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


              COMMODITY IN FOCUS: STRESS IN COTTON 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

                               __________

                            DECEMBER 9, 2015

                               __________

                           Serial No. 114-36
                           
                           
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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
TRENT KELLY, Mississippi

                                 ______

                    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.......................................     4
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...................................     3

                               Witnesses

Stephens, Shane, Vice Chairman, National Cotton Council, 
  Greenwood, MS..................................................     5
    Prepared statement...........................................     6
    Submitted question...........................................    54
Reed, J.D., Nathan B., Arkansas State Chairman, American Cotton 
  Producers, Marianna, AR........................................    10
    Prepared statement...........................................    12
    Submitted question...........................................    54
Holladay, Shawn L., Producer Board Member, National Cotton 
  Council, Lubbock, TX...........................................    15
    Prepared statement...........................................    17
    Submitted questions..........................................    54
Wannamaker, Kendall ``Kent'' W., President, Southern Cotton 
  Growers, Saint Matthews, SC....................................    20
    Prepared statement...........................................    21
    Submitted question...........................................    55
Michael, Cannon, Producer Board Member, National Cotton Council, 
  Los Banos, CA..................................................    25
    Prepared statement...........................................    27
    Submitted question...........................................    55
Wright, Mike, Executive Vice President, City Bank Texas, Lubbock, 
  TX.............................................................    33
    Prepared statement...........................................    34
    Submitted questions..........................................    56

                           Submitted Material

Smith, Dan, Member, Board of Directors, Texas Farm Bureau, 
  submitted statement............................................    53

 
              COMMODITY IN FOCUS: STRESS IN COTTON COUNTRY

                              ----------                              


                      WEDNESDAY, DECEMBER 9, 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 of the Longworth House Office Building, Hon. Eric A. 
``Rick'' Crawford [Chairman of the Subcommittee] presiding.
    Members present: Representatives Crawford, Lucas, 
Neugebauer, Austin Scott of Georgia, Allen, Abraham, Conaway 
(ex officio), Walz, Bustos, Graham, Ashford, David Scott of 
Georgia, Costa, Kirkpatrick, and Vela.
    Staff present: Bart Fischer, Callie McAdams, Haley Graves, 
Matt Schertz, Mollie Wilken, Skylar Sowder, Anne Simmons, 
Matthew MacKenzie, Mike Stranz, Nicole Scott, and Carly 
Reedholm.

    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, entitled, Commodity in 
Focus: Stress in Cotton Country, will come to order.
    As most of you are aware, we have a very serious situation 
unfolding in the Cotton Belt right now. The purpose of this 
hearing is to hear from the folks who are directly affected on 
the frontlines.
    I think it is important that we hear from the folks on this 
panel as they articulate how difficult the circumstances are 
right now and what may lie in store if mitigating action is not 
taken soon.
    Whether you hail from cotton country or not, each Member of 
this Committee can relate to what is unfolding in the Cotton 
Belt by imagining the exact same conditions unfolding with 
respect to the major crop grown in your part of the country, 
the economic lifeblood of your communities.
    In the not too distant past, we lost to China most of what 
was once the largest manufacturing sector in America, our 
textile industry. Now, I believe we are in grave danger of 
losing the vast majority of our production to China, India, and 
other countries that are employing anti-competitive trade 
practices that no American farmer can match.
    Every farmer in America deals in varying degrees with high 
and rising foreign subsidies and tariffs. Every farmer in 
America is struggling with low prices and rising inputs. And, 
every farmer in America has at one time or another been dealt a 
blow by Mother Nature. Some farmers, including many in the 
Cotton Belt, have suffered blow after blow for several years in 
a row now.
    But what distinguishes the cotton farmer right now from his 
brethren who grow other staple crops is the fact that the 
cotton farmer is trying to weather all of these things at once, 
most in their severest form, and without the benefit of an 
effective farm safety net.
    I greatly appreciate the efforts of cotton farmers to put 
together a policy for cotton lint that would end the WTO 
litigation instigated by Brazil. Unfortunately, the current 
cotton policy that was put in place last year was entirely 
predicated on a functioning world cotton market. But, a 
functioning world market is hardly what we have going on today.
    I am going to allow our witnesses to describe more fully 
what China, India, and other countries are doing and how these 
actions are destroying the cotton market and harming U.S. 
cotton farmers.
    Today, I implore the Secretary to use the authorities that 
we have given him in the farm bill to provide critical and 
urgent relief by designating cottonseed as an oilseed for 
purposes of Price Loss Coverage and Agricultural Risk Coverage.
    While I do not believe that this action is a cure for all 
that ails, it is still meaningful help that is within the 
Secretary's power to provide.
    I am very grateful to Secretary Vilsack for taking 
administrative actions in many instances in the past in order 
to head off a crisis in other parts of farm country. I believe 
that the Secretary cares about our nation's farmers and 
ranchers, and so I am very hopeful that he and his team will 
take action on this important matter.
    I know that my friend, Mr. Walz, and Ranking Member 
Peterson, do not have a direct dog in this fight. After all, 
there is not a lot of cotton grown in Minnesota. But, I know 
Mr. Walz believes as I do that agriculture must hang together 
or we will certainly hang separately.
    So, Mr. Walz, please accept my sincerest gratitude for your 
friendship and your help.
    [The prepared statement of Mr. Crawford follows:]

Prepared Statement of Hon. Eric A. ``Rick'' Crawford, a Representative 
                       in Congress from Arkansas
    As most of you are aware, we have a very serious situation 
unfolding in the Cotton Belt right now. The purpose of this hearing is 
to hear from the folks who are directly affected on the front lines.
    I think it is important that we hear from the folks on this panel 
as they articulate how difficult the circumstances are right now and 
what may lie in store if mitigating action is not taken soon.
    Whether you hail from cotton country or not, each Member of this 
Committee can relate to what is unfolding in the Cotton Belt by 
imagining that the exact same conditions were unfolding with respect to 
the major crop grown in your part of the country, the economic 
lifeblood of your communities.
    In the not too distant past, we lost to China most of what was once 
the largest manufacturing sector in America, our textile industry. Now, 
I believe we are in grave danger of losing the vast majority of our 
production to China, India, and other countries that are employing 
anti-competitive trade practices that no American farmer can match.
    Every farmer in America deals in varying degrees with high and 
rising foreign subsidies and tariffs. Every farmer in America is 
struggling with low prices and rising inputs. And, every farmer in 
America has at one time or another been dealt a blow by Mother Nature. 
Some farmers, including many in the Cotton Belt, have suffered blow 
after blow for several years in a row now.
    But what distinguishes the cotton farmer right now from his 
brethren who grow other staple crops is the fact that the cotton farmer 
is trying to weather all of these things at once, most in their 
severest form, and without the benefit of an effective farm safety net.
    I greatly appreciate the efforts of cotton farmers to put together 
a policy for cotton lint that would end the WTO litigation instigated 
by Brazil. Unfortunately, the current cotton policy that was put in 
place last year was entirely predicated on a functioning world cotton 
market. But, a functioning world market is hardly what we have going on 
today.
    I will allow our witnesses to describe more fully what China, 
India, and other countries are doing and how these actions are 
destroying the cotton market and harming U.S. cotton farmers.
    Today, I implore the Secretary to use the authorities that we have 
given him in the farm bill to provide critical and urgent relief by 
designating cottonseed as an oilseed for purposes of Price Loss 
Coverage and Agricultural Risk Coverage.
    While I do not believe that this action is a cure for all that 
ails, it is still meaningful help that is within the Secretary's power 
to provide.
    I am very grateful to Secretary Vilsack for taking administrative 
actions in many instances in the past in order to head off a crisis in 
other parts of farm country. I believe that the Secretary cares about 
our nation's farmers and ranchers. And, so I am very hopeful that he 
and his team will take action on this important matter.
    I know that my friend, Mr. Walz, and Ranking Member Peterson, do 
not have a direct dog in this fight. After all, there is not a lot of 
cotton grown in Minnesota. But, I know Mr. Walz believes as I do that 
agriculture must hang together or hang separate.
    So, Mr. Walz, please accept my sincerest gratitude for your 
friendship and your help.
    I would now recognize my good friend, Mr. Walz, for his opening 
statement.

    The Chairman. And I would now like to recognize my good 
friend from Minnesota, Mr. Walz, for his opening statement.

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

    Mr. Walz. Well, thank you, Chairman Crawford. And I think 
it is obvious to all of you, you have no better friend and 
advocate than the Chairman on this issue, and he has been a 
champion of making sure we are educated, and this is another 
step of putting the experts in front of us.
    I appreciate the hearing. It is another example that the 
Chairman of the full Committee, Mr. Conaway, is here, another 
example this is a bipartisan Committee that actually is 
interested in moving things forward, and that is the nature of 
how we get together here. The Chairman has mentioned it, not a 
lot of cotton in southern Minnesota, but as a kid who grew up 
chocking cockleburs in cornfields, there is probably not a lot 
of difference between chocking pigweed and cotton. We all have 
those common interests, and we have proven this, that it has 
become more and more difficult to hold together this coalition 
to get things done. The Chairman on this Committee did that in 
a--what I considered an assault towards one of the basic safety 
net features in crop insurance, and did a masterful job of 
making sure we keep that important program intact.
    So again, I appreciate it. You being here is critically 
important because this is about education. This is the way that 
Congress is supposed to work. I look forward to hearing from 
you when these issues come up, whether it is cottonseed oil or 
those things, a lot of us, even Members of Congress, certainly 
producers up in my neck of the woods might not understand what 
you are going through, but at one time or another, we will all 
go through it. And as these market fluctuations, these things 
that are happening, the practical things that we can do need to 
be implemented.
    So thank you all for taking the time. I am really looking 
forward for your testimony, and please know it does make a big 
difference.
    I yield back.
    The Chairman. I thank the gentleman. The chair would 
request that other Members submit their opening statements for 
the record so the witnesses may begin their testimony, and to 
ensure that there is ample time for questions.
    The chair would like to 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 the Members' understanding.
    Witnesses are reminded to limit their oral presentations to 
5 minutes. All written statements will be included in the 
record.
    I want to thank all of you for being here. I will introduce 
you individually here in just a minute, but just in reference 
to my comments about your 5 minute testimony, in the interest 
of our six panelists, look at the traffic light in front of 
you. When it is green, you are good to go. When it is yellow, 
put your foot on the gas. And when it is red, you are going to 
need to stop, because we want to make sure that we do get an 
opportunity to address each of you and give our Members ample 
opportunity. So be looking at the traffic light.
    Again, I want to thank our witnesses at the table, Mr. 
Shane Stephens who is the Vice Chairman of the National Cotton 
Council of Greenwood, Mississippi; Mr. Nathan Reed who is the 
Arkansas State Chairman for American Cotton Producers, 
Marianna, Arkansas; Mr. Shawn Holladay, Producer Board Member, 
National Cotton Council, from Lubbock, Texas; Mr. Kendall 
Wannamaker, President, Southern Cotton Growers, from Saint 
Matthews, South Carolina; and as Mr. Costa hasn't made it in 
yet, I will introduce Mr. Cannon Michael, Producer Board 
Member, National Cotton Council, Los Banos, California; and Mr. 
Mike Wright, Executive Vice President, City Bank Texas, 
Lubbock, Texas.
    And before I introduce the individual panelists, I would 
defer to the Chairman of the full Committee, if he has any 
statement he would like to make at this time.

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

    Mr. Conaway. Well, I thank you, Chairman.
    No statement, other than to welcome our witnesses, and 
particularly Shawn Holladay and his wife, Julie, from Lamesa, 
Texas, and who I ask to vote for me every 2 years. I have to be 
particularly nice to them.
    I look forward to our witnesses' testimony, and I yield 
back.
    The Chairman. Thank you, Mr. Chairman.
    I would like to welcome our witnesses to the table. Mr. 
Shane Stephens, you are recognized for 5 minutes.

  STATEMENT OF SHANE STEPHENS, VICE CHAIRMAN, NATIONAL COTTON 
                     COUNCIL, GREENWOOD, MS

    Mr. Stephens. Thank you. I would like to thank Chairman 
Crawford, Ranking Member Walz, and the Members of the 
Subcommittee for the opportunity to present the views of the 
National Cotton Council regarding the current economic 
situation in the U.S. cotton industry.
    Cotton is a cornerstone of the rural economy in the 17 
cotton-producing states, stretching from Virginia to 
California. Unfortunately, the current economic situation is 
chipping away at that cornerstone, and threatening to cause 
long-term and potentially irreversible damage to the industry 
and the associated infrastructure.
    Acreage is down in all regions, and total U.S. plantings 
are the lowest since 1983. Losses in cotton area translate into 
pressure on associated businesses, infrastructure, and rural 
economies. Research has affirmed the multiplier effects on 
rural economies when cotton acres decline.
    A thriving cotton industry is critical to the success of 
many local economies. World cotton demand remains ten percent 
below the peak observed in 2006. Reduced consumption is largely 
the result of the tremendous increase in polyester use. Excess 
production capacity, in many cases fueled by foreign government 
support, is contributing to polyester prices below 50 per 
pound in key Asian markets.
    The prospect of higher cotton prices is further challenged 
by world stocks-to-use ratio hovering at 100 percent. The 
increase in stocks was the direct result of policies in place 
in China from 2011 through 2013. During those years, China 
supported its cotton farmers by purchasing vast amounts of its 
production into government reserves at prices well above the 
world market. Realizing that continually building stocks was 
not a long-term solution, China instituted a target price 
program in 2014 at roughly $1.45 per pound.
    Certainly, China is not the only country to support cotton 
production with government programs. Recent testimony presented 
by the National Cotton Council to the House Agriculture 
Committee provides a more exhaustive review of policies in 
place in other countries. According to a 2014 ICAC report, 
international cotton production is supported at a level almost 
four times the level provided U.S. cotton farmers. With the 
lowest U.S. acreage in more than 30 years, the smallest exports 
in 15 years, and cotton prices at their lowest level since the 
2009 recession, economic pressure is mounting, with revenue 
down 34 percent from the average levels of 2010 through 2013.
    Given the cumulative impacts of the past 2 years, producers 
are increasingly concerned about securing financing for the 
2016 crop.
    Commodity markets are cyclical and low prices are the cure 
for low prices. However, in the current cycle, the cure may not 
come in time to sustain many producers' businesses and local 
economies relying on cotton.
    Futures markets suggest that a relatively flat price 
situation is likely at least through the 2017 crop, if not 
longer. To provide much-needed relief, the industry is asking 
USDA to designate cottonseed as an other oilseed for the 
purpose of the Price Loss Coverage and Agricultural Risk 
Coverage Programs.
    The 2014 Farm Bill includes statutory authority for the 
USDA to designate other oilseeds for inclusion in farm bill 
programs. The infrastructure for the cotton industry will 
continue to shrink unless there is a stabilizing policy for 
cotton to help sustain the industry in periods of financial 
pressures such as currently exist.
    In order to provide timely relief, the Secretary is 
requested to implement the program for the 2015 crop. 
Streamlined implementation can be achieved by offering the 
option to receive cottonseed PLC/ARC payments on generic base 
attributed to cottonseed, without penalizing producers who made 
other program planning decisions. For 2016 and beyond, the U.S. 
cotton industry will work with the Secretary to develop 
comprehensive provisions of the PLC/ARC Programs.
    Numerous lending institutions have expressed their support 
for the proposal through letters to the Secretary. There is a 
similar letter being circulated among Members of the House, and 
we thank those of you who have signed, and encourage those who 
have not yet signed to please do so. The cotton industry 
generates annual economic activity in excess of $100 billion. 
Implementation of the cottonseed proposal will play a critical 
role in protecting that economic activity.
    We understand the significant request represented by the 
proposal, but we believe the current economic condition 
requires immediate action. Support provided by cottonseed 
programs should be viewed in the same manner as other farm 
program spending, which is an investment in not only production 
agriculture, but the rural economy.
    Thank you, and I would be happy to answer questions at the 
appropriate time.
    [The prepared statement of Mr. Stephens follows:]

