to lower prices of 
major U.S. row crops combined with production costs that have remained 
persistently high. For example, corn prices are currently about 50 
percent less than in 2013 and soybean prices have dropped more than 30 
percent over the same time frame. Despite the lower commodity prices, 
input costs have remained relatively high, causing profit margins to 
weaken notably over the past 2 years.
    Quarterly surveys of agricultural banks conducted by regional 
Federal Reserve Banks have also pointed to reduced farm income. 
According to the Kansas City Fed's survey, farm income has declined in 
every quarter since mid-2013 when compared with the same quarter in the 
preceding year. Bankers surveyed by other Federal Reserve Districts 
have reported similar reductions in farm income despite extraordinarily 
high profit margins in U.S. cattle, hog, and dairy sectors in 2014.
    Weaker farm income and reduced cash flow, particularly in the crop 
sector, have also caused farmland prices to decline from their recent 
record highs. After posting annual gains of 25 to 35 percent between 
2010 and 2012, Federal Reserve surveys show that farmland values have 
steadily decreased over the past year in Iowa, Illinois, Nebraska, and 
Minnesota. These four states collectively account for more than \1/2\ 
of total U.S. corn production.
Agricultural Lending and Credit Conditions
    Ongoing declines in farm income and reduced levels of working 
capital have caused the financial condition of crop producers to 
deteriorate recently. Federal Reserve surveys show that farm loan 
repayment rates at commercial banks have steadily weakened since 2013 
in states concentrated in row crop production. In a March 2015 survey 
of agricultural credit conditions conducted by the Federal Reserve Bank 
of Kansas City, more than 60 percent of responding banks reported a 
modest deterioration in the financial conditions of crop producers 
relative to the previous year.
    As cash flow has declined, more producers have also needed external 
financing to pay for operating expenses and capital purchases. The 
Federal Reserve's Agricultural Finance Databook, included in the 
material that follows, shows that the volume of new, short-term farm 
loan originations has increased by an annual average of 20 percent 
since the beginning of 2014. Increased loan demand has also been 
supported by livestock loans for the purchase of feeder cattle, where 
prices remain near historical highs.
    To briefly summarize, the risk associated with agricultural 
production in the U.S. appears to have increased since 2013, 
particularly in row crop production. Farmers with especially high 
production costs and high levels of debt will likely face additional 
financial stress in the coming months if the current environment in 
crop sector profit margins persists. Although a farm crisis on the 
scale of the 1980s seems unlikely at this point, there appears to be 
growing concern among agricultural lending institutions that the level 
of financial stress in the sector, overall, may also intensify over the 
next 6 to 12 months.
    The following material, published by the Federal Reserve Bank of 
Kansas City, is also included with my written statement to provide 
additional detail on recent developments in the financial conditions of 
U.S. agriculture.
                              Attachment 1
Federal Reserve Bank of Kansas City: Agricultural Credit Survey (May 
        2015)
``Agricultural Credit Conditions Weaken''
By Nathan Kauffman, Assistant Vice President and Omaha Branch 
        Executive, Cortney Cowley, Economist and Maria Akers, Associate 
        Economist
Summary
    Credit conditions in the Federal Reserve's Tenth District weakened 
as farm income declined further in the first quarter of 2015. 
Persistently low crop prices and high input costs reduced profit 
margins and increased concerns about future loan repayment capacity. 
Funds were available to meet historically high loan demand, but loan 
repayment rates dropped considerably. Although profit margins in the 
livestock industry have remained stable, most bankers do not expect 
farm income or credit conditions to improve in the next 3 months. 
Reduced incomes in the crop sector trimmed the value of non-irrigated 
and irrigated cropland, but steady profitability in the cattle sector 
supported higher prices for ranchland.
Farm Income
    Farm income continued to decline in the first quarter of 2015 
(Chart 1). Reduced supplies from winter wheat kill and persistently low 
crop prices have tightened revenues for crop producers. Despite poor 
winter wheat conditions in parts of the Tenth District that may limit 
production, wheat prices have remained around 30 percent less than a 
year ago. Similarly, as of the end of April, corn prices were about 27 
percent less than the previous year. Moreover, since July 2014, the 
monthly average price of corn has been less than $4.00 per bushel, 
generally below what some bankers noted is the breakeven cost of 
production for corn producers. Although many livestock operators have 
profited from lower feed grain costs, crop production costs have 
remained relatively high.
    Weaker profit margins and reduced cash flows caused financial 
conditions to weaken for many crop producers in the District. In fact, 
more than 60 percent of survey respondents reported a modest 
deterioration from a year ago in the financial conditions of crop 
producers (Chart 2). In contrast, nearly \1/2\ of respondents indicated 
that financial conditions have improved over the past year for 
borrowers that rely on crops as inputs, such as cattle, hog, poultry 
and dairy producers.
Chart 1: Tenth District Farm Income and Capital Spending
Difussion Index *
                      Diffusion Index *


          * Bankers responded to each item by indicating whether 
        conditions during the current quarter were higher than, lower 
        than, or the same as in the year-earlier period. The index 
        numbers are computed by subtracting the percentage of bankers 
        who responded ``lower'' from the percentage who responded 
        ``higher'' and adding 100.
Chart 2: Overall Change in Financial Conditions, Relative to One Year 
        Ago
Percent of Respondents


    On a more regional level, farm income declined in all District 
states except Oklahoma. In Oklahoma, farm income has steadily improved 
over the last 3 years due to revenue from mineral rights and cattle 
production but remained unchanged in the first quarter of 2015 (Chart 
3). Although farm income held steady in Oklahoma, a greater portion of 
agricultural lenders reported farm income was lower than a year ago in 
Kansas, western Missouri, Nebraska and the Mountain States (Colorado, 
northern New Mexico and Wyoming).
    Strains on the farm economy have begun to affect the overall 
economic outlook in some states. Through 2014, growth in per capita 
personal income was notably smaller in states most heavily concentrated 
in crop production (Map). For example, per capita personal income 
expanded less than 1.0 percent in Iowa and South Dakota and declined 
slightly in Nebraska. These growth rates were significantly weaker than 
the national average of 3.9 percent from 2013 to 2014. Ninety-four 
percent of survey respondents expect farm income to remain the same or 
decline further in the next 3 months. Additional declines in farm 
income could continue to create economic challenges in states heavily 
dependent on crops.
Chart 3: Tenth District Farm Income, First Quarter
Difussion Index *


          * Bankers responded to each item by indicating whether 
        conditions during the current quarter were higher than, lower 
        than, or the same as in the year-earlier period. The index 
        numbers are computed by subtracting the percentage of bankers 
        who responded ``lower'' from the percentage who responded 
        ``higher'' and adding 100.
Map: Per Capita Personal Income


Farm Loan Demand and Credit Conditions
    The continued decline in farm income boosted demand for new loans 
as well as renewals and extensions on existing loans (Chart 4). During 
years of historically high farm income, some farmers were able to self-
finance. However, as working capital has declined due to high 
production costs and lower crop revenues, more producers have needed 
external financing to pay for operating expenses and capital purchases. 
Loan demand was also supported by livestock loans on feeder cattle, 
which still command historically high prices. In fact, demand for non-
real estate farm loans increased across all District states in the 
first quarter and is expected to remain elevated over the next 3 months 
(Chart 5). If expectations are met, the survey measure of loan demand 
would be the highest since the survey began in 1980.
Chart 4: Tenth District Credit Conditions
Difussion Index *
                      Diffusion Index *


          * Bankers responded to each item by indicating whether 
        conditions during the current quarter were higher than, lower 
        than, or the same as in the year-earlier period. The index 
        numbers are computed by subtracting the percentage of bankers 
        who responded ``lower'' from the percentage who responded 
        ``higher'' and adding 100.
Chart 5: Tenth District Credit Conditions, First Quarter 2015
Difussion Index *


          * Bankers responded to each item by indicating whether 
        conditions during the current quarter were higher than, lower 
        than, or the same as in the year-earlier period. The index 
        numbers are computed by subtracting the percentage of bankers 
        who responded ``lower'' from the percentage who responded 
        ``higher'' and adding 100.

    Alongside reduced farm income and higher loan demand, loan 
repayment rates have declined significantly. More than 26 percent of 
survey respondents reported that loan repayment rates declined in the 
first quarter of 2015, compared to 17 percent in the previous quarter. 
Moreover, the expectation for loan repayment rates in the next 3 months 
was the lowest since 2003, and, if expectations hold, could be the 
first time in several years that repayment rates decline in all 
District states.
    The deterioration in loan repayment rates has not yet affected fund 
availability, which increased slightly in the first quarter. Of banks 
responding to the survey, 98.8 percent indicated that no loans were 
reduced or refused due to a shortage of funds. Still, collateral 
requirements remained the same or increased slightly for most farm 
loans throughout the District due to concerns over reduced working 
capital and annual increases in carry-over debt (Chart 6). Bankers also 
expressed concerns over increased debt-to-asset ratios, especially for 
younger farmers with high borrowing needs.
Chart 6: Borrowers with an Increase in Carry-over Debt, First Quarter
Percent 


Farmland Values
    Amid further declines in farm income, bankers reported that Tenth 
District cropland values edged down in the first quarter (Chart 7). In 
fact, irrigated cropland values declined in the first quarter, falling 
slightly below year-ago levels for the first time in more than 5 years 
(Chart 8). The value of non-irrigated cropland also declined, but was 
holding just above year-ago levels. Similar to previous surveys, 
Nebraska posted some of the largest price declines while cropland 
values in Oklahoma and the Mountain States remained the most resilient 
(Table). Looking ahead, very few bankers expect price appreciation and 
more than a quarter of survey respondents expect cropland values to 
decline further in the next 3 months (Chart 9). Still, a majority of 
bankers anticipates that cropland values will hold steady, partly due 
to a limited supply of farms for sale.
Chart 7: Tenth District Farmland Values, Quarterly Gains
Percent Change from the Previous Year *


          * Percent changes are calculated using responses only from 
        those banks reporting in both the past and current quarters.
Chart 8: Tenth District Farmland Values, Annual Gains
Percent Change from the Previous Year *


          * Percent changes are calculated using responses only from 
        those banks reporting in both the past and current quarters.

 Table: Tenth District Farmland Value Gains by State, First Quarter 2015
                   Percent Change from Previous Year *
------------------------------------------------------------------------
                    Nonirrigated        Irrigated          Ranchland
------------------------------------------------------------------------
Kansas                         0.2               ^2.4                5.0
Missouri                       0.9             ** N/A                3.9
Nebraska                      ^0.6               ^3.6               10.1
Oklahoma                       6.8                5.6                5.3
Mountain States                6.4                2.7               11.4
 ***
Tenth District                 0.9               ^2.1                6.8
------------------------------------------------------------------------
* Percent changes are calculated using responses only from those banks
  reporting in both the past and current quarters.
** Not reported due to small sample size.
*** Mountain States include Colorado, northern New Mexico and Wyoming,
  which are grouped because of limited survey responses from each state.

Chart 9: Expected Trend in Tenth District Farmland Values
Difussion Index *


          * Bankers responded to each item by indicating whether they 
        expected land values would increase, decrease, or remain the 
        same. The index numbers are computed by subtracting the 
        percentage of bankers who responded ``decrease'' from the 
        percentage who responded ``increase'' and adding 100.

    Tenth District ranchland values generally held firm in the first 
quarter of 2015 and year-over-year gains remained strong. In contrast 
to the crop sector, where lower incomes were starting to place downward 
pressure on cropland values, bankers reported profits in the cattle 
sector were continuing to support high ranchland values. Ranchland in 
Nebraska and the Mountain States appreciated the most during the past 
year with somewhat smaller gains reported in Kansas and Oklahoma, due 
in part to dry pasture conditions. Looking ahead, bankers expect 
continued strength in the cattle sector and increasing cattle 
inventories will sustain demand, and prices, for ranchland.
Conclusion
    Low crop prices placed added stress on net farm incomes and 
contributed to weaker credit conditions in the first quarter. As farm 
incomes fell, cropland values moderated and more producers depended on 
financing to cover operating expenses. Sufficient funds were available 
to meet increases in loan demand, but declines in repayment rates as 
well as slight increases in carry-over debt, collateral requirements 
and loan renewals and extensions suggest that credit quality may become 
more of a concern moving forward.
                              Attachment 2
Federal Reserve Bank of Kansas City: Agricultural Finance Databook 
        (April 2015)
``Loan Volumes Continue Rising as Lower Farm Incomes Persist''
By Nathan Kauffman, Assistant Vice President and Omaha Branch 
        Executive, Cortney Cowley, Economist
Summary
    Loan volumes for almost all farming purposes rose at commercial 
banks, as many producers contended with tighter profit margins. 
Persistently low crop prices and elevated input costs continued to 
increase farmers' short-term financing needs. High prices for feeder 
cattle further boosted loan volumes in the livestock sector. 
Agricultural input costs were expected to decline in 2015, but cash 
receipts were expected to drop further, keeping profit margins tight 
for many producers. Lower farm incomes kept loan demand strong 
throughout the Federal Reserve Districts surveyed, while loan repayment 
rates were slightly weaker. Despite reduced farm incomes and increased 
debt outstanding, loan delinquency rates declined, and profits 
increased slightly at most agricultural banks. Lower farm incomes also 
affected farmland values, but the changes varied widely among states. 
Farmland values in crop-intensive states decreased slightly, while 
demand strengthened for good-quality farmland and ranchland in states 
more concentrated in livestock production or with wealth generated from 
other sources, such as oil and natural gas exploration.
Section A--First Quarter National Farm Loan Data
    Agricultural lending continued to grow in the first quarter of 
2015. The national Survey of Terms of Bank Lending to Farmers, 
conducted during the first full week of February, indicated the total 
volume of non-real estate farm loans was $8.1 billion more than in the 
same period in 2014 (Chart 1). Overall growth in loan volume was driven 
by increased borrowing for current operating expenses and livestock 
purchases. Current operating loan volumes grew for the third year in a 
row following several quarters of depressed crop prices (Charts 2 and 
3). Demand for operating loans could remain elevated as futures markets 
for fall crops show prices are expected to remain low due to the 
possibility of another record harvest.
    The USDA projected plantings report showed soybean acreage could 
rise to record levels in 2015. Corn acreage was expected to decline for 
the third consecutive year, but the corn crop was still projected to be 
the third largest in history. As in 2014, large corn and soybean 
harvests could keep crop prices comparatively low, which would further 
weaken cash receipts for fall crops (Chart 4). This year, input costs 
were expected to decline less than crop cash receipts, which could put 
additional downward pressure on farm income and further increase the 
need for financing to cover expenses.
Chart 1: Non-Real Estate Farm Loan Volumes by Purpose
Billion Dollars


          Source: Agricultural Finance Databook, Table A.3.
Chart 2: Current Operating Loan Volume
Billion Dollars, Four Quarter Moving Average


          Source: Agricultural Finance Databook, Table A.3
Chart 3: U.S. Corn and Soybean Prices
Dollars per Bushel
                    Dollars per Bushel


          Sources: The Wall Street Journal and Chicago Board of Trade.
Chart 4: U.S. Crop Cash Receipts and Input Costs
Percent Change from 2007


          Source: USDA.

    Livestock loan volumes increased in the first quarter of 2015 as 
profit margins in the cattle sector reacted to another quarter of 
strong prices for feeder cattle. Profit margins tightened for feedlot 
operators, while cow/calf producers experienced better margins due to 
high cattle prices and low feed costs. Lending for feeder livestock 
increased more than 20 percent as producers rebuilt their herds and 
feedlot operators dealt with increasing costs (Chart 5). Following 
several years of herd liquidation, in 2014, cattle operations switched 
from liquidation to expansion and the U.S. cattle herd grew by 2.1 
percent. As cattle inventories rebounded slightly, feeder cattle prices 
softened in the first quarter of 2015 but remained historically high. 
High feeder cattle prices continued to sustain livestock loan volumes 
but could moderate.
    In the hog sector, loan volumes rose as declining hog prices 
resulted in reduced profit margins. The drop in hog prices over the 
last two quarters was primarily the result of a growing U.S. hog herd. 
Hog inventories began rebounding in the second \1/2\ of 2014, following 
massive reductions during the porcine epidemic diarrhea virus outbreak 
(Chart 6). Since June 2014, hog prices have dropped 40 percent, causing 
hog producers to depend more on lending to maintain inventories and 
cover operating expenses.
Chart 5: Livestock Loan Volume and Feeder Cattle Price
Billion Dollars, Four Quarter Moving Average
            Dollars per Hundredweight


          Sources: Agricultural Finance Databook, Table A.3, USDA.
Chart 6: Hog Inventory and Price
Million Hogs
            Dollars per Hundredweight


          Source: USDA, Haver Analytics.

    Although farm sector lending has continued to rise, the share of 
farm loans made with fixed interest rates increased notably in the 
first quarter of 2015. Between the first quarters of 2013 and 2015, the 
share of all non-real estate farm loans with fixed interest rates rose 
from 26 percent to 40 percent, respectively (Chart 7). This shift from 
floating to fixed interest rates was most pronounced for livestock 
loans, excluding feeder livestock, and farm machinery and equipment 
loans (Chart 8). Interest rates on non-real estate farm loans increased 
modestly in the first quarter of 2015, after declining steadily since 
2007, and this uptick could have prompted more farmers to further 
``lock-in'' at historically low rates.
Chart 7: Shares of Non-Real Estate Bank Loans with Floating and Fixed 
        Interest Rates Made to Farmers
Percent 


          Sources: Agricultural Finance Databook, Tables A.5 and A.6.
Chart 8: Shares of Non-Real Estate Farm Loans with Fixed Interest Rates 
        by Purpose
Percent 


          Source: Agricultural Finance Databook, Table A.6.
Section B--Fourth Quarter Call Report Data
    Despite declines in farm income over the last several quarters, 
delinquency rates on both farm real estate and non-real estate loans 
declined in late 2014 (Chart 9). Although incomes have dropped 
substantially from recent highs, they were not yet expected to fall 
below the average of the past 40 years (Chart 10). In addition, 
extremely low incomes (i.e., 50 percent below the long-run average) 
have not been observed since 1983 and, in the 4 years prior to 2015, 
incomes were extraordinarily high. Multiple years of historically high 
incomes helped strengthen balance sheets and better prepare producers 
for the effects of declining prices seen more recently. As a result of 
borrowers' strong financial positions, credit conditions have remained 
solid, even as debt in the farm sector has increased.
Chart 9: Delinquency Rates on Farm Loans
Percent of Outstanding Loans, Seasonally Adjusted


          Source: Federal Reserve Board of Governors.
Chart 10: Real Net Farm Income
Billion Dollars (2009$)


          Source: USDA.

