[Senate Hearing 114-]
[From the U.S. Government Publishing Office]
A ROUNDTABLE DISCUSSION ON THE STATE OF THE FARM ECONOMY
----------
TUESDAY, MARCH 1, 2016
U.S. Senate,
Subcommittee on Agriculture, Rural Development,
Food and Drug Administration and Related Agencies,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 2:36 p.m., in room SD-116, Dirksen
Senate Office Building, Hon. Jerry Moran (chairman) presiding.
Present: Senators Moran, Blunt, Hoeven, Merkley, and
Tester.
OPENING STATEMENT OF SENATOR JERRY MORAN
Senator Moran. Gentlemen, thank you for joining us. In
consultation with the ranking member, we concluded that at the
beginning of this appropriations process, it would be useful
for us to have an update on the economic conditions that
agriculture (ag) producers, agribusinesses, and rural America,
are facing.
We will begin our normal appropriations process with the
Food and Drug Administration (FDA) Commissioner, the newly
confirmed FDA Commissioner, tomorrow, and then we will have
Secretary Vilsack in front of the committee a week later, as we
begin our efforts to determine appropriate funding within the
U.S. Department of Agriculture (USDA) and FDA.
But as a broader backdrop, we would like to hear what you
believe is going on in the ag economy. Then we invited some of
the representatives from a variety of farm and commodity groups
to join us for any kind of follow-up discussion that we might
have with you and among ourselves.
My intention is this is not a hearing. We have described it
as a roundtable. The goal is to just have dialogue. I noticed
they gave me a gavel. Maybe that is just psychological, but we
will use it to try to keep us working in an orderly fashion.
Again, we appreciate you taking time to bring us up-to-date
on your latest findings and conclusions in regard to
agriculture. We have three outstanding--if there is an
outstanding economist, we have three of them with us. I am
delighted you could spend the time.
Senator Merkley, anything you would like to say?
Senator Merkley. I very much appreciate you bringing your
expertise. Agriculture is the second-largest driver of our
economy in the State of Oregon. It is a continuously shifting
landscape. I know, doctor, you gave the state of agriculture in
America report last week, and I very much look forward to your
insights. Thank you.
Senator Moran. Senator Merkley, thank you.
Senator Blunt, anything?
Senator Blunt. I think I am fine.
Senator Moran. All right. Very good.
We have with us Dr. Robert Johansson, Chief Economist at
USDA; Dr. Nathan Kauffman, Kansas City Federal Reserve's lead
expert in agricultural economics, headquartered, in this case,
in Omaha; and Patrick Westhoff, the director of the Food and
Agriculture Policy Research Institute at the University of
Missouri.
Senator Blunt has insisted that we both be on our best
behavior when it comes to Kansas and Missouri.
Thank you for joining us.
Dr. Johansson, please tell us what you think we should
know.
STATEMENT OF DR. ROBERT JOHANSSON, PH.D., CHIEF
ECONOMIST, DEPARTMENT OF AGRICULTURE
Dr. Johansson. Thank you very much for inviting us up to
talk about the agricultural outlook for 2016 and beyond. I am
sure our discussion today will take us to many different
sectors and perhaps past 2016.
As you mentioned, a lot of the comments I will make today
are based on the agricultural outlook that the Department put
together last week at the Agricultural Outlook Forum. I
summarized a couple of those in the handout that I put together
for you, so you do not have a statement from me, but you have
some slides, and I will just talk from those slides, sort of
walk through them as we go along.
So last year, the outlook for the ag economy was driven
mostly by microeconomic factors. If you recall, transportation
issues were on everybody's minds, energy prices declined, a
drought in the West. This year, while energy prices and drought
are still important components of the outlook, the overall
picture for agriculture in the United States is being driven
more by macroeconomic factors such as economic growth and
currency values.
So turning to slide 2 in the handouts.
[The information follows:]
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Dr. Johansson. We can see that 2015 marked a change in the
global business cycle. World GDP growth, the blue dashed line,
is now expected to rise more slowly and to plateau at just over
3 percent.
A key component of that slowdown is the slowing economic
growth in China. We see China's GDP growth slowing to 6.1
percent in 2016, and edging down over the next 10 years to
about 5 percent. That means China's economy is now forecast to
be about 8 percent smaller in 2020 and about 15 percent smaller
in 2025, compared to last year's forecast.
Now, by comparison, the United States is expected to be a
growth leader amongst developed economies in the next decade.
Slide 3 illustrates the expected 3 percent growth for the
U.S. economy in 2016 and 2017--that is the red line--before
gradually moving to a longer term growth rate of 2.3 percent.
[The information follows:]
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Dr. Johansson. Driven by relative strength and safety of
the U.S. economy, the value of the dollar has increased
substantially in 2015. That is the blue line. That growth is
expected to continue through 2017.
A stronger dollar, as we all know here, means it is more
difficult to sell our products abroad to countries with weaker
currencies, such as Egypt and Nigeria, major wheat importers.
And it is easier for countries such as Canada and those in the
European Union (EU) to sell their agricultural products abroad,
making for an extremely competitive trade environment for U.S.
producers.
That being said, a strong U.S. economy does help U.S.
producers in several ways. I have summarized three of them
here. There are likely more that some of my colleagues may want
to talk about.
But first, it is easier for U.S. buyers to import goods
such as fertilizer from countries with weaker currency, such as
Canada, Russia, and the Ukraine. Second, a stronger U.S.
economy provides off-farm income opportunities for a large
majority of U.S. farm households. And third, 80 percent of ag
products produced in the United States are sold domestically,
so a strong U.S. economy likely means more opportunities to
sell those products and provide value-added here in the United
States.
Turning to the outlook for trade on slide 4, U.S. ag
exports are forecast in fiscal year 2016 at $125 billion.