 Prepared Statement of Shane Stephens, Vice Chairman, National Cotton 
                         Council, Greenwood, MS
    I would like to thank Chairman Crawford, Ranking Member Walz, and 
the Members of the Subcommittee for the opportunity to present the 
views of the National Cotton Council regarding the current economic 
situation in the U.S. cotton industry. My name is Shane Stephens, and I 
am the Vice President of Cotton Services and Warehousing for Staplcotn 
Cooperative in Greenwood, Mississippi. I currently serve as Vice 
Chairman of the National Cotton Council.
    The National Cotton Council (NCC) is the central organization of 
the United States cotton industry. Its members include producers, 
ginners, merchants, cooperatives, warehousers, textile manufacturers 
and cottonseed processors and merchandisers. Cotton's scope and 
economic impact extend well beyond the approximately 19,000 farmers 
that plant between 8 and 12 million acres of cotton each year. Taking 
into account diversified cropping patterns, cotton farmers annually 
cultivate more than 30 million acres of land. Processors and 
distributors of cotton fiber and downstream manufacturers of cotton 
apparel and home furnishings are located in virtually every state. 
Nationally, farms and businesses directly involved in the production, 
distribution and processing of cotton employ almost 200,000 workers and 
produce direct business revenue of more than $27 billion. Accounting 
for the ripple effect of cotton through the broader economy, direct and 
indirect employment surpasses 420,000 workers with economic activity 
well in excess of $100 billion.
    Cotton is a cornerstone of the rural economy in the 17 cotton-
producing states stretching from Virginia to California. Unfortunately, 
the current economic situation is chipping away at that cornerstone and 
threatening to cause long-term and potentially irreversible damage to 
the industry and the associated infrastructure. In response to weaker 
price conditions for cotton relative to competing crops, U.S. producers 
responded with plantings of just 8.5 million acres of cotton in 2015 
(based on the November 2015 NASS estimates). Acreage is down in all 
regions, and the U.S. total is the lowest since 1983, which was a year 
when acreage was sharply reduced by government programs that encouraged 
land idling.
    Losses in cotton area translate into pressure on associated 
businesses, infrastructure and rural economies. For example, USDA 
reports that only 601 gins operated in 2014, down 33% over the past 
decade. Researchers at Louisiana State University \1\ have affirmed the 
multiplier effects on rural economies when cotton acreage declines. A 
thriving cotton economy is critical to the success of many local 
economies.
---------------------------------------------------------------------------
    \1\ http://ageconsearch.umn.edu/bitstream/46823/1/
Fannin_Paxton_Valco_SAEA_
2009_sub_ver.pdf.
---------------------------------------------------------------------------
    As the 2015 harvest winds down, cotton futures prices trading in 
the low to mid 60 range are at the lowest levels since 2009. Concerns 
about world demand, burdensome global stocks, a stronger U.S. dollar 
and general price pressure in commodity markets are playing a factor in 
the current price environment. The effects of these factors are evident 
in the latest estimates of cotton production and use.
    To understand the challenges facing cotton farmers, it is important 
to review the dynamics at work in global cotton demand. USDA estimates 
world mill use at 111.6 million bales for the current 2015 marketing 
year. The estimate represents an increase of approximately 1% from 2014 
mill use, and mill use is expected to exceed world production for the 
first time in 6 years. However, even with very modest growth, world 
cotton demand remains almost 13 million bales below the peak demand 
observed in 2006. Slumping demand is largely the result of the 
tremendous increase in polyester use. During the 2006-2015 period when 
cotton mill use fell by 13 million bales, polyester's production 
capacity, primarily located in China, increased by 145 million bales. 
Excess production capacity, in many cases fueled by government support, 
is contributing to polyester prices in Asian markets below 50 per 
pound. While consumers continue to express their preference for cotton 
products, the tremendous increase in low-priced polyester production 
has created extraordinary hurdles for increasing cotton demand.
    For cotton farmers, the prospect of higher cotton prices is further 
challenged by a world stocks-to-use ratio that exceeded 100% in the 
2014 marketing year. Current stocks-to-use ratios stand in stark 
contrast to historical stocks that generally ranged between 50 and 60 
percent of total use. The recent increase in stocks was the direct 
result of policies in place in China for the 2011 through 2013 crops. 
During those years, China supported its cotton farmers by purchasing 
vast amounts of its production into government reserves at prices well 
above the world market. With most domestic production locked in 
reserves, China imported annually between 14 and 24 million bales from 
the world market.
    A number of significant outcomes resulted from China's policy of 
building reserves. First, purchasing the majority of the domestic crop 
at the support level essentially established a floor on internal cotton 
prices. By late 2011, China's cotton prices were well above 
international cotton prices and also well above polyester prices. 
China's mill use of cotton suffered as a result of uncompetitive 
prices. China's cotton area was generally stable between 12 and 14 
million acres.
    However, it became clear that continually building stocks was not a 
long-term solution. After 3 years of amassing more than 50 million 
bales of cotton in government reserves, China instituted a target price 
program for the 2014 crop at a level of roughly $1.45 per pound. The 
new target price program was applicable to the western province of 
Xinjiang, while the remaining cotton-producing provinces received a 
direct subsidy of $0.15 per pound. The target price program was 
continued for the 2015 crop, although the target price was reduced by 
3.5% when measured in local currency. The announced target price 
equated to approximately $1.40 per pound based on exchange rates 
prevailing at planting time. In another change from the 2014 crop, no 
direct support was announced for the eastern provinces. As a result, 
cotton area in those provinces has sharply declined.
    China is not the only country to support cotton production with 
government programs. Recent testimony \2\ presented by the National 
Cotton Council to the House Agriculture Committee provides a more 
exhaustive review of policies in place in other countries. With 1 out 
of every 4 bales of the global cotton crop now produced in India, their 
government programs can have a significant impact on the world market. 
The Cotton Corporation of India, a government-run procurement and 
distribution company, is responsible for administering the price 
support program. The Minimum Support Price (MSP) is announced by the 
government each year. Between 2010 and 2015, the MSP for medium staple 
cotton increased by 52%, while the MSP for long staple cotton increased 
by 42%. The MSP is announced on the basis of seed cotton. Converting to 
a lint-equivalent basis requires an assumption about turn-out rates 
when the cotton is ginned. Assuming gin turn-out rates between 35% and 
40%, current minimum prices in India equate to between $0.70 and $0.80 
per pound.
---------------------------------------------------------------------------
    \2\ http://agriculture.house.gov/uploadedfiles/
10.21.15_adams_testimony.pdf.
---------------------------------------------------------------------------
    While U.S. cotton policy is a focal point in international circles, 
there are ample studies and reports that document the various forms of 
government support present in most cotton-producing countries. While 
U.S. support for cotton has been declining in recent years, government 
intervention in other countries has been increasing. With reduced 
support in the 2014 Farm Bill, U.S. cotton farmers are competing with 
cotton producers in other countries that are benefiting from higher 
support levels. Two recent reports illustrate the comparative support 
rates across selected cotton producing countries. In June 2015 
testimony to the House Agriculture Committee, Dr. Darren Hudson with 
Texas Tech University noted that the marketing loan in the United 
States was below support prices in China, India, Pakistan, Brazil, and 
Uzbekistan.\3\
---------------------------------------------------------------------------
    \3\ http://agriculture.house.gov/uploadedfiles/
hudson_testimony.pdf.
---------------------------------------------------------------------------
    In a November 2014 report,\4\ the International Cotton Advisory 
Committee (ICAC) reported that average direct assistance to cotton 
production across all countries was $0.26 per pound. For the United 
States, ICAC estimated the average support at $0.07 per pound. Direct 
assistance to U.S. cotton producers was well below levels provided in 
other countries. It should be noted that the ICAC study was based on 
the 2013 crop year, which was the final year before the significant 
changes implemented by the new farm legislation.
---------------------------------------------------------------------------
    \4\ International Cotton Advisory Committee. Production and Trade 
Policies Affecting the Cotton Industry. November 2014. Washington, D.C.
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    The studies underscore the challenging conditions facing U.S. 
producers with international cotton production supported at a level 
almost four times the level of support in the United States. 
Unfortunately, current proposals submitted within the World Trade 
Organization (WTO) would lead to a further imbalance in the situation. 
The U.S. cotton industry is steadfastly opposed to any proposals 
considered in the lead-up to or during the December WTO Ministerial 
that further commits the U.S. to additional changes in cotton policy. I 
encourage this Committee and our negotiators to hold firmly to the 
position that agricultural markets have changed since 2005, and that 
the U.S. cotton industry has evolved in ways that far exceed the 
demands of the Hong Kong Mandate. A cotton specific ``solution'' in the 
WTO negotiations is no longer necessary.
    I bring these issues to the attention of the Subcommittee because 
of the critical influence of international markets in the financial 
conditions of U.S. cotton farmers. In recent years, approximately 75% 
of U.S. production enters export channels. Policies that directly 
affect international production, consumption and trade have a direct 
bearing on U.S. market prices. Currently, the strength of the U.S. 
dollar is a limiting factor in exports. China, already covered in some 
depth, remains the largest cotton importer although they are projected 
to significantly reduce imports given the current balance between 
supply and demand. Another obstacle impeding U.S. exports is an ongoing 
dumping investigation conducted by the Turkish Government.
    In recent years, Turkey has been the second largest export customer 
for U.S. cotton. For the past year, Turkish authorities have been 
investigating U.S. cotton exporting companies to determine if U.S. 
cotton is being dumped into the Turkish market. An affirmative finding 
by Turkish officials would mean that an anti-dumping duty would be 
applied to U.S. cotton imports, while imports from other countries 
would remain duty free. A duty would undermine the competitiveness of 
U.S. cotton and directly impact prices received by U.S. cotton farmers. 
The uncertainty of the ongoing investigation is already dampening 
interest in U.S. cotton by Turkish mills, as current sales for this 
marketing year are just \1/3\ of year-ago levels.
    The Turkish Government self-initiated the investigation shortly 
after the U.S. announced anti-dumping/countervailing duty (AD/CVD) 
investigations of Turkish steel pipe. The Minister of Economy was 
quoted in Turkish press as saying Turkey would launch three 
investigations for every one the U.S. aimed at Turkish products. The 
document produced to support the initiation of the investigation is 
largely redacted, so the information upon which the allegation of 
dumping is based is not available for parties to rebut. Many observers 
believe that Turkey seeks to damage the U.S. cotton industry by using 
the AD investigation not to benefit their domestic industry but out of 
retribution for the U.S. steel cases. This is just as much in 
contravention of the WTO as using trade barriers out of protectionist 
intent.
    It is against the backdrop of these challenges that 2015 U.S. 
exports projected at 10.2 million bales would be the lowest in 15 
years. Of course, the demand base for U.S. cotton is much different 
than 15 years ago. When cotton exports last fell short of 10 million 
bales in 2000, the U.S. textile industry consumed almost 9 million 
bales. Unfortunately, that is no longer the case.
    Between 1997 and 2008, the amount of cotton used by U.S. textile 
mills experienced a precipitous decline, falling from 11.3 million 
bales down to 3.5 million bales. Since 2008, the U.S. textile industry 
has stabilized, and there has even been a modest increase in cotton 
consumption with mill use for the current marketing year expected to 
reach 3.7 million bales. In recent years, the U.S. industry has 
benefited from new investments, and textile companies are building new 
spinning operations in the United States.
    One factor contributing to the renewed optimism in the U.S. 
industry is the continued benefits of the Economic Adjustment 
Assistance Program (EAAP), first authorized in the 2008 Farm Bill. 
Recipients must agree to invest the proceeds in equipment and 
manufacturing plants, including construction of new facilities as well 
as modernization and expansion of existing facilities. EAAP funds have 
allowed investments in new equipment and new technology, thus allowing 
companies to reduce costs, increase efficiency and become more 
competitive against imported textile products. I would like to thank 
the Members of this Subcommittee for their work in the reauthorization 
of the program in the 2014 Farm Bill. The continuing support of the 
program allows U.S. textile mills to make the new investments necessary 
to remain competitive.
    For the U.S. textile industry, the Export-Import (Ex-Im) Bank plays 
an important role in providing financing. Members of the Subcommittee 
are likely aware of the amount of U.S. cotton production that enters 
export channels, but it is also the case that the majority of yarn and 
fabric produced by our textile manufacturers is exported. The Ex-Im 
Bank plays a critical role in financing exports of textile products. We 
commend Congress for taking steps to reauthorize the Ex-Im Bank.
    A final issue to bring to your attention, particularly as it 
relates to the U.S. textile industry, is the Trans-Pacific Partnership 
(TPP) agreement. Overall, the agreement provides for equity and 
reciprocity for many aspects of trade in cotton fiber between the 
United States and the other TPP countries. With respect to cotton fiber 
imports into the United States, the agreement provides for elimination 
of import duties within 10 years. The duties and quotas applicable to 
U.S. cotton fiber exports to TPP countries appear to be eliminated 
immediately.
    The cotton industry cannot evaluate any free trade agreement 
without consideration of the provisions of the agreement that affect 
trade in cotton textiles. The U.S. cotton industry has long held the 
concern that a TPP agreement that includes Vietnam is not positive for 
the U.S. textile industry. Much of the concern stems from granting 
additional access to the U.S. textile market to a centrally-planned 
economy that has textile companies with a history of contract defaults. 
With those overarching concerns in mind, U.S. negotiators appear to 
have taken steps to mitigate the negative impacts. The agreement 
generally contains acceptable rules of origin for textiles and limited 
exceptions that allow for a well-balanced outcome for all parties as 
well as our partners in the Western Hemisphere. However, there are 
special provisions with Vietnam and Malaysia that can be detrimental to 
the U.S. cotton industry if not appropriately implemented. Strong 
customs enforcement is of critical importance to ensure that the 
provisions of the agreement are adhered to.
    The 2014 Farm Bill included a number of significant changes, not 
only for cotton policy, but on a more general basis. The unified 
payment limit that now includes marketing loan gains has been extremely 
burdensome to implement and created additional uncertainty for cotton 
producers and merchandisers. It is our hope that a reauthorization of 
generic certificates will provide relief from this provision.
    Another issue creating challenges in the marketing of cotton is the 
requirement for producers to file a CCC-941 Average Adjust Gross Income 
(AGI) Certification and Consent to Disclosure of Tax Information form 
on an annual basis. The requirement for each producer to file a CCC-941 
every program year has caused a major interruption in the orderly flow 
of marketing cotton. The overwhelming majority of producer's average 
adjusted gross income is less than $900,000. An alternative would be to 
require that filing this form be done on a one-time basis and remain in 
effect for the life of the farm bill. Then require the IRS to annually 
audit and report to FSA if the producer's AGI exceeds $900,000. Since 
the determination of the average AGI is performed on the 3 years 
preceding the previous crop year, IRS should be able to report any 
changes in AGI status on producers prior to any payments for the crop 
year. As it works today, IRS reviews every producer every year. Why 
make the producer re-file the same form each year? This would be a more 
efficient use of all involved in the process. Any assistance you can 
bring to alleviate the huge burden this puts on all cooperatives and 
marketers handling this issue will be greatly appreciated.
    Mr. Chairman, the National Cotton Council sincerely appreciates the 
opportunity to provide an update on the economic situation of the U.S. 
cotton industry. With the lowest U.S. acreage in more than 30 years, 
the smallest exports in 15 years, and cotton prices at their lowest 
level since the 2009 recession, economic pressure is mounting with 
revenue down 34% from the average levels of 2010 to 2013. Lower 
revenues generated by an acre of cotton lint and cottonseed production 
come at a time when costs of production remain at elevated levels. The 
differential between costs and market revenue is the largest in the 
past 10 years. Given the cumulative impacts of 2014 and 2015, producers 
are increasingly concerned about securing production financing for the 
2016 crop.
    We understand that commodity markets are cyclical, and low prices 
are the cure for low prices. However, in the current cycle, the cure 
may not come in time to sustain many producers and businesses reliant 
on cotton. Futures markets suggest that a relatively flat price 
situation could prevail for 2016 and 2017. Cotton prices remain 
pressured by global stocks in excess of 100 million bales with more 
than 60 million bales held by China. In the face of increased 
government support in other countries, the U.S. industry is requesting 
USDA to designate cottonseed as an `other oilseed' for the purpose of 
the Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC) 
programs authorized in the 2014 Farm Bill.
    The 2014 Farm Bill (and previous farm bills) includes statutory 
authority for USDA to designate `other oilseeds' for purposes of farm 
bill programs. The infrastructure for the U.S. cotton industry (gins, 
warehouses, marketing co-ops and merchants, and cottonseed crushers and 
merchandizers) will continue to shrink unless there is a stabilizing 
policy for cotton to help sustain the industry in periods of low prices 
such as currently exists. This program will be important to ensure 
continued crop diversity in many parts of the Cotton Belt and the 
continued economic activity in rural areas.
    Cotton is the only traditional `program' crop that does not have 
any fixed price protection policy delivered by FSA in the 2014 Farm 
Bill. While this was the result of the WTO case brought by Brazil 
challenging U.S. cotton policies and the export credit guarantee 
programs from more than a decade ago, there still exists an ability and 
opportunity to provide support for a major co-product of cotton 
production--cottonseed. It is also important to remind the Subcommittee 
that more than 80% of retaliatory authority given to Brazil was due to 
export credit programs.
    In order to provide timely relief from current financial pressures, 
the Secretary is requested to implement the program as early as the 
2015 crop. For the 2015 crop, streamlined implementation can be 
achieved by offering a producer the option to receive cottonseed PLC/
ARC payments on cottonseed acres attributed to generic base without 
penalizing producers who made other covered commodity program planting 
decisions. For the 2016 crop and beyond, the U.S. cotton industry will 
work with the Secretary to develop comprehensive provisions of the PLC/
ARC programs.
    Numerous lending institutions have expressed their support for the 
proposal through letters to the Secretary. We understand that a letter 
is being circulated among Members of the House, and we thank those of 
you who have signed the letter and encourage those who have not yet 
signed to please do so. The cotton industry understands the significant 
request represented by this proposal. Such a program does not come 
without an additional workload for USDA and the potential for 
additional spending. However, spending under a cottonseed program 
should be viewed in the same manner as other farm program spending, 
which is an investment in not only production agriculture but the rural 
economy. As previously noted in my testimony, the cotton industry 
generates annual economic activity in excess of $100 billion. 
Implementation of the cottonseed proposal will play a critical role in 
protecting that economic activity.
    Thank you, and I will be happy to answer any questions at the 
appropriate time.

    The Chairman. Thank you, Mr. Stephens.
    I now want to recognize a constituent of mine who has made 
the trip up here, and also want to congratulate you and your 
family on your recent award for Arkansas Farm Family of the 
Year. Thank you for being here. I now recognize Mr. Nathan 
Reed, for 5 minutes.

  STATEMENT OF NATHAN B. REED, J.D., ARKANSAS STATE CHAIRMAN, 
            AMERICAN COTTON PRODUCERS, MARIANNA, AR

    Mr. Reed. Chairman Crawford, Ranking Member Walz, and 
Members of the Subcommittee, thank you for the opportunity to 
testify today. My name is Nathan Reed and I live and farm in 
Marianna, Arkansas.
    Cotton acreage in the mid-South region of Arkansas, 
Louisiana, Mississippi, Missouri, and Tennessee is 980,000 
acres, the lowest amount in several decades, and down from 4 
million acres just 10 years ago. A decline of this magnitude is 
having severe consequences for the entire cotton industry. I 
fear our region is at a tipping point with regard to cotton 
acreage and the remaining infrastructure.
    If some stabilizing policy is not implemented very soon, 
cotton acres are likely to continue their decline to the point 
that the remaining infrastructure cannot survive.
    Production costs have continuously increased over the last 
decade. According to the University of Arkansas, average 
production costs for irrigated cotton have increased by $147 
per acre since 2008, while current cotton prices are largely 
unchanged. With low cotton prices and tight margins, absent 
above-average yields, producers are facing negative cash flows.
    The importance of cottonseed continues to grow; now 
representing 25 percent of the total value from an acre of 
cotton production. To address the current economic crisis, I 
join the other panelists, the National Cotton Council, and 125 
mid-South ag lenders in supporting the use of administrative 
authority granted to USDA to designate cottonseed as an other 
oilseed for farm program participation.
    Another significant concern is USDA's current rulemaking 
regarding the determination of whether an individual is 
actively engaged in a farming operation. I want to emphasize 
the very narrow scope of the farm bill provision that resulted 
in this rulemaking process. The farm bill clearly stipulates 
that no changes in the actively engaged provisions will apply 
to individuals or entities comprised solely of family members. 
Further, the bill only requires the Secretary to define the 
term significant contribution of active personal management. 
Beyond this, no other changes are required by statute. The 
Secretary has discretion if deemed appropriate to establish 
limits on the number of individuals that can qualify based on 
active personal management, but again, this is not required by 
law. We urge this Subcommittee to work closely with USDA to 
ensure any changes to actively engaged provisions adhere to the 
intent of the farm bill. I also want to urge that no other 
changes or modifications are made relative to program 
eligibility, including implementation of the spousal rule.
    EPA's Spill Prevention, Control, and Countermeasures Rule 
is a prime example of an ongoing regulation that is 
unnecessarily burdening farmers and adding costs to address a 
problem that does not exist. Chairman Crawford, we are 
extremely appreciative of you leading the efforts to rein-in 
this regulation and ensure it is a more realistic and cost-
effective rule.
    One of the largest production costs across the Cotton Belt 
is managing herbicide-resistant weeds. Currently, there are two 
new cotton traits to help manage weed resistance that have been 
approved by the USDA, but are still awaiting label approval by 
the EPA. We strongly urge this Committee and others in Congress 
to engage with the EPA to hold them accountable for the actions 
that they are continuing to delay the availability of safe and 
effective crop protection products.
    I appreciate the Members of this Subcommittee for holding 
this timely hearing to review the current conditions facing 
U.S. cotton. Feedback from across the industry underscores the 
critical importance of policy actions, such as the cottonseed 
proposal that can provide stability for our industry. The 
current situation in the cotton industry goes beyond the normal 
challenges, and is to the breaking point for many producers, 
and those in other industry segments.
    Thank you for this opportunity, and I will be glad to 
respond to any questions at the appropriate time.
    [The prepared statement of Mr. Reed follows:]