    Commercial bank call report data showed that farm sector lending at 
commercial banks has, in fact, continued to rise and profitability at 
both agricultural and other small banks has remained relatively strong. 
In the fourth quarter of 2014, farm debt outstanding at commercial 
banks grew 8.3 percent from 2013 (Chart 11). Loan growth was driven by 
a 6.8 percent increase in the volume of loans secured by farm real 
estate and a 9.9 percent increase in the volume of loans to finance 
agricultural production. At the same time, the percentage of 
nonperforming farm loans and net charge-offs declined. Improved farm 
sector loan performance supported a slight rise in profits at 
agricultural banks. At the end of the fourth quarter, the return on 
assets at banks with an above-average share of loans made to the 
agricultural sector rose from 1.09 percent in 2013 to 1.13 percent in 
2014 (Chart 12).
Chart 11: Farm Debt Outstanding at Commercial Banks
Percent Change from Previous Year


          Source: Agricultural Finance Databook, Table B.1.
Chart 12: Rate of Return on Assets, Fourth Quarter 2014
Percent


          Source: Agricultural Finance Databook, Table B.7.
Section C--Fourth Quarter Regional Agricultural Data
    Although loan delinquency rates remain low, Federal Reserve 
District agricultural survey data showed slight deteriorations in some 
credit conditions across some regions. In most districts, demand for 
operating loans increased, loan repayment rates declined and more 
requests were made for loan renewals and extensions (Chart 13). 
Declines in farm income also pushed down household and capital spending 
in all districts. Survey respondents indicated that funds were 
available for farm loans but noted a slight increase in collateral 
requirements. Looking ahead, bankers in the Chicago and Dallas Federal 
Reserve Districts expected lending to increase for cattle and operating 
expenses next quarter, while loan volume was expected to decrease for 
crop storage and farm machinery.
Chart 13: Selected Agricultural Credit Conditions, Fourth Quarter 2014
Difussion Index *


          Source: Agricultural Finance Databook, Table C.1.

    Depressed farm incomes have begun to put downward pressure on 
farmland values, particularly in areas devoted to crop production. 
Farmland values declined in states throughout the Corn Belt due to 
lower crop prices, while values rose in states relatively more 
dependent on cattle, oil and natural gas production (Map). In the 
Dallas Federal Reserve District for example, farmland values 
strengthened for all types of farmland, while dryland and irrigated 
farmland values declined or increased at a slower rate in the 
Minneapolis and Kansas City Districts. Ranchland values continued to 
climb in all districts, as feeder cattle prices supported strong profit 
margins for cow/calf operations. As demand remained high and supply 
became more limited for good-quality land, the range of prices between 
good and marginal land also increased. A majority of survey 
respondents, however, expected farmland values to remain steady or 
decline in 2015.
Map: Value of Non-Irrigated Cropland, Fourth Quarter 2014
Percent Change from Previous Year


          * Mountain States include Wyoming, northern New Mexico and 
        Colorado, which are grouped because of limited survey responses 
        from each state.
          Source: Federal Reserve District Agricultural Credit Surveys 
        (Chicago, Dallas, Kansas City, and Minneapolis)
Conclusion
    As profit margins on farms tightened, producers borrowed more and 
reduced capital spending in late 2014 and early 2015. However, farm 
income has yet to fall below long-term historical averages, and recent 
data have shown only minimal declines in credit conditions. Relatively 
strong credit conditions have been partially supported by extraordinary 
profits among crop producers the last several years and, more recently, 
record profits for cow/calf producers. If the declining trend in farm 
income persists, however, agricultural credit conditions could weaken 
more noticeably in the future.

    The Chairman. I thank the gentleman for his testimony and 
recognize Mr. Paul Combs, for 5 minutes.

 STATEMENT OF PAUL T. COMBS, RICE, SOYBEAN, COTTON, CORN, AND 
     WHEAT PRODUCER AND FARM EQUIPMENT DEALER, KENNETT, MO

    Mr. Combs. Chairman Crawford, Ranking Member Walz, and 
Members of the Subcommittee, thank you for holding this hearing 
on the financial health of farm country and for inviting me to 
testify.
    As a producer, agri-businessman, and bank director, I have 
a unique ability to observe the farm economy from multiple 
angles. I farm corn, rice, soybeans, and wheat in the Boot heel 
of Missouri and own farm implement dealerships in southeast 
Missouri and northeast Arkansas. I am a former Member of the 
Board of Directors of the Federal Reserve Bank of St. Louis, 
and I currently serve on the board of First National Bank in 
Kennett. In all of these capacities, I have seen the farm 
sector go from one of the bright spots in the economy less than 
2 years ago to now limping along. In less than 2 years, the 
average price received for corn has fallen 44 percent, and all 
other major commodities have experienced a similar nosedive. 
The pain isn't only felt on the farm, but on the hundreds of 
other businesses like our family's equipment dealerships that 
rely on producers.
    My family owns and operates 11 dealerships and employs 185 
people throughout southeast Missouri and northeast Arkansas. 
Our sales are down about 15 percent year over year, 2015 over 
2014. And I anticipate the sales to continue to stagnate or 
even get worse in the third and fourth quarters of 2015. 
Fortunately, in our area, many producers had forward contracted 
or hedged their 2014 crop at higher prices. However, there 
isn't an opportunity in the market to do the same in 2015, and 
in the face of low prices, one of the first areas the producers 
cut costs is in their equipment investments.
    Adding to the challenge is the uncertainty regarding tax 
policy. Section 179 and bonus depreciation are key tools 
producers utilize when making equipment purchases, and these 
provisions expired on January 1, 2014 and were not 
retroactively extended until December 19. Many of our customers 
held off on buying equipment until they knew for certain what 
provisions would be in place. And when they were finally 
extended, there wasn't enough time left in the year for a 
farmer to take delivery of the equipment. We are in the same 
situation again this year with the higher limit in section 179 
and the bonus depreciation, and I hope that Congress can make 
permanent or at least extend these provisions early enough in 
the year so that farmers and businesses can be able to utilize 
them.
    During my tenure on the Board of the Federal Reserve Bank 
of St. Louis, I saw the effect that a vibrant agricultural 
sector can have on the economy of rural America. Despite the 
stagnation in the urban economies, many rural communities were 
insulated from the worst of the downturn thanks to a healthy 
farm economy. High commodity prices allowed producers to make 
those investments in land and equipment. And those dollars 
continued to turn over multiple times in our rural communities. 
However, today there has been an almost complete turnaround 
with Economic Research Service at USDA predicting net farm 
income to fall 32 percent this year and be down 43 from the 
high in 2013. I have witnessed this firsthand as a board member 
of my local bank, which has a large farm loan portfolio. We 
have already seen many producers have to refinance the losses 
they incurred last year for periods of up to 10 years. Some of 
our farmers weren't able to qualify for traditional operating 
loans and were forced to go to FSA guaranteed loans or FSA 
subordinated loans, which can be the loans of last resort. And 
of the producers who were able to get crop loans for this year, 
many are barely able to cash flow and need near record yields 
to make the loans work.
    Perhaps the only positive influence on this outlook in 
added uncertainty is the support provided by the farm bill, 
which I hope will help us weather the storm. Three years ago, I 
testified before the House Agriculture Committee, and we were 
in discussion of the needs for the 2012 Farm Bill. So I know 
how long and difficult a process it was to get the bill 
completed, and I want to thank all of you for the bill that we 
have in helping ensure farmers have at least some measure of 
stability in a very unstable market.
    The modest support provided by the farm bill is vital, not 
just to producers that are the direct beneficiaries, but to all 
of the businesses that depend on agriculture. Effective farm 
policy gives producers, agribusinesses and lenders the 
confidence we need to continue investing in our farms and 
obtaining credit to finance these investments.
    Overall, there appears to be some challenging times on the 
horizon for rural America and the farm economy. U.S. farm 
policy is absolutely critical to helping us weather the 
downturn and run our businesses. I want to thank each of you 
for your work in helping to develop, preserve, and protect 
these policies. Thank you again for your leadership and the 
opportunity to offer my testimony this morning, and I look 
forward to answering any questions that you may have.
    [The prepared statement of Mr. Combs follows:]

 Prepared Statement of Paul T. Combs, Rice, Soybean, Cotton, Corn, and 
         Wheat Producer and Farm Equipment Dealer, Kennett, MO
Introduction
    Chairman Crawford, Ranking Member Walz, and Members of the 
Subcommittee, thank you for holding this hearing regarding an update on 
the financial health of farm country. I appreciate the opportunity to 
offer testimony on farm country from the perspective of a producer who 
comes from an area that produces many different crops and where we have 
a number of cropping options.
    My name is Paul T. Combs. I grow rice, soybeans, corn, and wheat in 
Dunklin and Pemiscot counties in the Missouri Boot heel. In addition to 
our farming operation, my family and I also own and operate farm 
equipment dealerships in both Missouri and Arkansas.
    I recently completed two terms on the board of the Federal Reserve 
Bank of St. Louis and I also serve on several boards and committees for 
farm organizations, including the USA Rice Federation.
Overview of the Agriculture Economy
    As a producer, implement dealer, former Federal Reserve of St. 
Louis board member, and current board member of my local bank, I have 
an opportunity to observe the agricultural economy from multiple 
angles.
    As a farmer I have seen the farm price received for corn fall from 
$6.79 per bushel in July of 2013 when the farm bill first passed the 
House of Representatives, to $3.81 per bushel today, a 44 percent drop. 
It is a similar story for other crops as well. Adding to the squeeze on 
producers' balance sheets are the costs of inputs, which haven't 
declined. Farmers are still paying high prices for seed, fertilizer, 
fuel and electricity costs for irrigation, and wages for their 
employees. All told, this year is shaping up to be difficult across 
farm country. The only silver lining so far is that we have had some 
good moisture and there is potential to make up for the falling prices 
with good production. But as we know well in Missouri after 
experiencing a devastating flood in 2011 and drought conditions in 
2012, nothing is certain until the grain is in the bin.
    As an implement dealer I operate 11 dealerships and employ 185 
people in rural Missouri and Arkansas. So when the farm economy 
struggles I get hit not only as a producer, but on the business side as 
well. One of the first areas in which farmers try to control costs in 
the face of tighter margins is in their equipment investments. The past 
several years had been good for equipment sales. When prices were high 
and farmers had good income many reinvested their profits in buying new 
tractors and equipment, but over the past year sales have slowed 
significantly. My sales are down 15% year over year and that's even 
with producers having the benefit of hedging their 2014 crop. However, 
that hedging opportunity did not present itself in 2015 and we are very 
concerned about the prospects of the 3rd and 4th quarters of this year. 
In other areas of the country where they did not experience a few good 
years to build up reserves the situation for agribusinesses is more 
serious with sales almost completely stagnant.
    Farm equipment manufacturers are feeling the effects of the lower 
commodity prices and slow sales. Last August, Deere & Co. announced it 
would lay off a total of over 1,000 workers in their harvesting and 
agricultural equipment factories, and earlier this year Caterpillar 
announced it would be closing two plants in North Carolina and Georgia, 
leaving 275 people out of work. CNH Industrial, which manufactures Case 
IH and New Holland equipment, has also announced a number of layoffs at 
local plants across the country. The same is true for other equipment 
manufacturers as well where in the face of falling revenue they are 
forced to idle plants and reduce output.
    Implement dealers aren't the only ones affected by the downturn in 
farm country. Other agribusinesses that rely on farmers are also 
impacted, from the dealerships that sell trucks to the seed and 
chemical companies; no one is left unharmed when farm income takes a 
nosedive.
    During my tenure on the Federal Reserve Board of St. Louis I was 
able to observe the health of the agriculture sector from a macro level 
and witness the effect that agriculture has on the state of the rural 
economy. In 2012 a Kansas City Fed white paper spoke directly to this, 
stating ``The global boom in commodity markets underpinned rural 
economic gains in 2011. Supported by strong global demand, booming 
commodity markets spurred robust growth in many mining and farming 
communities.'' While the rest of the country was experiencing severe 
economic turmoil, rural areas, though still impacted, were somewhat 
insulated and bolstered by a strong farm sector. However, today the 
situation is quite the opposite. Despite the urban economy starting to 
show signs of life, falling commodity prices are a drag on rural 
America. In the Summary of Commentary on Current Economic Conditions, 
commonly referred to as the ``beige book'', the Federal Reserve 
publishes observations about the health of the economies of various 
industries in the different regions of the country. In the report 
released February 2015 edition the Kansas City district states relative 
to agriculture that, ``District farm income weakened further since the 
last survey period . . . Looking forward, District contacts expected 
modest declines in cropland values and further deterioration in farm 
loan repayment rates amid tighter profit margins for crop producers''.
    Also highlighting the downturn in farm country is the Economic 
Research Service of USDA whose 2015 Farm Sector Income Forecast 
predicts net farm income to fall to $73.6 billion this year, down 32% 
from last year and 43% from the high of 2013. Fluctuating prices are 
part of the nature of farming and for the most part producers are adept 
at adjusting in the face of hard times, but the plummet that we are 
seeing today is far more severe than anything even the best managers 
could have predicted or planned for.
Net Farm Income and Net Cash Income, 2000-2015F


          Note: F = Forecast. Data for 2014 and 2015 are forecasts.
          Source: USDA, Economic Research Service, Farm Income Wealth 
        and Statistics.
          Data as of February 10, 2015.

    As a board member of First National Bank of Kennett I have seen 
first hand the stress this has put on the lending community. Some of 
our producers were forced to move from a conventional operating loan to 
FSA guaranteed or subordinated loans, a loan of last resort. Plus, of 
the farmers that were approved this year many were barely able to cash 
flow, just 1 year of poor yields and many of them will be forced out of 
business, or will have to refinance their loss, which can take in some 
cases excess of 10 years to pay back.
Effects of Strong Farm Policy
    The current situation that I have outlined above has generated a 
need for farmers to take steps to minimize their exposure to risk, 
resulting in a pullback in investments for their farm. This pullback 
starts first with their suppliers of inputs (equipment, grain storage 
facilities, fertilizer) and then begins to impact the majority of 
businesses in rural America. We've seen this cycle play out over and 
over and I hope we will not repeat the mistakes of the past by taking 
for granted how important a dependable safety net is, not just to 
producers, but all businesses and families that depend on agriculture.
    Effective farm policy gives producers, agribusinesses, and lenders 
alike the confidence we need to continue investing in our farms, and 
obtaining credit to finance these investments.
Successes of the 2014 Farm Bill
    I want to therefore commend the work that the Members of this 
Subcommittee, the Agriculture Committees and both chambers of Congress 
did to write and pass the Agricultural Act of 2014. I know full well 
how long of a road it was to get the farm bill to the President's desk, 
but the conditions of today just underscore how vital it was to get it 
passed when you did.
    Throughout the farm bill debate, beginning with hearings in 2010, 
the farm economy was booming in many areas of the country. Net farm 
income was at record highs, land values were steadily increasing, and 
many producers were paying down debt and investing further in their 
operations. This led many to be lulled into a false sense of security, 
with some economists claiming that we had reached a ``new normal'' for 
agriculture due to high commodity prices. Many farm bill ideas were 
based on this assumption and were not written to withstand the hard 
times that many of us knew were on the way. Fortunately Congress 
listened to the needs of all producers and crafted a farm bill that 
provides the ability to tailor risk management to each operation in 
order to weather this downturn in the markets and survive to farm 
another year.
    A cornerstone of the safety net for many producers is Federal Crop 
Insurance, without which most farmers would never be able to secure 
financing for their operations or survive 1 year of disaster. The 
availability and affordability of crop insurance ensures that producers 
are able to participate and purchase a level of insurance that works 
for their operations. For lenders this is crucial when considering 
extending credit to farmers as it provides at least some certainty that 
he can repay his loan even if wiped out by weather or market collapse. 
The farm bill made several enhancements to crop insurance and provided 
producers greater ability to tailor their insurance purchase to their 
farms. This is especially important to many producers, regions, and 
crops that have been under-served under Federal Crop Insurance.
    However, there is one form of risk that insurance is not meant to 
address, which is falling and sustained low prices. This is the exact 
scenario I warned against 3 years ago the last time I testified before 
the Agriculture Committee and it is the exact scenario we find 
ourselves in today. Fortunately the farm bill addresses this risk by 
providing a commodity title that can help a farmer weather the bad 
times and survive to farm again in the good times when prices recover.
    For my operation I was able to enroll my corn and soybeans in ARC 
and protect myself against the downturn in prices for at least the 
first few years and enroll my rice, wheat, and sorghum in PLC where my 
primary risk is not revenue fluctuations but rather sustained low 
prices. This flexibility is absolutely essential and producer choice, 
although complicated, is part of what made the farm bill a success.
    These policies are not just important to me as a producer, but are 
essential to the agribusinesses that rely on the agricultural economy 
as well. If a market or weather event like the 2012 drought were to 
repeat itself and there were no farm policy in place not a single 
tractor would leave the lot next year and my 185 employees would be out 
of work. Furthermore, without the underpinnings of sound farm policy 
creditors would not be able to extend financing to producers. I do not 
know many farmers in my area that are sitting on enough cash reserves 
to self finance what can be upwards of a million dollars in expenses 
for just 1 year on just the hope that they will make a crop at the end 
of the season. And if they were able to self finance, it would only 
take 1 year of drought, floods, or an untimely hail storm to put a 
farmer out of business.
    All of this is to say, the farm economy is struggling, but the one 
bright spot for me as a producer and businessman is that we have a 5 
year farm bill in place that was written to help us weather this storm.
Other Challenges
    In addition to falling commodity prices, the rural economy faces 
challenges due to burdensome regulations, unpredictable tax policy, and 
transportation issues, just to name a few. Farmers need certainty and 
the threat of potentially not being able to plow through the field 
without violating the law, not knowing what the Tax Code will be 12 
days before the end of the year, and not having a reliable means to 
deliver a crop to market all provide added worries and impediments to a 
profitable agricultural economy. These factors also impede our global 
competitiveness.
Regulations
    One needs to look no further than the Clean Water Rule (formerly 
known as Waters of the United States, or WOTUS), which was issued last 
week, to find an example of regulatory overreach that threatens to 
saddle us with huge new costs and even stiff civil and criminal 
penalties. The process the Environmental Protection Agency used to 
arrive at the final Clean Water Rule was convoluted and not at all 
transparent. I am very concerned about the impact the rule will have on 
my farming operation and implement dealerships.
Tax Policy
    One other aspect of Federal policy that seriously hinders my 
business is the uncertain nature of the Tax Code, specifically the 
expiration of Section 179 and bonus depreciation. After expiring at the 
end of 2013, Congress did eventually retroactively extend these 
provisions for the 2014 tax year, but not until December 19th. This is 
not enough time to get the full economic value of these provisions. The 
provisions ought to be made permanent but if that is not in the cards 
then an earlier extension of current law is very important. The current 
$25,000 limit that Section 179 reverted to on January 1st of this year 
would not even cover the cost of most plows I sell, much less the 
tractors needed to pull them.
Transportation Issues
    Farmers rely heavily on transportation infrastructure to get their 
crops to market, we in Missouri are fortunate to have access to several 
waterways where transporting via barges is a cost effective and 
efficient way to move our commodities. However, aging locks and dams 
and the lack of investment in river infrastructure has caused problems 
for many producers, especially those upriver from me. Some of these 
issues were addressed in the Water Resources Development Act which 
passed last session of Congress, however there is more work needed to 
be done to ensure that transportation costs or delays do not get in the 
way of farmers delivering their crops to domestic and overseas markets.
Conclusion
    Over all, we have some very rocky waters to navigate ahead of us. 
U.S. farm policy is absolutely critical to helping us avoid the shoals. 
I thank each of you for your work in helping to develop, preserve, and 
protect these policies.
    Again, thank you for your leadership and for the opportunity to 
offer my testimony this morning. I look forward to working with you and 
your staff and will be happy to respond to any questions you might 
have.