[The information follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Dr. Johansson. That is down 10.5 percent from last year,
and a third of that decline comes from reduced sales to China.
Slide 5 summarizes some specific categories of exports
compared to last year.
[The information follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Dr. Johansson. So for example, we expect grain and feed
exports to be down $4.4 billion this year. Soybean exports are
projected down by $6.3 billion. I will note, however, that we
expect 46 million metric tons of exports of soybeans and
soybean products in fiscal year 2016. That would mark the
second highest volume of soybeans exported.
Cotton exports are forecast $900 million below last year on
shrinking global demand. Rice exports are forecast down $300
million, mostly on declines in volume. Livestock products are
down $2 billion from last year, due to lower prices. And dairy
has dropped $700 million due to lower prices and strong
competition from the EU.
So that is a lot of reductions. I just wanted to point out
that sales of horticultural products driven by fruit and
vegetable processing and tree nut exports are up $600 million
in 2016 relative to 2015.
So what explains those projections? Turning to slide 6, for
example, we know that over the past 10 years, ag exports to
China have increased by more than 125 percent.
[The information follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Dr. Johansson. However, we project China's imports of corn,
sorghum, and barley to slow in the near future as they seek to
lower their relatively high stocks of corn that have been
fueled by their domestic policies.
Nevertheless, we expect global trade with China to grow
about 30 percent over the next 10 years for combined grains,
oilseeds, and cotton.
Similarly, for Brazil, we expect their producers to respond
to high prices for corn and soybeans, given their devalued
currency. And therefore, we expect them to increase planted
acreage and increase production. Over the longer term, that is
likely to translate into a 30 percent increase in Brazilian
soybean and corn exports, and continued competition for U.S.
exporters.
Slide 7 shows the recent history of the U.S. crop prices.
[The information follows:]
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Dr. Johansson. Over the past 3 years, the global stock
levels have increased on expanded global supplies. As
mentioned, the dollar has strengthened.
In addition, more recently, Argentina has taken recent
actions to be more competitive in world commodity markets. Oil
prices and fertilizer prices have continued to weaken, and
China's demand for sorghum has slowed.
So as a result, we put that into our forecast for the 2016-
2017 crop year, and we show that wheat prices are estimated to
fall to $4.20 a bushel. Corn prices are projected to fall to
$3.45 a bushel. Soybeans are expected to fall to $8.50 a
bushel. The all-rice price is projected flat at $12.90 per
hundredweight. Cotton prices are projected down to $0.58 per
pound.
Slide 8 shows how continued pressure on margins due to
those falling prices is expected to lower the total area
allocated to major crops in 2016-2017 by about 2.5 million
acres from last year.
[The information follows:]
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Dr. Johansson. The eight-crop area is down nearly 8.5
million acres from the recent peak in 2014, despite falling
Conservation Reserve Program (CRP) acreage. Along with weather,
changes in harvest-time prices and import costs between now and
spring planting will obviously determine final acreage.
Turning to livestock, dairy, and poultry sectors, we
project that total meat and poultry production will be at a
record high of 97 billion pounds in 2016, as production of
beef, pork, and broilers and turkeys all increase. Milk
production is also expected to be at a record 212 billion
pounds in 2016.
Slide 9 shows how meat exports are expected to increase in
2016, and that is in volume terms, following declines in beef
and broiler exports and slow growth in pork exports last year.
[The information follows:]
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Dr. Johansson. Exports are expected to be up as larger
supplies and lower prices increase the attractiveness of U.S.
products to foreign consumers.
Still, a relatively strong dollar, Russia's continued ban
on imports U.S. meat, and slow economic growth in a number of
countries, may end up constraining those export growth
forecasts for meats.
We see a similar story for dairy. Up until last year,
exports were growing steadily. However, the confluence of a
strong dollar, large competitor supplies, and lower imports in
key markets, resulted in lower exports in 2015, and many of
those conditions persist into 2016.
Turning to prices on slide 10, we expect fed steer prices
to decline to 137 per hundredweight.
[The information follows:]
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Dr. Johansson. Hog prices are expected to fall to $47 per
hundredweight. Broiler prices are expected to average about
$0.88 per pound. Although domestic demand for milk and milk
products provide support for product prices, we do expect milk
prices to fall to $15.65 per hundredweight for all milk in
2016. That is down 8 percent.
We can show how this affects farm budgets and farm incomes
in a number of ways. I just put one slide on here.
[The information follows:]
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Dr. Johansson. I apologize. I did want to update this for a
Kansas example, but I do have two examples here from the
University of Illinois, updated to show more recent prices for
2016. Of course, these costs are likely to come down in 2016,
so this just serves to show as an example of what a farmer may
be looking at right now thinking about planting.
Revenue to cover such things as rent and salary after
accounting for other costs is lower than the average cash rent
value. As a result, producers will likely increase loan demand,
seek to scale back on the cost side, such as limiting chemical
inputs, seed purchases, crop insurance, machinery costs, and
negotiating down cash rents, if they are able. Of course, we
would also know that government payments are expected to help
contribute to farm revenues this coming year. For example,
county-level Agricultural Risk Coverage payments of $30 an acre
are assumed in this example. That could be higher or lower,
depending on how benchmark revenues are for that county.
Just turning to slide 12, for example, that illustrates the
point.
[The information follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Dr. Johansson. Those are county payments to corn-based
acres for the 2014 crop. This is relative to direct payments
under the 2008 Farm Bill.
We can see that where county yields and revenues were
relatively high in 2014 compared to a 5-year olympic average,
producers received lower payments--those are the red counties--
versus counties where yields and revenues were lower than the
average. Those would be the green counties. So higher payments
in the green counties, and lower payments in the red counties,
compared to 2008 direct payments.