 Prepared Statement of Nathan B. Reed, J.D., Arkansas State Chairman, 
                American Cotton Producers, Marianna, AR
Introduction
    Chairman Crawford, Ranking Member Walz, and Members of the 
Subcommittee, thank you for the opportunity to testify today regarding 
the current condition of the U.S. cotton industry, the significant 
challenges cotton producers face, and what policy changes are needed to 
address this worsening situation. My name is Nathan Reed and I farm in 
Marianna, Arkansas.
Farm and Background
    I am the owner of Nathan B. Reed Farms and Eldon Reed Farms, Inc. 
which are row crop operations. I farm approximately 7,000 acres of 
rice, cotton, corn, soybeans, and cereal rye in the Delta region of 
southeast Arkansas.
Acreage and Infrastructure Impacts
    The acreage planted to cotton in the mid-South region of Arkansas, 
Louisiana, Mississippi, Missouri, and Tennessee for 2015 is 980,000 
acres, the lowest amount in several decades. A decline of this 
magnitude is having severe consequences for the entire cotton industry 
in the region, from producers, gins, warehouses, marketing 
cooperatives, merchants, and cottonseed processors and merchandisers. 
This region has the capability to produce some of the highest cotton 
yields across the Cotton Belt and has historically been a major area of 
cotton production. However, in recent years due to the influence of 
many factors, some driven by Federal policies, and some by economics, 
acreage has continued to decline. I fear our region is at a tipping 
point with regard to cotton acreage and the remaining infrastructure. 
If some stabilizing policy is not implemented very soon, cotton acres 
are likely to continue their decline to the point that what is left of 
our infrastructure cannot survive. As you know, once the infrastructure 
of gins, warehouses, and related businesses are gone, they are not 
likely to return, making it unlikely cotton production will return to 
our region.
Policy Needs
    In an effort to address the current economic crisis in the cotton 
industry, the National Cotton Council and other cotton industry 
organizations have developed a proposal to help bring some stability to 
the industry. This proposal is based on the administrative authority 
that Congress has provided to USDA in the current and previous farm 
bills that allows the Secretary of Agriculture to designate other 
oilseeds as eligible for farm program participation. We believe that 
cottonseed, which is an important co-product of cotton production, 
should be designated as an oilseed and defined as a covered commodity 
under this farm bill, making cottonseed eligible for the PLC/ARC 
program. The importance of cottonseed continues to grow, as it now 
represents about 25% of the total revenue or value from an acre of 
cotton production.
    It is important to note that the designation we are seeking would 
not require any legislative action by Congress and would not reopen the 
2014 Farm Bill. The farm bill provides this authority to the Secretary 
of Agriculture and we strongly believe the current economic 
circumstances of the U.S. cotton industry warrant this action. Without 
some stabilizing policy put in place for the cotton industry, given the 
current and projected prices and costs of production, we can expect to 
see a continued decline in mid-South cotton acres and the associated 
infrastructure. As the acreage continues to shrink, our region is 
planting more corn and soybeans and this trend will continue. A more 
recent development has been the production of peanuts in this region, 
and with our productive soils, irrigation capabilities, and the current 
farm bill policies, I expect to see further increases of peanut acreage 
in the mid-South absent some response to the current cotton economic 
situation.
    As further evidence of the need for the cottonseed policy, at least 
125 lenders across the mid-South region have written to Secretary 
Vilsack urging him to take action on the cottonseed proposal to help 
address the deteriorating situation. The national Farm Credit Council, 
representing all the local farm credit associations, sent a similar 
letter outlining the current need for USDA to use whatever authorities 
available to assist the industry. Additionally, state farm bureaus 
representing four of the five states in the mid-South region have also 
written to the Secretary urging him to move forward with the cottonseed 
policy.
Costs of Production
    Production costs have continuously increased over the last decade. 
According to the University of Arkansas extension service, average 
production costs for irrigated cotton have increased by $147 per acre 
since 2008. With low cotton prices and tight margins, some producers 
will likely have negative cash flows in 2015 and 2016. For 2015, the 
University of Arkansas extension budgets show a loss of $33 per acre 
for center pivot irrigated GLB2 cotton and a loss of $95 per acre for 
non-irrigated GLT cotton.
    The increase in production costs for the Delta region as reported 
by Mississippi State extension is even higher with an average increase 
of about $180 per acre since 2008 for the B2RF variety. Mississippi 
State published 12 cotton budgets for 2015 based on different 
varieties/practice/regions and all showed negative net returns above 
total costs for 2015, with an average loss of $67. The University of 
Tennessee extension budgets report an average loss of $166 for 2015. 
For 2016, the Mississippi State budgets are showing even greater losses 
for the Delta and non-Delta regions as compared to 2015. Production 
costs for irrigated B2RF cotton are projected to be $65 higher in 2016. 
Average losses across all varieties/practices/regions are $90 per acre.
Policy Costs
`Actively Engaged' Rulemaking
    One significant policy concern regarding farm bill implementation 
is USDA's current rulemaking to modify the parameters used to determine 
whether an individual is `actively engaged' in a farming operation and 
eligible to participate in farm programs. While we have concerns about 
the potential unintended consequences from this rulemaking, we want to 
emphasize the very narrow scope of the farm bill provision that 
resulted in the `actively engaged' rulemaking. The farm bill clearly 
stipulates that no changes in the `actively engaged' provisions will 
apply to individuals or entities comprised solely of family members. 
Further, the bill only requires the Secretary of Agriculture to define 
the term ``significant contribution of active personal management.'' 
Beyond this, the only other possible change is, if the Secretary 
determines it is appropriate, to establish limits on the number of 
individuals by farm type that can qualify based on active personal 
management. However, this is not a change required by the statute. And 
even this provision cannot apply to or impact any individuals or 
entities made up solely of family members. We urge this Subcommittee to 
continue to work closely with USDA as this rulemaking proceeds to 
ensure any changes to `actively engaged' provisions closely adhere to 
the narrowly crafted provision in the farm bill.
    The NCC has always maintained that effective farm policy must 
maximize participation without regard to farm size or income. 
Artificially limiting benefits is a disincentive to economic efficiency 
and undermines the ability to compete with heavily subsidized foreign 
agricultural products. Artificially limited benefits are also 
incompatible with a market-oriented farm policy. Arbitrary restrictions 
on the contribution of management and labor are out of touch with 
today's agricultural operations and would only contribute to 
inefficiencies.
    Earlier this year, USDA issued the proposed rule on `actively 
engaged' and NCC along with numerous other commodity and farm 
organizations commented on the proposal. Of the approximately 90 
comments received, 26 were from various groups, with 18 of those groups 
opposed to the changes and expressing concern about the potential 
impacts. We urge USDA to seriously consider the issues raised in these 
comments regarding the implications of the proposed rule. It is our 
understanding that the final rule is at the Office of Management and 
Budget for review, and we strongly ask that the final rule not apply 
for the 2016 crop year, given that the 2016 crop year has already 
started for fall-planted crops. The final rule should not go into 
effect until 2017 at the earliest to allow producers and their families 
an opportunity to make the necessary transitions to comply with any new 
requirements.
    In addition to the `actively engaged' rulemaking, we also want to 
ensure that no other changes or modifications are made relative to 
program eligibility, including the spousal rule and how USDA implements 
this provision.
Regulatory Costs
Spill Prevention, Control, and Countermeasures Rule
    The EPA's Spill Prevention, Control, and Countermeasures (SPCC) 
rule is a prime example of an ongoing regulation that is unnecessarily 
burdening farmers and adding compliance costs to address a problem that 
does not exist or a concern that is not realistic. The SPCC rule places 
specific requirements on above-ground oil and fuel storage tanks 
located on farms. The rule was initially promulgated by the 
Environmental Protection Agency (EPA) under the jurisdiction of the 
Clean Water Act (CWA) as an attempt to protect navigable waters. 
However, the rule lacks a common-sense approach to how best to ensure 
natural resources on agricultural land are protected from possible fuel 
spills.
    Chairman Crawford, we are extremely appreciative of your leading 
the efforts to rein in this regulation and ensure it is a more 
meaningful, realistic, and cost-effective rule. We are pleased that the 
U.S. House has passed both standalone legislation and as part of 
broader legislation to address this costly regulation, but we are still 
awaiting action in the Senate to finally see enactment of legislation 
to make the needed changes to the SPCC rule.
Approval of Herbicide Tolerant Trait and Labels
    One of the largest production costs on U.S. cotton farms across the 
Cotton Belt today is managing herbicide-resistant weeds and the 
activities involved in doing so. The `management' of weeds includes 
field preparation activities, cover crops, purchasing seed with 
herbicide-tolerant traits, and the use of herbicides. The tools that 
farmers have available to them in their toolbox for managing herbicide-
resistant weeds are becoming fewer and fewer, greatly increasing the 
need for approval of new herbicide traits and the necessary herbicide 
label approvals. With regard to weed control, it is particularly 
important that farmers have options and the ability to use multiple 
modes of action.
    Currently, there are two new cotton traits to help manage weed 
resistance that have been approved by USDA's Animal and Plant Health 
Inspection Service (APHIS), but are still awaiting label approval by 
the EPA. It is taking an inordinate amount of time to have new 
technologies approved by EPA. For example, one important technology 
that would allow farmers to use dicamba over the top of cotton and 
soybeans has been pending for over 5 years at EPA. In addition, EPA 
just revoked the label for a formulation of 2-4-D that was used on 
limited soybean acreage this year and was scheduled for traited cotton 
varieties in the 2016 crop.
    Neither of these new tools were made available in time for the 2015 
planting season, although the reasons for the delay were weak at best. 
Yet today, we are less than 3 months away from the earliest cotton 
planting in parts of the Cotton Belt, and still neither of the two 
products have approved labels by EPA. At this rate, EPA is very likely 
to cause cotton producers to begin yet another production season 
handicapped in their efforts to control herbicide-resistant weeds, and 
the reasons for the seemingly unending delay are questionable at best. 
The approval process at EPA is being hijacked by a broken and 
unworkable Endangered Species Act, which one of my fellow panelists 
addresses in more detail in his testimony. In addition, EPA, and the 
Executive Branch, are allowing those groups opposed to any advances in 
modern agriculture to use the court system to slow, and in many cases 
halt, the approval process. A recent example is the decision by EPA to 
withdraw the registration for the use of a new herbicide label on a new 
trait due to ongoing court action.
    We strongly urge this Committee and others in Congress to engage 
with EPA to hold them accountable for the actions that are continuing 
to delay the availability of safe and effective crop protection 
products. Without the availability of new tools to control weeds and 
other pests, the production costs for cotton will continue to increase, 
leading to a further decline in cotton acreage as producers shift to 
other crops with lower costs of production, partly due to the 
availability of newer, more effective weed control products.
Waters of the U.S. Rule
    The final rule provides none of the clarity and certainty EPA 
claims. Instead, it creates confusion and risk by providing EPA and 
Corps of Engineers (the Agencies) with almost unlimited authority to 
regulate, at their discretion, any low spot where rainwater collects, 
including common farm ditches, ephemeral drainages, agricultural ponds, 
and isolated wetlands found in and near farms and ranches across the 
nation. The proposed rule defines terms like ``tributary'' and 
``adjacent'' in ways that make it impossible for a typical farmer or 
rancher to know whether the specific ditches or low areas at their farm 
will be deemed ``waters of the U.S.'' These definitions are certainly 
broad enough, however, to give regulators (and citizen plaintiffs) 
plenty of room to assert that such areas are subject to CWA 
jurisdiction. Moreover, no crisis exists. The Agencies do not argue 
that they need to regulate farming and ranching to protect navigable 
waters. Yet, the regulation gives them sweeping authority to do so, 
which they may exercise at will, or in response to a citizen plaintiff. 
Farming is a water-dependent enterprise, especially in the part of the 
country where I farm. The majority of my acreage is irrigated, which is 
common for most row crop farms in the Mississippi Delta region. 
Irrigation ditches carry flowing water to fields throughout the growing 
season as farmers open and close irrigation gates to allow the water to 
reach particular fields. These irrigation ditches are typically close 
to larger sources of water, irrigation canals, or actual navigable 
waters that are the source of irrigation water, and these ditches 
channel return flows back to those source waters.
    Except for very narrow exemptions, regulating drains, ditches, 
ponds, and other low spots within farm fields as ``navigable waters'' 
would mean that any discharge of a pollutant (e.g., soil, dust, 
pesticides, fertilizers and ``biological material'') into those 
ditches, drains, ponds, etc., will be unlawful without a CWA permit.
    This jurisdictional expansion will be disastrous. Farmers need to 
apply weed, insect, and disease control products to protect their 
crops. On much of our most productive farmlands (areas with plenty of 
rain), it would be extremely difficult to avoid entirely the small 
wetlands, ephemeral drainages, and ditches in and around farm fields 
when applying such products. If low spots in farm fields are defined as 
jurisdictional waters, a Federal permit will be required for farmers to 
protect crops. Absent a permit, even accidental deposition of 
pesticides into these ``jurisdictional'' features (even at times when 
the features are completely dry) would be unlawful discharges.
    The same goes for the application of fertilizer, another necessary 
aspect of farms. It is simply not feasible for farmers to avoid adding 
fertilizer to low spots within farm fields that may become 
jurisdictional. As a result, the rule imposes on farmers the burden of 
obtaining a section 402 National Pollutant Discharge Elimination System 
permit to fertilize their fields and put EPA into the business of 
regulating whether, when, and how a farmer's crops may be fertilized.
Conclusion
    I appreciate the Members of this Subcommittee for holding this 
timely hearing to review the current state of the U.S. cotton industry 
and hear some suggestions from across the Cotton Belt of policy actions 
that can bring some level of stability back to our industry. We know 
that agriculture and farming always has its share of ups and downs--
that is to be expected--but the current situation in the cotton 
industry goes beyond these expected challenges and is to the breaking 
point for many producers and those in other industry segments. Thank 
you for this opportunity and I will be glad to respond to any questions 
at the appropriate time.

    The Chairman. Thank you, Mr. Reed.
    I now recognize Mr. Shawn Holladay from National Cotton 
Council, Lubbock, Texas.

STATEMENT OF SHAWN L. HOLLADAY, PRODUCER BOARD MEMBER, NATIONAL 
                  COTTON COUNCIL, LUBBOCK, TX

    Mr. Holladay. Good morning, Chairman Crawford, Ranking 
Member Walz, and Members of the Subcommittee. My name is Shawn 
Holladay. My wife, Julie, daughter, Katy, and I grow cotton in 
Lamesa, Texas, in Dawson and Martin Counties. I currently serve 
as the President of Plains Cotton Growers, as well as the 
Chairman of the Farm Policy Task Force of the American Cotton 
Producers.
    Our area of Texas, which is proudly represented on the 
Agriculture Committee by both the Chairman and the Vice 
Chairman, is the largest contiguous cotton-producing region in 
the country. Texas is also the largest cotton-producing state 
in the nation, claiming 55 percent of total acreage. I cite 
these statistics to underscore the economic toll on Texas when 
the cotton industry is in the tank. The financial situation has 
deteriorated, with crop prices falling sharply and input costs 
rising. For Texas, the current marketing conditions compound an 
already difficult situation brought about by a series of 
natural disasters.
    As this Committee has thoroughly reviewed in previous 
hearings, we are getting hammered in the global market by huge 
foreign subsidies, tariffs, and non-tariff trade barriers that 
have always been high, but are rising to record levels. Mr. 
Chairman, this does not take into account EPA regulations, tax 
uncertainty, and other Federal policies that add significantly 
to our cost of production.
    It is fair to say that all of us in farm country could use 
a period of extraordinary yields, plus a strong and sustained 
rebound in prices. The cotton situation is unique among 
commodities because we have been hit with significant changes 
in both market prices and the farm program safety net. Cotton 
producers are by and large operating under a safety net that 
was never designed to address these dire circumstances.
    Successive droughts in Texas, while devastating, are only 
part of the story. Even beyond the severest drought years, 
yields have continued to be extremely low. Cotton prices remain 
depressed, and some producers are suffering a decline in value 
due to weather-related quality losses. Resistant weed pressure 
is a relatively new challenge that is adding significant costs 
to our operations. As a result, farmers in our part of the 
country were totally bled out of liquidity by the end of 2014. 
Many struggled to get approved for financing this year. Some 
were forced to sell off land. Still others were forced to quit 
farming.
    Mr. Chairman, I know that a lot of this simply is the price 
you pay if you want to farm. Trust me, what Mother Nature can 
throw at a guy is clear to a family that has farmed mostly 
dryland cotton in west Texas for four generations. We 
understand the volatile effects of extreme weather conditions. 
Good years can be followed by a complete loss. Thanks to the 
occasional good years and crop insurance, we have been able to 
get through tough times. However, crop insurance was never 
designed to deal with anti-competitive trading practices by 
countries like China and India, yet that is almost exclusively 
what a cotton farmer must rely on today. As many of you know, 
China supported world prices by accumulating stocks that today 
amount to about 4 years of U.S. production. China then switched 
gears to heavily subsidize their own production, sending world 
prices into a total tailspin. Now, India is an even greater 
concern because it is an exporting country with increasing 
domestic support in production. Put simply, cotton farmers in 
the United States cannot survive long on 60 cotton, as other 
countries subsidize cotton production at a level that is four 
times higher than the United States.
    This scenario simply does not pencil out. As we have seen 
before, once cotton production goes away in an area, the 
infrastructure dies with it and whole communities suffer.
    As farmers begin to look at financing the 2016 crop, it is 
absolutely essential that the Secretary use the authority 
Congress granted under the farm bill to take decisive action to 
designate cottonseed as an other oilseed. I know that many 
times when there has been a crisis in countryside and action 
was gummed up in Washington, the Secretary has stepped in and 
broken the logjam. That is what we are hoping and praying for 
here.
    I am indebted to you, Chairman Crawford, Ranking Member 
Walz, and Members of the Subcommittee, who have urged Secretary 
Vilsack to take action on cottonseed.
    Thank you for the opportunity to testify at this hearing, 
and I look forward to answering your questions.
    [The prepared statement of Mr. Holladay follows:]

    Prepared Statement of Shawn L. Holladay, Producer Board Member, 
                  National Cotton Council, Lubbock, TX
Introduction
    Good morning, Chairman Crawford, Ranking Member Walz, and Members 
of the Subcommittee. My name is Shawn Holladay. My wife Julie, daughter 
Katy, and I live in Lubbock, Texas and we grow cotton in Dawson and 
Martin Counties. I currently serve as the President of the Plains 
Cotton Growers, as well as Chairman of the Farm Policy Task Force of 
the American Cotton Producers.
Texas Cotton Situation
    Our area of Texas, which is proudly represented on the Agriculture 
Committee by both the Chairman and the Vice Chairman, is the largest 
contiguous cotton producing region in the country. The State of Texas 
is also the largest cotton producing state in the nation, claiming 55 
percent of total U.S. acreage. I would add that cotton is also Texas' 
highest valued cash commodity.
    I cite these statistics not only because I am very proud of them, 
but also to underscore the economic toll on Texas when the cotton 
industry is in the tank. I know that farmers are struggling all across 
the country right now, with net farm income down 55% over the past 2 
years from $123.3B in 2013 to a forecast of $55.9B in 2015. Crop prices 
are down sharply and input costs are rising. While a good many farmers 
have enjoyed some very strong yields in recent years, many others are 
recovering from strings of natural disasters. Still others are very 
much in the grips of drought, flooding, or both.
    As this Committee has so thoroughly laid out in previous hearings, 
we are getting hammered in the global market by huge foreign subsidies, 
tariffs, and non-tariff trade barriers that have always been high but 
are rising to record heights. Mr. Chairman, this does not take into 
account EPA regulations, tax uncertainty, and other Federal policies 
that add significantly to our costs of production. I have gone into 
more detail on these challenges in my written statement.
    It is fair to say that what all of us in farm country could really 
use is a period of some extraordinary yields plus a very strong and 
sustained rebound in prices. What distinguishes the situation for 
cotton farmers from that of others is the severity with which cotton 
has been hit; that cotton farmers have been hit by all of these 
culprits nearly all at once; and that cotton producers are by and large 
operating under a safety net that was never designed to meet this kind 
of crisis.
    I will defer to my colleagues at this table to speak about the 
unique situation for cotton in their own region of the country. I will 
speak only of our situation at home. Compounding already high input 
costs has been the introduction of resistant weed pressure in Texas 
that is adding significant costs to our operations.
    Successive droughts in Texas, while well documented is only part of 
the story. Even beyond the severest drought years, yields have 
continued to be extremely low while at a time the floor has fallen on 
cotton prices.
    The result is, farmers in our part of the country were totally bled 
out of liquidity by the end of last year. A great many struggled to get 
approved for financing for this year, with many forced to sell off 
land, and still others forced to quit. [Crop year] 2015 got off to a 
promising start with, finally, some really good rains. But that rain 
ultimately became excessive. A lot of our crops were washed out. This 
meant not only the additional cost of having to replant but also having 
to put down the even greater weed pressure that all of the rain brought 
with it. At the end of the day, when excessive moisture turned into 3 
months of little or no rain, the root systems in our crops proved too 
weak to produce anything close to the promising yields we had been 
praying for.
    I know that a lot of this is simply the price you pay if you want 
to farm.
    Trust me, what Mother Nature can throw at a guy is clear to a 
family that has farmed mostly dryland cotton in west Texas for four 
generations. Thanks to the good Lord smiling on us every now and again 
and crop insurance, we have been able to get through tough times. 
However, crop insurance was never designed to deal with anti-
competitive trading practices by countries like China and India. Yet, 
that is almost exclusively what a cotton farmer must rely on today.
    As many of you know, China drove up world prices, and our costs, by 
accumulating stocks that today amount to about 4 years' of U.S. 
production. China then switched gears to instead heavily subsidize 
their own production, sending world cotton prices into a total 
tailspin. Now, India is following suit in pursuing its own set of 
harmful policies.
    Put simply, cotton farmers in the United States cannot survive long 
on 60 cotton as China and other countries subsidize and glut the world 
market by guaranteeing their farmers $1.40 a pound. This scenario 
simply does not pencil out and as we have seen before, once cotton 
production goes away in an area, the infrastructure dies with it, never 
to return, and whole communities suffer.
    While many of my fellow producers had a difficult time 
understanding the circumstances facing our industry concerning cotton 
farm program options for the 2014 Farm Bill, as a leader, I know the 
hard choices that had to be made by our leadership and this Committee. 
We appreciate the inclusion of the STAX cotton crop insurance and other 
crop insurance enhancements including the APH adjustment. However, we 
believe there are still program options possible for cotton producers 
that do not require re-opening the 2014 Farm Bill.
    As this Subcommittee is aware, our industry is asking Secretary 
Vilsack to designate cottonseed as an ``other oilseed'' and make it 
eligible for PLC and ARC programs. We appreciate Chairman Conaway and 
Ranking Member Peterson authoring a Congressional letter to the 
Secretary urging him to take such action. We are encouraging all Cotton 
Belt Members to join this letter. We are also initiating a similar 
effort in the Senate as well as a major push from agricultural lenders. 
A letter signed by 197 lenders in Texas and over 400 letters across the 
Cotton Belt were recently sent to Secretary Vilsack in strong support 
of USDA designating cottonseed as an ``other oilseed'' for ARC/PLC 
purposes. Implementation of this program is not a ``silver bullet'' 
that will restore profitability, but it will be a tremendous help in 
allowing our industry to survive these difficult economic times.
Federal Crop Insurance
    Earlier, I referenced our dependence on a sound Federal Crop 
Insurance Program as a critical risk management tool. However, it is 
important to understand that crop insurance benefits are not profit. 
Multi-peril and area-wide policy coverage does not fully indemnify 
producers for weather-related risks. Most producers in my state and 
across the Cotton Belt have 25-40% threshold exposures before coverage 
kicks in. This is one of the reasons why our industry supported 
shallow-loss coverage provisions such as STAX and SCO.
    Our industry appreciates this Committee's stance on challenging the 
proposed $3 billion reduction in crop insurance expenditures. Given the 
cotton industry's major dependence on Federal crop insurance, it is 
critical to avoid any budget reductions.
    In this, the initial year of STAX being offered to producers, 
approximately 12,000 policies were purchased, covering about 30% of the 
insured acreage. While this adoption rate is less than hoped for, there 
were several factors that contributed to this level. Many producers 
were challenged to understand the complexities of the 2014 Farm Bill 
options at the same time as having to evaluate the new menu of crop 
insurance provisions. We believe with more education for producers and 
more training for agents, the STAX adoption rate will improve.
    Specifically, we are encouraged that the Risk Management Agency has 
announced positive changes in the STAX program for the 2016 crop that 
will improve the product. Producers will now have the option of 
purchasing individual STAX coverage by practice and will now be able to 
add the cottonseed endorsement to their STAX coverage.
    Producers appreciate the farm bill's APH Yield Adjustment provision 
which allows the exclusion of extremely low yields in the APH 
calculation. An additional change that is still needed would be to 
allow producers the option of individual enterprise unit pricing by 
practice. While enterprise unit pricing is now rated by practice, a 
producer is still required to have all production in a county covered. 
This additional flexibility would allow producers to enhance the 
individualized crop insurance coverage options.
Boll Weevil and Pink Bollworm Eradication
    Two of the major initiatives by our industry and USDA that have 
been a positive for cotton production are the success of the boll 
weevil and pink bollworm eradication programs. The Boll Weevil 
Eradication program is in its final stages with the only active zone 
being the Lower Rio Grande area of southern Texas bordering Mexico. 
However, this area is proving to be one of the most difficult to 
eradicate. While significant progress has been made, we still face an 
influx of boll weevils from northern Mexico. Our industry, in 
conjunction with USDA APHIS, is exploring every possible option to 
conquer this challenge. Likewise, the Pink Boll worm Eradication 
program is nearing completion, and a transition plan [is] now in effect 
that will hopefully allow the U.S. Cotton Belt to be designated pink 
bollworm-free. Therefore, it is vital that Congress maintain funding 
for both of these programs as we transition to eradication. Any 
reduction or a discontinuance of appropriated funds could reverse the 
eradication efforts that the successful producer/Federal Government 
partnership has achieved to date.
Crop Protection Products
    Another significant concern of our industry is serious challenges 
to the availability of crop protection products and biotech traits that 
are critical inputs for cotton and all major commodity producers. 
Specifically, the approval of cotton biotech trait chemistries to 
combat resistant weeds are being delayed by EPA. Resistant weeds are 
quickly becoming a major problem in west Texas given the return of 
periodic moisture. Cotton varieties with biotech traits are available 
to cotton producers but without the approval of the associated 
chemistries they cannot provide an effective tool to fight [resistant] 
weeds. It is vitally important that EPA expedite the approval process 
for these products.
    The Endangered Species Consultation process required under the 
Endangered Species Act between EPA and Fish and Wildlife Services is 
broken and continues to delay the approval process while the two 
Agencies seek a solution. The broken consultation process continues to 
provide legal challenges against EPA by anti-pesticide groups. And the 
fear of legal action increases the delay of critically needed 
production products.
    Additionally, an entire class of agriculture chemistry, known as 
the organophosphates, is under regulatory review by EPA. This review 
includes several critical cotton pesticides, with Malathion being one. 
Our concern is the prospect of adding unwarranted safety criteria based 
on unsound risk principles that could result in a severe limitation or 
cancellation of use. The industry is concerned that EPA's adoption of 
this new risk factor in the registration review of multiple 
organophosphates sets a new precedent that could jeopardize the boll 
weevil eradication program. Scientists who have advised the cotton 
industry and APHIS on boll weevil eradication operations indicate that 
there is no Malathion substitute product to functionally conduct a boll 
weevil eradication program. The Organophosphate review process 
threatens several critical products used in cotton production. For 
example, Bidrin is critical for control of certain stinkbug 
populations. It is not used across the whole Cotton Belt as EPA assumes 
in their risk process, but it is critical at random locations based on 
the occurrence of the pest. Tribufos, a critical harvest aid product 
that aids in defoliating cotton, is critical especially under certain 
environmental conditions.
    The industry is very concerned that EPA is adopting risk assessment 
procedures that lean more toward the European model of precaution 
rather than sound science-based risk assessment balanced with a sound 
science-based benefits assessment. We applaud efforts made by USDA's 
Office of Pest Management Policy to advocate for agriculture and 
provide consultation to EPA, but we feel EPA gives little consideration 
to the consultation. Our industry hopes EPA returns to reliance on 
sound scientific data and risk-benefits analysis directed under FIFRA.
Conclusion
    Mr. Chairman, I wish I could come to this hearing with more 
positive news about the state of the U.S. cotton industry, especially 
in my home State of Texas. But, the reality is that cotton producers, 
cotton infrastructure and the rural communities that depend upon a 
viable cotton industry are in peril. All of these challenges I have 
outlined combine to create the worst cash flow situation for cotton 
growers in years, and without some relief, many producers will be out 
of business because they will not be able to obtain financing. Our 
industry has faced difficult economic circumstances before and if these 
challenges I have outlined can be somewhat mitigated, we have a good 
chance to become profitable again in the future.
    Again, I commend this Subcommittee for holding this hearing and 
allowing the cotton industry to share its concerns. I will be happy to 
respond to questions at the proper time.

    The Chairman. Thank you, Mr. Holladay.
    Mr. Wannamaker, you are recognized for 5 minutes.