    The Chairman. Thank you, Mr. Combs.
    Mr. Verett, you are recognized for 5 minutes.

STATEMENT OF STEVE VERETT, COTTON, SORGHUM, AND WHEAT PRODUCER, 
                          LUBBOCK, TX

    Mr. Verett. Thank you, Mr. Chairman, Ranking Member Walz, 
and Members of the Subcommittee for inviting me to testify. My 
name is Steve Verett. My son, brother, and I farm near Ralls, 
Texas, where we grow cotton, sorghum, and wheat. I am also the 
Executive Vice President of Plains Cotton Growers, and 
Treasurer of the Southwest Council of Agribusiness.
    This hearing is important because there has been a huge 
change in the farm economy between the time that you started 
the farm bill process and today. Cotton prices now are 70 
percent lower than the high recorded in 2011 and down 30 
percent compared to the highs in the succeeding 3 years. I 
speak in terms of cotton, but this plummet in prices is 
commodity-wide. As a consequence, farmers across the country 
are facing very difficult times, even those who had experienced 
a stronger price rally and good production in recent years. For 
cotton growers, the price rally was not as strong or sustained. 
And in Texas, where we have been dealing with a string of the 
severest level of drought, these times are extremely 
challenging because we have had little opportunity to build up 
financial reserves in order to get through this bear market.
    In order to benefit from stronger prices, you have to have 
a crop to sell. The stress is especially great for young 
farmers who have debt and little equity in their operations. 
And although we have faced 4 years of drought and the crop 
losses that come with it and the collapse in crop prices, our 
input costs are sticky and, in most cases, rising.
    The good Lord has answered our prayers this year, sending 
us desperately needed rainfall. But as you undoubtedly read, 
our cup is overflowing, and many producers will not be able to 
get into the field to plant a crop in a timely fashion.
    Securing financing for 2015 was extremely challenging for 
many farmers, in part because so many were carrying debt from 
the year before. For many Texas producers, there will be no 
room for error this year if they expect to secure financing for 
2016. In light of this, I would say that the health of the farm 
economy is very precarious. This is especially true in my part 
of the country, but based on what I have heard from my fellow 
producers around the country, everybody is really praying for a 
price recovery, strong yields, and in many cases, both. Without 
a turnaround, those who have had a recent history of stronger 
prices and production will take on more financial water while 
others less fortunate will be navigating serious financial 
straits. These conditions are not just affecting farm families, 
but people in cities like Amarillo and Lubbock and in smaller 
towns throughout Texas, even when their work has nothing to do 
with agriculture.
    Cotton is the number one cash crop in Texas, and Lubbock 
County is the largest cotton-producing county in America. 
Cotton is an economic lifeblood in Texas. That is why the farm 
bill and crop insurance are not just for farmers and ranchers. 
This is why it mystifies me when some people can't or won't 
appreciate why we need both when the answer is staring them in 
the face. Without Federal involvement and crop insurance, there 
would be no multi-peril insurance on our crops. And without a 
farm bill, there will be no American response to record high 
and rising foreign subsidies and tariffs.
    There are five studies published in the last 6 months that 
describe in great detail how our trading partners are breaking 
their trade commitments. Their cheating is harming America's 
farmers and ranchers, hurting our economy, and costing us jobs. 
But I don't have to read a study to know that because as a 
farmer, I am living it every day. When Communist China is 
paying its farmers $1.45 per pound for inferior cotton while I 
am earning something on the line of 60 for very high-quality 
cotton, something is not right. Communist China has a state-run 
economy, and for about the past decade, China had a policy of 
acquiring record stocks which sent world prices soaring, but 
overnight, Chinese policy changed and sent world prices into 
the tank. Now USDA says that China is likely to unload these 
stocks, depressing world prices with no end in sight. With 
China and other countries with low-wage jobs claiming much of 
our textile industries years ago, 80 to 85 percent of American 
cotton is exported. We are heavily dependent upon trade, but 
when it comes to the world cotton market, Communist China pulls 
nearly all the strings.
    What we have is a double-edged sword. First, even as you 
worked hard to cut $23 billion from the farm bill and still 
provide a safety net, all the other big players around the 
world were doubling down on their subsidies and protections, 
breaking their commitments. Our trade agreements give us a 
rules-based system, but we don't ever seem to enforce our 
rights.
    Second, our competitors go to Geneva and convince trade 
lawyers to arbitrarily change the rules that we agreed to in 
order to unfairly attack U.S. farm policy. That is how the 
Brazil case happened. Still I must support trade because as a 
major exporter, we have no choice. I would just like to see 
some effort at enforcement.
    Absent a free and open market or enforcement by our 
government to make it free and open, the farm bill offers 
American producers at least some tools to manage the risk of a 
market distorted by foreign subsidies and tariffs. The problem 
for cotton farmers is we had to give up those tools for cotton 
lint in the 2014 Farm Bill in order to satisfy Brazil. There is 
no ARC or PLC on cotton lint. This is a huge problem for cotton 
farmers based on the economic havoc that I have just described 
because the cotton STAX insurance policy is designed to operate 
in a free market and not as a response to cheating by other 
countries. I pray that we can weather the current storm, but if 
conditions continue, we may need USDA to use the tools it has 
available under the farm bill to help mitigate this serious 
situation.
    I have given you a lot to think about, mainly bad news for 
cotton, and I apologize for that, but I understood this was the 
purpose of today's hearing. Still I would be very remiss if I 
did not tell you how much I appreciate the Members of this 
Subcommittee and of the entire Committee for defending American 
farmers and ranchers every day. We as producers do not say it 
enough, but we are truly grateful. Thank you very much.
    With that, I would be glad to answer questions that you may 
have.
    [The prepared statement of Mr. Verett follows:]

    Prepared Statement of Steve Verett, Cotton, Sorghum, and Wheat 
                         Producer, Lubbock, TX
    Mr. Chairman, Ranking Member Walz, and Members of the Subcommittee. 
Thank you for holding this important hearing on the financial health of 
farm country.
    My name is Steve Verett. My son, brother, and I own and operate a 
3,500 acre family farm in Crosby County, Texas, located east of 
Lubbock. We are primarily cotton producers but we also grow wheat and 
sorghum. In addition to farming I also serve as the Executive Vice 
President of Plains Cotton Growers, Inc., and as Treasurer of the 
Southwest Council of Agribusiness. But, today, the only hat I wear is 
that of an American farmer.
    I expect that at least part of the reason you were motivated to 
hold this hearing is to help highlight the fact that, economically, 
times have changed significantly since consideration and passage of the 
2014 Farm Bill. This is true for all commodities including cotton.
    Consider this: in the year when the super committee was formed to 
achieve deficit reduction in order to avoid budget sequestration and 
the farm bill was potentially a part of that process, the average 
cotton price for 1 month reached almost $2.30 per pound, an unheard of 
level in a market where $1 cotton is unusual. In 2012, 2013, and in the 
early part of 2014, when the farm bill was finally enacted into law, 
the monthly average cotton price still reached as high as 94 to over a 
dollar per pound. Now, to clarify, this does not mean that cotton 
farmers all partook in these high prices, especially the high water 
mark where most did not. For example, producers who forward price their 
crops to manage risk often miss out on the peaks while those dealing 
with successive years of drought missed out altogether. But my primary 
point here is to suggest to you that the farm bill was written in the 
midst of a bullish cotton market and today all of those bulls are 
bears.
    Beginning last fall, cotton prices collapsed into the 60 range 
where prices largely remain today. Compared to the peak price back in 
2011 this constitutes a 70 percent drop in prices. But even compared to 
crop year averages recorded during the farm bill's consideration, 
cotton prices this year are still down very significantly, by as much 
as 30 percent.
    I can only say anecdotally, based on conversations I have had with 
producers and lenders in other parts of the country, that despite the 
stronger rally in crop prices that they had in the recent past, as 
compared to cotton, and despite having stronger yields, many producers 
in these parts of the country would be under water today given the 
plunge in prices but for their having purchased Federal Crop Insurance 
and the potential for some farm bill benefit being paid this October. 
These are the same producers who have had the opportunity to build up 
some financial reserves over the years, thanks to higher crop prices 
and good yields, and, yet, they are hoping and praying for some 
recovery in the market or a super strong yield to offset crop prices 
that today would not cover their bills.
    Having said that, now imagine a farmer in Texas who has been 
dealing with a severe drought--in many places a D4 drought--for the 
past 4 years, who has been growing crops that have seen a more modest, 
shorter-lived price rally in recent years but has still felt the same 
price plunge, and in the case of the cotton farmer, where he also has 
no farm bill benefit coming because crop insurance is it for cotton 
farmers. Producers in my part of the country have had little 
opportunity to build up reserves over the past 4 years in order to 
weather the current storm because they spent all of those years trying 
to keep their head above economic water because there was no rainwater.
    Consider further what beginning farmers and ranchers are 
experiencing. In many cases, they have no reserves built up and little 
equity in their operation.
    And, now, as you know due to the terrible tragedies in south Texas, 
the drought is giving way to deluges of rain that in many cases are 
preventing producers from planting a crop, causing them to potentially 
lose out on what could be a strong production year, the first in a very 
long time. To offer a personal illustration, on my own farm, I may be 
prevented from planting some acreage for the first time in 38 years.
    Yet, even as farmers across the country feel the effects of 
depressed crop prices, the prices we receive for our crops have not 
translated into lower input costs. Some input costs have gone down but 
most are stuck or are even still rising. It confirms once again the 
quip made by President Kennedy who very astutely observed that farmers 
are the only people in the economy who buy everything they buy at 
retail, sell everything they sell at wholesale, and pay the freight 
both ways.
    So, Mr. Chairman, if I were asked to describe the state of the 
financial health of the farm economy in one word, my answer would be: 
precarious.
    Lenders in my part of the country tell me that as much as 65 
percent of operating loans from last year had significant carry-over 
into 2015 because producers simply could not pay off their notes. 
Equipment dealers tell me that about half of producers in our area had 
to have their equipment notes restructured. Bankers pulled a rabbit out 
of the hat in getting a great majority of producers in our part of the 
country refinanced for 2015 in a time when it is very difficult to show 
a positive cash flow. But, with crop prices where they are right now, a 
producer, especially a producer still carrying last year's debt, will 
not be able to as much as stub a toe on the production or cost side of 
the equation if he plans to get refinanced for 2016. That producer is 
going to need a very good year this year. And, good Lord willing, he 
might get it--provided he can get into the field.
    Yet, the financial health of the farm economy does not just concern 
the farmer. The 1980s farm financial crisis and other severe times for 
agriculture have demonstrated that the impact of a bad farm economy is 
felt even in the cities. And, conversely, the manufacturing crisis of 
the early 2000s demonstrated that the impact of a good farm economy is 
also felt in the city. I expect that at least two of my fellow 
panelists can speak more fully on this but I will just offer some 
thoughts on this from my vantage point.
    Cotton is the No. 1 cash crop in the State of Texas. Lubbock County 
is the No. 1 cotton-producing county in America. So, when cotton prices 
are in the tank and drought is gripping our state, cities like Lubbock 
and Amarillo--where nearly \1/2\ million people live and work--suffer. 
And it suffices to say that when Lubbock or Amarillo cough smaller 
towns like Brownfield and Plainview are on a sick bed. Cotton is the 
lifeblood of these cities and towns and many just like them across the 
Cotton Belt. Crops grown by fellow producers across the country can 
tell a similar story.
    People not directly involved in agriculture but who live and work 
in these communities may not know it, they may not even think about it, 
but their livelihood depends on good crop prices and strong yields. 
And, in the absence of good yields and strong crop prices, these folks 
depend as much as the farmer on Federal Crop Insurance and the farm 
bill.
    I can go back to the manufacturing crisis of the early 2000s when a 
strong agricultural economy was being credited for helping to stabilize 
the national economy. Times were just starting to improve for 
agriculture about that time after we ourselves had experienced 4 very 
hard years on the farm when cotton prices fell to 28 a pound and corn 
prices were under a buck. I can attest that had Federal Crop Insurance 
and the farm bill not been there and had they not been strengthened to 
respond to this serious situation, we would have seen another 1980s 
farm financial crisis, we would not have been around to help offset the 
losses to the manufacturing sector, and the economic boats of more than 
just farmers and ranchers would have capsized.
    Now, in a city noted for political polarization where little can be 
agreed upon, I realize that some on either side of the political 
spectrum can still manage to come together in their common loathing of 
crop insurance and the farm bill. They use and abuse facts and 
statistics to paint the picture they want to and that is certainly 
their right. But my defense of crop insurance and the farm bill boils 
down to two facts. First, I could not buy insurance to cover my crop 
from multiple perils like I can on most anything else without Federal 
involvement. The weather risks of farming are simply too great for any 
private company to successfully offer insurance to producers at 
premiums that producers could afford. In the best of years, for some 
crops, on the best of ground, for the best of producers, this might be 
possible, but not year in and year out for all producers in all parts 
of the country on all crops. This is simply a fact.
    Every farmer in the country wishes he could buy insurance on his 
crops the same way he buys insurance on anything else, in part so we 
did not have to come to Washington hat in hand to plead for protection 
of our insurance. Making this plea every 5 years causes anxiety enough, 
especially when the House defeated by only nine votes an amendment that 
would have, without the least bit of exaggeration, killed Federal Crop 
Insurance but the anxiety reaches new levels when year in and year out 
we face killer amendments on the House and Senate floors that are 
cloaked as mere reforms. It is key to remember that producers write 
huge checks to cover our end of the premium on crop insurance, totaling 
about $4 billion last year, and in any year other than a year when we 
receive an indemnity, it is the farmer paying the government money not 
the government paying the farmer.
    Second, very often, we are not operating in a free and open market. 
I will not duplicate here what you are likely to hear at tomorrow's 
hearing but there are no fewer than five studies out there showing that 
even as you worked hard to cut the cost of the farm bill by some $23 
billion, our trading partners were all very busy increasing subsidies, 
tariffs, and building up other walls against the commodities we produce 
here in America. Texas Tech University, Charleston College, DTB 
Associates, the OECD and the office of the United States Trade 
Representative all have extensive reports on what each of our trading 
partners is up to in this regard and, quite frankly, it is scandalous. 
USTR's report alone numbers more than 400 pages and I expect that none 
of these reports cover every creative angle these countries are taking 
to protect their agriculture sector.
    The whole goal behind our trade agreements is to have a rules-based 
system and I certainly support this effort. But, the practical problem 
that we need to address is two-fold not only to make that goal a 
reality but also to maintain agricultural support for trade. First, we 
are not holding our trading partners' feet to the fire to ensure they 
live up to their commitments. And, second, we are allowing our trading 
partners to reinvent what our country agreed to in order to tear down 
any support for American farmers in the same way that courts here at 
home sometimes make up the law as they go along rather than simply 
interpret it. The American cotton farmer knows this all too well based 
on our experience with Brazil.
    We are incredibly dependent on the world market, especially in the 
case of cotton where a majority of our textile mills have left our 
shores long ago, along with tens of thousands of good paying jobs. We 
now depend on the world cotton market to sell about 80 to 85 percent of 
what we produce. And that world cotton market we depend on revolves 
around communist China, a state-planned economy, the world's largest 
consumer, importer, and stockholder of cotton, and the second largest 
producer. And this brings me to my point about free and open markets.
    China has been the world's largest cotton importer since 2003 
though it was certainly a big player well before that time. Since then, 
China has driven world cotton stocks to nearly double average levels, 
with world stocks approaching nearly 90% of use in 2012 and 2013. 
During this same period, China was offering its producers a minimum of 
$2,950 per ton to $3,200 per ton at a time when the world median 
monthly price was $2,000 per ton and no monthly average exceeded $2,600 
per ton. Import tariffs in China range from 0-40%, with most cotton 
entering at 13% or 27% with VAT. In 2014, China instituted a program in 
the Xinjiang province to pay producers there about $1.45 per pound even 
as cotton prices in the U.S. were falling into the 60 range. There is 
significant uncertainty as to how communist China--the government, not 
markets--will deal with the unprecedented level of stocks China is 
sitting on, but lower imports by China are thought highly likely over 
several years. As such, USDA predicts that global cotton markets will 
face a tough and costly transition should China in fact return world 
stocks to normal levels with anything other than a long transition 
period. And, USDA offers this comparison: China's disposal of a large 
cotton stockpile in the early 2000s may provide some guidance about how 
Chinese authorities might dispose of their current stockpile. By 1999, 
China had accumulated large cotton stocks (140 percent of use), which 
they reduced to 48 percent stocks-to-use by 2004. This is chilling 
because it was in the late 1990s and early 2000s when the U.S. 
agriculture economy neared collapse and cotton prices reached that 
apocalyptic 28 per pound.
    I wish I could say that China is alone on this front but, as the 
reports on foreign subsidies and tariffs that I referred to earlier 
indicate, China is only one of many, though certainly a big one. India 
is working hard to do what China has done in terms of implementing 
policies to protect and promote its cotton industry through government 
largesse and barriers to trade. And Turkey is yet one more in a litany 
of examples, where the Turkish Government has alleged, without any 
substantiation, that the U.S. cotton industry is somehow illegally 
dumping exports to Turkey, with one Turkish official even reportedly 
saying that the charge is simply in retaliation against the United 
States for something our country has alleged to have done on steel.
    In short, farmers can and do manage extraordinary risks. But, there 
is no way that an individual American farmer can somehow manage the 
risks associated with, for instance, a state run economy the size of 
China that for several years will acquire stocks of historic record and 
then all of a sudden stop and, perhaps, in time liquidate those stocks 
back down to normal levels. And note that I am not even speaking to 
some of the more controversial issues associated with leveling the 
playing field in the global market, such as currency manipulation, wage 
disparities, or differences in environmental protection requirements; I 
speak strictly in terms of subsidies, tariffs, and non-tariff trade 
barriers erected for the purpose of building up their own industry at 
the expense of American exports.
    China serves as a specific though not by any means exclusive reason 
why we have and why we need U.S. farm policy. Our farm policy is a very 
modest response to the kind of anti-competitive trading practices that 
we would not tolerate within our borders and which we should not 
tolerate outside of our borders either.
    One very serious problem for cotton lint, however, is it is no 
longer eligible for key farm bill support, as other crops are. To 
comply with the World Trade Organization ruling in the Brazil case, 
cotton policy was completely overhauled, with cotton lint not included 
in either the Agriculture Risk Coverage or Price Loss Coverage options. 
Instead, cotton retains access to the marketing loan with a base loan 
rate well below the cost of production, as well as traditional crop 
insurance, and a new area-based crop insurance policy known as STAX. 
The trouble is, the success of this policy as an effective safety net 
is largely predicated on a free and open market on cotton which, as I 
have just explained, we most certainly do not have today. As a result, 
first year participation in the new STAX insurance policy is low. And, 
of course, traditional crop insurance was never designed to meet the 
anti-competitive trade practices of our trading partners but to respond 
to crop losses due to weather and revenue swings within a single crop 
year in order to provide replacement cost protection.
    This is certainly not good news for the American cotton farmer. 
But, absent any action by the U.S. Government to compel our trading 
partners to play by the rules that they agreed to, I do believe that 
there are at least some tools within the farm bill that are available 
to USDA that might assist cotton producers in dealing with this 
extraordinary situation that is totally out of U.S. producer control 
and that may very well require mitigation depending on price and 
production conditions.
    Despite this ominous testimony, which I believe does reflect the 
feeling of most producers, and certainly cotton producers, I remain 
hopeful, in first part because that is what farmers do but in second 
part because I am testifying before Members of Congress who understand 
what I have just laid out. Many of you were in the trenches, leading 
the fight for a new 5 year farm bill during what was a very contentious 
and protracted, 4 year debate. I am very heartened and encouraged by 
your support. I know that many of you took a lot of bullets from 
opponents of U.S. farm policy on account of your support while maybe 
you did not always get the thanks you deserved back home for making it 
happen. For all that you have done and continue to do for American 
agriculture, please accept my gratitude and sincerest thanks, and know 
that American agriculture is a bit like family and friends in that we 
do not always express our appreciation as we should.
    Before I conclude, let me touch on a few other issues of great 
importance to agriculture that I would be remiss not to mention. My 
brief discussion of these issues is in no way meant to diminish their 
importance to agriculture but rather a function of time as I felt that 
a primary focus on the current conditions facing cotton farmers was 
especially appropriate in the context of today's hearing.
    First, on a note very much related to the importance of the farm 
bill and crop insurance, let me just convey my thanks to each of you 
for working to protect both in the budget process. We know that it did 
not just happen and that it involved a lot of blood, sweat, toil, and 
tears on your part. We very much hope that you will stand your ground 
against any attacks during the appropriations process.
    Second, we are grateful for all that you are doing on a bipartisan 
basis to block the Waters of the U.S. regulation. I believe that 
Chairman Conaway and Ranking Member Peterson reflect the collective 
wisdom of all of agriculture when they rejected EPA's attempt to 
repackage and sell what is basically the same rule. We also very much 
appreciate efforts to eliminate the permitting requirements under the 
Clean Water Act that are duplicative of requirements already imposed by 
FIFRA. Crop prices and yields matter but so do costs and Federal 
dollars can also be better spent on things other than on doubling down 
on permitting requirements and policing ditches.
    Third, producers like me very much appreciate the bipartisan 
efforts to eliminate the death tax and make permanent the section 179 
and bonus depreciation levels extended late last year. We also 
appreciate that the proposal to eliminate stepped up basis for 
producers was rejected. As a dad who wants to pass along the farm to 
his son, the death tax and stepped up basis issues are not provisions 
for the wealthy but provisions meant to make for certain my son is not 
shouldered with an unsustainable amount of debt, especially in these 
very uncertain times when debt load can make or break a producer. In 
regard to section 179 and bonus depreciation, we do very much 
appreciate that these provisions were ultimately extended and I know 
that you recognize how much more these provisions could mean for 
producers and the whole economy if made permanent or at least extended 
earlier in the year if an extension is all we can hope for. The 
conditions in cotton country that I have just outlined have really hit 
the implement dealers and addressing this issue in a timely way would 
certainly be of help to them.
    Finally, on behalf of every producer who has been coping with 
extreme drought or flooding or other weather events where a toll has 
been taken on our Actual Production History for crop insurance, I want 
to thank this Committee for developing the APH adjustment included in 
the farm bill and for pressing for its timely implementation. This 
provision has been a lifesaver for so many producers because it gave 
them an opportunity to pay a higher premium to buy adequate insurance 
to cover what they have proven they can grow. This was a key provision 
of the farm bill and we thank you for being the genesis of it, and we 
also commend Secretary Vilsack and Risk Management Agency Administrator 
Willis and his team for pulling out the stops to make it happen.
    Thank you once again, Mr. Chairman, and Ranking Member Walz for 
affording me this opportunity to testify. I look forward to hearing 
your thoughts and answering any questions that you may have.