Overall, government payments are expected up in calendar
year 2016 by about $3.4 billion relative to calendar year 2015.
Most of that is due to the new payments for agriculture risk
coverage (ARC) and price loss coverage (PLC).
Turning to the next slide, representative farm data
generated by Texas A&M this past December also show pressure on
farm finances over the next few years.
[The information follows:]
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Dr. Johansson. Considering cash and real net worth
prospects, they find that 45 percent of their representation
crop farms and 60 percent of their representative cotton farms
are in poor financial positions. The data suggests that only 20
percent of cotton farms are in good financial condition. The
share of representative farms for all crops that are in good
condition are at about 40 percent.
The new farm bill also provided producers with more options
for Federal crop insurance, including new policies like peanut
revenue insurance and the Stacked Income Protection Plan, or
STAX, for upland cotton.
Slide 14 shows some statistics.
[The information follows:]
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Dr. Johansson [continuing]. On how STAX uptake has been
higher in some States than others, reaching over 50 percent of
planted acres in Alabama, but generally well below the purchase
of traditional crop insurance for revenue protection policies.
Lastly, slide 15.
[The information follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Dr. Johansson. This suggests that consumer food price
inflation has slowed. Prices for cereals, fruit, and vegetables
are currently rising at relatively low levels. Meat retail
prices have fallen recently, representing a sharp turnaround
after a period when price changes were more than 10 percent
year over year.
So to conclude, continued record global crops for grains
and oilseeds has contributed to stock building and price
declines over the past year. High stock levels and the strong
U.S. dollar contribute to lower export demand. Commodity prices
are expected to soften. And food prices for most categories are
expected to show little inflation in 2016.
Lower commodity prices will lead to reduced planted acres
and imply lower overall farm incomes. However, debt-to-asset
ratios remain historically low and the majority of farm
households are expected to see increases in household income in
2016, mostly due to off-farm opportunities.
The new farm programs will benefit many producers. Falling
energy prices will lower input costs, and new crop insurance
products will cover more products at higher coverage than in
previous years, so it is not all bad news.
So thank you. I am willing to take questions now or after
the other speakers.
Senator Moran. Let's hear from Dr. Kauffman.
Dr. Kauffman, welcome. We are glad to hear what is going on
in our region. I hope it is better than what Dr. Johansson says
is true for the country.
STATEMENT OF DR. NATHAN KAUFFMAN, PH.D., ASSISTANT VICE
PRESIDENT AND OMAHA BRANCH EXECUTIVE,
FEDERAL RESERVE BANK OF KANSAS CITY
Dr. Kauffman. Thank you, Mr. Chairman. Thank you for the
invitation to participate. It is a good opportunity for us, and
this is obviously an important conversation for the Federal
Reserve Bank of Kansas City, as agriculture is a very
significant part of our district. We do have a high rural
concentration in our area.
My name is Nathan Kauffman. I am assistant vice president
and economist at the Kansas City Fed. The Kansas City Fed has
long devoted significant attention to U.S. ag. In our district,
we cover all of Kansas, Nebraska, Oklahoma, Colorado, Wyoming,
part of New Mexico, and part of Missouri. As I noted, we do
have a high concentration of agriculture.
I lead our efforts at the bank to track agricultural and
rural economies, both at a regional and national level.
Primarily, I will be focusing my comments this afternoon and on
issues pertaining to agricultural credits. I will provide a
little bit of context as it relates to farm income and what we
see in that area, but ultimately with the goal of describing a
little bit more what we are seeing as it relates to credit.
Let me emphasize before I begin that these are my
statements. My statements are my views only, which are not
necessarily those of the Federal Reserve system, or any of its
representatives.
I will spend just a few minutes talking about what we see
on farm income before moving into credit conditions.
As Rob noted, following multiple consecutive years of
strong incomes in the farm sector, farm income has steadily
weakened the past few years and is expected to remain low in
the coming months. Again, as Rob noted from the USDA, net farm
income in 2015 was forecasted to be more than 50 percent less
than 2013, and the forecast for 2016 is for an additional
modest decline.
Regional Federal Reserve surveys of agricultural banks,
both in the Kansas City Fed district and nationally, paint a
similar picture. Most bankers expect farm income to remain low
through 2016 and have expressed increasing concern about the
potential implications of that development.
The drop in farm income since 2013 has been primarily due,
both in our district and nationally, to significant declines in
the prices of major U.S. row crops. Corn prices, for example,
dropped by more than 50 percent from the peak in 2012 to the
latter part of 2014.
Since 2014, prices have fluctuated some, but have largely
remained flat over the past 18 months. Soybean prices also
dropped significantly from 2012 to 2014 and have continued to
fall over the past year. The prices for other major crops such
as wheat, sorghum, and rice, have experienced similar declines
in varying degrees.
Input costs for crop production have declined somewhat over
the past 12 to 18 months due to lower fuel costs and modest
reductions in fertilizer prices. However, costs have generally
remained high, and many producers have continued to report
negative profit margins with crop prices below their breakeven
cost of production.
In the latter part of 2015, sharp losses in some segments
of the livestock sector--and again, particularly in our
district--have exacerbated the sense of pessimism in the
agricultural economy. From peak levels around the beginning of
2015, cattle prices have dropped by about 25 percent by the end
of the year. Hog prices have declined by a similar amount. And
milk prices have also continued to drift lower. Although cow-
calf operations have generally remained profitable, some cattle
feed lot operators reported losses of up to $500 per head just
several months ago, and profitability in other segments of the
livestock sector have generally also worsened over the past
year.
So with that glance into farm income, let me turn now to
agricultural credit conditions.