          STATEMENT OF KENDALL ``KENT'' W. WANNAMAKER,
           PRESIDENT, SOUTHERN COTTON GROWERS, SAINT
                          MATTHEWS, SC

    Mr. Wannamaker. Good morning. I am Kent Wannamaker, a 
sixth-generation producer from Saint Matthews, South Carolina, 
and I farm cotton, peanuts, and corn. I currently serve as 
President of the Southern Cotton Growers, an organization that 
represents thousands of cotton farmers from six southeastern 
states.
    I first would like to thank Chairman Crawford, Ranking 
Member Walz, and Members of the Subcommittee for the 
opportunity to testify.
    My state and farm recently endured the wrath of Mother 
Nature in the form of historic rains and floods. My area 
received around 11" of rain, while some areas of the state 
received more than 25". The rain and floods occurred in October 
at the beginning of harvest, when all inputs have been put into 
the crop. Unfortunately, persistent rains have not allowed 
field work to resume in many areas. The result has been not 
only yield losses, but also quality losses.
    At a recent meeting with RMA, an issue was raised regarding 
the timing of indemnity payments. Current procedures require a 
producer who is accepting an appraisal to destroy the crop 
prior to receiving the indemnity. Unfortunately, many producers 
will not be able to destroy their crop for many weeks to come. 
The request to RMA is to allow a producer the opportunity to 
pledge to destroy the crop at the earliest date possible, or 
provide documentation that the crop was destroyed, but allow 
indemnity payments to be made prior to destruction. Getting the 
indemnity payments to these producers in the timeliest manner 
is extremely important. Ongoing delays are compounding the 
challenges for servicing debt for this year's crop, and 
securing financing for next year's crop.
    Another issue that has intensified over the last several 
years is the challenge to control damaging pests with minimum 
impact on managed honeybee colonies. The cotton industry is 
troubled by the recent decision of the Ninth Circuit Court that 
vacated the registration of crop protection product because the 
court did not believe EPA had sufficiently shown no harm to 
bees. The industry further notes the court did not consider the 
benefits of the chemistry, as EPA is mandated to do. The 
court's decision will alter the registration and registration 
review process of EPA, creating additional costs, and delaying 
timely review of necessary crop protection tools.
    One of the most challenging issues from the 2014 law is the 
imposition of the unified payment limit on the marketing loan 
program. With 2014 ARC and PLC payments having been paid, many 
producers have found themselves with either no limit left for 
the payment, or only eligible to receive a portion of the 
payments due to them. In the worst case, the producer received 
payments in excess of the limit and will be required to repay a 
portion to USDA.
    The Fiscal Year 2016 House agriculture appropriations bill 
includes language that directs USDA, beginning with the 2015 
crop, to operate the marketing loan program as they did prior 
to the 2008 Farm Bill. This provision allows USDA to issue 
marketing certificates, thus permitting the program to function 
as intended. If this provision is not included, it is likely 
that some cotton will be placed in the marketing loan for the 
full 9 month term, and then be forfeited to USDA rather than 
being actively marketed during the year. This practice will 
lead to cotton being locked in the loan program, disrupting 
cotton flow to the market, and leading to potentially greater 
government costs.
    Other panelists have mentioned the request that the 
Secretary designate cottonseed as an other oilseed to be 
eligible for the ARC and PLC programs, and I want to echo my 
strong support. In addition to numerous calls for action from 
the cotton industry, 50 agricultural lenders from the Southeast 
have contacted the Secretary requesting you take action. In my 
state, we have seen a production decline of over 40 percent in 
just 1 year, making it much harder for gins and warehouses to 
cash flow with the type of reduction in volume. Crop insurance 
has been there to help us when we needed it. The Agriculture 
Committee and others have worked to strengthen and enhance the 
role of crop insurance to respond to weather-related disasters 
since Congressional approval of ad hoc disaster assistance has 
become much more difficult in recent years. Yet crop insurance 
alone is not equipped to address long-term price declines as 
currently being experienced in the cotton industry. Therefore, 
the cottonseed program is needed to help provide income support 
for cotton producers.
    Mr. Chairman, I appreciate the opportunity to testify 
before this Subcommittee, and I am happy to answer questions at 
the appropriate time.
    [The prepared statement of Mr. Wannamaker follows:]

   Prepared Statement of Kendall ``Kent'' W. Wannamaker, President, 
              Southern Cotton Growers, Saint Matthews, SC
Introduction
    I am Kent Wannamaker a sixth generation producer from Saint 
Matthews, South Carolina. My farming operation consists of 2,500 acres 
of cotton, peanuts and corn. I have ownership interests in a cotton 
gin, a peanut buying point and a cottonseed rail handling facility. 
Currently, I serve as President of Southern Cotton Growers. Southern 
Cotton Growers, Inc. represent thousands of cotton producers throughout 
Alabama, Georgia, South Carolina, North Carolina, Florida, and 
Virginia. Southern is the largest pure cotton producer's organization 
in the United States in terms of states represented.
    I first would like to thank Chairman Crawford, Ranking Member Walz, 
and Members of the Subcommittee for the opportunity to present these 
views regarding the state of the U.S. cotton industry.
    My state and farm recently endured the wrath of Mother Nature in 
the form of historic rains and floods. My area received around 11" of 
rain while some areas of the state received 25". Our crop literally 
started out with a drought and ended with a flood. To compound matters, 
the rains and floods occurred in October at the beginning of harvest 
when all the inputs have been put into the crop. The situation in my 
area is truly dire. We have been working with the insurance companies 
and the Risk Management Agency (RMA) to make sure appraisals are 
correct, consistent and handled by knowledgeable appraisers. I recently 
attended a meeting in South Carolina with RMA Associate Administrator 
Tim Gannon and appreciate him taking time to come to our state. One of 
the requests made at the meeting and echoed in a letter to the RMA 
Administrator from the National Cotton Council has to do with the 
timing of indemnity payments. Current indemnity procedures require a 
producer who is accepting an appraisal to destroy the crop prior to 
receiving their indemnity. I understand the basis for this procedure is 
to ensure compliance with crop insurance procedures that minimize moral 
hazard within the program. However, in this special circumstance, many 
producers will not be able to destroy the crop for many weeks, thus not 
receiving their indemnity until a much later date. This issue is 
compounded with the end of the year approaching and many farm and 
machinery notes coming due. The request to RMA is to allow a producer 
facing these circumstances the opportunity to pledge to destroy the 
crop at the earliest date possible or provide documentation at a later 
date that the crop was destroyed but allow for indemnity payments to be 
made prior to crop destruction. Getting the indemnity payments due 
these producers in the timeliest manner is extremely important.
Implications of Unified Payment Limitation
    One of the most challenging issues from the 2014 law has been the 
imposition of the unified payment limit on the marketing loan program. 
Unlike previous farm bills, this is the first time a single, unified 
limit has applied to multiple programs--marketing loan program, 
Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC). This 
fact, coupled with the direct attribution provisions that were first 
instituted with the 2008 Farm Bill, has resulted in an extremely 
complex and challenging task for USDA's Farm Service Agency (FSA) to be 
able to accurately and timely track the accrual of marketing loan 
benefits to an individual producer. Since producers can and do market 
their cotton (and other crops) using multiple marketing channels--
marketing cooperatives, private merchants, direct marketing--the 
complexity of tracking marketing loan benefits through these multiple 
transactions in a timely manner has proven to be beyond the capability 
of FSA's current systems.
    For producers of multiple crops, the implications of the unified 
payment limit will be particularly harmful as a portion or all of a 
producers' payment limit could be used for marketing loan benefits as 
the crop is marketed throughout the year. In many cases the exact time 
of loan redemption is out of the producers' control if the commodity is 
marketed through a cooperative or a private merchant that has the 
option to redeem the loan commodity at any time. Now that ARC and PLC 
payments for the 2014 crop have been paid, many producers have found 
themselves with either no limit left for the payments or only eligible 
to receive a portion of the payments they are eligible for. In the 
worst case, a producer receives payments in excess of the limit and is 
required to repay a portion of the payment to USDA.
    NCC has worked closely with FSA over the past year to help 
facilitate information sharing between FSA and industry marketers in an 
attempt to develop more accurate and timely tracking of loan benefits. 
In addition, we continue to be concerned about the long-term impact on 
marketing decisions as producers see the impact of this unified payment 
limit. The Fiscal Year 2016 House agriculture appropriations bill 
includes language that directs USDA to operate the marketing loan 
program as they did prior to the 2008 Farm Bill beginning with the 2015 
crop. This provision allows USDA to issue marketing certificates and 
will allow the program to function as [intended] since its 
implementation nearly 30 years ago. Unfortunately if this provision is 
not included, it is likely that some cotton will be placed in the 
marketing loan for the full 9 month term and then be forfeited to USDA, 
rather than being forward contracted or actively marketed during the 
year. This practice will lead to cotton being locked in the loan 
program, disrupting cotton flow to the market and to end-users, and 
leading to potentially greater government costs.
Resistant Weeds
    Production costs are always a concern for cotton producers, 
especially during times when cotton prices are low. Producers struggle 
to minimize crop inputs but are often forced to allocate additional 
funds in response to pest pressure from plant diseases, insects and 
weeds. The cotton industry recognizes the importance of preserving crop 
protection materials that function differently from each other in the 
way they control pests. For example, producer's reliance on glyphosate 
alone created tremendous selection pressure on weeds to single out the 
few plants, particularly a few palmer amaranth, that contained genetic 
abilities to survive the glyphosate applications. This example is not 
the first time some weeds were selected out of a weed population 
demonstrating survival of the fittest. Scientists explain that the 
diversity of the genetics in weed populations is so great that there 
are likely weeds resistant to herbicides that have not been discovered. 
The importance of this is to understand that production practices must 
use multiple herbicide modes of action, which means additional 
herbicide products rather than just one product. Scientists tell us 
that this approach will minimize the isolation of resistant plants that 
then produce offspring of weeds resistant to the single mode of action.
    Producers have changed weed control practices in order to combat 
resistant weeds, but that has dramatically increased the cost of 
production. Scientists warn that there are few chemistries currently 
available for weed control and no expectation of new products on the 
market for many years. Producers recognize we must preserve the 
materials available, but we must have flexibility to accommodate 
individual farm needs that differ in geographic location and 
environmental influence. Regulatory mandates that attempt to identify 
management practices for all farms will not work--it is not a case of 
one size fits all. Weed management and resistance management should be 
emphasized and promoted through educational efforts. Federal agencies 
should recognize the need for multiple crop protection practices and 
chemistries in order to achieve a diverse, sustainable production 
system. Novel, genetic approaches that expand the use of current 
products which have been safely used for many years should be 
encouraged. The Environmental Protection Agency (EPA) should be 
encouraged to understand that low usage of a product should not be 
interpreted as a lack of need, but that it may fit particular important 
needs. Additionally, EPA should be encouraged to understand each 
product removed from use increases reliance on fewer remaining products 
and decreases resistance management options. EPA should be encouraged 
to refrain from mandating resistance management practices that reduce 
producer flexibility and do not consider the needs of different 
geographic systems. USDA should be encouraged to streamline the 
regulatory process for transgenic plants in order to expand the 
opportunities for additional pest control practices. Extension service 
experts should be encouraged to provide the scientific educational 
material related to resistance management that addresses the needs of 
their respective state. Producers must have educational assistance to 
determine scientific practices that accomplish the needs of their farm 
and flexibility in those practices in order to identify cost effective, 
sustainable production practices.
Pollinators
    An additional development that has intensified over the last 
several years is the challenge to control damaging insect pests with 
minimum impact on another insect--managed honey bee colonies. The 
cotton industry recognizes the harsh challenges the beekeeper industry 
is facing, but is concerned that some groups are misrepresenting the 
science of multiple factors contributing to honey bee decline in order 
to focus attention solely on crop protection products. The cotton 
industry compliments USDA and EPA for their multiple efforts to discuss 
the research demonstrating multiple factors and urges the agencies to 
continue their focus on the broad issues rather than isolating the 
focus on crop protection practices alone. The cotton industry 
additionally encourages the development of a scientifically reliable 
measure of the status of managed honey bee colonies. The cotton 
industry compliments EPA on their recognition that most of the issues 
of concern at the farm level can be avoided just by having a more clear 
communication process between crop producers and beekeepers. The cotton 
industry has urged it's producers to become engaged in these 
communications and to work with a broad group of stakeholders including 
extension service, state departments of agriculture, other crop 
producers, beekeepers, and others involved in the use of crop 
protection materials to develop local practices and communications 
plans that work for the needs of the area. Such plans, sometimes 
identified as state pollinator protection plans, bring together local 
parties in order to collaboratively identify local needs and local 
solutions that provide coexistence of all.
    The cotton industry is troubled by the recent decision of the Ninth 
Circuit Court that vacated the registration of a crop protection 
product because the court did not believe EPA had sufficiently shown no 
harm to bees, and further notes the court did not consider the benefits 
of the chemistry as EPA is mandated to do under the Federal 
Insecticide, Fungicide, and Rodenticide Act (FIFRA) risk-benefit 
analysis. The cotton industry in concerned the court's decision will 
alter the registration and registration review process of EPA creating 
additional costs and delaying timely review of necessary crop 
protection tools. The cotton industry understands that honey bees are 
managed property and are often congregated in close proximity to 
managed crops. This practice is not new, and both industries have 
coexisted for many years. However, the removal of crop protection 
products will not allow a continuation of crop production and 
scientists have stated the removal of pesticides alone will not solve 
the decline in honey bee health.
    The cotton industry is appreciative of the National Strategy that 
has identified multiple partnerships to address multiple factors 
causing honey bee decline. The cotton industry is encouraged that the 
plan seeks to expand beekeepers access to public lands and parks, and 
seeks to improve public-private partnerships to enhance pollinator 
habitat. The cotton industry compliments USDA Natural Resources 
Conservation Service (NRCS) programs to encourage the expansion of 
pollinator habitats on farms, but urges NRCS to expand the plant 
selection beyond native plants. Honey bees are not native to the U.S., 
but were brought here because of the ability to house the bees in boxes 
that could be managed for pollinating some crops. Therefore, improving 
honey bee habitat should not be limited to native plants that have 
limited supply and are costly, but should be broadened to include 
clovers and other, lower cost plants known to be favored by honey bees. 
Although it is estimated that one out of every three bites of food 
involve pollinators, we must remember we cannot sacrifice the other two 
bites. The cotton industry believes local communication and cooperation 
between crop producers and beekeepers, along with expanded affordable 
habitat will provide continued coexistence of the two industries. 
Additionally, USDA should be encouraged to increase research focus on 
the control of the multiple pests of honey bees and their hives as well 
as technology improvements that would provide beekeepers better ability 
to monitor hive health.
Cottonseed
    Others have mentioned the proposal by the National Cotton Council 
and other cotton organizations that requests that the Secretary 
designate cottonseed as an `other oilseed' and be eligible for the ARC 
and PLC programs, and I want to echo my strong support. As you are 
aware this proposal would not require any legislative changes nor would 
it reopen the farm bill. It is a request that the Secretary use the 
authority given to him in the farm bill to designate `other oilseeds'. 
This action is desperately needed to provide stability in the cotton 
industry and in addition from calls for action within the cotton 
industry 50 agriculture lenders from the Southeast have contacted the 
Secretary requesting he take action. In my state we have seen acreage 
decrease by over 15% in just 1 year. This is causing a strain on the 
cotton infrastructure as it is much harder to make a gin or a warehouse 
cash flow with that type of single year reduction in volume. Cotton 
farmers have experienced a significant decline in the market since 
passage of the 2014 Farm Bill and I believe the economic situation 
facing the industry warrants the Secretary's approval of this request. 
As I mentioned earlier, in my state and on my farm, we have experienced 
a devastating flood this year. Crop insurance was there to help us when 
we needed it but unfortunately does not mitigate the multi-year price 
decline. As we all recognize, the Committee and others have worked to 
strengthen and enhance the role of crop insurance to respond to 
weather-related disasters since [Congressional] approval of ad hoc 
disaster assistance is no longer seen [as] politically viable. Yet, 
crop insurance alone is not equipped to address long-term price 
declines as [is] currently being experienced in the cotton industry. 
Therefore, the cottonseed policy is needed to help provide price 
support for cottonseed. I thank all the Members of this Subcommittee 
who have signed Chairman Conaway and Ranking Member Peterson's letter 
to the Secretary in support of this program and I encourage you to 
contact the Secretary directly as the situation in cotton country is 
dire.
Conclusion
    As you have heard from my testimony and that of others, the U.S. 
cotton industry is at a critical junction and any assistance from 
Congress and the Administration is needed to help us weather this 
economic and regulatory storm. I appreciate the opportunity to testify 
before this Subcommittee and commend the Chairman and Ranking Member 
for holding this important hearing to better understand the many issues 
facing the cotton industry. Thank you for the consideration of my views 
and [I] am happy to answer questions at the appropriate time.

    The Chairman. Thank you, Mr. Wannamaker.
    I am pleased to recognize the gentleman from California, 
Mr. Costa, to introduce our next witness.
    Mr. Costa. Thank you very much, Mr. Chairman, and Members 
of the Subcommittee, for holding this hearing. It is important; 
as we talk about not only America's cotton industry, but as a 
part of the larger context of commodities that we produce 
throughout the country. And our next witness, Cannon Michael, 
is a friend of mine. He and his family have farmed in the San 
Joaquin Valley now for six generations. It is a family-owned 
farm, the Bowles Farming Company. Part of California's great 
agricultural history is part of Cannon Michael's history. They 
are a diversified operation, farming cotton, wheat, fresh 
market and processing tomatoes, fresh market onions, and 
cantaloupes, and last night Cannon told me they are going to 
start growing carrots. But they have been devastated, as all 
farmers in California have, by the drought, both Mother Nature 
and the lack of our ability to fix a water system that is long 
overdue, that has compiled to make it very difficult, and they 
have had to fallow acres.
    Nonetheless, he has been innovative. As he has worked up, 
they have included various innovative irrigation technologies, 
and they have focused on production methods that included 
planning of transgenic varieties, and employing organic methods 
as well.
    So we are very proud of not only Cannon Michael and his 
family, but all of the agricultural organizations that are 
reflected here today, and that he is a member of. Among his 
leadership positions, he serves on the Board of Directors of 
the National Cotton Council, the Cotton Council International, 
and he is past Chairman of the California Cotton Growers 
Association, and Cotton Foundation.
    Let me just close, because he has his 5 minutes, but it is 
with a thought, 15 years ago, California had 1\1/2\ million 
acres of cotton production. Fifteen years ago. Today, we have 
less than 200,000 acres that has been planted, and is primarily 
pima cotton. The argument by some who don't understand 
agriculture is that we shouldn't be planting cotton because it 
uses too much water. Of course, the argument today is we 
shouldn't be planting almonds because they use too much water. 
I guess if we didn't plant anything we wouldn't use any water, 
but nonetheless, that obviously doesn't take into account the 
importance of California agriculture as a part of American 
agriculture.
    I present to you my friend, Cannon Michael.
    The Chairman. Mr. Michael, you are recognized for 5 
minutes.

 STATEMENT OF CANNON MICHAEL, PRODUCER BOARD MEMBER, NATIONAL 
                 COTTON COUNCIL, LOS BANOS, CA

    Mr. Michael. And, Congressman Costa, I appreciate the very 
kind introduction, as well as the long-term friendship that we 
have had. Thank you, Chairman Crawford, Ranking Member Walz, 
and Members of the Subcommittee.
    Congressman Costa covered a lot of my background, so I will 
just start with, when I returned to my family's farm in 1998, 
there were almost 2 million acres of cotton being grown in the 
West region, and the West region includes Arizona, California, 
and New Mexico, and it was truly a vibrant industry that we 
were a part of. You fast forward to 2015 and the acreage 
planted to cotton in the West region is just slightly over 
300,000 acres. This includes 167,000 acres of upland cotton and 
151,000 acres of ELS, or extra-long staple or ELS cotton.
    The West has the highest per acre yields of any area of the 
Cotton Belt, and it produces some of the highest quality cotton 
due to our unique climate. Yet we also have the highest 
production costs in the Cotton Belt, largely due to the heavy 
regulatory burden that is placed on agriculture in California. 
Given the economic situation facing the cotton industry, some 
action must be taken to stabilize the acreage declines and 
infrastructure loss in our region.
    As you know, the farm bill gives the Secretary of 
Agriculture the authority to designate additional oilseed crops 
without reopening the farm bill. We are now seeking this 
designation for all cottonseed, whether produced from upland or 
ELS cotton, since there is no distinction in the seed produced 
from both types.
    The 2014 Farm Bill continued the ELS cotton loan program, 
as well as competitiveness provisions to ensure ELS cotton 
remains competitive in international markets. The industry is 
currently working with the USDA to ensure that the most 
accurate market quotes are used to administer the program.
    With China's increased government support boosting their 
ELS production significantly, its market prices must be 
considered in implementing the U.S. competitiveness provision.
    Satellite imagery indicates that this past year 1 million 
acres of productive California farmland sat idle due to lack of 
water. This year on my farm alone, we fallowed about \1/3\ of 
the farm. Every acre of farm that is fallowed has a ripple 
effect throughout the economy. Less production means fewer 
workers have jobs, local businesses suffer, with reduced sales 
of fuel, tires, fertilizers, seed, and other inputs, and 
transportation companies must scale back operations due to 
reduced volumes. Impacts that I am describing go well beyond 
just the sectors I mentioned, as I have not even touched on 
equipment sales, lending institutions, and eventually the 
consumers themselves.
    The current water situation in California is a result of 
both the prolonged drought, as well as misguided and inflexible 
regulatory constraints. Five years ago, reservoirs in 
California were brim full of water. Since then, much of our 
precious water supply, which had previously gone to Central 
Valley farms and communities, has been mandated to flow out the 
Golden Gate by Federal and state fish agencies with no apparent 
benefit for the fish species that they are trying to protect.
    We must manage water to meet all needs, but in a manner 
that shares the pain and does not create winners and losers. We 
have lost sight of the goals and purposes that the Federal 
water projects were originally built to serve.
    In many parts of the West, litigation stemming from citizen 
suit provisions of environmental laws, including the Endangered 
Species Act or ESA, is producing Federal court decisions or 
court-approved settlements that direct Federal agency 
management of state water resources. As a prime example here in 
California, Federal management of the water in the Bay Delta, 
driven in part by third party citizen law suits via the ESA, 
has redirected millions of acre feet of water away from human 
uses towards the perceived needs of the environment, with no 
documented benefit to the fish intended for protection.
    And I have just a couple of quick slides to go through. The 
largest reservoir in the State of California is Lake Shasta. As 
you can see, the red line is the operations in 1977 when they 
used the reservoir for what it was for, which was to give water 
to communities, farms, wildlife refuges. They took that 
reservoir down to 650,000 acre feet in storage. This past year, 
held captive was over 1.2 million acre feet in this fourth year 
of drought, held away from family farms, from communities in 
the Central Valley. So you can see here water supply is being 
held hostage. Also this shows how much water has flowed into 
the Bay Delta and how much water is let out to the ocean, 
again, with the ESA being the main driver.
    We do need more surface storage as well as groundwater 
storage, and we need to continue to push back on these 
inflexible regulations.
    I thank the Subcommittee and the Members here today for the 
opportunity to discuss some of these challenges, and appreciate 
the time.
    [The prepared statement of Mr. Michael follows:]