    The Chairman. Thank you, Mr. Verett.
    Mr. Brantley, you are recognized for 5 minutes.

   STATEMENT OF L. DOW BRANTLEY III, RICE, COTTON, CORN, AND 
                 SOYBEAN PRODUCER, ENGLAND, AR

    Mr. Brantley. Chairman Crawford, Ranking Member Walz, and 
Members of the Subcommittee, I am honored to have the 
opportunity to offer my views today on the current state of the 
agriculture economy. Again, my name is Dow Brantley, and I farm 
9,500 acres of row crops in central Arkansas in the community 
of England. We grow rice, cotton, corn, and soybeans. I farm in 
partnership with my parents, two brothers, and our families. 
And I am pleased to serve as Chairman of the USA Rice 
Federation, the Arkansas Rice Federation, and Arkansas Rice 
Farmers. But today I am going to try to offer my testimony as 
an individual diversified farmer from the Mississippi River 
Delta.
    Rice is our primary focus, and as you know, Mr. Chairman, 
Arkansas grows approximately 1.3 to 1.5 million acres of rice 
each year, which is about \1/2\ of the U.S. rice crop. Rice 
production, transportation, and processing play important roles 
in our state by providing thousands of jobs in the Mississippi 
River Delta. Nationally, the U.S. rice industry contributes $34 
billion in annual economic activities. It provides jobs and 
income for everyone involved in the value chain, contributing 
approximately 128,000 jobs.
    This year's rice crop is expected to bring about $3 a 
hundredweight less than the 2013 crop on top of rising input 
costs, which are all well beyond the control of the farmer. The 
stakes are higher and higher, and the profit margins are 
continuing to shrink and, in many cases, are in the red today.
    For those unfamiliar with the crop, rice fields are flooded 
during the growing season to provide water that the plants need 
and to help control weeds. While drought during the growing 
season adds to the cost of labor and other flood management, we 
fortunately do not typically lose a crop due to drought. On the 
other hand, this year's planting period in Arkansas and 
surrounding areas has been hampered by unusually wet weather. 
Aside from battling Mother Nature, government interference is 
the biggest challenge that rice producers face as they deal 
with the plethora of factors affecting price beyond their 
control.
    As rice is the most government-interfered crop in the 
world, the U.S. has difficulty competing with foreign 
governments who illegally subsidize their crops and participate 
in unfair trade negotiations. It is critical that the U.S. 
Government continue to go after the bad actors that put our 
nation's rice producers at an unfair disadvantage.
    A study released last month on the global competitiveness 
of the U.S. rice industry by the USITC lays out these 
challenges in great detail. The key conclusions outline the 
pervasive extent of government involvement in global rice 
markets and the high level of foreign tariffs that keep out 
U.S. rice exports. USITC analysts conclude that U.S. rice 
production would be approximately 25 percent higher in the 
absence of global tariffs. In this sense, a big risk to the 
U.S. rice industry is not crop failure, as it may be for some 
other commodities, but rather the trade policies of our own and 
foreign governments.
    I believe the first order of business should be to right 
this wrong. I encourage Committee Members to read and consider 
two sets of comments referenced in my written testimony 
regarding the 2014 Farm Bill's actively engaged in farming 
proposed regulation. The proposal's requirements do not make 
good business sense and would come at a significant cost and 
thus be punitive to my family's operation, which was supposed 
to be exempt from any change.
    In summary, I appreciate the work of this Committee in 
crafting the 2014 Farm Bill and the work you are doing to 
monitor the agriculture economy. I think it is critical that we 
maintain provisions that allow us to be competitive in the 
world's markets distorted by high foreign subsidies and tariffs 
that contribute to the kind of depressed prices we have today, 
including necessary acts of enforcement towards foreign markets 
that operate illegally and put U.S. rice farmers at an unfair 
disadvantage.
    Without U.S. farm policies in place, the current economy 
would not prevent farmers from continuing to farm, but it would 
prevent future generations from becoming involved in farming 
operations, leaving our industry in peril. I want to leave my 
operation as a legacy for my children, and so we as an industry 
need to do all we can to invest in today's economy.
    Thank you for the opportunity to present my views today. I 
will be glad to answer any questions.
    [The prepared statement of Mr. Brantley follows:]

  Prepared Statement of L. Dow Brantley III, Rice, Cotton, Corn, and 
                     Soybean Producer, England, AR
Introduction
    Chairman Crawford, Ranking Member Walz, and Members of the 
Subcommittee, thank you for holding this important hearing on the 
financial health of farm country. I am honored to have the opportunity 
to offer testimony before the Committee concerning my views on the 
current state of the agriculture economy.
    My name is Dow Brantley. My farm is located in central Arkansas 
near the community of England. We grow rice, cotton, corn, and 
soybeans. I farm in partnership with my father, mother, two brothers 
and our families. Due to the hard work of my grandparents and parents, 
our family farm has grown from just a few hundred acres in 1946 to 
around 9,500 acres in row crop production today. I am pleased to serve 
as the Chairman of the USA Rice Federation, Arkansas Rice Federation 
and Arkansas Rice Farmers, as well as a board member for many other 
agribusiness associations in the state, but I offer my testimony today 
from my perspective as a diversified farmer.
Industry Overview
    As I stated, my farm is diversified, but rice is one of our primary 
focuses. It is worth noting that Arkansas grows rice on approximately 
1.3 to 1.5 million acres each year, which is nearly \1/2\ of the entire 
U.S. rice crop. Rice production, transportation and processing play 
important roles in the state by providing thousands of jobs in what is 
referred to as the Mississippi River Delta. Rice is the state's second 
highest value commodity and the top agricultural export. Nationally, 
the U.S. rice industry contributes $34 billion in annual economic 
activity. It provides jobs and income for not only rice producers and 
processors, but also for all involved in the value chain, contributing 
128,000 jobs.
    About 85 percent of all the rice that is consumed in the U.S. is 
produced domestically. Despite significant trade barriers to exports, 
the U.S. remains the largest non-Asian exporter of rice and one of the 
largest exporters worldwide.
    Rice fields are flooded during the growing season to provide water 
that the plants need and to help control weeds. While drought during 
the growing season adds to the cost of maintaining the flood and 
certainly adds to the labor required to check irrigation pumps and keep 
levees intact, we fortunately do not typically lose a rice crop due to 
drought. On the other hand, this year's planting period in Arkansas and 
surrounding areas has been hampered by unusually wet weather.
    In their recent outlook for its representative farms assuming the 
2014 Farm Bill provisions and FAPRI January 2015 Baseline price 
projections, the Agricultural and Food Policy Center (AFPC) at Texas 
A&M University indicates a significant amount of financial stress for 
rice farms over the life of the farm bill. Six of thirteen 
representative rice farms are projected to be in good financial 
condition (small probability of not cash flowing or losing real 
equity), none are projected to be in marginal condition and seven are 
in poor condition (high likelihood of not cash flowing and losing real 
equity). The AFPC projections should be viewed as optimistic because 
the analysis used a price forecast that was more than $1.00/cwt higher 
than currently projected prices.
    This year's rice crop is expected to bring approximately $3.00/cwt 
average less than the 2013 crop. Throughout this time period input 
costs have continued to rise, especially for seed and implements and 
other key inputs--U.S. farmers cannot control these costs. The stakes 
are higher and higher, and the profit margins are continuing to shrink 
and in many cases are in the red today.
    In addition to low prices, the industry is trying to defend itself 
from a food safety standpoint as critics urge the Food and Drug 
Administration to set a standard for inorganic arsenic levels in rice 
to a level significantly lower than the international Codex standard. 
Mounting unnecessary regulations on the industry which do not have 
scientific backing will only further magnify the U.S. trade disparities 
and cause additional harm and burden for our farmers, millers and 
merchants.
Global Challenges of U.S. Rice Industry
    When we're not battling Mother Nature we still have uncontrollable 
factors that could make or break us any given year, a prime example is 
government interference in rice production. It is decisions taken by 
our own Federal Government and the governments of nations around the 
world. As rice is the most government-interfered crop in the world, the 
U.S. has difficulty competing with foreign governments who illegally 
subsidize their crops and participate in unfair trade negotiations. 
Unfortunately, these bad actors are the same entities that set the 
world price and without a powerful farm bill, rice producers would be 
in more trouble economically than they are currently. It is critical 
that the U.S. Government continues to go after the bad actors that put 
our nation's rice producers at an unfair advantage.
    A study released last month on the global competitiveness of the 
U.S. rice industry by the U.S. International Trade Commission (USITC) 
lays out these challenges in great detail. The key conclusions are well 
known to our industry and my fellow producers. It outlined the 
pervasive extent of government involvement in global rice markets and 
the high levels of foreign tariffs that keep out U.S. rice exports. 
USITC analysts concluded that U.S. rice production would be 1.3 million 
metric tons (mmt) higher in the absence of global tariffs. Removing 
foreign tariffs--U.S. import duties on rice are essentially zero--not 
only leads to higher production but would also increase U.S. exports by 
slightly more than 1.3 mmt or approximately 25 percent.
    Here are some examples:

  1.  Thailand's recently discontinued Paddy Pledging Scheme purchased 
            rice from Thai farmers at the equivalent of $22.22/cwt. The 
            U.S. market price is in the $13/cwt range. Thailand amassed 
            approximately 12 million to 15 million metric tons of rice 
            stocks as a result and the government is now disposing of 
            these stocks by using export subsidies.

  2.  India, one of the world's top rice exporters, subsidizes the cost 
            of fertilizer and other inputs for its farmers and the 
            country has emerged as a major world exporter.

  3.  Iraq's government-controlled tender process since 2014 has nearly 
            shut U.S. rice out of a traditional and large market 
            despite continued price competitive offers from U.S. 
            exporters.

  4.  South Korean negotiators, at the eleventh hour, demanded that 
            rice be excluded from the so-called Korea Free Trade 
            Agreement because they considered rice a ``sensitive 
            crop.'' U.S. negotiators agreed to the exclusion.

  5.  China continues to deny access to U.S. rice despite years of 
            technical negotiations with the U.S. Government on a 
            phytosanitary protocol.

  6.  Japan's continued reluctance to grant meaningful market access to 
            U.S. rice in the Trans Pacific Partnership negotiations 
            raises real questions about the value of the TPP to the 
            U.S. rice industry. We know that the Administration is 
            questioning key WTO members about compliance with their WTO 
            obligations as regards domestic support for agriculture, 
            but these efforts are, unfortunately, insufficient.

  7.  While the U.S. has extended trade and travel status with Vietnam 
            and China, countries which were our enemies in the 1960s 
            and 1970s, we have not restored normal travel and trade 
            relations with Cuba where the U.S. Government continues an 
            embargo that was put into place more than 50 years ago. For 
            my commodity, rice, where government intervention and trade 
            barriers are rampant, Cuba offers a rare, new opportunity 
            for an export market where I and other U.S. producers can 
            compete on price and quality.