The persistent declines in farm income and poor profit
margins have reduced cash flow and increased short-term lending
needs in the farm sector. The Federal Reserve's agricultural
finance data book shows that the volume of new short-term farm
loan originations at commercial banks increased more than 50
percent from 2012 through 2015. These loans are primarily
operating loans used to finance ongoing expenses required for
production.
This development is particularly concerning, I would note,
because it has occurred during a time when farm income has been
roughly cut in half, raising concerns about the debt service
capacity of farm borrowers for the coming year.
Similarly, agricultural credit conditions have also
steadily weakened over the course of the downturn in the
agricultural economy. Data from Kansas City Fed surveys of
agricultural banks in our seven-State region that we cover show
that loan repayment rates have declined in each of the past
nine quarters, with the sharpest change reported in the most
recent survey in the fourth quarter of 2015.
Moreover, bankers expect repayment rates to weaken further
in the coming months amid further increases in loan demand and
increasing demand for loan renewals and extensions.
Bankers have also indicated that credit availability has
tightened somewhat in recent months, alongside farm borrowers'
heightened demand for credit to finance their operations.
Despite the softening credit conditions, delinquency rates
for both real estate and non-real estate farm loans have
remained historically low. In the fourth quarter of 2015, the
delinquency rate on farm real estate loans was only 1.5
percent, compared with 3.6 percent just 5 years ago, and was
significantly less, I would note, than the delinquency rate on
residential real estate loans, for example, in the fourth
quarter.
Similarly, delinquency rates on agricultural production
loans have declined over the past 5 years from 2.7 percent to
less than 1 percent.
Although delinquency rates have remained low, it is
important to note that many lenders have indicated that it has
largely been the strong incomes of previous years combined with
low interest rates that has kept loan performance strong during
this intensifying downturn in the farm sector.
However, significant working capital deterioration in 2015
has placed many borrowers in a more precarious financial
position this year. If the current environment of low farm
incomes persists through 2016, lenders generally expect to see
loan performance deteriorate through the year.
Although farm income has dropped considerably, farm land
values have declined at a more modest rate pace. In the Kansas
City Fed district, for example, the average value of high-
quality cropland has declined in each of the past four
quarters, but by less than 5 percent in each quarter relative
to the previous year. Farmland values are an important part of
the health of balance sheets in the farm sector, and the fact
that farm land values have remained relatively strong has
helped support the overall financial position of many farm
borrowers.
Nevertheless, our survey data also show that farmland
values are expected to continue to soften over the next year,
alongside lower incomes in the sector.
To briefly summarize the recent downturn, and the ag
economy has continued to intensify over the past year, barring
significant increases in agricultural commodity prices in the
coming months, which seem unlikely based on current market
fundamentals, the sharp drop in farm income last year appears
likely to persist through 2016.
Although outright defaults in the farm sector have been
limited to date, it is possible that financial stress among
farm borrowers could increase through the year. This could
further weaken agricultural credit conditions, and also place
additional pressure on farmland values. As a result, some
producers, and I would note here particularly those producers
who are most highly leveraged, could face difficulty financing
their operations in the coming year.
Again, thank you for participating today. I look forward to
questions.
[The statement follows:]
Prepared Statement of Dr. Nathan S. Kauffman
Thank you, Mr. Chairman and members of the subcommittee, for the
invitation to participate in today's roundtable discussion on economic
conditions in the U.S. farm sector. My name is Nathan Kauffman, and I
am assistant vice president and economist at the Federal Reserve Bank
of Kansas City, a regional Reserve Bank that has long devoted
significant attention to U.S. agriculture. The economy of our Reserve
Bank's district, which includes all or parts of Missouri, Nebraska,
Kansas, Oklahoma, Colorado, Wyoming and New Mexico, has a high
concentration of agriculture, and I lead several efforts at our Bank to
track the agricultural and rural economy at both a regional and
national level. These efforts include a regional agricultural credit
survey of commercial banks in our district, the Federal Reserve
System's Agricultural Finance Databook, which is a national survey of
agricultural lending activity at commercial banks, as well as other
research and ongoing outreach efforts. I will be sharing with you
today, information on recent developments in the agricultural economy,
with an emphasis on agricultural credit and lending conditions. Before
I begin, let me emphasize that my statement represents my views only,
which are not necessarily those of the Federal Reserve System or any of
its representatives.
farm income conditions
Following multiple consecutive years of strong incomes in the farm
sector, farm income has steadily weakened the past few years and is
expected to remain low in the coming months. According to the U.S.
Department of Agriculture, net farm income in 2015 was forecasted to be
more than 50 percent less than in 2013, and the forecast for 2016 is
for an additional modest decline (Chart 1). Regional Federal Reserve
surveys of agricultural banks, both in the Kansas City Fed District and
nationally, paint a similar picture. Most bankers expect farm income to
remain low through 2016 and have expressed increasing concern about the
potential implications of this development.
The drop in farm income since 2013 has been primarily due to
significant declines in the prices of major U.S. row crops. Corn
prices, for example, dropped by more than 50 percent from the peak in
2012 to the latter part of 2014. Since 2014, prices have fluctuated
some, but have largely remained flat over the past 18 months. Soybean
prices also dropped significantly from 2012 to 2014 and have continued
to fall over the past year. The prices for other major crops, such as
wheat, sorghum and rice, have experienced similar declines in varying
degrees. Input costs for crop production have declined somewhat over
the past 12 to 18 months due to lower fuel costs and modest reductions
in fertilizer prices. However, costs have generally remained high, and
many producers have continued to report negative profit margins, with
crop prices below their breakeven cost of production.
In the latter part of 2015, sharp losses in some segments of the
livestock sector have exacerbated the sense of pessimism in the U.S.
agricultural economy. From peak levels around the beginning of 2015,
cattle prices had dropped by about 25 percent by the end of the year.