 Prepared Statement of Cannon Michael, Producer Board Member, National 
                     Cotton Council, Los Banos, CA
Introduction
    Thank you, Chairman Crawford, Ranking Member Walz, and Members of 
the Subcommittee for the opportunity to testify today regarding the 
current condition of the U.S. cotton industry, the significant 
challenges cotton producers face, and what policy changes are needed to 
address this worsening situation. My name is Cannon Michael and I farm 
in Los Banos, California.
Farm and Background
    I manage the Bowles family farming operation. I am the 6th 
generation of my family to be involved with California agriculture. My 
great-great-great grandfather came over from Germany as a young man and 
was able to start a cattle business on some of the same land that we 
now farm today. Starting at age 13, I began to work on the farm during 
the summer months. I learned about efficient irrigation practices, 
operation of farm equipment and gained experience with many aspects of 
managing an integrated farming operation in California's San Joaquin 
Valley. I met my wife in Los Banos in 1999 and we now have three sons. 
I live on the farm with my family and cannot imagine a better 
environment to raise my children. We farm in an area that has a very 
historic water right, but that has not spared us from the impacts of 
the ongoing drought.
    I'm a farmer and I'm here to talk about what I know best: farming, 
and farmers and ranchers in California and elsewhere in the West have 
been hit hard by the drought.
Acreage and Infrastructure Impacts
    The acreage planted to cotton in the West region, which includes 
Arizona, California, and New Mexico, for 2015 is 318,000 acres. This 
includes 167,000 acres of upland cotton and 151,000 acres of Extra Long 
Staple (ELS) cotton in the three-state region. A decline of this 
magnitude is having severe consequences for the entire cotton industry 
in the region, from producers, gins, warehouses, marketing 
cooperatives, merchants, and cottonseed processors and merchandisers. 
The West region has the highest per acre yields of any area of the 
Cotton Belt and produces some of the highest quality cotton due to our 
unique climate. Yet, we also have the highest production costs of 
anywhere in the Cotton Belt, largely due to the heavy regulatory burden 
placed on agriculture in California, particularly.
Policy Needs
    Given the current economic situation facing the U.S. cotton 
industry, it is imperative that some action be taken to help stabilize 
the escalation of acreage declines and infrastructure loss in our 
region. While there are other cropping options in many parts of the 
Cotton Belt, there is significant importance and value in maintaining 
crop diversity that includes cotton. The increased production of 
perennial tree crops in our area has picked up some of the acres 
previously devoted to cotton. However, each year, we are seeing more 
and more acres that are fallowed as a result of the worsening water 
crisis in California. I will address this issue in more detail later in 
the testimony.
    To address the current crisis, the National Cotton Council and all 
of the U.S. cotton industry is seeking the designation of cottonseed as 
an `other oilseed' for purposes of the ARC/PLC programs in the 2014 
Farm Bill. As you know, the farm bill gives the Secretary of 
Agriculture the authority to designate oilseed crops for such purposes, 
and this can be accomplished without reopening the farm bill. We are 
seeking this designation for all cottonseed, whether produced from 
upland or Extra Long Staple (ELS) cotton, since there is no distinction 
in the seed produced from both types.
Extra Long Staple Cotton Policy
    The 2014 Farm Bill continued the Extra Long Staple (ELS), or 
``Pima'' cotton loan program as well as a competitiveness provision to 
ensure U.S. Pima cotton remains competitive in international markets. 
The balance between the upland and Pima programs is important to ensure 
that acreage is planted in response to market signals and not program 
benefits.
    According to the farm bill, the ELS Competitiveness Payment Program 
(CPP) is intended to:

   Maintain and expand the domestic use of ELS cotton produced 
        in the U.S.;

   Increase exports of ELS cotton produced in the U.S.; and

   Ensure that ELS cotton produced in the U.S. remains 
        competitive in world markets.

    While this program has proven to be an effective and efficient tool 
to address global competitiveness issues for ELS cotton since its 
implementation in 1999, there is a relatively recent development that 
is hampering the proper operation of the program. In December 2014, 
USDA FSA announced, without any notice to the industry, that it would 
be withdrawing one of the foreign growths of cotton used in the 
program--Egyptian Giza 86 price quote. FSA indicated this action was 
taken due to a decrease in the quality characteristics for the 2014 
crop of Giza 86 compared to previous crop years. The removal of this 
key quote significantly impacts the operation and effectiveness of the 
program as the other foreign price quotes currently used in the program 
have relatively small amounts of production. The U.S. industry is 
concerned that the current foreign price quotes being utilized do not 
adequately allow for the appropriate determination of potential CPP 
payments. We strongly urge that USDA reinstate the use of the Giza 86 
quote for use in the program this marketing year.
    In addition, there is a separate issue with regard to ELS cotton 
production in China. China has been the largest market for U.S. ELS 
cotton for a number of years, yet in 2014, China introduced a domestic 
subsidy for Chinese ELS cotton. This has led to a significant increase 
in ELS cotton acreage in China. For this reason, we believe USDA should 
also add the Chinese ELS 137 cotton price quote as one of the 
competitive growths for the CPP. This price quote is currently 
available and should be added to the CPP to ensure the program serves 
the intended function of helping to ensure a competitive market for 
U.S. ELS cotton production. We ask this Subcommittee to please engage 
USDA to help ensure these necessary changes are made and are effective 
for the current marketing year.
Policy Costs
Western Water Policy and Drought
    Water connects us all--farms, cities and the environment--and while 
drought presents unique problems for each sector, our solutions should 
be interconnected and mutually beneficial--not divisive. That requires 
a willingness of all parties, including Federal agencies, to be 
creative and flexible. That is happening in some places. In other 
places, it's not. The most helpful thing that Congress can do for 
drought-stricken states is to encourage, demand and mandate, where 
necessary, creativity and flexibility on the part of Federal water 
management and regulatory agencies.
    In 2014 our family fallowed more than 15% of our farm. This year, 
we have \1/4\ of the farm abandoned or fallowed. When one hears that 
land is ``fallowed'' it might only seem that the impact is to the 
farmer, but that is definitely not the case. Every acre of farmed land 
generates jobs, economic activity and products. That is why the drought 
is so devastating to the rural agricultural communities of the Central 
Valley.
    If I leave an acre fallow, my workers have less work and I use my 
tractors less. If I use my tractor less, I buy less fuel, lubricants 
and parts and tires, which means the local businesses that supply these 
things sell less and their companies suffer. When I don't purchase 
inputs for the land (fertilizer, seeds, amendments, etc.), the local 
companies that sell these items suffer reduced sales and the truck 
drivers who deliver these items have less work. With fewer trucks 
running fewer routes, fuel and parts purchases are reduced.
    This is a very scary time for me and my family, since substantial 
investments are being made, primarily with the intent of converting 
more of our operation to drip irrigation, which we hope will stretch 
limited water supplies. Those investments will be for naught if the 
current drought/regulatory paradigm persists into the future and there 
is no water to conserve.
    Five years ago, reservoirs in California were brim full of water. 
Since then, much of that stored water--which had previously supplied 
Central Valley farms for decades--has been allowed to flow out the 
Golden Gate by Federal fisheries agencies, with no apparent benefit for 
the fish species it is intended to protect.
    The key challenges western irrigators face in times of drought 
include competition for scarce water supplies, insufficient water 
infrastructure, growing populations, endangered species, increasing 
weather variability/climate change, and energy development.
Water Infrastructure Improvements
    Also, new tools to assist in financing major improvements to aging 
water infrastructure will be needed in the coming years to ensure that 
farmers and ranchers charged for these upgrades can afford repayment. 
Water infrastructure is a long-term investment, as are farms and 
ranches, and long repayment and low interest terms will be crucial in 
reinvesting in aging facilities to meet the challenges of tomorrow. 
Such improvements could include investments in everything from new 
water storage reservoirs (both on- and off-stream), regulating 
reservoirs, canal lining, computerized water management and delivery 
systems, real-time monitoring of ecosystem functions and river flows 
for both fish and people, and watershed-based integrated regional water 
management. With the advent of the Water Infrastructure Finance and 
Innovation Act (WIFIA) in the WRRDA 2014, the Alliance believes a 
similar affordable loan program could be instituted at Reclamation to 
assist in providing capital for such investments. Also, more 
flexibility may be needed to allow for private investments at 
Reclamation facilities in order to attract additional capital to meet 
future water supply needs.
    Western irrigators need flexible, streamlined policies and new 
affordable financing tools that provide balance and certainty to 
support collaborative efforts and manage future water infrastructure 
challenges. Solutions in all of these areas will be crucial to future 
enhanced agricultural production, conservation and community outcomes 
in the West.
    Growing concerns about the delays and costs associated with the 
proposed Sites off-stream reservoir project in the Sacramento Valley of 
California, as well as the need for a local voice, led to the 
formation, in August of 2010, of the Sites Project Joint Powers 
Authority (Sites JPA). The Sites JPA, which includes Sacramento Valley 
counties and water districts, was formed with the stated purpose of 
establishing a public entity to design, acquire, manage and operate 
Sites Reservoir and related facilities to improve the operation of the 
state's water system.
    The project would also provide improvements in ecosystem and water 
quality conditions in the Sacramento River system and in the Bay-Delta, 
as well as provide flood control and other benefits to a large area of 
the State of California. The formation of local JPA's was included as a 
key provision in the 2009 California Water Package Water Bond 
legislation for the purposes of pursuing storage projects that could be 
eligible for up to 50% of project funding for public benefits.
    As the Sites JPA began working with the Bureau of Reclamation and 
California Department of Water Resources, the JPA took a common-sense 
approach. The JPA worked with Reclamation and DWR to put together 
Foundational Formulation Principles. In other words, first identifying 
the needs of the water operations system and then designing the project 
that would meet those needs. Local project proponents envisioned a 
project that would be integrated with the system they already had, and 
one that would also operate effectively regardless of future 
operational changes to the larger system, such as construction of new 
conveyance to export water [to] users located south of the Delta. The 
JPA wanted to maximize the benefits associated with existing 
infrastructure and provide as much benefit as possible to both the 
existing state and Federal water projects at the lowest feasible cost.
    The JPA approached the Sites project with the goal of making the 
best possible use of limited resources, and in the end, local 
irrigators believe they have identified a project that is both 
affordable and will provide significant benefits. The proposed project 
maximizes ecosystem benefits consistent with the state water bond, 
which states that at least 50% of the public benefit objectives must be 
ecosystem improvements. Other benefits include water supply 
reliability, water quality improvements, flexible hydropower 
generation, more recreation benefits and increased flood damage 
reduction. In short, the JPA approached the Sites project with the goal 
of generating water for the environment while improving statewide water 
reliability and regional sustainability in northern California. They 
believe they have achieved that goal.
Environmental Regulatory Costs
Endangered Species Act
    We need a new way of looking at how we manage our limited water 
resources, one that includes a broader view of how water is used, along 
with consideration of population growth, food production and habitat 
needs. The goal should be to integrate food production and conservation 
practices into water management decision making and water use 
priorities, creating a more holistic view of water management for 
multiple uses. We must begin to plan now in order to hold intact 
current options. Planning must allow for flexibility and consider all 
needs, not just focus on meeting future needs from population growth.
    In many parts of the West, litigation stemming from citizen suit 
provisions of environmental laws including the Endangered Species Act 
(ESA) and Clean Water Act (CWA) is producing Federal court decisions 
(or court approved ``settlements'') that direct Federal agency 
``management'' of state water resources.
    Congress should recognize that this type of litigation and 
resulting settlements can actually harm the overall health and 
resilience of landscapes and watersheds by focusing on single species 
management under the Federal Endangered Species Act (ESA). We should 
seek solutions that reflect a philosophy that the best decisions on 
water issues take place at the state and local level. Finding ways to 
incentivize landowners to make the ESA work is far more preferable than 
what we have been seeing in recent years, where the ESA has been used 
by special interest environmental groups and Federal agencies in court 
as a means of ``protecting'' only a single species (such as the 
Sacramento-San Joaquin River Delta smelt in California) without regard 
for other impacts, including those on other non-listed species.
    Litigation and the manner in which certain Federal agencies 
administer the ESA are very much driving water management decisions 
these days, at least in the West. And adversarial, single-purpose 
approach is not helping the agencies recover very many species. Recent 
research into litigation associated with Federal environmental laws is 
beginning to uncover some unsettling facts: the Federal Government 
appears to be spending about as much money funding plaintiffs' 
environmental lawyers as it does to directly protect endangered 
species. Certain tax exempt, nonprofit organizations have been 
consistently awarded attorney fees from the Federal Government, for 
suing the Federal Government. These same environmental groups are 
receiving millions of tax dollars in attorney fees for settling or 
``winning'' cases against the Federal Government.
    We must manage water to meet all needs but in a manner that 
``shares the pain,'' not creates winners and losers, especially when 
the losers are the very beneficiaries the Federal water projects were 
originally built to serve. The past Federal management of water in 
California's Bay-Delta, which has redirected under the ESA millions of 
acre feet of water away from human uses and towards the perceived needs 
of the environment, with no documented benefit to the ESA listed fish 
intended for protection, is a prime example. Meanwhile, California 
water and power customers have suffered enormous, unmitigated losses 
due to this ``management by perception'' approach.
    To Central Valley Project agricultural water contractors, the loss 
of 123,000 acre feet of Trinity River water that could have been 
diverted to the CVP for drought relief in today's water market equates 
to nearly a $250,000,000 replacement value. And this calculation 
doesn't account for the other known socioeconomic impacts resulting 
from fallowed acreage, lost production, lost sales, lost employment, 
and increased need for social services throughout the San Joaquin 
Valley's communities, many of which are considered disadvantaged under 
Federal and state laws.
    Good water management requires flexibility, as well as adaptive 
management. More regulation usually reduces this flexibility. Federal 
agencies managing the competing demands for water in the West have in 
some cases failed in creating opportunities for more flexible water 
management during times of drought.
    The original intent of the ESA--stated in the Act itself--was to 
encourage ``the states and other interested parties, through Federal 
financial assistance and a system of incentives, to develop and 
maintain conservation programs which meet national and international 
standards.'' Of special importance to the Family Farm Alliance is that 
the ESA explicitly declared that it was the policy of Congress that 
``Federal agencies shall cooperate with state and local agencies to 
resolve water resource issues in concert with conservation of 
endangered species.''
    The authors of the ESA clearly believed in applying the ESA in a 
way that would foster collaboration and efficiency of program delivery, 
in an incentive-driven manner. Unfortunately, implementation of the ESA 
has ``progressed'' in recent years toward an approach that is now 
driven by litigation and sometimes the inappropriate, inconsistent and 
incorrect interpretation of the law by Federal agencies. As far as the 
Act itself is concerned, little to no progress has occurred to keep 
this 40 year old law in step with the modem era. The ESA has not been 
substantially updated since 1988.
    The ESA is an outdated law that is clearly not working as it was 
originally intended. It needs to be more about incentives and 
collaboration and less about litigation and regulation. Fewer than 2% 
of the species ever listed under the Act have been recovered and 
removed from the list, and the failures under the law far outstrip the 
successes. Meanwhile, the economic and sociologic impacts of the ESA 
have been dramatic. From the Alliance's standpoint, the law has really 
only inflicted harm and generated litigation that uses the Act as a 
weapon against our members' ability to use our natural resources for 
farming and ranching, while doing little to help the environment or the 
very species it was designed to protect.
    More surface and groundwater storage is still a critical piece of 
the solution to water shortfalls. Congress should streamline regulatory 
hurdles to assist in developing new environmentally sensitive water 
storage projects and other necessary water infrastructure improvements. 
Congress should work to facilitate the construction of new surface 
storage facilities, providing a more effective process to move water 
storage projects forward.
New Federal Ozone Air Quality Standards
    The EPA has recently adopted yet another, more restrictive, and 
unrealistic, ozone standard for California. The new standard is 70 
parts per billion (ppb) which will be extremely overwhelming for 
California agriculture. Specifically, the San Joaquin Valley has not 
yet been able to meet the previous three ozone standards by EPA. In 
fact, the plans to meet these earlier standards haven't even been 
written, yet EPA is moving forward with a new, stricter standard.
    As you know, California already has some of the strongest air 
regulations in the country, and much of the world. These standards are 
resulting in severe economic consequences for agriculture in the state 
due to requirements such as:

   Mandatory replacement of all trucks used in agriculture.

   Mandatory replacement of all irrigation pump engines.

   Mandatory replacement of all tractors and harvesters.

   Rule for the control of on-farm dust.

   Reduction of pesticide VOCs.

    This is all being done in an area that already has background 
levels of ozone at 60 ppb. Yet, EPA has stated ``For California's 
nonattainment areas to meet the updated ozone standards, the state and 
EPA have recognized that transformational change is likely needed, such 
as transition to largely zero or near-zero emission vehicle 
technologies, and a significant turnover of the legacy fleet of 
vehicles, among other changes.''
    To be able to even come close to meeting the new EPA standards for 
ozone, it would require converting all equipment to electric, yet the 
technology to do so does not exist today. As a result, failure to meet 
the new standards will lead to penalties that all businesses, including 
agriculture, must pay. These are costs and penalties that are 
unnecessary and lead to an uncompetitive business environment, yet 
California already has the cleanest, lowest emission equipment in the 
world, and the toughest regulations to go along with it.
Conclusion
    I would like to thank the Members of this Subcommittee for the 
opportunity to discuss some of the extreme challenges facing the U.S. 
cotton industry, and particularly the excessive regulatory burdens on 
California producers. With today's market prices, the added costs of 
regulatory compliance and added production costs are making a bad 
situation much worse. There must be some relief provided, both to 
provide some economic stability and to relieve some of the stifling 
regulatory regime. Thank you again for this opportunity and I will be 
glad to respond to any questions at the appropriate time.
                              Attachments
Lake Shasta Storage Levels




    The Chairman. Thank you, Mr. Michael.
    Mr. Wright, you are recognized for 5 minutes.

 STATEMENT OF MIKE WRIGHT, EXECUTIVE VICE PRESIDENT, CITY BANK 
                       TEXAS, LUBBOCK, TX

    Mr. Wright. Chairman Crawford, Ranking Member Walz, and 
Members of the Subcommittee, thank you for taking time to host 
this important hearing on the general state of the U.S. cotton 
industry. My name is Mike Wright. I am the Executive Vice 
President for the agricultural lending division of City Bank in 
Lubbock, Texas.
    City Bank is a locally owned bank with assets in excess of 
$2 billion, with an agricultural loan portfolio of about $200 
million. I was born and raised on a Lubbock County cotton farm. 
I farmed for 8 years, and I have been involved with ag lending 
since March of 1982. Agriculture is my background and it is my 
livelihood.
    In Lubbock and the surrounding 67 county area, cotton is 
the main economic industry, with 20 to 25 percent of the U.S. 
cotton produced in this region. Cotton production is extremely 
important for the survival of many rural economies across 
Texas. Declines in cotton acres are a tremendous concern for 
agricultural lenders as this translates into pressure on 
associated businesses, infrastructure, and rural economies, 
which are also our customers. Prolonged production declines of 
this scale will result in severe strain on the entire cotton 
infrastructure, which continues to be the backbone of many 
small, rural communities across Texas. A thriving cotton 
industry is critical to the success of many local economies.
    According to the Federal Reserve Bank, demand for operating 
loans has increased in the third quarter of 2015, and loan 
repayment rates have slowed. The margins in farming have been 
getting tighter every year due to higher production costs and 
lower commodity prices. As cotton prices have been suppressed, 
in part due to policies and other cotton-producing countries, 
U.S. producers are struggling to service their debt and make a 
profit. Producers need above-average yields just to break even.
    In this economic environment, access to credit remains one 
of the most important resources for agriculture producers. In 
2016, we are anticipating cash flow problems from some of our 
very good customers with a long history with our bank. The 
importance of FSA guaranteed loans cannot be understated in the 
current economic environment. City Bank is an FSA preferred 
lender in the Guaranteed Loan Program. Over the years, the 
Guaranteed Loan Program has been a tremendous benefit to the 
producers as well as to lenders. In some cases, a producer has 
a terrible year and his loan may still be a good loan, but weak 
in one or more areas of our analysis. The Guaranteed Loan 
Program allows our bank to continue working with the producer, 
but a portion of the loan is guaranteed and the producer has 
some time to work out the situation.
    The elimination of direct and countercyclical payments 
significantly increased the risk endured by producers and 
lenders. Now, crop insurance provides the main safety net and 
is vital to our customers. We greatly appreciate the continued 
support for the crop insurance program, and the successful 
efforts of the Members of this Subcommittee to eliminate the 
proposed cuts to crop insurance. If insurance premiums increase 
so that producers are not able to afford insurance, we will not 
be able to provide financing.
    As you have heard from others, the addition of a cottonseed 
support policy will be important to ensure continued economic 
activity in rural areas. A cottonseed support policy will help 
alleviate the increasing financial stress within the cotton 
industry, and allow for continued credit availability.
    As I close, let me express my sincere appreciation to the 
Subcommittee for allowing me to testify today. As you move 
forward, I pray that you can show other Members of Congress 
that agriculture is the backbone of this great nation. My 
family is dependent on it, as well as yours. As you leave 
today, I would hope that you would take the following quote and 
have it somewhere you will see every day, and remember the 
words of William Jennings Bryan: ``Burn down your cities and 
leave our farms, and your cities will spring up again as if by 
magic, but destroy our farms and the grass will grow in the 
streets of every city in the country.''
    The American farmer is one of the most efficient producers 
of the world. If they can continue to provide food and fiber at 
a price that allows the American people to spend the largest 
part of their incomes on homes, vehicles, televisions, and 
phones, the American farmer will continue to do just that. But 
if there is no incentive or profit in their actions, then the 
grass will begin to grow.
    [The prepared statement of Mr. Wright follows:]