    In this sense, a big risk to the U.S. rice industry is not crop 
failure as it may be for some producers, but rather our own 
government's trade policies and the trade policies of foreign 
governments. I believe the first order of business should be to at long 
last right this wrong. But, as our government hopefully works toward 
that goal, U.S. farm policy continues to be an important and even vital 
risk management tool.
2014 Farm Bill Review
    The 2014 Farm Bill made significant changes, many of which should 
be very helpful, but some of which are making managing our operation a 
little more challenging. For rice farmers, there is no doubt the 
elimination of the direct payment has created an enormous challenge. 
The direct payment was capital that a farmer could count on and that 
helped us do our work and manage our farm better. We all understand why 
direct payments were eliminated, and ultimately we were able to support 
this given the PLC option that was put in the new farm bill, but I 
don't want to pass over the fact that not having this payment last 
October, at the same time prices for our products were sliding below 
costs of production, has made this business a lot more difficult.
    With that said, PLC which is what most rice farmers chose, should 
in fact provide some real support in time of need. I appreciate the 
certainty that there should be some help on the way this October. This 
by no means guarantees me a profit, but it does at least give me a 
fighting chance and the confidence I need to go out and spend the money 
to try to make a good crop. For other crops in my area, the ARC program 
looked like a good option for the next couple of years anyway, and will 
provide some helpful liquidity. Finally, for cotton and for the other 
crops, I am grateful for the new insurance options of STAX and SCO. 
None of this was particularly attractive this year due to distorted 
global markets and their impact on prices, but I do believe that in a 
free and fair market these policies can be a valuable tool for 
producers.
    I recognize the challenge Congress was faced with to make 
improvements to crop insurance and commodity policy. Having watched the 
2014 Farm Bill process in its 4 year entirety, it seems like nearly a 
miracle that you were able to put together and pass a bipartisan farm 
bill and maintain as strong of policies as you did. I do want to thank 
you for this Committee's tireless efforts on behalf of producers of all 
crops in all growing regions.
Crop Insurance
    Crop insurance, as a whole, has not worked for rice generally, and 
on my farm particularly like it has for other crops and areas. Our farm 
is 100 percent irrigated, and on average, our yields are very 
consistent. Our financial problems occur with higher production costs 
due to irrigation or as the result of a weather event in the fall that 
disrupts our harvest and affects the quality of our crops. We have made 
attempts to address these shortcomings through the promotion of a 
downed rice policy, and as I stated earlier we are hopeful about the 
new SCO policy. I would also note that the 2014 Farm Bill included a 
provision which would allow producers to purchase insurance to cover 
their margins. It appears this policy is on track to be made available 
for the 2016 crop year, and so we are eager to see if in fact it will 
be as viable as we hope. It is imperative that SCO is made available to 
all of the rice growing counties to be fully effective and that revenue 
protection be available every year and not inconsistently offered.
Payment Limitations/Means Testing
    Farms from my home area and rice farms in general tend to be larger 
and thus more sensitive to payment limit provisions. The 2014 Farm Bill 
retained workable payment limit provisions, and for this we thank you. 
This was coupled the authority granted to the Secretary of Agriculture 
to: (1) change ``actively engaged'' requirements for eligibility; and 
(2) impose a hard limit on marketing loan benefits which only serves to 
hamper the orderly marketing of certain crops.
    A number of farm organizations joined in submitting a comment 
(http://www.usarice.com/doclib/191/26/7929.pdf) on the proposed 
``actively engaged rule,'' and the six rice producing states also 
submitted a comment (http://www.usarice.com/doclib/191/26/7926.pdf). I 
would encourage Committee Members to read and consider these carefully. 
For purposes of this testimony, let me just say that these changes 
would require our farm to make changes in our day-to-day operations 
that do not make good business sense. This would come at a significant 
cost and thus be punitive to my family's operation. Note that we are a 
family operation, and thus we were supposed to be exempt from any 
change. This rule needs to be revised significantly.
    Regarding the marketing loan, this was largely an issue for cotton 
with the 2014 crop, but under the combined pay limit it impacts the 
safety net for all commodities. I don't think anyone anticipated at the 
time of farm bill passage that the marketing loan would come into play 
for any crops including cotton, and no one would have wanted the 
orderly marketing of crops to be disrupted. Unfortunately, this has 
become the case and I believe this problem should be addressed.
Conclusion
    In summary, I appreciate the work of the Committee on Agriculture 
in crafting the 2014 Farm Bill and the work you're doing to monitor the 
agricultural economy. I know implementing this farm bill and developing 
the next farm bill will present its own set of challenges. I remind you 
that it is critical that we maintain provisions that allow us to be 
competitive in world markets distorted by high foreign subsidies and 
tariffs that contribute to the kind of depressed prices we have today. 
This includes providing necessary acts of enforcement towards foreign 
markets that operate illegally and put U.S. rice farmers at an unfair 
disadvantage.
    Without these price protection and other farm policies in place, 
the current economy will not only discourage farmers from continuing to 
farm but it will discourage future generations from becoming involved 
in new or existing farming operations, leaving our industry in peril. I 
want to leave my operation as a legacy for my children. We as an 
industry need to do all we can to invest in today's economy.
    Thank you for the opportunity to present my views today and I will 
be happy to respond to any questions.

    The Chairman. Thank you, Mr. Brantley.
    Mr. Paap, you are recognized for 5 minutes.

  STATEMENT OF KEVIN PAAP, CORN AND SOYBEAN PRODUCER, GARDEN 
                            CITY, MN

    Mr. Paap. Thank you, Mr. Chairman, for this opportunity, 
Members of the Subcommittee. My name is Kevin Paap. As 
mentioned, I am President of the Minnesota Farm Bureau, but 
today I would like to talk a little bit as a fourth-generation 
family farmer. We raise corn, soybeans, and boys, boys being 
the most important crop. You know, sustainability is important 
in all of agriculture, but generational sustainability is the 
most important.
    When I had this opportunity presented on me, I consulted my 
bankers, some other bankers, crop insurance agents, farm 
management instructors, machinery dealers, and my neighbors. 
And most of the answers I got were all two-word answers: They 
were things like it stinks. It is difficult. Be aware. It is 
bleak. Be ready. When we talk about the financial condition of 
farm country, the two words everybody agrees on: It depends. It 
depends on your type of operation. If you are a crops guy in 
Minnesota, your income is down 65 percent from last year. If 
you are a dairy, you are up 200 percent. So it depends on the 
type. It depends, do you own or rent that land? It depends on 
your age, your equity, and most importantly, it depends on the 
weather.
    It has already been mentioned, as we are seeing $50 to $100 
an acre losses in crops, we are spending our own cash to meet 
our cash flow losses. We have working capital burn. Financial 
stress, it is here. It is real. It will be challenging for 
many. I do believe as well this is not the 1980s. I graduated 
from college in the 1980s and started farming. We don't want to 
do that again. There is going to be a need for more FSA 
guaranteed loans. Will there be enough money?
    It was mentioned, Minnesota turkeys, we are number one in 
turkeys. The avian influenza, bird flu: In 23 of our 87 
counties, we have 103 farms infected; 8,355,732 birds in 
Minnesota; over 41 million across the U.S. And to me as a corn 
and soybean farmer, my bottom line is thinking about one bird 
equals about 1 bushel of corn. What are we going to do with 
that nearly 8\1/2\ million bushels, billion bushels that we 
need to worry about--million bushels.
    But it is not just financial stress. It is the emotional 
stress that was managed. It is the jobs. It is the dollars not 
spent on Main Street. And it is real. This weekend a barn 4 
miles from our farm was hit. Puts us into that control area. 
You know the one thing that this Committee can do to help with 
the financial stress in farm country is the one thing important 
to everyone in agriculture, important to this Committee, 
important enough it was in the title of your Subcommittee, and 
that is risk management, crop insurance. This public-private 
partnership of crop insurance, revenue insurance, is so 
important. It is critical to us as farmers. It lets us use that 
cash, that crop, as cash, as collateral, as we borrow the 
money.
    Really crop insurance is my banker's best friend. We always 
talk about beginning farmers and wanting to get that fifth 
generation going on our farm. One thing that is so important, 
certainly the ability to purchase that crop insurance at a 
reduced price is important, but what I heard from farm 
management instructors and bankers, if we want beginning 
farmers in agriculture, we want to have the ability to use 
realistic yields, to be able to transfer those yields just 
shows a true picture. That means 190 bushel yield compared to 
maybe 170 bushel yield if you are a beginning farmer. That is 
$80 an acre. That maybe means loan or no loan.
    In conclusion, I want to, as I visited with a good friend, 
a farmer, farm management instructor, Paul Lanoue, from 
Marshall, Minnesota, he was the first one when I asked how 
would you describe it? He said it stinks. His comments were, we 
as farmers, we must understand our ratios. We must know where 
we are. We have to be able to see this train wreck ahead of us 
because if we understand where we are, we manage the things we 
can manage, there are going to be a lot of opportunities ahead. 
All we have to do is hold it together to get through this.
    Again, I thank you for this opportunity and I am happy to 
answer any questions.
    [The prepared statement of Mr. Paap follows:]

  Prepared Statement of Kevin Paap, Corn and Soybean Producer, Garden 
                                City, MN
    Mr. Chairman, and Members of the Subcommittee, thank you for the 
opportunity to provide an update on the financial health of rural 
America.
    My name is Kevin Paap. I am President of the Minnesota Farm Bureau 
Federation, but today I would like to give you some perspectives on the 
financial health of farm country as a fourth generation corn and 
soybean farmer from Blue Earth County, Minnesota. Immediately after 
your invitation to testify I consulted my local bankers, farm 
management instructors, crop insurance agents, farm equipment dealers 
and other farmers for their assistance. I believe you can best describe 
the financial health of farm country in two words, ``it depends''.
    The good news in Minnesota is that the median income for all farms 
in 2014 was up 3% over 2013.\1\ However, this figure does not tell the 
complete story. Agriculture is comprised of varying sectors where some 
face good years, and others more challenging. Crop farmers continue to 
face steep declines in crop prices with high input costs, while 
livestock producers saw 2014 as one of their best years ever.
---------------------------------------------------------------------------
    \1\ 2014 FINBIN Report on Minnesota Farm Finances, April 2015, 
Center for Farm Financial Management, University of Minnesota, p. 2.
---------------------------------------------------------------------------
    One sector of agriculture that is arguably one of the hardest hit 
right now are turkey and chicken growers. Minnesota is proud to be the 
number one state in turkey production, however, the current conditions 
of outbreaks of Highly Pathogenic Avian Influenza H5N2, more commonly 
referred to as avian influenza, has been ravaging Minnesota poultry 
farms at a rapid rate since late this winter. As of May 28, 2015, 
ninety-eight Minnesota farms in twenty-two counties totaling over 
8,269,432 birds have been affected by this disease. According to a 
study conducted by the University of Minnesota, as of May 11, 2015, an 
estimated $113.6 million of poultry production has already been lost in 
the state.\2\ However, our poultry farmers are not the only ones 
impacted by this outbreak. With fewer birds making it to market and 
delays for incoming stocks of the next flocks, there is less need for 
inputs such as feed and other supplies. There are incredible ripple 
effects affecting the bigger economy. According to a University of 
Minnesota study, the $113.6 million in losses as of May 11, 2015, have 
an estimated loss of $202.5 million in economic activity in Greater 
Minnesota and nearly 800 jobs have been affected.\3\ Unfortunately, 
this continues to be a devastating problem and will only continue to 
affect not only the agriculture industry, but the greater economy, 
possibly for several years. A loss of just $1 million in direct losses 
causes a loss of $450,000 in lost farm and household income, and if the 
lost jobs at processing plants are factored in, a $1 million could 
cause $9.3 million in lost household income.\4\ That is a significant 
amount of money that will no longer make it back into the local 
economy.
---------------------------------------------------------------------------
    \2\ Impact of Poultry and Egg Production Losses and Poultry 
Processing Losses Due to the Avian Influenza, 2015, Regents of the 
University of Minnesota, available at http://blog.lib.umn.edu/umnext/
news/2015/05/extension-analysis-economic-impact-of-avian-flu-nears-310-
million-as-of-mid-may.php.
    \3\ Ibid, p. 6.
    \4\ Ibid, p. 2.
---------------------------------------------------------------------------
    Despite this devastating effect on Minnesota agriculture, there are 
still bright spots. We are off to a great start on this year's crops, 
the weather has cooperated to give us timely planting and continues to 
bless us with the right amount of rainfall and sunshine. Because of 
increased worldwide demand for the products we grow combined with past 
higher prices because of smaller crops due to the weather, farmers have 
grown working capital which will certainly help deal with another tough 
financial year.
    Financial stress, it is here, it is real and it will be challenging 
for many. But I believe we are not reliving the 1980's--I graduated 
from an agriculture college in 1981 and gained a considerable amount of 
additional education while starting to farm on my own through the 
1980s! Today I believe farmers are not nearly as leveraged, as lenders 
have a very different attitude towards borrowing money against real 
estate.
    A topic that is very familiar in farm country is working capital 
burn. With significantly lower commodity prices and our direct and 
overhead costs of land rent, seed, fertilizer, etc. not coming down, 
farmers are losing $50 to $100 dollars per acre. We are spending our 
cash on cash flow losses, we are burning our working capital. Every 
farmer only has so much working capital.
    Financial stress, it's here, it's real and it is challenging for 
many. Because of working capital burn, many farmers are restructuring 
their debt to stretch out capital payments. We are seeing many more FSA 
guaranteed loans, and we are seeing bankers backing out of direct 
loans. The question many times is will the FSA direct loan program run 
out of money?
    The number one thing this Subcommittee can help rural America with, 
the must have tool we need in farming, the topic that is important 
enough to be in your Subcommittee name is risk management. The risk 
management tools of crop and revenue insurance are critical to the 
financial health of farm country. This private-public partnership 
allows farmers to customize our risk management plans and coverage 
levels to accurately reflect our individual yields and risks. Crop 
insurance allows me to use my growing crops as collateral. Crop 
insurance is my banker's best friend!
    As a fourth generation farmer and father, and with a son living \1/
2\ mile down the road in the house his great grandfather built and 
sleeping in the same bedroom his grandfather was born in, I cannot help 
but think about the next generation. Farmers are an aging population, 
we need the tools to help our beginning farmers.
    If I was asked what is something this Subcommittee can do to help 
beginning farmers, the answer would be two words--risk management. Crop 
insurance helps beginning farmers and all farmers be competitive and be 
innovative. Risk management tools are a must have for beginning 
farmers, their collateral to borrow money is the growing crops, they 
must be able to protect it. Crop insurance is their banker's best 
friend. An important part of a beginning farmers risk management is 
coverage, the ability to transfer Actual Production History (APH) 
yields makes a huge difference in their coverage. Insuring the corn 
crop at a 190 bushel per acre APH versus 170 bushel APH per acre 
calculated by county yield or transitional (T) yields means $80 per 
acre. It may be the deciding factor of loan or no loan to a beginning 
farmer.
    When I asked my friend, fellow farmer and farm management 
instructor Paul Lanoue from Marshall, Minnesota about the financial 
health of farm country his answer was also two words--``it stinks!'' 
His comments after that made a lot of sense. Farmers must understand 
our financial ratios, farmers must be able to see the train wreck ahead 
of us and be ready to manage the things we can manage. There will be 
many opportunities ahead, all we need to do is hold it together through 
this current financial stress.
    Again, I sincerely appreciate the opportunity to appear before the 
Subcommittee, and I look forward to answering your questions.