Hog prices have declined by a similar amount, and milk prices have also
continued to drift lower. Although cow-calf operations have generally
remained profitable, some cattle feedlot operators reported losses of
up to $500 per head several months ago, and profitability in other
segments of the livestock sector generally have also worsened over the
past year.
agricultural credit conditions
The persistent declines in farm income and poor profit margins have
reduced cash flow and increased short-term lending needs in the farm
sector. The Federal Reserve's Agricultural Finance Databook shows that
the volume of new, short-term farm loan originations at commercial
banks increased more than 50 percent from 2012 through 2015 (Chart 2).
These loans are primarily operating loans, used to finance ongoing
expenses required for production. This development is particularly
concerning because it has occurred during a time when farm income has
been roughly cut in half, raising significant concerns about the debt
service capacity of farm borrowers for the coming year.
Similarly, agricultural credit conditions have also steadily
weakened over the course of the downturn in the agricultural economy.
Data from Kansas City Fed surveys of agricultural banks in our seven-
state region show that loan repayment rates have declined in each of
the past nine quarters, with the sharpest change reported in the most
recent survey in the fourth quarter of 2015 (Chart 3). Moreover,
bankers expect repayment rates to weaken further in the coming months
amid further increases in loan demand and increasing demand for loan
renewals and extensions. Bankers have also indicated that credit
availability has tightened somewhat in recent months alongside farm
borrowers' heightened demand for credit to finance their operations.
Despite the softening credit conditions, delinquency rates for both
real estate and non-real estate farm loans have remained historically
low. In the fourth quarter of 2015, the delinquency rate on farm real
estate loans was only 1.5 percent, compared with 3.6 percent 5 years
ago, and was significantly less than the delinquency rate on
residential real estate loans in the fourth quarter (Chart 4).
Similarly, delinquency rates on agricultural production loans have
declined over the past 5 years from 2.7 percent to less than 1 percent.
Although delinquency rates have remained low, it is important to note
that many lenders have indicated that the strong incomes of previous
years, combined with low interest rates, have kept loan performance
strong during the recent downturn (Chart 5). However, significant
working capital deterioration in 2015 has placed many borrowers in a
more precarious financial position this year. If the current
environment of low farm incomes persists through 2016, lenders
generally expect to see loan performance deteriorate through the year.
Although farm income has dropped considerably, farmland values have
declined at a more modest pace. In the Kansas City Fed District, for
example, the average value of high quality cropland has declined in
each of the past four quarters, but by less than 5 percent in each
quarter relative to the previous year (Chart 6). Farmland values are an
important part of the health of balance sheets in the farm sector. The
fact that farmland values have remained relatively strong has helped
support the overall financial position of many farm borrowers.
Nevertheless, our survey data also show that farmland values are
expected to continue to soften over the next year alongside lower
incomes in the sector.
conclusion
To summarize, the recent downturn in the agricultural economy has
continued to intensify over the past year. Barring significant
increases in agricultural commodity prices in the coming months, which
seem unlikely based on current market fundamentals, the sharp drop in
farm income last year appears likely to persist through 2016. Although
outright defaults in the farm sector have been limited to date, it is
possible that financial stress among farm borrowers could increase
through the year. This could further weaken agricultural credit
conditions and also place additional pressure on farmland values. As a
result, some producers, particularly those who are highly leveraged,
could face difficulty financing their operations in the coming year.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Senator Moran. Dr. Westhoff, let's see if you can make us
feel a little bit more optimistic.
STATEMENT OF DR. PATRICK WESTHOFF, PH.D., DIRECTOR,
FOOD AND AGRICULTURAL POLICY RESEARCH
INSTITUTE
Dr. Westhoff. I would like to tell you that I have a very
different story, but I am afraid you are going to find it is
more of the same song.
I thank you very much for the opportunity to discuss the
outlook for the U.S. farm economy. For more than 30 years, our
institute has developed 10-year projections for agricultural
commodity markets and analyzed the impacts of various policy
options.
Today, I will briefly summarize some key findings from our
new baseline, which we expect to release next week, probably
next Thursday. Note that the estimates were not final at the
time I prepared these remarks, but they should be pretty close,
and I think the stories will hold.
Farm commodity prices, as has already been discussed, have
declined sharply after reaching record highs in recent years.
For example, the marketing year average price for corn fell
from $6.89 per bushel back in 2012 to an estimated $3.60 per
bushel this year. Wheat, soybean, and cotton prices have also
declined very sharply, as shown in table 1 of my statement.
The high prices of the 2010 to 2012 period and more
favorable weather conditions resulted in a large increase in
U.S. and global crop production, while a variety of factors,
including the strong dollar, have served to limit demand
growth, so carryover stocks have increased.
Crop cash receipts fell by an estimated 17 percent between
2012 and 2015.
On the livestock side, prices for cattle, chickens, and
milk all reached record highs in 2014 because of strong export
demand, disease outbreaks, delayed effects on production of
droughts, and high feed costs. So that happened in previous
years.
Total meat and milk production rebounded in 2015 at the
same time a strong dollar helped constrain export sales.
Prices fell sharply for hogs, chickens, and milk in 2015
relative to the previous year.
Fed steer prices peaked in the final quarter of 2014, and
then declined very sharply during 2015, as you have heard.
Livestock cash receipts are down 12 percent in 2015.
Now looking forward, for the crop outlook, our baseline
projections assume a continuation of current policies and a
macroeconomic outlook developed by IHS Global Insight, a
private forecasting firm.
We recognize that the world is a very uncertain place, so
we use our models to derive distributions of various
agricultural sector variables.