Prepared Statement of Mike Wright, Executive Vice President, City Bank 
                           Texas, Lubbock, TX
    Chairman Crawford, Ranking Member Walz, and Members of the 
Subcommittee, thank you for taking time to host this important hearing 
on the general state of the U.S. cotton industry. My name is Mike 
Wright, Executive Vice President of the agricultural lending division 
of City Bank in Lubbock, Texas.
Background
    City Bank is a locally owned bank with assets in excess of $2 
Billion with an agricultural loan portfolio of about $200 Million, 
which is of just over 11% of the total borrowing. I was born and raised 
on a Lubbock County cotton farm, farmed for 8 years and have been 
involved with ag lending since March of 1982. Agriculture is my 
background and my lifeblood.
Current Market Situation
    Texas is the largest cotton producing state, with about 54% of the 
total U.S. cotton acreage. In Lubbock and the surrounding 67 county 
area, cotton is the main economic industry with about 20-25% of U.S. 
cotton produced in this region. Cotton production is extremely 
important for the survival of many rural economies across Texas. Only 
4.8 million acres of cotton were planted in 2015, down 30% from 2014 
and 24% less than the recent 5 year average. The 2015 cotton acreage is 
the lowest amount in Texas since 1989. Excessive rains plagued much of 
the state during planting time and according to the Farm Service 
Agency, Texas had almost 400,000 prevented planted cotton [acres] this 
year.
    Losses in cotton area are a tremendous concern for agricultural 
lenders as this translates into pressure on associated businesses, 
infrastructure and rural economies who are also our customers. 
Prolonged production declines of this scale will result in severe 
strain on the entire cotton infrastructure, which continues to be the 
backbone of many small, rural communities across Texas. A thriving 
cotton economy is critical to the success of many local economies.
    Low prices and high production costs have created tremendous 
financial pressure on the agricultural industry. As the 2015 harvest 
nears completion, producers across Texas are facing incredibly 
difficult economic conditions. According to a survey by the Federal 
Reserve Bank of Dallas,\1\ many Texas cotton growers may actually fare 
better in earlier drought years than in 2015. Production costs have 
been even higher this year as increased rainfall led to additional weed 
problems. In some areas, excess moisture has negatively impacted 
yields. In 2011 and 2012, crop insurance guarantees were higher due to 
much higher prices. This year, crop insurance guarantees are lower and 
many producers have average yields that will not trigger a crop 
insurance indemnity. In addition, some producers are dealing with 
quality issues that will likely result in further discounts to the 
price they receive for cotton. The projection of continued declines in 
market revenue coupled with elevated production costs cause serious 
concerns among the lending community.
---------------------------------------------------------------------------
    \1\ Federal Reserve Bank of Dallas. ``Special Report: Commodities 
and Drought.'' Agricultural Survey. Third Quarter 2015. Available at: 
https://www.dallasfed.org/assets/documents/research/agsurvey/2011/
ag1103b.pdf.
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Current Lending Situation
    In this economic environment, access to credit remains one of the 
most important resources for agricultural producers. However, with 
increasing debt and tighter margins, agricultural lenders are facing a 
tough situation. According to the Federal Reserve Bank of Dallas,\2\ 
demand for agricultural operating loans has increased in the third 
quarter of 2015 and loan repayment rates have slowed. After 2 years of 
declining farm income and few expectations for higher commodity prices 
in the near future, one of our most significant problems at City Bank 
is getting a producer's loan to show a positive cash flow. The margins 
in agricultural production have been getting tighter every year due to 
higher production costs and lower commodity prices. Producers need 
above average yields just to break even. There is no doubt that some 
cotton farmers will not qualify for financing next year. We are 
concerned about our ability to continue to meet the lending needs of 
America's cotton farmers in years to come. Going into the next crop 
year, the ability to obtain financing will become increasingly more 
difficult as crop prices remain low.
---------------------------------------------------------------------------
    \2\ Federal Reserve Bank of Dallas. ``Agricultural Survey: Survey 
Highlights.'' Third Quarter 2015. Available at: https://
www.dallasfed.org/assets/documents/research/agsurvey/2015/ag1503.pdf.
---------------------------------------------------------------------------
    Production costs have continuously increased over the last decade. 
According to Texas A&M extension, production costs have increased by 
about $72 per acre for non-irrigated cotton and $169 per acre for 
irrigated cotton since 2008. The increase in seed costs is particularly 
concerning now that producers are experiencing more problems with 
chemical resistant weeds. Harvest expenses have increased as well due 
to a large increase in equipment costs. Cotton is a highly capital 
intensive crop requiring a much higher investment in equipment as 
compared to other row crops. A new cotton harvester costs $650,000. 
Term debt service on these types of inputs is extremely high. With low 
cotton prices, the cash flows have become much tighter and the margins 
are even lower. For 2015, the Texas A&M extension budgets show a loss 
of $18 per acre on dryland cotton and $85 per acre on irrigated cotton.
    Looking ahead to 2016, were are anticipating potential cash flow 
problems from some of our very good customers with a long history with 
our bank, including producers who are not highly leveraged. The 
increased short-term debt burden coupled with 2 years of declining farm 
income is particularly concerning. Although some producers will still 
have some equity position going into 2016, lower grades of cotton and 
lower prices may lead to a carryover of debt for 2015. With low price 
expectations for 2016 and carryover debt, these producers may not be 
able to show a positive cash flow in 2016.
    To further intensify the situation, lenders are currently facing 
even tighter underwriting standards. New banking regulations require a 
more stringent stress-testing approach and the ability to show a 
positive cash flow. As noted by an extension economist at Texas A&M, as 
implementation of additional reform measures continues, credit 
standards will be higher and the requirements for risk-based capital 
liquidity will increase.\3\ As lenders face stricter standards for loan 
underwriting, credit analysis, and loan risk rating from bank 
examiners, the ability to extend riskier loans will be less likely.
---------------------------------------------------------------------------
    \3\ Klinefelter, D. ``Back-to-Back Low Returns Bound to Raise Flags 
with Farm Lenders.'' AgFax. May 14, 2015. Available at: http://
agfax.com/2015/05/14/back-to-back-low-return-years-bound-to-raise-
flags-with-farm-lenders-dtn/.
---------------------------------------------------------------------------
Importance of Government Programs
    The importance of FSA guaranteed loans cannot be understated in the 
current economic and lending environment. City Bank is an FSA Preferred 
Lender in the Guaranteed Loan Program. FSA guaranteed loans provide 
lenders with a guarantee of up to 95 percent of the loss of principal 
and interest on a loan. Farmers and ranchers apply to an agricultural 
lender, which then arranges for the guarantee. The FSA guarantee 
permits lenders to make agricultural credit available to farmers who do 
not meet the lender's normal underwriting criteria. Over the years, the 
Guaranteed Loan program has been a tremendous benefit to the producers 
as well as to lenders. There have been times when a producer has had a 
terrible year and maybe his loan is still a good loan but weak in one 
or more areas of our analysis. The Guaranteed Loan Program allows City 
Bank to continue working with the producer but a portion of the loan is 
guaranteed and the producer has some time to work out the situation. 
Over the years, we have had many producers on guaranteed loans who have 
been able to work their way back to a direct City Bank loan following a 
good crop year. As it stands today, City Bank will be utilizing the 
program even more for 2016. Continued funding for the Guaranteed Loan 
Program with no additional cuts is a high priority for the agricultural 
industry.
    The elimination of direct payments and countercyclical payments 
significantly increased the risk endured by agricultural producers and 
lenders. Direct payments provided a reliable source of income for loan 
repayment. In most cases, direct and countercyclical payments would be 
included as profit in the farming operation and would allow a farm to 
cash flow and continue farming. As cotton prices have been suppressed 
in part due to agricultural policies in other major cotton producing 
countries, U.S. cotton producers are struggling to service their debt 
and make a profit. While other commodities have a substitute program in 
the 2014 Farm Bill, cotton is no longer a covered commodity under Title 
I programs, so the safety net is entirely comprised of the marketing 
loan and crop insurance programs. The marketing loan program provides 
important collateral for lending and is a vital component of the cotton 
safety net. The proposed addition of marketing loan certificates would 
help alleviate some of the financial pressures faced by our growers.
    We greatly appreciate the continued support for the crop insurance 
program and the efforts to eliminate the proposed cuts to crop 
insurance. Crop insurance is a vital component of the safety net for 
cotton producers and any additional cuts would be detrimental to the 
cotton industry. Crop insurance provides assurance to lenders that 
farmers can repay their operating loans. We appreciate the addition of 
the STAX program to provide additional risk management for cotton 
producers. However, due to the uncertainty in area-wide payments as 
well of the timing of payments, it is difficult to factor a STAX 
indemnity into loan repayment.
    In Texas, 97% of cotton acreage is covered by an individual 
insurance policy. This area is extremely vulnerable to weather related 
problems and large temperature variations and weather extremes are very 
common, even within a 24 hour period. While agriculture has always been 
a risky business, the risks for cotton producers have been exacerbated 
in the past few years due to low prices, farm policies of other major 
cotton producing countries, 2014 Farm Bill changes to the cotton safety 
net, and now chemical resistant weeds. The increased risks for 
producers directly affects the ability to qualify for financing. If a 
producer has a good financial equity position, can obtain affordable 
crop insurance and receives government program payments that can be 
used for loan repayment, banks can use those tools for loan 
collateralization. Any increase in crop insurance premiums for the 
producer could greatly affect the affordability of insurance and the 
ability to secure financing as most lenders will require crop 
insurance.
Policy Needs
    Producers across the Cotton Belt are struggling with the effects of 
low prices, weak demand, and growing competition from heavily-
subsidized foreign producers. The infrastructure for the U.S. cotton 
industry (gins, warehouses, marketing co-ops and merchants, and 
cottonseed crushers and merchandizers) will continue to shrink unless 
there is a stabilizing policy for cotton to help sustain the industry 
in periods of low prices such as currently exists today.
    As you have heard from others, the National Cotton Council and 
other cotton industry organizations have developed a proposal to help 
bring some stability to the industry. This proposal is based on the 
administrative authority that Congress has provided to USDA in the 
current and previous farm bills that allows the Secretary of 
Agriculture to designate other oilseeds as eligible for farm program 
participation. We believe that cottonseed, which is an important co-
product of cotton production, should be designated as an oilseed and 
defined as a covered commodity under this farm bill, making cottonseed 
eligible for the PLC/ARC program. The importance of cottonseed 
continues to grow, as it now represents about 25% of the total revenue 
or value from an acre of cotton production.
    The addition of a cottonseed support policy will be important to 
ensure continued economic activity in rural areas that is based on 
cotton production and the associated activities to process, store, 
transport, and market cotton and cotton products. A cottonseed support 
policy could help alleviate the increasing financial stress of the 
cotton industry and allow for continued credit availability.
    Without some stabilizing policy put in place for the cotton 
industry, given the current and projected prices and costs of 
production, we can expect to see a continued decline in Texas cotton 
acres and the associated infrastructure. As further evidence of the 
need for the cottonseed policy, at least 197 lenders across Texas have 
written to Secretary Vilsack urging him to take action on the 
cottonseed proposal to help address the deteriorating situation. The 
national Farm Credit Council, representing all the local farm credit 
associations, sent a similar letter outlining the current need for USDA 
to use whatever authorities available to assist the industry.
    From a lenders point of view, it is imperative that actions be 
taken that can have a stabilizing effect on the U.S. cotton industry. 
We strongly recommend you use all authorities at your discretion to 
assist in this situation and specifically that you designate cottonseed 
as an `other oilseed' for purposes of the Agriculture Risk Coverage and 
Price Loss Coverage programs. This designation would help bring much 
needed stability and support to producers, and in these times of low 
prices, allow them to have the balance sheets necessary to procure 
production financing.
    As I close, let me express my sincere appreciation to the Committee 
for allowing me to testify today. As you move forward I pray that you 
can show others of our legislature that agriculture is the backbone of 
this great nation. My family is dependent on it as well as yours. As 
you leave today, I would hope that you will take the following quote 
and have it somewhere you will see every day and remember the words: In 
1896 William Jennings Bryan said it best, ``Burn down your cities and 
leave our farms, and your cities will spring up again as if by magic, 
but destroy our farms and the grass will grow in the streets of every 
city in the country.'' The American farmer is one of the most efficient 
producers in the world today. If they can continue to provide food and 
fiber at a price that allows the American people to spend the largest 
part of their income on homes, vehicles, televisions and phones, the 
American farmer will continue to do just that. But if there is no 
incentive or profit in their actions, then the grass will begin to 
grow.