    The Chairman. I thank the gentleman for his comments, and I 
appreciate all of your testimony. I am confident that we are 
going to get a lot out of this, and we appreciate you being 
here today.
    I want to start the questions. First off, to Mr. Combs, 
oftentimes the indicators of the health of the farm economy are 
new and used farm equipment sales, kind of a barometer of what 
the farm economy is at any given time. What are you seeing in 
your equipment dealership, and to what extent does that provide 
a future outlook that farmers in the area have?
    Mr. Combs. As I mentioned, our sales are down about 15 
percent year over year through April. Our concern is in the 
third and fourth quarters. We sold a lot of equipment at the 
end of 2014 that was delivered in 2015 based on people that had 
their commodities hedged in 2014, and they hadn't done that in 
2015. So I am concerned that the third and fourth quarters and 
the first quarter of 2016 could be rough, and 15 percent is the 
minimum that we are going to be down. I think we are at as good 
a place as we could finish if we could hold that 15 percent 
reduction.
    The Chairman. Okay. As I mentioned, I know you are a CPA. 
You are tracking these numbers pretty closely. Does that match 
up pretty well with national figures?
    Mr. Combs. Yes. The major manufacturers are forecasting 
anywhere from 15 to 25, and we are prepared to go to 25. We 
hope it is not any more than that.
    The Chairman. Mr. Brantley, I was going to ask you about 
actively engaged, but I am going to defer to the Ranking Member 
because I don't want to steal his thunder on that. But I would 
ask you this, and to all the panelists, you guys are producers, 
and I know that one of the recurring themes that we have heard 
in testimony was sort of the international rules violations 
that takes place as a matter of course with some of our global 
neighbors. Is that lost in coffee shops? Are producers talking 
about that? Do they recognize how important that is to our farm 
economy? Can you give me a comment on that from the turnrow?
    Mr. Brantley. The question is, do farmers recognize the 
importance of trade? Yes, we do, especially in rice, where \1/
2\ of rice is exported around the world. It is important day in 
and day out. The hot topics right now are Cuba and Iraq. We 
desperately need a place to move this supply of rice. Cuba is a 
no-brainer for us in Arkansas or anywhere in the mid-South. We 
desperately need some help in Iraq for trying to get their 
government to buy our rice when we are the cheapest product 
around the world.
    The Chairman. Okay.
    Mr. Verett, your comments?
    Mr. Verett. I would say that producers in my area are very 
confused by all of it. I can't tell you how many times over the 
last 8 to 10 months as we have had farm bill meetings and we 
discussed about the changes in the farm bill, the first 
question that comes up is, why do we have to have a program 
that says you can't have any kind of price protection, and we 
have to lower our loan, and our major competitors don't fall 
under those same rules? They are very confused by all of it, 
and it is very difficult in trying to explain to them. 
Sometimes I have a hard time understanding it myself. But they 
are very confused, and they just don't get it. I mean, and 
rightly they don't get it. I don't get it either, and that is 
part of the problem that we have.
    The Chairman. Understood.
    Mr. Paap?
    Mr. Paap. We are fortunate in this country we can grow more 
than we need, and we need to use those customers of that 95 
percent of the world that isn't the United States. I planted my 
37th crop this spring. I know when I planted that soybean 
field, every other row of those soybeans, my soybeans, are 
leaving my state. I mean, our financial health depends on 
demand, which is a relative of price. We have to have that 
demand. We have to have that ability to get our products to the 
people that want them.
    The Chairman. Thank you.
    Dr. Kauffman, I am not letting you out without a question, 
and this won't be a difficult question at all. Where do you 
think interest rates are going?
    Dr. Kauffman. So for questions pertaining to interest 
rates, I would refer to the Federal Open Market Committee 
Statement and let Chair Yellen respond to that.
    The Chairman. Well done. Well done. So I guess that is 
going to be your answer on the record. I appreciate your 
answers, gentlemen, and I am sure you are going to get a lot of 
good questions.
    We will start by recognizing the Ranking Member, my friend, 
Mr. Walz.
    Mr. Walz. Thank you, Mr. Chairman.
    Thank all of you. Like I said, I am always so impressed 
with the competency and the experience. Thank you all for being 
here. It is helpful to us, and the complexity starts to show 
up. If it is complex for the folks that sit on this Committee, 
the challenges amongst our colleagues and then, by extension, 
the American public. So I wanted to thank all of you.
    Mr. Verett, Mr. Paap, both of you, the full-throated 
endorsement of risk management tools, I very much appreciate 
that. We need to do--we meaning us--need to do a better job of 
articulating that to our constituents about why they are 
benefiting from these programs because it seems like it only 
comes home to roost--no pun intended--when you see what 
happened to egg prices and things that are going on up there. 
Now people start paying attention to these things that happen. 
That is why this hearing is important.
    I want to just ask just a couple questions. Mr. Brantley, 
the Chairman has been great helping me understand more about 
rice. It is a different animal than some of the crops we see 
out in Minnesota, but this actively engaged provision, I did 
want to bring that up and maybe go to some of the other 
producers and how it impacts them because it is again not the 
one size fits all. The comment period closed last week. It is a 
proposed rule. What advice would you give us as we try and get 
this thing right?
    Mr. Brantley. I think this Committee set a standard of what 
a family farm is, and the comment period, what I see the USDA 
asking is for comment on what a family farm should be and who 
should participate as a family farmer, which is the complete 
opposite of what this Committee asked in the last farm bill. We 
are a family farm. I do have one partner is who is a non-family 
member who has been on our farm for 25 years. Just because we 
have one non-family member, the way the proposal from the USDA 
reads is now my family farm is no longer exempt for that 
family-farm status. So I would look at this Committee and ask 
who is supposed to define that? I would hope that this 
Committee can work with the USDA to keep the family farms the 
way they are, keep the actively engaged rules the way they 
were, and not let them change it off of a comment period.
    Mr. Walz. Is this unique to rice? Or, Kevin, are you 
hearing this from our folks out there? Is it a little different 
on how the structuring is? Because I know they are not all 
structured the same.
    Mr. Paap. It is those family partnerships or those 
operations that have somebody not involved in the family, and 
that many times is the case where there is someone that is not 
a family farmer, not a member of the family, in that operation. 
So there will be many family farms that it might not have any 
impact on, but there will be some. I guess my answer is the 
same, Mr. Walz: It depends.
    Mr. Walz. Okay. We appreciate it, and now is the time for 
us to speak out on this, so I very much appreciate that, and we 
are very interested in making sure we get that part right.
    If I could go on to ask the witnesses now it is kind of a 
reflection period where we just closed out the software and we 
had the first signup period on ARC and PLC. What is your 
impressions on how that went, how the process went? I guess we 
are not going to know the impacts of those programs for a 
while, but if somebody could give your impact, your input on 
that.
    Mr. Combs. I am familiar with two county offices in the 
Boot heel of Missouri, Dunklin and Pemiscot Counties. And the 
employees of the Farm Service Agency did a tremendous job of 
getting people in and getting the work through the process. As 
complicated as the farm bill was, for them to be able to be 
educated and get all the producers in and signed up, they did 
yeoman's work at USDA. I can't say enough good about the Farm 
Service Agency at the local level.
    Mr. Walz. Go ahead, Kevin.
    Mr. Paap. I have had the good fortune of knowing Deputy 
Secretary Krysta Harden for over 20 years, and I would just 
echo the comments I put in my February 19 e-mail to her. I 
arrived at my local FSA at 2:02 p.m. I waited 45 minutes, which 
I knew I did. I didn't have an appointment. I walked in. I sat 
down at one of the seven desks at the Blue Earth County FSA. It 
took me 12 minutes to update my yields. It took me 6 minutes to 
sign up for the ARC county. It by far, with the technology and 
the preparation, was the easiest farm bill I have signed up for 
in my farming career.
    Mr. Walz. I wish Health and Human Services would listen to 
them. Thank you all for that. It is good stuff if we get some 
other folks asking questions. I want to end with, because it is 
trying to explain this risk management to our constituents is 
really something we need to keep focusing on because it is too 
critical to allow the politics to undermine it in any way. I 
yield back.
    The Chairman. I thank the gentleman.
    I recognize the full Committee Chairman, Mr. Conaway.
    Mr. Conaway. Well, thank you, Mr. Chairman. I appreciate 
that. One quick question for Mr. Verett.
    Steve, in your written testimony and also in your oral 
testimony, you made a reference that traditional crop insurance 
was not designed to meet anti-competitive practices by our 
trading partners but, in fact, were designed for low yields, 
weather impacts, revenue swings, that kind of thing. Can you 
expand on that for us as to how that works or doesn't work?
    Mr. Verett. Well, crop insurance is primarily to protect on 
yields, but certainly the revenue products are very important. 
But they only account for change of price within a crop year. 
If it starts out kind of low to begin with, there is not much 
protection offered, and that is what has happened in cotton. 
When we are talking about the things that are going on in the 
international markets, and specifically what I mentioned about 
China and their effect on the world market and what is 
happening, crop insurance can't account for that. It just 
can't. It does a great job. It is very necessary on protecting 
me on yield loss and revenue loss within that year, but it was 
never intended to be in place for long-term or extended low 
prices, and that is what lots of times happens with some of the 
international problems we have.
    Mr. Conaway. I appreciate that.
    Mr. Brantley, you mentioned trade with Cuba and selling 
rice to those guys. Can you walk us through what the current 
state of affairs is with respect to what the barrier to selling 
rice to Cuba is right now?
    Mr. Brantley. We are waiting on the word go from our U.S. 
Government.
    Mr. Conaway. Well, isn't it really just a financing issue? 
You can sell rice now if you can convince the Cubans to pay you 
way ahead of time. Right?
    Mr. Brantley. Well, through a third party, is the way I 
understand it. And we did that the last time we did it in 2006, 
somewhere in that neighborhood, but through a third party, 
which was something that did not work.
    Mr. Conaway. Okay. Selling whatever commodity to Cuba, 
would it be better to be able to sell to just the government-
owned entity that is your one contact, or would it be better to 
sell to co-ops and others across all of Cuba that might spread 
the wealth. It is a leading question.
    Mr. Brantley. That is tough to answer. I think the first 
thing you do is start selling to the government entity.
    Mr. Conaway. To the entity that is run by the----
    Mr. Brantley. Just to start the process, and then let the 
fair trade take over from there. I believe if you start, we 
start selling commodities to Cuba, that there will be----
    Mr. Conaway. Well, we are selling now. We just have some 
artificial barriers that came with the Bush Administration that 
make it really difficult. Right?
    Mr. Brantley. We haven't sold any rice since 2006.
    Mr. Conaway. I appreciate that.
    Mr. Chairman, I yield back.
    The Chairman. I thank the Chairman.
    I recognize the gentleman from Nebraska, for 5 minutes.
    Mr. Ashford. Dr. Kauffman, I am happy to see you are a 
graduate of Iowa State. My son Tom is enrolling in Iowa State 
this year, so we are excited in our family for that.
    Let me, if I could, just ask you--and thanks for coming, 
and your testimony is interesting. And I did note from our 
local paper, the Omaha World-Herald, a couple weeks ago 
referenced the fact that Nebraska was the one state in the 
country that did not see an increase in personal income from 
2013 to 2014, so it is related obviously to ag and prices, and 
I understand that. From a banker's perspective, as we look 
forward out 5 years, let's say, what are the benchmarks--you 
noted a few of them in your charts here--but what are the 
benchmarks you look at as we go out 5 years to think about how 
we can plan for the future in ag in our state and across the 
country? What are you looking at, good and bad, in evaluating 
the future out 5 years?
    Dr. Kauffman. As was noted in some earlier testimony, it 
depends somewhat on the crop sector versus the livestock 
sector. We have seen extremely high prices in 2014 in some of 
Nebraska's livestock sector. When you talk to bankers--and this 
is true for Nebraska, as well as surrounding states, that do 
depend relatively more on agriculture, there is a strong 
emphasis and growing emphasis on working capital and liquidity. 
As has been noted in some of the testimonies, farm income has 
been projected to decline 43 percent from 2013. I would note 
that that is still relatively an average with the long-term 
average--that is on trend with the long-term average--but it is 
a sharp reduction from 2013. So many bankers are noting that 
that is an adjustment in agriculture, recognizing that to get 
through the setback, producers will need to focus on working 
capital, maintaining liquidity, looking at balance sheets, 
thinking very carefully about efficiency, and cutting costs 
whenever possible. That is the focus for agriculture, and as 
you noted, there are a lot of industries that directly and 
indirectly then depend on agriculture.
    Mr. Ashford. Thank you. And the comment was made about 
looking forward to the fifth generation of farming in his 
family--which is very neat, by the way. I am a fifth-generation 
Nebraskan, and it is important to have that continuity. As the 
difference between small farms, and it was referenced in 
earlier testimony--or not small farms but young farmers getting 
into the business versus others and the difficulties that they 
have, can you express that a little bit from the financial 
perspective?
    Dr. Kauffman. Sure. So for young farmers that have been 
getting into the business, say, in the past 3 to 5 years when 
land prices were rising and other prices of agricultural 
commodities and input costs were rising, that is a difficult 
environment to get into a business. So for young producers that 
has been a difficult position. I think that bankers would also 
say that young farmers typically have a harder time simply 
because they haven't had the years of equity that many of the 
older operators have had in terms of building up low debt-to-
asset ratios, maybe owning the farmland outright and not being 
dependent on, let's say, cash rents on a year-to-year basis 
that also then present their own level of risk.
    Mr. Ashford. So when we are looking ahead 5 years or 10 
years and we see that situation with the younger farmers, how 
does that play out then? What needs to happen? Prices need to 
go up, obviously, but what needs to happen to get us to a place 
where the younger farmers can start to get the benefit of some 
of what their parents have?
    Dr. Kauffman. I think right now the environment that we are 
in is low profit margins, and efficiency is ultimately being 
emphasized, so it could take some time. It could take some 
adjustment for young farmers to be able to get to the point 
where they have maybe realized scale that is sufficient enough 
to get some of the benefits of better profit margins. But for 
right now, it is just a time of sort of looking very carefully 
at where they can cut costs in an environment when costs have 
remained relatively high.
    Mr. Ashford. Thanks.
    I yield back.
    I thank the chair.
    The Chairman. I thank the gentleman.
    I now recognize the distinguished Chairman Emeritus, the 
gentleman from Oklahoma, for 5 minutes.
    Mr. Lucas. That is a very polite way of saying the old guy, 
and I appreciate that, Mr. Chairman.
    Dr. Kauffman, I started farming in 1977, thanks to my 
maternal grandfather's willingness to co-sign a lease on an 
old, worn-out farm and to co-sign a note at the bank. Being 
under age, I wasn't old enough to do that on my own. So by the 
mid-1980s, I had still not purchased any land, but I watched 
what happened when the world fell out from under all of us.
    Let's talk for a moment about the circumstances now 
compared to then. In the mid-1980s, we had gone through a runup 
in land prices, most of it financed by debt, most of it 
financed by the most amazing leveraging of assets to get there. 
And when the air went out of the balloon, it took out an entire 
generation. You mentioned the cooling in land prices, can you 
compare the circumstances now with the 1980s. How much of this 
increase in land value and land purchases have been financed 
with equity now versus debt or almost total debt in the 1970s 
and early 1980s?
    Dr. Kauffman. I think there is a distinction. You mentioned 
some similarities, and when you look at the early 1980s coming 
out of the 1970s, certainly we had a runup in farm income, 
runup in farmland values. And to that extent, we have seen some 
of those similar signs today. You mentioned leverage, though, 
and that is one of the differences. When you look at measures 
of debt-to-asset ratios as an example, it has been about 10.6 
percent in 2014. It is expected to maybe tick up a little in 
2015. So on average, leverage is not being used as extensively 
as it had been in the late 1970s. With that being said, there 
are, of course, as you have had some consolidation in the farm 
sector, that doesn't mean that credit exposure at an individual 
level would be higher.
    Mr. Lucas. And you, Mr. Combs, as bankers well, 
understand----
    Mr. Combs. The big difference is interest rates. We don't 
have 18 or 20 percent interest that a farmer told me Jesus 
Christ himself couldn't pay 20 percent interest.
    Mr. Lucas. Remember part of the hook in the early 1980s was 
we went from price controls on interest rates that dated back 
to the 1930s to turning them loose. I borrowed cow feed money 
at 17 percent and was so happy to get it and had so much equity 
at the time, but that is just what the rate was.
    That said, if we were to continue to see a downturn in land 
prices, younger farmers, beginning farmers, just as in the 
1970s and 1980s, would be hurt, would be under pressure. But a 
lot of pressure this time or a lot of the loss would be 
sustained by older, established farmers--correct--who have used 
that equity in the last 5 years to purchase those farms? They 
would still have the land. They just would have a different 
balance sheet. Fair statement?
    Mr. Combs. That is a fair statement because the banks, 
rural banks in the Farm Credit System, the life insurance 
companies that loan money in our area, have been much more 
stringent in their underwriting requirements and their appetite 
for the amount of leverage they would allow on a farm. So as 
the values have gone down, the people still own the land, but 
it is just that their balance sheet, their net worth, has 
shrunk, for lack of a better term.
    Mr. Lucas. So we did learn from the pain of 40 years ago.
    Mr. Verett, you and I are from a region of the country 
where we have an extra issue on top of all of these, 5 
miserable weather years in a row. The weather has changed, at 
least in my part of the great Southwest. I see some clouds 
passing over your folks on the radar screen too. I don't know 
what that has done to your planting program for the spring and 
summer, but I see the weather change. Describe for a moment, 
crop insurance never makes anyone 100 percent whole. Describe 
to us for a moment what the last 5 years have done to 
producers, not only in cotton but in the other commodities in 
your region of the country.
    Mr. Verett. Well, as you mentioned, crop insurance is never 
intended to fully replace a crop. I will say, we were fortunate 
if we were going to have had the drought when we did, 
especially in 2011 and 2012, from a cotton perspective, was one 
of the highest prices that we had for cotton. We didn't grow 
any, we weren't able to sell it, but that was reflected, as I 
mentioned earlier to Mr. Conaway, in crop insurance because it 
was high, it did help come a lot closer to replacing that crop, 
not having. As you well know, no one insures in our part of the 
world in Texas and Oklahoma--if you get to 70 percent, you are 
on the high end of insurance, and most of our guys are in that 
55 to 65 percent range, so you still have a significant amount 
of your cost unprotected no matter what the price is. So, yes, 
it has started raining, and we are very blessed with that. But 
as I said to my son, it brings a new set of challenges.
    Mr. Lucas. And we start with a 5 year period coming out of 
where we have not had the crops we would have had at those 
prices, missed opportunities. We are in a different position 
than some of our neighbors maybe who had 5 great years.
    Mr. Verett. That is right.
    Mr. Lucas. That said, one last question. What do you say to 
one of my colleagues or somebody in the House who says, ``Well, 
if cotton is not a good deal, go raise something else''?
    Mr. Verett. Well, you know very well, Mr. Lucas, that our 
part of the world gets about from 18" to 20" of rainfall and we 
don't have the good fortune to be able to plant corn or 
soybeans. Sorghum is an alternative. Wheat certainly is an 
alternative. But for the great preponderance of our area, 
cotton is the best choice. Plus you mentioned about what is 
happening with the drought. The biggest effect of the drought 
over the last several years is the infrastructure. Producers 
have been able to weather it, thank goodness to crop insurance. 
But if you are a cotton gin or you are a cotton oil mill press 
or just a business supplying inputs to those farmers, they are 
the ones that is been hurt the most. So we have that 
infrastructure. As a guy told me one time that owned a cotton 
gin, he said he hasn't figured out a way to run grain sorghum 
through that cotton gin yet. So we are very invested in the 