Figure 1 in my handout shows the average of the projected
corn prices as a way of giving you an idea of what that
variability might look like in front of us. In 10 percent of
the model's 500 outcomes for the future, the average corn price
in most years is above the top line there, about $5 per bushel
most years. And in 10 percent, it falls below the bottom line,
about $3 per bushel.
I should point out that these estimates only consider a
subset of the factors that cause commodity prices to be
uncertain. The actual uncertainty around our long-term
projections may be even longer than what those numbers might
suggest.
The story would look very similar for other crops. For the
next few years, we expect wheat, soybean, and cotton prices all
to average near their 2015, 2016 levels. We are a little bit
more optimistic than U.S. standard price projections, but not
very much. It is the same basic story.
Population and income growth around the world contribute to
rising food, feed, and fiber consumption, but global crop
supplies are projected to be adequate to meet that demand, even
at prices well below the 2010 to 2012 peaks. The United States
continues to face strong competition, as you have heard
already, from Brazil, Argentina, Russia, Ukraine, and many
other exporters. And demand growth in China may be slowing.
On the livestock side, beef, pork, chicken, and milk
production are all expected to increase in 2016, even as the
strong dollar constrains growth in export sales. The result is
a further projected decline in prices for cattle, hogs,
chicken, and milk. Cattle prices could decline further in 2017
and maybe even 2018 as additional cows in the breeding herd
today eventually translate into more beef production. In the
long run, livestock prices will tend to move with beef prices.
The projected prices and production levels suggest that
both crop and livestock receipts could decline again in 2016,
as shown in figure 2. In later years, however, increasing
production contributes to a moderate rate of increase in
projected cash receipts.
However, note that even in 2025, both crop and livestock
receipts remain below their peak values of recent years. That
is even in nominal terms, adjusted for inflation being even
lower than that.
Just briefly on the farm program side, I will not read all
of my prepared remarks here, but to say that the 2014 farm
bill, as you know, significantly reoriented U.S. farm policy.
Price Loss Coverage payments occur when marketing year average
farm prices fall below fixed reference prices. County
agricultural risk coverage (ARC-CO) payments occur when a proxy
for per county revenues for a particular crop fall below a
trigger tied to past prices and yields.
Most corn, soybean, and wheat-based acreage enrolled in
ARC-CO while most sorghum, barley, rice, and peanut base is
enrolled in PLC.
Averaging across our 500 possible outcomes for the future,
we project that ARC payments will peak in the current market
year for 2015 crop, as shown in figure 3. Projected ARC
payments then decline, not so much because of any major
increase in projected prices or yields, but because the moving
average of past prices that is used to determine guarantees
will be declining over time. So that means there will be less
support provided by these programs as time goes on, especially
since most corn, soybean, and wheat farmers are enrolled in
ARC.
Note that actual payments in any given year can be greatly
different than levels shown, suggesting that the cost to
taxpayers of these programs is quite uncertain. Just to give an
example, in 2018, in about one-third of our 500 outcomes for
that year, ARC payments are less than $1 billion. But on the
other hand, in 10 percent of the outcomes, it is more than $4
billion. There is a lot of uncertainty about the future costs
of these programs, depending on marketing conditions.
In terms of crop insurance, the 2014 farm bill creates a
number of new crop insurance options for producers. Cotton
producers, for example, can choose to purchase STAX, as was
talked about already, an area-based policy that supplements
individual coverage. There is no ARC or PLC program for upland
cotton.
Across 500 outcomes, average crop insurance net indemnities
are a little over $5 billion per year. Projected ARC and PLC
payments exceed crop insurance in 2015 and 2016, but the
reverse is true in later years.
In terms of net farm income, I would like to tell you about
an optimistic picture, but I do not have one for you today, I
am afraid.
The declining crop and livestock receipts have resulted in
a dramatic reduction in net farm income relative to the record
level of 2013. Lower fuel, fertilizer, and feed prices help
reduce production costs by about $10 billion in 2015 and
another reduction is expected in 2016. But the projected cost
reductions are not nearly enough to offset revenue losses.
Given all the assumptions of our analysis, net farm income
remains below recent peak levels throughout the next 10 years.
Projected real, inflation-adjusted net farm income is about the
same in 2025 as it was in 2015.
As with other projections, there is a lot of uncertainty
around these numbers. Even modest proportional changes in costs
or revenues can result in very large proportional changes in
net income.
So in summary, and final comments here, if these
projections prove correct, consistent with previous speakers,
it suggests an extended period of financial stress in U.S.
agriculture. Not only are farm incomes expected to remain well
below recent peaks, but businesses that sell machinery and
inputs to farmers are also likely to be negatively affected.
Farm asset values are likely to be under pressure, especially
if interest rates were to increase.
However, it is also important to maintain perspective.
While rising debt is a serious concern, debt-asset ratios
remain low by historical standards. Even if interest rates
increase from current levels, they are likely to remain well
below the levels that prevailed during the farm crisis years of
the 1980s. While commodity prices are all below recent peaks,
they remain high by pre-2007 levels.
You can look for our new baseline soon, probably by next
Thursday at our Web site. Our baseline briefing book will
provide detailed estimates for farm commodity markets, farm
program costs, farm income, and consumer food costs.
Thank you for this opportunity. I am happy to answer any
questions.