    The Chairman. Thank you, Mr. Wright.
    The gentleman from Texas, Mr. Vela, is not a Member of the 
Subcommittee but has joined us today. Pursuant to Committee 
rule XI(e), I have consulted with the Ranking Member, and we 
are pleased to welcome him to join in the questioning of 
witnesses.
    With that, I will recognize myself for 5 minutes.
    I am going to direct this to Mr. Reed initially, and then 
some of the other producers might want to weigh in on this. 
Some of your testimony mentioned the request that the Secretary 
of Agriculture designate cottonseed as an other oilseed for ARC 
and PLC programs. Talk more about why you as a farmer, as well 
as upstream and downstream businesses in the broader rural 
economy, need that sort of action. How would it help you as a 
producer as well as the stakeholders in your community, and how 
that proposal would impact other commodities and cotton 
farmers, or farmers in the other regions?
    Mr. Reed. Thank you. The cotton industry now is in dire 
straits. We have shown that. The problem in our area is we have 
irrigation, we have fairly consistent yields, but with the 
price that we are receiving, it just does not work. And pretty 
much every university budget in the Delta shows that. For us to 
continue to produce cotton at these price levels is just 
unsustainable. Also, when you lose your cotton farmers, you 
lose your cotton industries.
    I was looking this morning at auction papers, and 
generally, most of the farm auctions that are coming up have a 
cotton picker in them. So it is mostly cotton farmers. And with 
the removal of cotton from the farm program in this last farm 
bill, the problem with crop insurance is there is not a price 
policy there whenever the price is at its lowest levels, even 
with the STAX and the buy-up that we buy. So it is extremely 
important if cottonseed can be designated as an other oilseed, 
without opening the farm bill, we can receive some support 
there and maybe stop the bleeding in the cotton industry.
    The Chairman. Thank you.
    Mr. Holladay, would you like to weigh in on that?
    Mr. Holladay. Yes. If you look at where cotton is today and 
look where we are headed over the next few years, you cannot 
see an up-tick in cotton prices, basically due to the policies 
of these other countries. Being a part of the commodity title, 
again in respect to some sort of support on what we grow, would 
be a very important thing in being able to cash flow our 
operations. Having the ability to have cottonseed as an other 
oilseed would do that. It is not going to be a silver bullet, 
and it is not going to be enough of a cash exchange to where 
you are moving acres from one place to the other, but it will 
sustain cotton operations and it would be sound policy.
    The Chairman. Thank you.
    Mr. Wright, you mentioned that some of your long-time 
customers having negative cash flow issues, have a history of 
being good customers, productive farmers, would this cottonseed 
proposal enhance their ability to cash flow in your perspective 
as a lender?
    Mr. Wright. Yes, sir, it would. Sorry. Yes, sir, it would.
    We are looking for anything that we can use to cash flow 
these producers. As I have stated, as well as the other panel 
members, when we lost our direct payments and our 
countercyclical payments, a lot of times for our producers, 
that was their profit.
    When you work their loan and you have finally got it all 
done, when you look at the bottom line and if they show a net 
profit in their operation, you could go back and generally it 
was the direct payment or in the countercyclicals. So when that 
went away, then we lost that option and the cotton prices went 
down. So this is another tool that lenders will be able to use 
and it will help us greatly.
    The Chairman. Thank you.
    Let me ask you, Mr. Stephens, changing the subject a little 
bit. We are looking at the next few years with huge world 
cotton stocks overhanging the market. We know that has been a 
problem. China and India are probably the culprits in that 
scenario. In spite of market signals, we see cotton production 
ramped up in those countries. Based on that, what is your 
expectation for the future of cotton prices and returns for 
U.S. cotton farmers throughout the life of this farm bill?
    Mr. Stephens. Yes, sir. Well, of course, USDA is projecting 
flat prices through the farm bill, the prices are not deemed by 
most experts to have a whole lot of upside. And you already 
mentioned China with 60 million bales that is government-
controlled, that is if it is available to the market, or is it 
not available to the market. Well, that is a decision the 
Chinese Government makes, not the free market. And so that is 
overhanging the potential rise in prices.
    And then you mentioned India also, with 1 in 4 bales 
produced in India now, and with a minimum support price in 
India, and other subsidies that those producers receive, and 
the government controlling the internal and external 
availability of Indian cotton. Then it puts the U.S. producer 
in an untenable and really a position where they can't predict 
what these foreign governments are going to do and how they are 
going to affect their prices.
    The Chairman. Thank you, sir.
    I appreciate the responses. I now recognize Mr. Walz, for 5 
minutes.
    Mr. Walz. Thank you, Chairman. And thank you all for your 
testimony. It is really helpful.
    I was mentioning to the Chairman, listening to Mr. 
Wannamaker and Mr. Michael, you are sixth generation producers. 
That is longer than Minnesota has been a state, so that ought 
to stand for something. And the knowledge that you bring means 
something, and so I like it.
    This is kind of a primer for me. I want you to help me with 
this. Last fall, my producers' biggest decision was ARC or PLC, 
basically, on how they were going to go. That is not the case 
for you. It was base acreage reallocation. And one of the 
things that this Committee has stood strong on is this crop 
insurance issue, and I know your producers are covered by that. 
What I am trying to understand is only 30 percent of cotton 
acres are covered by STAX, and I am trying to understand why 
that is the case, what we could do, why it either works or 
doesn't work. But as your decisions with the new farm bill were 
put into place, for the growers, how did you decide those base 
acre reallocations, and how do you decide whether to get into 
STAX or not?
    Mr. Wannamaker. Most of the STAX decisions were probably 
influenced most by the crop insurance salesman. In my 
particular instance, my crop insurance salesman showed me a 10 
year scenario of how many years I would be paid, according to 
what the premium was, and he convinced me that it was a good 
risk to take. Most crop insurance salesmen did not push the 
STAX program, in my area anyway, and so a lot of people did not 
take it. If they had it to do over again, they would. But I am 
surely glad I did but, like I say, everybody needed to hear 
that scenario he painted for us. STAX is not true crop 
insurance, it is an investment that over the long haul will 
pay, but it is not true crop insurance on my farm. I actually 
took 75 percent coverage and then took a buy-out with STAX 
above that because I felt like if I didn't have full coverage 
on my farm with 75 percent, that I might have a loss and my 
neighbors might not. So, in other words, my reason might not 
happen, but it might, so I wanted to have true crop insurance 
for myself. STAX is a good tool, it is just that it wasn't sold 
by the people selling crop insurance very well.
    Mr. Walz. Mr. Michael, I am going to turn to you. Well, I 
appreciate that, and we have to see it. That is an interesting 
take for us to try and understand.
    This is the thing that gets so frustrating up here, the 
either-or choices that get made, and you mentioned in 
California is a unique situation in certain ways because of the 
regulation. It is very helpful on the water situation, but I 
would like you to explain in real terms, because unfortunately, 
we get painted into a picture on this. If you bring up a 
concern about a regulation then you are painted as if you don't 
care about that, which, of course, you do. You care about clean 
water, you care about endangered species. My question to you 
is, if you could help me understand this. On the issue of 
background ozone levels, in real practical terms for you to 
meet what is being proposed, what would that look like, what 
would that piece of equipment look like? How would you go about 
your operation if you were just going to make a good faith 
effort and do everything you could to meet that requirement, 
because it is the right thing do to if you think that, but what 
does it mean in practical terms?
    Mr. Michael. Well, I would love to have you guys come out 
and see some of the tractors and the contraptions that we now 
have on our equipment out in California. Not only does it make 
it a lot more expensive and a lot more maintenance, but it 
makes that piece of equipment really not saleable out of the 
State of California in the future. So not only do you have to 
pay more for the equipment, it has less value, going forward.
    But, these future requirements that are being proposed now 
are going to really make it even more difficult on top of the 
layers of regulation that we already have. I don't know what we 
are going to end up with. I think we need to go back to a mule 
and a plough, but we are trying to be as efficient and 
productive as we absolutely can. And, again----
    Mr. Walz. Would it be farfetched to--are you looking at 
electric tractors?
    Mr. Michael. There is everything being proposed right now. 
At some point that may even be on the table. But, we are trying 
diesel and clean-burning diesel, which we have an ultra-low 
sulfur formulation that is only for California that we have to 
use. So, we are already doing every step that we can. So in----
    Mr. Walz. What is----
    Mr. Michael.--this----
    Mr. Walz. What is the price on a boutique fuel like that?
    Mr. Michael. Our average is $1 more than the rest of the 
nation. We can't import from other states because of the 
special formulation, so we kind of exist in our own island out 
there.
    Mr. Walz. Well, I do think it is important because all too 
often those of us who are concerned about this, and I know many 
in this room, we want to have sustainability, we want clean 
air, clean water, but there is a practical nature that has to 
be applied too. And it gets very frustrating for you, saying we 
are doing everything possible to reach that, but here is what 
it means. I think sometimes if we can articulate this is what 
it looks like in the real world, not just theoretically, I 
think that is really important. So thank you for your 
testimony.
    I yield back.
    The Chairman. I recognize the Chairman of the full 
Committee, Mr. Conaway, for 5 minutes.
    Mr. Conaway. Well, thank you, Chairman. I appreciate our 
witnesses being here.
    Could one of you give us a quick scenario? We get this 
comment from time to time from folks who don't understand a lot 
about agriculture, and that is, ``Why don't you just plant 
something else?'' If you can't make a profit from growing 
cotton, why don't you plant something else? Shawn, would you 
like to take a shot at that?
    Mr. Holladay. Yes, thank you, Mr. Chairman. In our area of 
Texas, and a large portion of Texas is historically cotton-
specific country. As you well know, the land has always been 
cotton land from the very beginning when it was tilled out of 
prairie. Cotton is the most profitable plant from a water usage 
standpoint out there, there is a vast majority, especially on 
the southern high plains of dryland operations, and the water 
input is high efficiency, low volume water that is putting on 
there, drip irrigation, LEPA system irrigation, and such as 
that. And cotton has a whole lot more yield potential when it 
comes to breaking even on a crop.
    Mr. Conaway. All right. There are so many bits and pieces 
to it, but can you flesh out the impact that a permanent loss 
of cotton production would have on your area? In terms of the 
both the upstream and downstream industries, from inputs and 
suppliers to gins, compresses, and merchants, those kind of 
things?
    Walk us through that a little bit.
    Mr. Holladay. As you know, the pipeline of cotton is not 
the only thing affected in the cotton country. Especially mom-
and-pop organizations within these rural communities are highly 
stressed right now in the cotton country. Your infrastructure 
itself, which, if you lose, is not something that you can 
afford millions and millions of dollars to----
    Mr. Conaway. Describe that----
    Mr. Holladay.--put that in place.
    Mr. Conaway.--infrastructure.
    Mr. Holladay. Yes.
    Mr. Conaway. You are talking about mom-and-pop shops, you 
have mechanics and other suppliers.
    Mr. Holladay. Yes.
    Mr. Conaway. Walk us through some of the faces----
    Mr. Holladay. Well, you have----
    Mr. Conaway.--that we would lose.
    Mr. Holladay. Yes, sir. Your tractor dealerships would 
consolidate, they would use less mechanics, there would be one 
to every four or five communities. That is being looked at. The 
gins would consolidate to one or two per county. You would lose 
jobs in every instance that you look at something like that. 
You have tire dealerships, hardware stores. I mean if you are 
looking at--on the high plains of Texas, you are looking at 
between one to four and one to five jobs are related to 
agriculture, and cotton is the primary crop grown in that area. 
And if you switch to a different crop and go to something that 
is unsuited for our soils, you are going to take the amount of 
farmers down a significant number, and the amount of support 
down, everything comes down, and that affects the rural 
communities.
    Mr. Conaway. Mr. Wright, we had the Farm Credit 
Administration in here last week. We asked them about 
availability of credit for the 2016 crop year and beyond. I am 
worried that some of the mechanical underwriting rules being 
placed on banks will prevent lenders like you from being able 
to use your own judgment for risks, and this automatically 
prevents you from financing next year's crop. Can you walk us 
through that? Is that a legitimate risk, or am I overplaying 
that?
    Mr. Wright. Yes, sir, it is a very legitimate risk. As I 
have told people before, agriculture is a different animal, and 
when you look at it from a banking standpoint, you have to 
understand ag. I have been part of an organization before where 
they changed upper management and they hired guys that didn't 
understand agriculture, and it became a reg, and that is when I 
went to City Bank and found some people that understood. But 
the regulators are coming in now, and our cash flows, years and 
years ago--and you may remember this--you had what was asset-
based lenders, and as long as you had plenty of collateral and 
as long as you could secure it, then you could pretty well go 
and make the loan. That all changed, and we got back into the 
cash flow position that we are in now. So you can have all the 
collateral you want to, but if you can't cash flow this, then 
they hold our feet to the fire. And so we have to be 
accountable to the regulators and to the banking industry, and 
this it makes it tough.
    Mr. Conaway. Is there a way to have a non-credit-supported 
production agriculture system? Could we do away with banks 
altogether, and make that work?
    Mr. Wright. Well, just give me a few more years and then it 
will be time for me to retire, and then we might want to do 
that. We at City Bank are pretty fortunate because of our total 
loan portfolio, ag is about 11 percent of that, which sounds 
pretty small. We topped out at about $216 million this year, 
which is pretty big, one of the bigger lenders. And what is 
going to hurt is when you talk about these other industries, 
the smaller banks and the smaller towns, those loan deposit 
ratios are in 80 percent, 90 percent, and those are in ag 
loans. That is what they loan to. That is all they have to loan 
to. And so it will cripple them.
    Mr. Conaway. All right. Thank you, Mr. Chairman. I yield 
back.
    The Chairman. Thank you, Mr. Chairman.
    I now recognize the gentleman from California, Mr. Costa, 
for 5 minutes.
    Mr. Costa. Thank you very much, Mr. Chairman.
    I want to go back to our witness from the San Joaquin 
Valley. Mr. Michael, you talked about, because of the result of 
a lot of changes, many factors above and beyond your control, 
you have had to become innovative in your efforts to try to 
maintain your efforts in the cotton industry. You described the 
extra long staple cotton competitiveness payment program, and 
the possible changes you would like to see as it relates to the 
pima cotton that you grow and the blends. It is the added value 
that you get for growing that pima cotton that allows you to 
still stay in that business. Could you be more explicit in 
terms of what you would like to see?
    Mr. Michael. Sure. The ELS cotton does exist sort of in a 
world of its own because of its length and strength 
characteristics. We do need to be able to stay competitive, 
China right now is subsidizing their growers over 40 a pound, 
and that has boosted their production to a very high level of 
ELS that we haven't really seen before. We would like to 
include that price as a reference point in with the discussions 
for our competitiveness program that we have in place.
    Mr. Costa. Do we know for sure that China is maintaining 
that premium blend, or are they, in fact, blending it with 
other varieties of cotton?
    Mr. Michael. Well, it is very possible, from what we have 
seen with our pima cotton, that there is a lot of blending out 
there because it is a higher-price product, so retailers are 
starting to find that there is actually quite a bit of 
gamesmanship going on. There is sort of some fraud being 
perpetrated on the consumer by products that are supposed to be 
100 percent ELS cotton are actually heavily blended with lower-
quality cotton, mainly at the mill level in China.
    Mr. Costa. Have you or your neighbors been able to utilize, 
out of the farm bill that we worked very hard on, some of the 
programs involved, like the EQIP program?
    Mr. Michael. We have used the EQIP program and been very 
successful getting some funding. The one problem is that we are 
just one entity, and the caps, you hit them pretty quickly. And 
so it sort of deincentivizes in some ways the larger producers 
from investing in larger conservation projects because of some 
of the cap limits. I understand there are reasons maybe for 
some of those limits, but in terms of water conservation in a 
state like California, it would be much more helpful if we had 
additional access to some grant funding. But unfortunately, we 
get capped out pretty quickly.
    Mr. Costa. I would like to ask all the witnesses quickly, 
if you can, because my family has been in the cotton business, 
we no longer are, it was no longer financially feasible with 
our kind of operation, we went to permanent crops, but there 
has always been the debate on the use of cotton for fiber in 
this country and around the world versus synthetic blends, and 
we look at the competition that is out there, where do you see 
the role of cotton in American and global economy in the next 
10 years? Anybody care to comment?
    Mr. Stephens. Well, of course, we see cotton as the 
premiere fiber, and the fiber you want to put----
    Mr. Costa. Well----
    Mr. Stephens.--next to your baby's----
    Mr. Costa.--no, I agree with you.
    Mr. Stephens.--skin. And what we have seen in the past 
several years is the largest textile consumer in the world, the 
textile supplier to the world, has had the highest cotton 
prices and the lowest polyester prices due to their government 
policy.
    Mr. Costa. Yes.
    Mr. Stephens. And so we as U.S. cotton farmers----
    Mr. Costa. Do we have any numbers on utilization of 
polyester products versus cotton today, and any trends over the 
last 20, 30 years?
    Mr. Stephens. Yes, sir, we do.
    Mr. Costa. Does the National Cotton Council?
    Mr. Stephens. Yes, sir, we do. And we will be happy to get 
those to you.
    Mr. Costa. Yes. Finally, Mr. Cannon Michael, I want to go 
back to your comments on the Endangered Species Act, and we 
have dealt with the Sage-Grouse in the Midwest and other 
problems that you alluded to with regards to the Delta smelt 
and salmon protection, I mean it is your view that we need to 
take another look and recalibrate the way the Endangered 
Species Act is being applied?
    Mr. Michael. I just would like to see a little bit more 
accountability and some metrics set in place where if there are 
going to be resources allocated for endangered species, there 
should be a level of accountability. We have seen in this 
drought, a high level of focus on urban use and agricultural 
use, but we are also using our engineered system to supply 
water for species, and if that is going to be the case, then we 
need to have that level of accountability. And for any state 
that is facing Endangered Species Act issues, it is advisable 
that you all would focus on wanting that to have some 
accountability because it is being applied in ways in 
California that are not helping the species, and that are still 
taking the resources, even though it is not working to help 
those species.
    Mr. Costa. Thank you. My time has expired, but for the 
Members of the Subcommittee, a bit of a footnote for history. I 
said a sixth generation farmer, and I am not sure which 
generation it would be appropriate, but somewhere back, great-
great-great-grandfather was a Speaker of the House of 
Representatives, by the name of Joe Cannon.
    The Chairman. That is interesting.
    Mr. Costa. So----
    The Chairman. Very interesting.
    Mr. Costa. Yes.
    The Chairman. Thank you, sir. I appreciate that.
    Mr. Austin Scott from Georgia, you are recognized for 5 
minutes.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
    And I could ask this question of any of you, I guess, but I 
am going to ask it of you, Mr. Wannamaker. We have heard here, 
and I hear back home, I am from Georgia, cotton is obviously a 
tremendous crop for us, about the challenges of obtaining 
financing if the situation doesn't improve. And I look at the 
stockpiles in China, and other areas around the world, of 
cotton and I just wonder, what percentage of the producers in 
our part of the world do you think are under so much pressure 
that they may not be able to borrow the money to plant next 
year?
    Mr. Wannamaker. I would venture to say that the biggest 
impact will be on young producers. I am 59 years old. I went 
through some good times, but a lot of these younger producers 
that are out there now went through some good times, they have 
never seen any bad times and they don't have any equity built 
up yet. I mean the young producer is probably the most at risk 
of any of them. The small, young producer that is just getting 
started or just got started in the last few years is at the 
most risk. I don't know the exact numbers, we probably could 
come up with them, but I would say the main focus should be on 
the next generation, keeping the next generation in business.
    Mr. Austin Scott of Georgia. So and if you don't want to 
answer this question, feel free not to. Sir, do you 
collateralize your own loan with other assets that you have 
already accumulated? Do you secure them or do you----
    Mr. Wannamaker. I do. My lender takes everything he can 
get. I try to give him as little as I can give him.
    Mr. Austin Scott of Georgia. I understand. The thing I hear 
from my bankers is they want the cash back on the loan. They 
don't want to take anybody's land. I mean that is----
    Mr. Wannamaker. Right.
    Mr. Austin Scott of Georgia.--that is not what they are in 
the business of. But it concerns me that when you see the 
stockpiles, and knowing nobody has a crystal ball, I mean 1 
year, 2 years, 3 years, how long does it take to----
    Mr. Wannamaker. It is at least the length of the farm bill, 
and that is why we are here today. We see it is bad now, but we 
see it staying this bad and this is probably the most, I don't 
know, I am really so anxious about this cottonseed program 
because it is the lifeblood of cotton. Cotton is going to leave 
the United States if we don't get this. I really believe we are 
on the road to having that happen.
    Mr. Austin Scott of Georgia. I am very concerned that you 
are right as well.
    Which brings me to the next question. So Brazil took action 
against the United States with regard to cotton, but if we are 
honest, it is China and India that is the problem with the 
global cotton market. How do we--what suggestions do any of you 
have for Congress and how we address that issue with regard to 
China and to India, and maybe why didn't Brazil take action 
against one of those two countries?
    Mr. Wannamaker. Well, I think partly because they 
considered themselves underdeveloped. The United States is 
considered a developed country, and so we are the ones that are 
picked on all the time. We are the most efficient producers in 
the world, yet we have to be asked to grow cotton for 64 when 
other countries are being subsidized up to $1.40.
    Mr. Austin Scott of Georgia. Yes.
    Mr. Wannamaker. I have made this comment to other farmers 
around, I said I would be growing cotton in my lot next to my 
house if I could get $1.40 for it. So we just can't compete 
against governments. We can compete against producers----
    Mr. Austin Scott of Georgia. Yes.
    Mr. Wannamaker.--but we can't compete against governments. 
So we have to make those governments more accountable and make 
them give their numbers and be as transparent as we are.
    Mr. Austin Scott of Georgia. I am down to less than a 
minute, but if any of the rest of you who are producers would 
like to speak about that, or any of you have any suggestions on 
kind of the global market and how long you see it takes to 
shake out? Mr. Holladay?
    Mr. Holladay. Yes. You can see if China's stockpile stays 
isolated, Shane would speak better to this than I can, but if 
their stockpile remains isolated and it is something that they 
are going to use, you can see an up-tick in the market 3 to 4 
years out maybe. Maybe sooner, depending on what happens in the 
rest of the world. I mean it is still a commodity that is used 
in the world, so depending on what China does with their 
stockpile would have a great impact on what our prices are 
going to be.
    Mr. Austin Scott of Georgia. Yes.
    Mr. Stephens. Yes. The U.S. producer, and to my knowledge, 
nobody in the U.S. has any influence or control, it is strictly 
we are at the mercy of the Chinese Government's decisions with 
their huge stockpile. It is twice what would be considered a 
long-term stock-to-use ratio, and it is because of the huge 
stockpiles in China. The market doesn't know are they 
available, are they going to be made available, are they going 
to be held off the market. It really is limiting our potential.
    The Chairman. The gentleman's time has expired.
    We are going to stay in Georgia, move across to Mr. David 
Scott, and recognize you for 5 minutes.
    Mr. David Scott of Georgia. Let's stay on the China 
situation that my good cousin over there, Austin Scott, brought 
to the fruition. How long do you think that China's current 
stocks will suppress the world's market, how much longer?
    Mr. Stephens. We really wish we knew. The only people that 
can answer that is the authority in China.
    What we do know is they continue to increase polyester 
production into the face of an already oversupplied polyester. 
They continue to take internal policies that lower the price of 
polyester in China, and they continue to hold the price of 
cotton inside China well above world prices.
    Mr. David Scott of Georgia. So in order for us to really 
see how we can, over in the United States and our agricultural 
policy, can thwart this or deal with this, what is your best 
understanding of why, why is China doing this? Is it to move 
into other crops, to diminish this, for example, you brought up 
polyester, some of our own mills are turning to polyester 
instead of cotton. What is the thinking, if you could get into 
the Chinese mindset, what is their thinking, they have to have 
some reasonable rationale for why they are doing this, because 
it could eventually come back to hurt them as well if they 
continue and suppress cotton?
    Mr. Stephens. Yes, sir. I suspect some people might say 
they don't have to have a reasonable decision-making process, 
what we understand is that China is a net importer of cotton, 
and has been for years. They are not a net importer of 
polyester. They continue to produce polyester inside China----
    Mr. David Scott of Georgia. Yes.
    Mr. Stephens.--to satisfy their internal use and the 
polyester that they sell to the rest of the world. So they are 
becoming less and less of an importer of raw cotton, so they 
are not looking----
    Mr. David Scott of Georgia. Yes.
    Mr. Stephens.--to the United States to supply raw product 
like they used to.
    Mr. David Scott of Georgia. And so for our cotton farmers, 
because I am very concerned about it because while the 
Chairman's beloved State of Texas is number one in cotton 
production, Austin in my State of Georgia is number two. So we 
are very much concerned. What would you say is the economic 
impact of the situation right now? In other words, financially, 
what is it costing our cotton farmers in the United States, 
this situation in China and India? Anybody? Is there a dollar 
figure? Is there something we can hang our hat on to say if we 
don't change this situation, if something isn't happening in 2 
or 3 years, or put some kind of figure on it, this is what is 
going to happen to the cotton farmers in Georgia and the United 
States?
    Mr. Stephens. Well, Mr. Scott, we have reported that there 
is $100 billion economic impact derived in the United States 
through the cotton industry. And you have heard the producers, 
and the producers I have talked to all across the mid-South and 
Southeast on a weekly basis tell me that the cotton industry 
will not sustain itself unless something substantial changes 
relatively quickly.
    Mr. David Scott of Georgia. Yes.
    Mr. Reed. And I would add that as a U.S. producer, I feel 
like, on a level playing field, I can compete against any 
producer in the world. I don't feel like we are in that 
situation now with the Chinese and India heavily subsidizing 
their cotton industry. So that is part of my----
    Mr. David Scott of Georgia. Yes. And so what would your 
best recommendation be as to what we need to do about it in 
terms of our agriculture policy?
    Mr. Reed. I would say, immediately short-term, have some 
system in place where cotton farming not even becomes 
profitable, just becomes where we don't go broke----
    Mr. David Scott of Georgia. Yes.
    Mr. Reed.--in the short-term. And that is really what we 
are asking for is to stop the bleeding. There will be some in 
this cottonseed program we are proposing. A lot of these 
generic base acres are going into peanut production, which has 
a very high government payment, and rice production.
    Mr. David Scott of Georgia. Right.
    Mr. Reed. There will be quite a bit of savings there by 
people not bleeding off acres into cotton production.
    Mr. Stephens. Oilseed.
    Mr. Reed. Yes, if we do get the oilseed payment, there will 
be quite a bit of savings there of people stopping to grow the 
peanuts just for the farm payment.
    Mr. David Scott of Georgia. So the one thing that we can do 
is make sure, if I hear you right, to make sure that the 
Secretary to Agriculture, Secretary Vilsack, designates 
cottonseed as other oilseed? That is something----
    Mr. Reed. Short-term, just to stop the bleeding and save 
our cotton infrastructure, because we are at a definite 
breaking point. Much less cotton in the mid-South, we are going 
to see gins fold up, and once that happens, they don't really 
come back.
    Even if the cotton market comes back, it will be very 
difficult.
    Mr. David Scott of Georgia. So the one thing we can 
definitely do as Members of Congress is to get letters and to 
get in contact with Agriculture Secretary Vilsack to spur him 
on to make this definition of other oilseed?
    Mr. Reed. Absolutely.
    Mr. David Scott of Georgia. We will do it. Thank you.
    The Chairman. The gentleman's time has expired.
    We are going to continue with the Georgia show and move 
across the aisle to Mr. Allen. You are recognized for 5 
minutes.
    Mr. Allen. Thank you, Mr. Chairman. And I am going to give 
you a few statistics on Georgia. I guess that is why there are 
three of us sitting here at this hearing. But first I want to 
thank our panel for coming before the Subcommittee today.
    I was the son of a farmer, so I know a little bit about 
your pain, although we didn't grow cotton, we were in the dairy 
business, which is the smartest thing my dad ever did was get 
out of that business and become a gentleman farmer.
    But I represent the 12th District of Georgia, and, of 
course, in 2014, the State of Georgia planted around 1.38 
million acres of cotton, and a yield of about 900 pounds per 
acre. And, in listening to both our farmers in the district and 
to you today, I don't see that it is our farmers' fault that 
prices are so low. Last year, for example, again, we averaged 
about 900 pounds per acre, compared to a national average of 
around 685 pounds per acre. So we are getting very efficient at 
what we do. And the thing that amazes me is that you still ride 
down the roads of Georgia, and I am sure it is like this in 
other states, where we have the old textile mills. They are now 
becoming office buildings and things like that. At least they 
are being converted, but for so long those buildings were 
vacant. We lost our textile industry, and for the life of me, I 
tell you, I do agree with some of our presidential candidates 
who have talked about our trade policies in the past. I don't 
understand why China would pay their farmer $1.40 a pound, or 
more, for cotton, which is less quality than our cotton, they 
will only pay us 62 a pound for the cotton to be able to make 
this shirt that I paid $35 for, that I bought and was made in 
China. Somewhere we are getting the short side of that deal, 
absolutely no question about it, and we need to make our 
friends in China aware of that. I am assuming that we could buy 
this shirt somewhere else, possibly. And that is the root of 
the problem as I see it, is that we have lost our textile 
industry, and now we are at the mercy of other nations. Eighty 
percent of our cotton grown in our district is sent through the 
Savannah port overseas. And we have to find a market for that. 
Of course, we have some things we have been working on as far 
as trade goes; but, obviously, we have to get to work on the 
source of the problem, and that is the ability to stabilize 
this world market and treat our farmers fairly in this country. 
And I see that as really a national security issue, Mr. 
Chairman.
    But again, enough on the foreign issues. Obviously, you all 
have talked about the economic impact of cotton as we reduce 
acreage. I have 18 gins in our district. When you build a 
cotton gin, it is a lot of infrastructure. You might be able 
to--okay, we are going to convert to cotton and grow cotton 
next year because it is back to $2.50 a pound, it takes years 
to build that gin. So you have those issues.
    I guess what do we do in the short-term? What can we do as 
a body in the short-term to shore us up and get us where we 
need to be?
    As far as the STAX Program, is there--Mr. Wannamaker, you 
commented on it. Is there any way we can make that program a 
bridge--I know we have the cottonseed issue, and our Chairman 
has sent a letter, which we are party to, to get the cottonseed 
thing done. But as far as the STAX program in place, is there 
any future as far as it stabilizing our situation until we can, 
as a country, get this thing solved?
    Mr. Wannamaker. STAX is a good program, but the cottonseed 
thing is--I think is definitely needed now. I mean----
    Mr. Allen. Okay.
    Mr. Wannamaker.--I just don't think----
    Mr. Allen. Well, that is----
    Mr. Wannamaker. Yes.
    Mr. Allen. That is an emergency.
    Mr. Wannamaker. Right. Right.
    Mr. Allen. Yes. It has to happen.
    Yes, sir, Mr. Reed?
    Mr. Reed. I was just going to add to that that STAX is an 
insurance program, and this low-price environment that we are 
in, it is----
    Mr. Stephens. It is a revenue.
    Mr. Reed. It is a revenue insurance and it is not--at 64 
cotton STAX is a little bit irrelevant because no matter how 
good the yield we make, it still doesn't come out.
    Mr. Allen. Yes. Well, I am out of time, doggone it. But 
anyway, thank you. Hang in there and let us know what we need 
to do to get this thing fixed. I appreciate it.
    The Chairman. The gentleman's time has expired.
    The gentleman from Texas, Mr. Neugebauer, is recognized for 
5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. Thank you for 
holding this hearing. It is good to see some great folks from 
the 19th District here today. Thank you, Shawn and Mike, for 
coming up and being a part of this panel.
    When you look at some of the options out there, near-term 
and long-term, and then you talk about the cottonseed issue, 
can you kind of walk the Committee through what the numbers 
would look like? Shawn, if you had something like that in place 
today on a per acre basis, what would we be talking about?
    Mr. Holladay. Well, the preliminary numbers that we are 
looking at, if you are wanting to look at, basically, you would 
be using a factor of about 1.4 percent to lint, so you would 
have a constant factor over to cottonseed. You would have 
probably a $60 or so acre payment on a 500 pound frozen yield 
at the FSA Office on your base acres, basically. That is a 
rough number. That is the way we figured it. That would be not 
a silver bullet and not enough money to move a whole lot of 
acres around, but a traditional cotton producer, it would be a 
big impact, as you well know, on cash flow in an operation. And 
near-term, without opening the farm bill, that is what we have 
available to us right now to try to get done, and we appreciate 
your help in getting that done.
    Mr. Neugebauer. Yes, thank you.
    And, Mr. Wright, back in your testimony you mentioned that 
it was hard to factor in STAX when you are doing these cash 
flow analyses, and you are saying you are getting some pressure 
from the regulators now of these cash flows. I have had a 
number of conversations with you and others that these cash 
flows are really tight, and particularly with the weather 
patterns we have had over the last 2 or 3 years, a lot of that 
equity has shrunk and so the cash flow becomes much more 
important. Can you kind of talk to us a little bit about the 
difficulties of using STAX in the cash flow projections, and 
how you incorporate that, and do you incorporate it?
    Mr. Wright. Well, we look at it, but STAX is a revenue 
insurance. And so it is based on, in our area, based on the 
county. And those 2015 indemnities won't be paid until some 
time in the late summer of 2016. Well, our guys need the money 
now. We need the money then, but it takes that much longer. So 
it is hard for us to take a number when we don't know what it 
might be, and it might not be anything. And so we really don't 
have anything concrete to put our hands on, to put it on paper, 
to put it in those cash flows.
    Mr. Neugebauer. One of the things that you mentioned is 
these cash flows are getting tighter and the examiners are 
looking at it harder. One of the things we saw last year was a 
lot more FSA Guaranteed Loan Program, and one of the things 
that happened to us because the demand had picked up in that 
program, is that we had people calling, literally, it was time 
to plant and they had not been able to get approval on their 
guarantee.
    We talked to the Secretary about that. They put some 
additional people in there, but my guess is if these prices 
remain at these levels, that that activity is going to increase 
because you are going to find it more and more difficult with 
the scrutiny you are getting, from the regulatory standpoint. 
Are you seeing where you are going to have to look at moving 
some more of that business to the guaranteed program?
    Mr. Wright. Yes, sir. Yes, sir. We are going to utilize it. 
We have used it, and it is one of the reasons we are a 
preferred lender. As a preferred lender, all we can use is our 
analysis. And so as a preferred lender, when we submit it to 
the state for approval, we just have to send an application and 
a narrative. Now, this narrative is about 6 or 8 pages long, 
but it takes in their whole operation. So once we do that, and 
that is why it is so critical for us to be a preferred lender. 
Now, we don't just send loans to FSA for guarantees just for 
the sake of doing it. If we see that we have a problem, we deal 
with the problem, we don't push it off on FSA. And another 
reason that we don't is there are regulations in place through 
FSA, to be a preferred lender you can't have--and I would have 
to go back and look at the regulation, but your loss ratio 
can't be but a certain level. And once you get to that level, 
then you could lose your preferred lender status. And we can't 
afford to do that, so we really look at the ones that we really 
think would go and would make.
    We heard some stories last year, we sent ours in early. 
Last year we had the option of choosing the county office or 
the state office to submit our applications through. We chose 
the state office, and it was a little slow down there but it 
wasn't anything like it was in the county. So we are going to 
have that again, I feel sure.
    Mr. Neugebauer. Well, one of the things we are going to 
need to do is anticipate that and make sure that they ramp up 
early and don't cause the kind of delay.
    Mr. Chairman, my time has expired. Thank you.
    The Chairman. Thank you very much.
    I want to thank each of you for coming. I know this was 
short notice, and you all responded. We certainly do appreciate 
that. And we appreciate your testimony. You have given us a lot 
to think about, a lot to work with.
    Before we adjourn, I want to invite the Ranking Member to 
make any closing statements he would like to make.
    Mr. Walz. Well, again, I thank the Chairman. And you 
demonstrated it again, you have a strong advocate on your side. 
We certainly appreciate it. And to each of you, you have made 
important points. Your marching order to us on action steps to 
take here. This issue on oilseed is immediate, needs to be 
done. The Secretary is aware of that. All of us will keep 
helping move them along to make a decision. And then some of 
these broader issues, from trade and the pressures you are up 
against. The Chairman keeps reminding me that this is the first 
step. Soybeans are in their sights too the same way. Once 
again, it reminds all of us you are fighting a fight for all 
agriculture, getting this right from unfair trade practices to 
how we go about some of these regulations to make sure they 
work.
    I would close, Mr. Wright, by thanking you for that quote 
from William Jennings Bryan. My family's farm is in Nebraska, 
and it is not often we hear a good Democrat quoted in here, 
especially from Nebraska. So he also had another quote where he 
said, ``He hopes the Democratic Party's, both wings could flap 
together.'' I would say on this one, ``both parties are 
flapping together for you.'' It is important you are here. We 
are unified in making this work. And six generations of 
families doing this, as I said, again, that says something 
about our heritage and our commitment.
    So I thank you all, and I yield back.
    The Chairman. I thank the gentleman.
    I just want to say, in dovetailing with the Ranking 
Member's comments, a couple of things that came to light in 
your testimony that was consistent across the board, first, I 
think we can agree that cottonseed designated as an oilseed 
would go a long way in mitigating any further damage while we 
address where we go from here. Again, not the silver bullet, 
but a good starting point. We are going to continue to urge the 
Secretary to take action on that.
    One of the things that I think Mr. Michael referenced 
this--or no, no, it was Mr. Wannamaker, we are a developed 
nation, and China and India continue to be referenced as 
developing nations. They have a competitive advantage against 
us in the World Trade Organization, so when we have grievances 
that are aired in the WTO, we are not on the same level playing 
field.
    That is something beyond the scope of this Committee, I 
believe, but something that maybe the Administration should be 
addressing is how we address that, going forward, because they 
are certainly a developed economy and should be treated as 
such, otherwise we will never fully be able to address these 
issues to a productive outcome.
    Thank you for 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 11:26 a.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
  Submitted Statement by Dan Smith, Member, Board of Directors, Texas 
                              Farm Bureau
    My name is Dan Smith; I'm a fourth-generation cotton farmer from 
Floyd County, Texas, and Member of the Board of Directors of the Texas 
Farm Bureau. I appreciate the opportunity to provide testimony on the 
looming financial crisis in the South Plains of Texas. The seeds of our 
current situation were sown years ago and threaten to play havoc with 
the economy of an entire region of my state.
    Those interested in the health of the cotton industry wrestled for 
years with how to address our World Trade Organization (WTO) loss in 
what is commonly known as the ``Brazilian Cotton Case.'' The WTO loss 
and decreasing levels of spending on farm programs dictated significant 
farm policy changes for U.S. cotton. The 2014 Farm Bill gave us a 
totally crop insurance-based support program for cotton and removed our 
crop from Title I.
    The removal of cotton as a covered commodity could not have come at 
a worse time. Cotton prices have dramatically decreased and the lack of 
a safety net has made profitable cotton farming much less likely.
    Cotton production is infrastructure intensive. Farmers depend on a 
network of capital-intensive businesses to process what we produce. 
From gins at the local level to textile plants at the end of the 
chain--all must be profitable to stay in business. It's a partnership. 
The farmer needs the downstream handlers and processors; who need the 
cotton flowing into the marketing stream. At present, all levels of our 
domestic cotton industry are hurting, but without farmers growing the 
crop to begin with, the industry grinds to a halt.
    Texas leads the United States in cotton production, growing 55% of 
the nation's total acres. The value of cash receipts for cotton is the 
largest of any crop in Texas at $2.2 billion. Needless to say, cotton 
plays a vital role in the Texas economy. If cotton production declines 
significantly as a result of persistent low prices, not only will local 
economies suffer but the state as a whole will suffer.
    Prices are one thing; profitability is another. The cotton 
industry, indeed much of American agriculture, is caught in a classic 
cost-price squeeze. The prices we pay for inputs are still high and 
reflect the overall high commodity prices of a few years back. Today's 
commodity prices are not sufficient to afford inflated input costs that 
remain high.
    The Agricultural and Food Policy Center at Texas A&M University 
(AFPC) tracks the financial health of representative farms across the 
country, including 16 cotton farms located in eight states. In March 
2015, they released their latest report. They projected nine of the 16 
farms would have a probability greater than 50 percent of a cash flow 
deficit by 2018. Half the farms were projected to lose net worth in 
that same time. Of the eight representative farms located in Texas, 
only one was ranked ``good'' in terms of long-term economic viability, 
two were ``marginal,'' and five were ``poor.'' If anything, the AFPC's 
bleak March forecast has deteriorated further since release.
    We are only aware of one proposed solution to address this 
situation. The request that the Secretary of Agriculture designate 
cottonseed as an ``other oilseed'' for purposes of inclusion in the 
Agriculture Risk Coverage and Price Loss Coverage programs (ARC/PLC) of 
the current farm bill. I believe this would be a wise step forward for 
all of agriculture, not just cotton farmers.
    When I harvest a cotton crop, I produce two distinct commodities: 
lint and seed. I bear production and price risk for each of those two 
products. Certainly if growing conditions are less than optimal, I 
produce less lint and less seed. However, other factors influence the 
price risk I face. Cottonseed prices are determined by a multitude of 
factors, chief among them global supply and demand for cottonseed meal 
and cottonseed oil. Those two commodities rise and fall in concert with 
other oilseed products. It stands to reason that they should be treated 
similarly in terms of government programs.
    Further, farmers can purchase a cottonseed endorsement on their 
crop insurance policies. Since the federally-backed crop insurance 
program recognizes the financial risk I face for the seed portion of my 
crop, it follows that the ARC/PLC programs of the 2014 Farm Bill should 
recognize that risk, as well.
    I strongly encourage USDA Secretary Tom Vilsack to use the 
authority he already possesses, designate cottonseed as an ``other 
oilseed,'' and get cottonseed eligible for the ARC/PLC safety net as 
soon as possible. This move will help ensure production of our number 
one natural fiber, increase the financial viability of family farms, 
and help the local economies of the Cotton Belt.
    Again, Texas Farm Bureau appreciates the opportunity to submit 
testimony on this important issue and salutes the Subcommittee for 
shining a spotlight on the current state of cotton production.
                                 ______
                                 