cotton industry, and it is the best fit for our area as well.
    Mr. Lucas. Mr. Chairman, if you indulge me for 10 more 
seconds, what Mr. Verett is saying about cotton is a reflection 
of many of the commodity groups raised across the country; they 
are raised because of the nature of the soil, the weather, the 
climate, the circumstances. It is not just an accident that you 
raise corn in Indiana or cotton in that part of Texas or wheat 
in western Kansas. It is not an accident. It is the best fit.
    I yield back, Mr. Chairman.
    The Chairman. Well said. I appreciate that.
    I am pleased to recognize the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. David Scott of Georgia. Thank you, Mr. Chairman.
    I would like to keep the line of questioning on, as 
Chairman Lucas was talking about, and that is cotton. I don't 
know how many people know this, but my State of Georgia is the 
second largest producer of cotton, second only to Texas. So I 
want to focus my comments on that.
    As you know, the cornerstone of the farm bill was the 
insurance, crop insurance, programs, and we have the 
Agricultural Risk Coverage, ARC, where payments are triggered 
when actual county crop revenue falls below a certain 
percentage. Then we have the Price Loss Coverage where payments 
are triggered when the price of a crop falls below its 
reference price. But then we have STAX. This is the new deal 
and cotton is coming under it for the very first time. And I 
have always had some concerns about that to make sure we 
treated our cotton producers very fairly, but there is one area 
where our cotton producers are not being treated fairly, and 
particularly in my State of Georgia, which I like to kind of 
focus on, and the issue is this: For this current year 
regarding cotton and STAX, there is great concern in my State 
of Georgia in the way that this plan is moving forward. And I 
am sure in other parts of this country may also have some 
problems.
    Now specifically the concern is the way that counties are 
being grouped and assessed for STAX payments. As many of you 
know, STAX payments are triggered only when an area's average 
revenue falls, and oftentimes the areas used for evaluation are 
based on boundaries that typically fall within county lines. 
Oftentimes an area includes several counties that are grouped 
together.
    Now I have concerns that there are counties being grouped 
together and assessed for the same payment structure when, in 
fact, they do not share any form of the same boundary line, nor 
do they even experience the same weather pattern.
    And, Mr. Verett, you and Mr. Lucas just got through 
discussing how important weather patterns are to the production 
of cotton. For example, in my State of Georgia there are cotton 
producer farms that are located in counties, such as Morgan 
County or Walton or Oconee, which are situated in the northern 
part of Georgia. However these counties in the northern part of 
Georgia being grouped and assessed for payment with counties to 
the south of where they are located. It would seem to make 
sense for these counties to be grouped with producers in 
counties to the north, northwest, not to the south. This is 
particular, too, in Georgia; it is almost like grouping 
producers in New York and New Jersey with producers in 
Virginia. The weather pattern, my state is a large state. If 
any of you, as you watch the weather patterns and you watch the 
jet streams, there is a divide where that jet stream comes 
right through middle Georgia, south of Atlanta. And when you 
get that way, north of Atlanta is in the mountains, is up. 
Toward the south, you are more acquainted with, associated with 
Florida and that area.
    So what I am asking for here, and, Mr. Verett, is for you, 
if you could comment on this, and if other members on the panel 
have similar issues within their own states, their own areas?
    Mr. Verett. I know when the STAX program was put together, 
and it is the same for SCO as well, they are both as such area-
wide trigger programs, the idea was--and I can't say that I am 
absolutely familiar with Georgia, I know the theory you are 
talking about and what you are talking about, but there had to 
be a certain amount of acres in a county for it to stand on its 
own, basically. And if it wasn't enough, then they were 
supposed to go to like--go out. They had like a circle, they 
went out to adjoining counties. I am not aware of any counties 
that were joined together in one region of the state and then 
not be contiguous, but that may very well be the case.
    What I would say to you, Mr. Scott is, now I know that the 
National Cotton Council--I served on a committee in helping 
implement STAX, that they stand ready to work with you, and I 
know that their staff would be more than willing to visit with 
you, and then go to USDA. We have been really trying to have a 
very close working relationship with the Risk Management Agency 
in trying to make this program work as good as it can.
    Mr. David Scott of Georgia. Right. Well, thank you.
    Mr. Chairman, I just want to make a point. Even when you 
get the boll weevil involved, the occurrence in the variations 
of that insect being impacted is dictated by the weather. And 
from north Georgia to south Georgia is a 25, 30 separation. 
So I would just like to ask if our Committee could go on record 
to encourage the Department of Agriculture, and more 
specifically the Risk Management Agency, to take a serious look 
at this so that we can make sure that we are treating our 
cotton producers fairly in Georgia and other parts of the 
country who might have this problem.
    The Chairman. Absolutely. We are very committed to working 
with you on that. I appreciate you bringing that up.
    I am pleased to recognize the gentleman from Texas, Mr. 
Neugebauer, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. Thanks for holding 
this hearing.
    Mr. Verett, there has been a lot of discussion about STAX, 
and one of the things that we are hearing, and you and I have 
had this conversation, is the participation rate seems to be 
pretty low in STAX. And STAX was designed to kind of be the 
alternative, I guess, due to the fact that cotton lost a lot of 
its commodity title support.
    Can you kind of elaborate on why you sense a lot of 
producers don't find STAX to be beneficial for them?
    Mr. Verett. I think there are a couple of reasons. Number 
one, it is area based, as you well know. So it is not dependent 
on you. It is dependent on what happens in the county. I think 
the fact that we had started getting rain and our situation 
looked better than it had for a number of years. Also, the 
county-expected revenue is based upon the last several years, 
and because of the drought, that is down very low.
    So the target revenue for STAX was low, especially on 
dryland and on non-irrigated, and you could separate between 
non-irrigated and irrigated. Plus the price was not that great 
to begin with. So I just think most people opted, especially 
non-irrigated, to just buy more underlying coverage. I think 
that is one of the main reasons, coming out of the drought.
    I just think there is unfamiliarity. Most people, when they 
buy crop insurance, whether it is hail insurance or underlying 
insurance, it is on their farm. Even though more people are 
using enterprise units and becoming more familiar with it, and 
as time goes on this will be another tool. I still think it is 
a good tool. It can protect you, especially from catastrophic 
price risk. It is almost like buying a put option, is what it 
is almost like. But the main thing with low participation was 
just the fact we are coming out of a drought and the prospect 
looks so good.
    Mr. Neugebauer. Has there been some discussion too about, 
well, farmers being able to get financing, and we are certainly 
hearing that, even from our banker friends that the farmers 
that are coming in have--particularly in our area that have 
been subject to this drought for 3 or 4 years, and really 
hadn't, like you said, and some of the other witnesses, been 
able to bank any reserves.
    What are you seeing from a perspective of has it been much 
more difficult this year to get financing for your operations?
    Mr. Verett. There is no doubt. Like Kevin, I talked to a 
couple of bankers and some equipment dealers before coming and 
putting my testimony together. I had one equipment dealer tell 
me that he had nine producers that were still waiting on 
decisions about operating loans for 2015, and those were all 
FSA decisions. They are borrowers that were waiting on 
decisions out of FSA.
    There is no doubt that that is the case. There is 
significant carryover in the business, and there is some that 
is not. It is not like cotton. The irrigated cotton farmers 
over the last several years that have been able to take more 
advantage of some of the price have done better than the non-
irrigated guys that didn't have a crop. So it is not like it 
has been total doom and gloom in the cotton business, but it 
has just been tough.
    But even those that have been successful in getting 
financing, most of those folks are eating into their own equity 
to do that. I mean, the only reason they were able to pay out 
after 2014 was they put a bunch of their money in on the front 
end before they started borrowing money, and they just didn't 
have as much to pay back. But this is why this year is going to 
be critical.
    I appreciated the questions of Mr. Lucas about the 1980s, 
and there is no doubt it is not what it was in the 1980s, 
mainly because of what Paul said, that is when I started 
farming, and the interest rate differences. But I can tell you 
as well, though, that where land prices have gone, and they 
haven't escalated near in our part of the world as they have in 
lots of the country. They have escalated pretty well, and those 
are going to be tough if people weren't buying with equity, it 
is going to be a tough situation if they are leveraged very 
much on that land as we go on the next few years.
    Mr. Neugebauer. Thank you.
    Mr. Combs, you mentioned section 179, and one of the things 
that was frustrating to a lot of producers in my district and 
even small businesses, not just agriculture, was the fact that 
we didn't do anything on that until the very end of the year. 
And obviously a lot of people are trying to make some buying 
and decisions on investments whether and--can you kind of just 
articulate how important it is to have some stable tax policy 
so that you as the equipment dealer but also as your customers 
can make those capital decisions?
    Mr. Combs. Well, the scale of farming has gotten so much 
bigger that customers tend to plan their purchases well in 
advance. And what we saw is that the year before it had been 
extended earlier in the year, and so people, after their crop 
was produced, say at the end of September, they knew that they 
had the ability to use the section 179 deduction and determine 
whether they were going to make purchases at the end of 2013.
    In 2014 we had some people, particularly these people that 
had their crops hedged, that had the ability to make the 
purchases, but they were wanting to take advantage of section 
179, and they just weren't sure it was going to be there. We 
kept getting word back from D.C. that they are going to get it 
done, they are going to get it done, but the--I guess they had 
seen enough stuff not get done that they were skeptical of 
that, and we had some people that would have purchased 
otherwise that absolutely didn't because it didn't happen until 
the very end of December. And so our message is if we can get 
it stable or if we can at least know where we are by the 
beginning of the fourth quarter, it would really help us.
    Mr. Neugebauer. Thank you.
    The Chairman. I thank the gentlemen, and recognize the 
gentlelady from Arizona, for 5 minutes.
    Mrs. Kirkpatrick. Thank you, Mr. Chairman.
    I just wanted to ask one follow-up question to the land 
prices and the rent prices.
    So we keep hearing that they are going up. And my question 
is for all of the panelists, if you could just tell me what is 
happening in your region. Are rent prices and land prices up, 
down, flat? Do you see a trend, and if you do, what that trend 
is.
    So we will start here. Thank you very much.
    Mr. Paap. Land prices certainly have not come down like 
commodity prices have or input prices have not come down. Land 
rents, it kind of depends how you treated your landlords in the 
good years. Those farmers, those renters, that made a little 
more money than they expected so they shared that with their 
landlords as a bonus are flexible. Now as things are tighter 
that we are losing $50 to $100 an acre, those landlords are 
very much more willing to negotiate on those rents. Those that 
didn't share in the good times that still have contracts, those 
landlords are holding us to those contracts.
    Mrs. Kirkpatrick. And do you see any trends?
    Mr. Paap. The trend we will see is they have to go down. 
And it might take the bankers to tell us there is no way you 
are going to pay that for rent. We don't like to give up. I 
have usually about one opportunity a lifetime as we look at 
area farms in our neighborhood. As farmers, we never like to 
give up land, and we always are looking at the opportunities in 
the future. But there is going to be some that--land is going 
to--as it was explained to me by a farm management instructor, 
there is going to be a fruit basket upset that we are going to 
see here soon.
    Mrs. Kirkpatrick. Yes, please.
    Mr. Brantley. Land prices in our area have not come down. 
If anything, they have gone up the first quarter of 2015.
    For crop rents in Arkansas, we are predominantly crop 
share. So those adjust year in, year out. The land that has 
been selling the last few years in Arkansas is the unimproved 
farms, the less desirable farms. The good farms haven't sold. I 
would hate to know what they would bring today. But you would 
think with the prices and the reckoning that is coming, that 
land prices have to come down some.
    Mrs. Kirkpatrick. Do you see any trends in that direction 
right now?
    Mr. Brantley. Not at all.
    Mrs. Kirkpatrick. Not at all. Okay. Thank you.
    Mr. Verett. As I mentioned earlier, land prices in our part 
of the world have not gone up as much as certainly the Midwest 
and even the mid-South, but they did increase pretty 
significantly. I would say they are flat. They are not 
continuing to go up. All of our rental agreements are crop 
share rental agreements. There are very little, if any, cash 
rents in my part of the world because it is just too risky. 
Nobody can lay out a guaranteed amount.
    But I can tell you, there is already talk beginning between 
land owners and operators on adjusting rental agreements. And 
they are going to have to be adjusted. And in a crop share it 
is basically that the owners have to take on more of the share 
of the inputs than what they are doing today. With seed costs, 
very few land owners pay seed cost. Seed cost is about $70 to 
$80 an acre now to plant cotton. That is one of the biggest 
costs we have up front.
    So there is going to have to be some adjustment or there 
are going to be--folks are just not going to be able to do it 
if prices don't improve.
    Mrs. Kirkpatrick. Well, and as you know, cotton is a big 
crop in Arizona.
    Mr. Verett. Yes, ma'am.
    Mrs. Kirkpatrick. So my cotton farmers are dealing with 
this. And thank you.
    Mr. Combs. In our area the land prices have softened 
anywhere from 10 to 15 percent. Rents have come down. And the 
only thing that hadn't forced the land down further is the low 
interest rates. In other words, the lack of return that 
institutional investors can get for their money somewhere else. 
There has been a lot of institutional money that has bought big 
tracts of land for cash, and as those institutional investors 
can do something better with their money, then that could pose 
a risk to the price stability of land in our area.
    Mrs. Kirkpatrick. Thank you. I have about 30 seconds left. 
Thank you.
    Dr. Kauffman. I would say in our area in Nebraska, Iowa, 
Illinois, in the heart of the Corn Belt, we are starting to see 
land prices soften on the order of about ten percent. Cash 
rents have maybe been a bit slower to adjust, and as has been 
noted, with cost being an important determinant of 
profitability, that is an area where over time there could very 
well be further pressure on cash rents and farmland values to 
adjust to the lower profit margins.
    Mrs. Kirkpatrick. Thank you, panelists. Thank you very much 
for your testimony, and I yield back.
    The Chairman. I thank the gentlelady. I recognize the 
gentleman from Georgia, Mr. Scott, for 5 minutes.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
    I am going to continue along that same line, but before I 
do, Mr. Verett, I want to go back to what you said about the 
low commodity prices. Cotton, for example, being as low as it 
is, that is cotton pickers that don't sell at the tractor 
dealership. That is cotton gins that don't run as much cotton 
through. It is important that we understand that when commodity 
prices go down, it doesn't just affect the farmer, it affects 
the whole community.
    And as someone who is from Georgia who represents 25 
counties, the largest part of the economy in the majority of 
the counties that I represent is at farm gate value, and so 
when these commodity prices go down, it has tremendous impacts 
on local school systems, the hospitals. It affects everybody in 
that area. And so I am certainly concerned about that.
    But I want to go back to the last comments. It used to be 
that when you were looking at buying the land next door that 
you were competing with the person who maybe lived on the other 
side of the land. And now, as you alluded to, you are not 
competing with them as much as you are competing with pension 
plans or other people who are investing not hundreds of 
thousands or millions of dollars, but in some cases hundreds of 
millions of dollars. And certainly, that has changed the 
dynamic of land values.
    And so, Dr. Kauffman, as you mention in your written 
testimony, with land prices softening, we hear in many cases 
that prices are still incredibly high. How much of that do you 
attribute to pension plans now and other commercial investors 
like that purchasing land? Do you see a bottom falling out of 
this? In those pensions, how do they mark their books with the 
value of that property if that property value falls?
    Dr. Kauffman. I think that there has been some investor 
interest in farmland certainly in large parts of the Corn Belt 
as well. I would say, though, more recently much of the 
farmland that has been selling in our area and throughout the 
Corn Belt has been predominantly from farmer interest.
    So it is typically farmers that are looking at their own 
operations and long-term planning and thinking about that being 
an opportunity that might not come along all that often. So 
much of the activity more recently has been for farmers that 
may even be willing and in a financial position to be able to 
pay a premium for land that they consider to be a very good 
opportunity.
    Mr. Austin Scott of Georgia. I know that the foundation of 
our local college purchased a farm in Texas, for example. So a 
Georgia college foundation buying a farm in Texas because they 
felt like it was a better investment than bonds. And I guess if 
your bond values fall, you have to reflect that at least on an 
annual basis, but do they have to reflect the variances in land 
prices?
    Dr. Kauffman. That may well differ depending on the 
specific case that you are referencing, but I think that 
investors and others are looking at many of the same things 
that others are looking at in the investment world and thinking 
about where they may get attractive returns, and certainly 
there has been attractive returns in agriculture production 
over the course of the past 5 years.
    Mr. Austin Scott of Georgia. That is because commodity 
prices have been good, and now that they are not so good it is 
going to be interesting to see if that continues.
    One of the things that concerns me about the President's 
budget that he put forward to our Committee, especially with 
regard to ag lending is that he proposes to take away a lot of 
the participating loans and move them to direct loans from FSA 
instead of them being guaranteed, if you will, where your local 
bankers participate in that.
    Could you speak to that? And why would he propose that? 
Doesn't that by definition take capital out of those loans if 
the local bank was going to participate?
    Dr. Kauffman. I am not sure if I understood the question. I 
wouldn't want to speculate as to what some of the decisions 
were behind that, but certainly the FSA has been involved in 
some of that.
    Mr. Austin Scott of Georgia. Mr. Combs, you are on a bank 
board, aren't you?
    Mr. Combs. Yes. The FSA wouldn't have the staff. In our 
area FSA on the subordinations and the guarantees, a lot of the 
banks will work up the loans and get FSA's blessing on it on a 
subordination or participation, and we have two guys full time 
in the Dunklin County office, and one full time in the 
neighboring county. You would have to ramp up the employees to 
the point--and I am not sure of the savings it would accrue 
back to the government after you got done hiring people, and 
then the thing that will happen is if they are not efficient 
about the way they do it, the people will be out of business 
when the loan doesn't get made.
    Mr. Austin Scott of Georgia. Mr. Combs, I am out of time. 
That proposal was kind of short sighted in what they put 
forward, and I certainly hope that we keep more of the 
participating and guaranteed loans instead of the direct 
lending.
    Mr. Combs. It is working now.
    Mr. Austin Scott of Georgia. But, it is not the farm guys 
up here that say if it ain't broke, don't fix it. You know, it 
seems to me in Washington, if it ain't broke you go meddle with 
it.
    The Chairman. The gentleman's time has expired.
    I recognize the gentleman from California, Mr. LaMalfa, a 
rice farmer, for 5 minutes.
    Mr. LaMalfa. Thank you, Mr. Chairman.
    From the number one rice growing district in the country 
evidently here, so appreciate it.
    You know, a subtext of this Committee, or maybe a different 
committee hearing, would be an update on the mental health of 
California's water policy. I mean, no storage built since 
really the 1970s--well, really more the 1960s in California: 
15,000 acre feet released the other day to help six fish go 
down the stream, which, thanks a lot to Bureau of Reclamation 
and the Endangered Species Act.
    We have much, much ag land already idled in our state 
because they are letting it all run out to the ocean pretty 
much. Yet The New York Times, for example, still claims in 
editorials that 80 percent of California's water is used for 
agriculture. They don't count of the whole 100 percent that 50 
percent goes for enviro-water or just letting it run out to the 