[The statement follows:]
Prepared Statement of Dr. Patrick Westhoff
Thank you for the opportunity to discuss the outlook for the U.S.
farm economy. For more than 30 years, our institute has developed ten-
year baseline projections for agricultural commodity markets and
analyzed the impacts of policy options. Today I will briefly summarize
some key finding from our new baseline, which we expect to release next
week. Note that the estimates were not final at the time these remarks
were prepared, but I would expect the basic ``stories'' discussed here
to hold.
the decline in commodity markets
Farm commodity prices have declined sharply after reaching record
highs in recent years. For example, the marketing year average price
for corn fell from $6.89 per bushel in the drought year of 2012/13 to
an estimated $3.60 per bushel just 3 years later (Table 1). Wheat,
soybean and cotton prices have also declined. The high prices of the
2010-2012 period and more favorable weather conditions resulted in a
large increase in U.S. and global crop production, while a variety of
factors limited demand growth, so carryover stocks increased. Crop cash
receipts fell by 17 percent between 2012 and 2015.
On the livestock side, prices for cattle, hogs, chickens and milk
all reached record highs in 2014 because of strong export demand,
disease outbreaks and the delayed effects on production of drought and
high feed costs. Total meat and milk production rebounded in 2015 at
the same time a strong dollar helped constrain export sales. Prices
fell sharply for hogs, chickens and milk in 2015 relative to the
previous year. Fed steer prices peaked in the final quarter of 2014,
but then declined in every quarter of 2015. Livestock cash receipts
dropped by 12 percent in 2015.
TABLE 1. THE DECLINE IN FARM COMMODITY PRICES AND CASH RECEIPTS
----------------------------------------------------------------------------------------------------------------
Peak year Peak level Recent year Recent level* Change
----------------------------------------------------------------------------------------------------------------
Corn price ($/bu.)...................... 2012/13 6.89 2015/16 3.60 -48%
Wheat price ($/bu.)..................... 2012/13 7.77 2015/16 5.00 -36%
Soybean price ($/bu.)................... 2012/13 14.40 2015/16 8.80 -39%
Cotton price (cents/lb.)................ 2011/12 88.30 2015/16 59.50 -33%
Fed cattle price ($/cwt)................ 2014 154.56 2015 148.12 -4%
Hog price ($/cwt)....................... 2014 76.03 2015 50.23 -34%
Chicken wholesale (cents/lb.)........... 2014 107.60 2015 90.50 -16%
All milk price ($/cwt).................. 2014 23.97 2015 17.08 -29%
Crop receipts ($ billion)............... 2012 232 2015 191 -17%
Livestock receipts ($ billion).......... 2014 212 2015 186 -12%
----------------------------------------------------------------------------------------------------------------
* 2015/16 crop prices use mid-point of the reported range from USDA's World Agricultural Supply and Demand
Estimates, February 2016.
the crop outlook
Our baseline projections assume a continuation of current policies
and a macroeconomic outlook developed by IHS Global Insight, a private
forecasting firm. We recognize that the world is a very uncertain
place, so we use our models to derive distributions of the agricultural
sector variables.
Figure 1 shows the average of the projected corn prices as well as
two more lines to give an idea of some of the uncertainty that
producers face. In 10 percent of the model's 500 outcomes, the corn
price exceeds the top line, about $5 per bushel, and in 10 percent it
falls below the bottom line, about $3 per bushel. I should point out
that these estimates only consider a subset of the factors that cause
commodity prices to be uncertain--the actual uncertainty around our
longer-term projections is probably even greater than the chart
indicates.
The story would be similar for other crops. For the next few years,
we expect wheat, soybean and cotton prices to all average near 2015/16
levels, but with considerable annual variation. Population and income
growth around the world contribute to rising food, feed and fiber
consumption, but global crop supplies are projected to be adequate to
meet that demand, even at prices well below the 2010-12 peaks. The
United States faces continued strong competition from Brazil,
Argentina, Russia, Ukraine and other exporters, and demand growth in
China may be slowing.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
livestock outlook and cash receipts
In 2016, beef, pork, chicken and milk production are all expected
to increase, even as the strong dollar constrains growth in export
sales. The result is a further projected decline in prices for cattle,
hogs, chicken and milk. Cattle prices could decline further in 2017 and
beyond as additional cows in the breeding herd eventually translate
into more beef production. In the long run, livestock prices will tend
to move with feed prices.
The projected prices and production levels suggest that both crop
and livestock receipts could decline again in 2016 (Figure 2). In later
years, increasing production contributes to a moderate rate of increase
in projected cash receipts. However, note that in 2025, both crop and
livestock receipts remain below their peak values of recent years.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
arc and plc
The 2014 farm bill significantly reoriented U.S. farm policy. Gone
are fixed annual direct payments and other past programs, and in their
place are two new programs that only make payments when prices or
revenues fall below trigger levels. Price loss coverage (PLC) payments
occur when marketing year average farm prices fall below fixed
reference prices. County agricultural risk coverage (ARC-CO) payments
occur when a proxy for per-acre county revenues for a particular crop
falls below a trigger tied to past prices and yields. Most corn,
soybean and wheat base acreage is enrolled in ARC-CO while most
sorghum, barley, rice and peanut base is enrolled in PLC. Few acres are
enrolled in ARC-IC, an alternative version of the program.
Averaging across 500 outcomes, we project that ARC payments will
peak in the current marketing year (Figure 3). Projected ARC payments
then decline, not so much because of any major increase in projected
prices or yields, but because the moving average of past prices used to
compute guarantees declines. The chart only shows outcomes through the
2018 expiration of the current farm bill.
Note that actual payments in any given year can differ greatly from
the levels shown, suggesting that the cost to taxpayers of these new
programs is quite uncertain. For example, in more than one-third of the
500 outcomes for the 2018 crop year, projected ARC-CO payments are less
than $1 billion, but they exceed $4 billion in the 10 percent of
outcomes with the greatest payments.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
crop insurance and commodity programs
The 2014 farm bill also creates a number of new crop insurance
options for producers. Cotton producers, for example, can choose to
purchase STAX, an area-based policy that supplements individual
coverage. There is no ARC or PLC program for upland cotton.