                          Submitted Questions
Questions Submitted by Hon. K. Michael Conaway, a Representative in 
        Congress from Texas
Response from Shane Stephens, Vice Chairman, National Cotton Council
    Question. This is not the first time cotton prices have fallen so 
low. Can you talk about why the situation this time is different, and 
what role the cuts in the cotton safety net might be having on cotton 
farmers in the situation you now face?
    Answer. We last saw cotton prices at these low, sustained levels in 
the late 1990s and early 2000s. And while those were also severely 
challenging economic times for cotton producers, the low prices were 
also impacting almost every other major crop. As a result, Congress 
stepped in to provide economic assistance in the short-term, and then 
the Agriculture Committees reauthorized the farm bill in 2002 to 
include programs better equipped to respond to significant price 
declines. These programs were there for all the crops to help weather 
the low prices until the economic environment improved, which it did in 
the latter half of the last decade.
    However, today cotton producers find themselves in a situation of 
extremely low cotton prices (cotton is currently the only crop with 
prices below the loan rate), yet cotton policy in the current farm bill 
is the least equipped or adequate to deal with multiple years of low 
commodity prices. This is largely due to the fact that most of cotton's 
policy is built around crop insurance products, which can be effective 
risk management tools for intra-year price and revenue swings, but 
largely ineffective for periods of sustained low prices. The U.S. 
cotton industry is now entering the third straight year with cotton 
prices below the cost of production and to date there has been no 
meaningful assistance provided.
Response from Nathan B. Reed, J.D., Arkansas State Chairman, American 
        Cotton Producers
    Question. We have heard a lot about how prices for cotton are low, 
and how the market situation is very unfavorable, with cotton farmers 
looking at net losses for planting cotton. How does the situation for 
cotton influence cotton planting decisions when you decide what to 
plant next spring and in future years? With the low market prices 
experienced for cotton lint, how do you decide whether to plant other 
crops, and what is the outlook for improved returns from those crops?
    Answer. In my area of the cotton belt, the Delta region of 
Arkansas, and for most producers throughout the Mississippi Delta, we 
have a number of cropping options given our soil type, climate, and 
irrigation capabilities. As a general rule, we have seen corn and 
soybean acreage increase and cotton acreage decline over the last 
several years as prices and returns from the grain crops have been more 
favorable than cotton. However, we want to continue to grow cotton, and 
continue to keep it in our crop rotation. Many cotton producers are 
also invested in cotton gins and warehouses, and unlike most grain 
crops that can all be handled by the same grain handling equipment and 
storage facilities, only cotton can be processed through a cotton gin. 
And cotton is important for our rural communities as the production 
inputs and processing of cotton result in more dollars turning over in 
the local economy than most other row crops.
    Given where cotton prices have been in recent years relative to 
grain crops, our cotton acreage has declined. However, for the upcoming 
season, with prices lower for corn, soybeans, and wheat, the relative 
returns for these crops compared to cotton are not significantly 
different. So, we may see some movement back to cotton acres because of 
the decline in grain prices not due to an improvement in cotton prices. 
However, the grain crops still have the advantage of farm policies that 
help protect against long term price or revenue declines, in addition 
to the ability to purchase crop insurance. Neither cotton lint nor 
cottonseed is currently able to utilize long term price and revenue 
protection offered by the ARC/PLC programs. It is for these reasons 
that USDA must work to designate cottonseed as an ``other oilseed'' 
making it eligible for ARC/PLC.
Response from Shawn L. Holladay, Producer Board Member, National Cotton 
        Council
    Question 1. Mr. Holladay, in your written testimony you mentioned 
that crop insurance was never designed to deal with anti-competitive 
trading practices by countries like China and India. It was also 
mentioned that crop insurance does not mitigate against multi-year 
price declines. I think there is this perspective out there that crop 
insurance is all a producer needs. Can you expand on whether this is 
the case?
    Answer. Crop insurance is a vital part of a producer's overall risk 
management portfolio, but it certainly is not all a producer needs to 
provide effective risk management. Crop insurance was created to 
mitigate losses due to a multitude of factors outside of a producer's 
control. Like any type of insurance, crop insurance is purchased by 
producers, a loss must be incurred and a deductible (in many cases the 
deductible is 30-40%) must be met before any indemnity is paid. The 
most popular type of crop insurance products are revenue based. These 
products are simply not as effective during a multi-year price decline. 
Cotton producers need a diversified portfolio of tools such as crop 
insurance for when disasters occur, but also access to other USDA 
programs such as ARC and PLC like other commodities to help mitigate 
multi-year price declines.

    Question 2. Can you explain the role the Stacked Income Protection 
Plan (STAX) plays in risk management for cotton farmers? Does STAX 
protect cotton farmers from multi-year price declines, and in your view 
is it sufficiently protecting cotton farmers in the price environment 
they now face?
    Answer. STAX was created in the 2014 Farm Bill for upland cotton 
producers. STAX is an area wide revenue insurance plan. STAX allows a 
producer to purchase an area wide plan to cover a range of 70-90% of 
their expected county revenue in concert with or in lieu of a 
traditional policy. This can be a very important part of a producer's 
overall risk management strategy as this can help cover a portion of 
the deductible of traditional insurance policies. STAX, like 
traditional crop insurance, was not designed to protect farmers from 
multi-year price declines as other USDA programs such as PLC focus on 
this issue. Unfortunately, neither cotton lint nor cottonseed is 
eligible for PLC. While STAX is functioning as it was envisioned, the 
cotton price environment and market dynamics have changed since STAX 
was first conceptualized in 2012 leading up to the new farm bill that 
was ultimately passed in 2014. During this period and when the bill was 
passed cotton prices were in the 80 range--the harvest price under 
STAX for 2015 was around $0.64. STAX like other revenue-based 
insurance products are not as effective in a low price environment.
Response from Kendall ``Kent'' W. Wannamaker, President, Southern 
        Cotton Growers
    Question. The written testimony emphasized how cotton production is 
specialized and requires specific equipment and infrastructure that 
cotton requires, such as cotton pickers and cotton gins. Can you 
explain more about any specific equipment and infrastructure for 
planting, management, harvest, or post-harvest processing that cotton 
requires?
    Answer. Of all the major row crops, cotton is one of the most 
intensively managed and requires some of the most specialized 
equipment. For example, cotton typically requires several applications 
during the growing season of pest control products to control insects, 
weeds, and diseases. Many other crops only require one or two such 
applications. In addition, cotton is harvested by either a cotton 
picker or cotton stripper harvester. These machines cost between 
$450,000 and $700,000 today and can only be used to harvest cotton. 
Most other crops are harvested with a combine, which costs on the low 
end of what a cotton harvester costs, and can be used to harvest 
multiple crops.
    Also, while most grain crops are marketable immediately upon 
harvest by a combine, cotton must be ginned to separate the fiber from 
the seed. This results in two marketable products--cotton fiber and 
cottonseed. This is another unique aspect of cotton production since it 
yields two separate, distinct, and marketable products from the same 
acre of production, which is unlike almost any other crop. The 
infrastructure for cotton production is extensive from the farm gate 
forward. The cotton gin is the first step in the post-harvest process. 
Next the bales of cotton fiber are shipped to warehouses for storage. 
From the warehouse, the bales are marketed by either cooperatives or 
merchants that sell the fiber to domestic textile mills or into the 
export market. Cottonseed is also stored in seed warehouses, typically 
located at the cotton gins, and then shipped to either cottonseed 
processors for crushing to produce cottonseed oil and meal or shipped 
to dairies as a feed source. The cottonseed is marketed by cottonseed 
merchandisers.
Response from Cannon Michael, Producer Board Member, National Cotton 
        Council
    Question. We have heard a lot about how prices for cotton are low, 
and how the market situation is very unfavorable, with cotton farmers 
looking at net losses for planting cotton. How does the situation for 
cotton influence cotton planting decisions when you decide what to 
plant next spring and in future years? With the low market prices 
experienced for cotton lint, how do you decide whether to plant other 
crops, and what is the outlook for improved returns from those crops?
    Answer. In the Central Valley of California where I farm, there are 
a number of factors that determine what crops we plant and whether we 
put ground into trees to produce fruit and nut crops or maintain the 
acreage in annual crop production, including cotton. Much of our 
situation continues to be dictated by the ongoing drought, burdensome 
and outdated water regulations, misguided environmental regulations 
that pick winners and losers, and our irrigation capabilities.
    Cotton was once a significant crop in the Valley, but we have seen 
significant acreage declines due to higher returns from specialty crops 
and the need to fallow acres due to water availability. We need to and 
want to grow cotton though, and we can produce some of the highest 
quality, highest yielding cotton in the world when given a chance to 
plant and produce a crop. However, we need commonsense water and 
environmental regulations that don't waste our water resources and we 
need to policy for cotton that allows it to remain competitive with 
cotton in other countries. On a level playing field, we can compete, 
however we can't compete with other governments that heavily support 
their cotton industries such as China and India. We need our government 
to make sure producers are equipped with policies that help level the 
playing field with other major cotton producing countries. Until these 
policy changes are made, we will continue to see acres in California 
fallowed due to water limitations and acres planted to other, higher 
return crops. If USDA would exercise their clear authority to designate 
cottonseed as an ``other oilseed'' within the Farm Bill, then that 
would help to tip the scales toward the U.S. in terms of competing with 
foreign governments supporting their cotton producers.
Response from Mike Wright, Executive Vice President, City Bank Texas
    Question 1. Mr. Wright, how does the troublesome financial 
situation in agriculture translate to farmers' ability to obtain 
financing? Could the current situation impact how willing banks are to 
make loans to farmers, regardless of what crop they are growing? What 
about any potential impacts of your use of FSA loans, and the loan risk 
FSA will be asked to take on? How widespread do you think any of the 
issues with obtaining financing will be?
    Answer. As we move into working loans for 2016, at this point, cash 
flow will be the major issue that hinders a producer in obtaining a 
loan. In our area, crop production has been better than average, but 
due to cotton grades being down, the prices paid to the producer have 
fallen. The result is that a big percentage of the producers will still 
pay in full their operating loan for 2015 but they may not have enough 
to service their term debt. If they do not pay their operating loan in 
full, then we will look at setting up a carryover note but then the 
cash flow problem becomes worse. When we set up another payment, then 
the margins shrink even more. They still may have some equity in their 
statement, but can't cash flow another payment.
    In our case, it really doesn't matter what crop it is. This is 
mainly cotton country. We can grow some different crops but the problem 
remains the same or could be worse depending on the crop and what it 
takes to harvest that crop if the producer does not have that 
particular crop harvesting equipment.
    We will continue to use the FSA Guaranteed loans as a means to help 
the producer stay in business, work his or her way out of a problem and 
give the bank some ability to continue with the producer and at the 
same time protect the bank and satisfy the regulators. As an FSA 
Guaranteed Preferred Lender, we mitigate the risk to FSA. If our bank 
exceeds a certain loss percentage, our preferred lender status could be 
in jeopardy and we want to avoid that. So if we have a loan that we 
know just won't make, we will not submit it for FSA approval. We will 
deal with the credit and work it out.
    The issues with financing will be nationwide.

    Question 2. Mr. Wright, you mentioned in your written statement 
that you are anticipating potential cash flow problems from some of 
your ``very good'' customers with a long history with your bank. 
Without divulging details of your bank's operations, can you give us a 
sense of the financial pressure? Help us understand how big of a 
problem cotton producers and their lenders face.
    Answer. We have discussed this with our management and chairman and 
if prices don't substantially improve in the next several years, we 
feel that 50% of our customers could be in dire problems or out of 
business. I have talked with one of our local auctioneers and he said 
that his phone has exploded over the last several weeks with people 
wanting dates for farm sales. I asked him if it was banks calling or 
people that have been told that they aren't going to be financed and he 
said that wasn't the case right now. It was producers that have just 
decided they didn't want to fight it anymore.

    Question 3. Mr. Wright, how does the risk to cotton farmers' 
financial situation impact your bank, and how you structure your loan 
portfolio? What do you expect the impact on other banks, particularly 
small community banks, due to these downturns to be?
    Answer. Total assets for our bank are over $2 billion. The loan to 
deposit ratio at the end of the year was at about 82%. We are a very 
diversified bank as far as loans are concerned with our consumer loans, 
mortgage loans, commercial real estate loans, commercial business loans 
and our agriculture loans. The ag loan portfolio is just over 11% and 
that represents approximately $215 million. It is a very important part 
of our bank and has been since the beginning of the bank. But smaller 
rural towns are not as fortunate as a larger city. Their loan to 
deposit ratios can run 80% to 90% to 100% in some cases the majority 
being agriculture loans. If the smaller banks lose loans due to the 
downturn, they don't have the diversity to replace them. It affects the 
town, the school system and everything in that community.

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