ocean: 40 percent is for ag, and the other ten percent is for 
cities. So there is a lot of frustration with that.
    People are now starting to take the ideal that in 
California that: Well, we are farming this desert anyway. We 
shouldn't be using water for that. We are exporting our water 
because we are exporting almonds, exporting rice, exporting the 
truck crops, the vegetable crops and all of that. We should 
keep that here. So the mentality seems just grow your own 
garden, evidently. So there is a lot of frustration about that.
    So when you add all this up together, exports are bad, 
well, for the purpose of this hearing, I guess there is really 
no amount of risk management or crop insurance that can fix 
that kind of stupid. Right? So there is a lot of frustration.
    But getting back to what we are working on here today, is 
that our own government's trade policy--I would like to direct 
this to Mr. Brantley. You were concerned about, in regards to 
our trade here, that we are not doing enough. In the TPP that 
is coming up, for example, what is the value of TPP going to be 
if not some of the issues involved with the negotiations? How 
is this going to look for U.S. rice, whether it is Arkansas 
rice, California rice, in concert to what you said in your 
testimony a little bit earlier? How is that looking to you?
    Mr. Brantley. If we are not allowed to increase rice sales 
to Japan, it is of no value. That is part of these 
negotiations, and that is the one thing that Japan keeps 
holding out. We, USA Rice, is in support of TPP only if we can 
get increased sales of rice to Japan.
    There is another issue that you have with the--I believe 
the bilateral agreement is Mexico and Vietnam are in 
discussions. We have no idea where that is going. But if 
Vietnam is allowed to come in with their rice duty free. That 
is the number one export for southern long grain rice.
    So we have a lot of issues at hand. We are in support of 
trade negotiations. Fair trade, I believe, is the best way for 
us to move our commodities around the world.
    Mr. LaMalfa. So since our newspapers in California say we 
shouldn't export any more because we are exporting water, you 
have too much water there, so it would be pretty important 
for----
    Mr. Brantley. Be glad to give you some. Yes.
    Mr. LaMalfa. Yes. Okay. I will be happy to run the pipe 
over there. Okay.
    Has your operation been impacted by RMA's decision not to 
offer a rice revenue crop insurance policy for 2015?
    Mr. Brantley. Say that again?
    Mr. LaMalfa. When RMA didn't get the rice revenue crop 
insurance policy ready for 2015, how were you impacted on that 
on your operation or your neighbors that you are hearing about?
    Mr. Brantley. Well, it excluded us from participating. The 
story is yet to be told. How low would the price of rice be 
depending on where we thought that spring price should have 
been. Rice is so thinly traded, it seems that we are always the 
last commodity to participate in whatever the next program 
should be.
    Mr. LaMalfa. I hear you.
    Mr. Brantley. And we needed it desperately. Rice's price 
has gone down dramatically, and if we had a revenue price it 
would have paid off this year. Just from the price alone. Not 
necessary the yield, but just from the price alone.
    When you think about insurance for rice and our yields are 
so stable, rarely do we have a claim on an insurance policy----
    Mr. LaMalfa. Yes, yield isn't the problem. It is usually 
price.
    Mr. Brantley. Always on price.
    Mr. LaMalfa. Same thing in California as well. For 2016, if 
we are not looking at some amazing weather this year, I don't 
know what we are looking at in any ag in California.
    So, Mr. Combs, real quick. You mentioned the section 179 
program. I am sorry we don't move faster around here, but I was 
able to tell some of my growers who caught me: ``Hey, Doug, you 
guys going to get that thing renewed this year?'' And I told 
them: ``I think so.'' I think you can figure that Congress will 
get that done, but you need a little more predictability. So we 
will try and do better on that in the future.
    And I have used my time. And I might come back to you in 
the second round's time.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    I recognize the gentleman from Illinois, Mr. Bost, for 5 
minutes.
    Mr. Bost. Thank you, Mr. Chairman.
    If I could, I would like to ask Mr. Combs a few questions 
mainly because you are the one of the panel there that is the 
closest to my home. I could throw a rock across the river and 
down in the----
    Mr. Combs. We have a dealership right across the river from 
you in Illinois. A lot of customers in Illinois.
    Mr. Bost. And that is what I want to ask you about. On 
these dealerships, I can look around, and whether it is over on 
your side of the river or my side of the river, there is a lot 
of equipment sitting----
    Mr. Combs. That is not good.
    Mr. Bost.--and waiting to be purchased, yes. And what I am 
needing to find out is, with these lower prices, what are you 
hearing from the lenders on any suggestions or any 
encouragement into--and are people willing to even take the 
risk to purchase new equipment?
    Mr. Combs. It is on an individual basis. If the customer 
had a good year in 2014, the lenders have been very willing to 
allow purchases. We have had a couple of cases dealership-wise 
where we were dealing with customers, and I have seen it on the 
bank side where the customer paid out in 2014, but they didn't 
have a big cushion and the banks advised them not to purchase 
the equipment. And when you have lowering commodity prices, 
usually the equipment values follow along.
    And so you are in a situation where you have equipment 
values that are falling, and you need to be selling it to 
people who may be being told by their bankers not to buy it. So 
it is kind of a Catch 22. The equipment will get worked through 
the system, but there is an excess particularly of used 
equipment sitting out there.
    Mr. Bost. And that is for used equipment. For new equipment 
and because I am a real stickler--I came from the trucking 
business. Okay? And I don't like big government a lot. I really 
don't. I think we kind of overstep many things.
    What has happened to the price of equipment to try to meet 
a lot of the standards set forth as far as EPA standards, other 
things as far as----
    Mr. Combs. The equipment has become more expensive in order 
to meet the emissions requirements. In other words, the 
equipment won't do any more than it would before, but there is 
increased costs both in terms of the cost of the equipment and 
the cost of the DEF fuel that we have to--or the DEF fluid that 
we have to put in with the fuel to--in order to meet the air 
standards, and that is true on tractors and combines and 
things. It is also true on something like an irrigation power 
unit that you are just trying to run a well with those small 
units are having to meet those same emission requirements.
    Mr. Bost. Well, and I don't have many questions, but that 
is the concern I have is is that, once again, whether it is ag 
or whether it is the trucking business or every business that 
seems to be out there, we end up putting undue strain or a 
heavy collar and a heavy burden on our producers when we are 
trying to compete in a worldwide market.
    Mr. Combs. Deere and Case are building engines without 
those same standards to go in tractors in Brazil.
    Mr. Bost. Right. And then we are trying to compete on that 
level.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. I thank the gentlemen.
    I now recognize the gentleman from Louisiana, Mr. Abraham, 
for 5 minutes.
    Mr. Abraham. Thank you, Mr. Chairman.
    First, thank you guys for coming. To me, our farmers, 
ranchers, foresters, you are our national security now. The 
volume and the quality of the product that you grow is just 
unsurpassed, and it is like I told the EPA when they were 
involved in--this is when we were discussing the WOTUS in the 
Clean Water Act, there is not going to be any better 
conservationists or environmentalists or protector of the land 
than the American farmer or rancher. So like Mr. Bost here, we 
need to get the government out and let you guys do what you do 
best.
    I also still live on the farm that I grew up on. So our 
family does farm, and I do realize that corn and soybeans are 
what we grow, are down a couple of dollars a bushel, but 
production costs, we still--costing about $200 an acre to 
fertilize that corn.
    So it is tough. And I am sure most of the general public 
understand, but maybe not all, that every time you guys go to 
work, it is like going to Vegas because you could have a pop-up 
thunderstorm today, and you could get some straight line winds 
and you would lay down a field of corn or a field of soybeans 
or a field of wheat, and you have had a bad day. We hope and we 
need to get that message out that what you do is very risky, 
and it is very touchy from day to day.
    And I will start with my question, Mr. Verett--well, I will 
start with you, but certainly any of you can answer this.
    In your testimony you said that about $4 billion were paid 
by total farmers in crop insurance in the course of a year. 
But, again, if we go back to a large city like D.C., that maybe 
others don't understand the percentage of liability insurance, 
workman's comp, insuring tractors, insuring tractor sheds. What 
percentage, if you don't mind, in your particular operation 
does that play as far as cost? It has to be a large percentage, 
I am sure, but for the average farmer, for yourself, how big of 
an issue is that?
    Mr. Verett. Are you asking how much crop insurance is, is 
that----
    Mr. Abraham. Well, that along with the workman's comp, 
because we know on a farm workman's comp is very high because 
it is such a dangerous profession. But you have also got to 
insure your buildings, insure your tractors. So how does that 
play into the overall picture?
    Mr. Verett. I suspect when you add all of my insurance, 
including crop insurance, which is part of risk management. It 
is all risk management. I am having to talk off the top of my 
head, but I suspect it is going to be something in the range of 
10 to 15 percent anyway.
    Mr. Abraham. And that is all your profit right there, if 
you are lucky.
    Mr. Verett. Yes. That is right.
    Mr. Abraham. And, Mr. Combs, I can tell you, in our family 
that we farm a lot, we have delayed purchases of equipment, and 
we usually have a 2 or 3 year lease that we roll over. And we 
are not doing that this year because of the uncertainty. So you 
are exactly right. It is a big deal.
    And like Mr. Scott said, we have a Hollywood name actor 
that has purchased thousands of acres of land in our neck of 
the woods that has artificially kept land prices high, and it 
has not allowed our farmers that need to purchase that land to 
do that. So investors are playing a big role.
    Mr. Brantley, I will ask you a quick question. I have a 
great friend in northeast Louisiana, grows a lot of rice, Mr. 
John Owen. You probably know him. But he has been an invaluable 
resource to me as far as information on a lot of things. And we 
have talked about that in the rice, particularly, the crop 
insurance sometimes isn't a viable option. Kind of going back 
to Mr. Verett's idea, what other risk management tools do you 
use to mitigate some of your potential losses if you can't do 
the crop insurance?
    Mr. Brantley. Speaking of Mr. Owen, he is our producer 
group Chairman, and he has been a great asset for me and all of 
us in the industry.
    But what risk management tools do we have? We don't have 
many in the rice world. We are eternal optimists. We have 
faith. That would be our biggest risk management.
    Mr. Abraham. The farmers and ranchers have always been----
    Mr. Brantley. We don't participate in crop insurance 
because our yields are stable, and the cost has been too high. 
And we are only subject to price risk. We are subject to a 
drought, but we can overcome that, as you know. Our biggest 
risk is foreign governments.
    Mr. Abraham. Okay. And one quick just follow-up with Mr. 
Paap, I in my previous life was a veterinarian. So I understand 
the turkey and the poultry cycle, but would you in just a few 
seconds just reiterate how important that cycle is for future 
production cycles. I mean, it is just not the 1 year. Is it?
    Mr. Paap. In agriculture we always talk about the weather, 
think about the weather, worry about the weather, and it is no 
different with this bird flu. We need some sunshine, some warm 
weather to help break that. But the weather changes again, and 
we are going to--we will be going through this again. So a lot 
of concern, a lot of not only financial anguish, but that 
emotional, that mental side is really taking a toll on our 
farmers.
    Mr. Abraham. Thank you. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    I recognize the gentleman from Georgia, Mr. Allen, for 5 
minutes.
    Mr. Allen. Thank you, Mr. Chairman. And I want to thank our 
panel for enlightening us on this and what you deal with out 
there every day. I too grew up on a farm, and my father became 
a gentleman farmer for the same problems that I am hearing 
about here today. He went into education, and thank goodness 
for that, I guess.
    But obviously in our district we grow a lot of cotton, and 
I have given a lot of thought, Mr. Verett, to your testimony 
today about the state of the industry and then your comment, 
Mr. Brantley, about, ``whether we make it or not depends on 
foreign governments.'' The thing I can't quite understand is 
that we grow the cotton and then we send it to Asia, and then 
they sell it back to us in the form of, I guess, what I am 
wearing here today. So we are at their mercy.
    And I know, of course, the rice is another issue, but as 
far as cotton goes, I mean, we export 80 percent of our cotton, 
and I guess we buy it right back in some form or another, and 
the government at same time is trying to subsidize this, but 
then, again, we see what the foreign governments are doing.
    Have we talked about a solution to this? I mean, obviously 
the textile industry is--well, it is not present in Georgia 
anymore--but it sounds like we have to do something to fix this 
problem, and that looks like we may have to look at the whole 
process. I read somewhere where we import back into the country 
36 percent of what the world makes out there. So it looks like 
we are paying for it to go and then to come back, and have we 
thought about that?
    Mr. Verett. Well, you are exactly correct. We grow at most 
about 18 to 19 million bales in good years. This last year we 
grew about 14 to 15 million bales, but we regularly import into 
the U.S. in the form of textiles, all right, we use and consume 
either through imports or what we produce domestically, which 
isn't a whole lot, about 20 million bales of cotton. So it is 
not like we are producing more than what we even need to use in 
the United States.
    So--but it does because we don't have that manufacturing 
anymore. Those were lost long ago. We still do a good bit of 
yarn spinning in the U.S. We are very efficient at that, but 
when it goes beyond that, certainly beyond the knitting and the 
weaving, we are not the low cost producers, by any means.
    But the solution is that we have to have better trade 
agreements, more fair trade agreements. And, quite honestly, 
this WTO deal, these multilateral agreements, as I mentioned, 
rule of law is important in trade agreements, but I just don't 
know how we think that we can get all of these countries 
together that are various economic levels and we can all come 
together and all agree on everything at one time, and then one 
country can throw it completely out of whack.
    We need to be negotiating trade agreements that are good 
for both this country and the other country that we are doing 
business with. Bilateral agreements are, to me, the most 
effective way to do those. Or at least regional agreements. We 
have benefited to a great extent through some of the Central 
American agreements in our hemisphere from a cotton 
perspective.
    But it is not an easy answer, Mr. Allen. But it has to do 
with agreements and how we are going to treat each other and 
how those enforcements are going to be done.
    Mr. Allen. Okay. Well, thank you, Mr. Verett. And I yield 
back my time.
    The Chairman. I thank the gentleman, and that will conclude 
our round of questioning. I would like to defer to the Ranking 
Member if he has any closing statements?
    Mr. Walz. Well, thank you, Mr. Chairman. Thank you all. One 
more, if I could, just a brief question to Dr. Kauffman maybe.
    I think it feels like to all of us the last couple weeks 
has kind of been EPA's mic-drop moment. They let a lot of stuff 
out pretty fast. And now it is for us to see what that means.
    And if I could, Dr. Kauffman, I would just ask, could you 
explain from the Midwest perspective and where you are sitting 
on this the impact of biofuels on the broader financial economy 
of farm country.
    Dr. Kauffman. Well, in terms of biofuels, no doubt that has 
been a significant demand factor for U.S. agriculture, 
particularly as corn is one of the main inputs for ethanol 
production. So over the course of the years that has been a 
factor that has boosted profitability and in general 
agriculture in our region.
    And so as you have seen some of those ethanol facilities 
and other forms of biofuel build out, that has also represented 
other forms of economic activity in those areas where there are 
jobs associated with ethanol production, for example, or 
trucking or any number of other jobs that might be related to 
producing ethanol.
    So certainly there is an impact much in the same way there 
would be for production of other products that would rely on 
agriculture.
    Mr. Walz. And you probably haven't had time to assess the 
impact of the current proposal?
    Dr. Kauffman. The only thing I would add on that is to the 
extent that the mandate that came out last week would have been 
maybe a bit below what was originally proposed a number of 
years ago in terms of ethanol production. But I would add there 
that the ethanol industry has been producing ethanol even 
absent some of those mandates has been a relatively profitable 
industry. So it is maybe a question more about what that means 
for the long term.
    Mr. Walz. Great. Well, I appreciate it. Well, I thank the 
Chairman. I thank each of you. Very helpful. Great insights. It 
gives us at least a place to start, going forward, as we talk 
to our constituents.
    I yield back.
    The Chairman. I thank the gentleman, and before I close, 
without objection, I will recognize Mr. LaMalfa for a quick 
question.
    Mr. LaMalfa. Okay. Thank you again, Mr. Chairman. I 
appreciate that. I just wanted to follow up one more time, Mr. 
Brantley.
    As we are hearing on TPP, the proposal, the report is maybe 
50,000 to 70,000 tons annually of limited new access to Japan 
for rice. Now, as I run those numbers, we make about 4 tons per 
acre on my operation. Most my neighbors do somewhere around 
there. And so that would be about 12,500 acres worth of 
production would be the new big wide opening that we would be 
having under TPP. Me and four or five other growers could fill 
that out. What kind of faith does that put you in the value of 
TPP for U.S. rice?
    Mr. Brantley. It is going to be hard to support at those 
levels. We have to have a significant increase for our industry 
to support that. I get what you are saying. It is only you and 
three others could produce that, but we were left out of the 
Korean Free Trade Agreement, and it appears that is happening 
here today. Without a significant increase, it will be hard for 
our industry to support it.
    Mr. LaMalfa. All right. Okay. I hear you.
    Again, thank you, Mr. Chairman. I appreciate your 
indulgence on that. I just wanted to get that one shot in 
there.
    And, Mr. Combs, we also feel your pain on the idea that if 
we have a severe drought, you are not just going to be down 15 
percent in sales, I don't see how you sell anything on what is 
coming down the pike. And I have, me and others, have come 
hunting tractors in your country a couple years ago, because 
you guys don't wear them all out before you resell them. So we 
appreciate that. Thank you.
    Mr. Combs. Keep coming.
    The Chairman. I thank the gentleman, and before we close, 
Dr. Kauffman, I appreciate you being here today and giving us 
the sort of the economic perspective on the dynamics of the 
farm economy. You don't have to answer this question. I want 
to, primarily, get feedback from our producers here.
    Just one final question, and we have heard a recurring 
theme today about government regulations, among other things, 
and that tends to be one of those topics that comes up any time 
we assemble a group of producers.
    But let me ask you this: I would be remiss if I didn't get 
your perspective on WOTUS, on the Waters of the U.S. rule. So 
let me just ask you this individually. I will start with you, 
Mr. Combs, do you support or oppose the rule, and would you 
support repeal of the rule?
    Mr. Combs. I oppose the rule. I would support repeal, we 
have farms in our family that have been in our family for over 
100 years. We are going to take care of that land, and we don't 
need somebody in Washington telling us how to dig a ditch on a 
farm to get rid of some water.
    The Chairman. Thank you.
    Mr. Verett?
    Mr. Verett. We oppose the rule and we would support 
legislation to repeal.
    The Chairman. Thank you sir.
    Mr. Brantley?
    Mr. Brantley. I would concur. Support the rule and oppose 
the repeal. I am sorry. I agree with what these gentlemen said. 
As Paul said, we are the greatest conservationists around. We 
know what we are doing. We would like to work with our agencies 
to conserve water, to improve quality and quantity, and we have 
pretty good track record of what we are doing.
    The Chairman. Thank you.
    Mr. Paap?
    Mr. Paap. The driveway I drove out of last night is the 
same driveway our family used 116 years ago. Hopefully we are 
going to use it the next 116 years. Certainly water quality, 
air quality, soil quality is all top priorities for us in 
agriculture. We don't believe from a Farm Bureau perspective 
and personally it is not the agency's job to do an end around 
Congress. That is the reason we have Congress, committees, 
hearings like this. It is not the agency's job to create laws.
    The Chairman. Thank you, gentlemen. I want to again extend 
our gratitude to you for being here today, and I appreciate 
your insights. I think this has been a very valuable hearing 
and I appreciate you being here.
    Under the rules of the Committee, the record of today's 
hearing will remain open for 10 calendar days to receive 
additional material and supplementary written responses from 
the witnesses to any questions posed by a Member.
    This Subcommittee on General Farm Commodities and Risk 
Management hearing is now adjourned.
    [Whereupon, at 11:44 a.m., the Subcommittee was adjourned.]