In any given year, indemnities can differ greatly from premiums,
but on average, we would expect total indemnity payments to be similar
to total premiums. Premium subsidies cover more than 60 percent of
total premiums.
Across 500 outcomes, average crop insurance net indemnities
(indemnity payments for losses minus producer paid premiums) average a
little over $5 billion per year (Figure 4). Projected ARC and PLC
payments exceed crop insurance net indemnities in 2015/16 and 2016/17,
but the reverse is true in later years. For years after 2018, we follow
the lead of the Congressional Budget Office and assume an extension of
2014 farm bill provisions.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
net farm income
The decline in crop and livestock receipts has resulted in a
dramatic reduction in net farm income relative to the record level of
2013. Lower fuel, fertilizer and feed prices helped reduce production
costs by about $10 billion in 2015 and another reduction is expected in
2016, but the projected cost reductions are not nearly enough to offset
revenue losses.
Given all the assumptions of our analysis, net farm income remains
well below recent peak levels (Figure 5). Projected real, inflation-
adjusted net farm income is about the same in 2025 as it was in 2015.
As with other projections, there is great uncertainty around
projections of net farm income. Even modest proportional changes in
costs or revenues can result in large proportional changes in net
income.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
final comments
If these projections prove correct, it suggests an extended period
of financial stress in U.S. agriculture. Not only are farm incomes
expected to remain well below recent peaks, but businesses that sell
machinery and inputs to farmers are also likely to be negatively
affected. Farm asset values are likely to be under pressure, especially
if interest rates increase.
However, it is also important to maintain perspective. While rising
debt is a serious concern, debt-asset ratios remain low by historical
standards. Even if interest rates increase from current levels, they
are likely to remain well below the levels that prevailed during the
farm crisis of the 1980s. While commodity prices are well below recent
peaks, they remain high by pre-2007 standards.
You can look for our new baseline soon, perhaps next week, at
www.fapri.missouri.edu. Our baseline briefing book will provide
detailed estimates for farm commodity markets, farm program costs, farm
income and consumer food costs.
Thank you for the opportunity, and I will be happy to answer any
questions.
Disclaimer:
The projections reported here are based upon work supported by the U.S.
Department of Agriculture, Office of the Chief Economist under
Agreement No. 58-0111-15-008 with the Curators of the University of
Missouri. Any opinion, finding, conclusions, or recommendations
expressed are those of the author and do not necessarily reflect the
view of the U.S. Department of Agriculture nor the University of
Missouri.
INTRODUCTION OF OTHER WITNESSES
Senator Moran. Dr. Westhoff, thank you very much.
The only thing worse than having three economists who
disagree each other is having three economists who agree with
each other when the outlook is bad.
We have others who are at the table. I probably should
explain this. We invited three significant and highly respected
ag economists to have a conversation with us. But as I
indicated earlier, we thought there might be policy questions
related to specific farm programs, commodities, regions of the
country. So we have Colin Woodall from the National Cattlemen's
Beef Association; Tom Sell, who has a variety of interests in
different farm commodities, but also a significant interest in
crop insurance; Reece Langley, cotton; Randy Russell, former
USDA official with, again, a variety of interests in farm
commodity groups across the country; and Dale Moore from the
American Farm Bureau.
I am going to yield my time to Senator Blunt, who needs to
get to the Intel Committee. Then I will go to Senator Merkley.
Senator Hoeven is headed back to Homeland Security, and I will
yield my time when it comes back to me to you as well.
Senator Blunt visited with me as I became the Chairman of
this Appropriations Committee, Dr. Westhoff, to make certain I
understood the value of the Food and Agricultural Policy
Research Institute (FAPRI) at the University of Missouri. And
from my days as a member of the House Agriculture Committee, we
appreciate the analysis. Senator Blunt was only reminding me of
something that I already knew.
Senator Blunt.
LONG-TERM AGRICULTURAL OUTLOOK
Senator Blunt. I would say, Chairman, things were a lot
better when I was the Chairman, whenever I was the top
Republican on this Committee.
There are very few days when the option of going to Intel
might look like a little bit of a relief. This probably is
still not one of them.
One of the things I have been wondering about, and I do
hope that you all have left plenty of room for optimism to
change some of these projections, but one of the things I have
been thinking about, even in the most optimistic scenario with
what we believe, from the lowest estimate of world food demand
to the highest estimate, it is still a big estimate. I have
been wondering what we do that helps farm families have some
sense of how those two things come close to evening out. I can
certainly see 3 decades, where 1 year we are low and the next
year we are high, and the challenge is just to meet the demand
that is going to be growing in what all of us would see as an
exponential way based on anything we have ever seen in world
food.
Now, clearly, if you have less money to spend, that demand
for better food might not be what it otherwise would be.
But, Mr. Russell, do you have a sense, and then Mr. Moore--
and this will be my only question, and anybody else can weigh-
in that wants to. Do you have a sense of what farm families
need to be looking at and anticipating as many of us are
excited about what can happen in agriculture, but agriculture
being what it is, trying to figure out how these things happen
at the right time is I think a challenge that I have not been
able to quite figure out yet. I have been saying recently to
the Missouri Farm Bureau, Blake, yesterday and others, it is
going to be a great 35 years for agriculture, but that does not
mean the next 2 or 3 years are going to be great, and it does
not mean there will not be some years in the middle.
I am just trying to figure out myself how we can look at
this in a way that can be helpful. Hopefully, we can stop doing
foolish regulatory things. Just the law of averages you would
think would eventually catch up with us on the regulatory
front.
But let's go to the two of you.
Mr. Russell. Thanks, Senator Blunt.
And thanks, Senator Moran, for holding the hearing. I think
it is important to have a good backdrop as to what the farm
income situation is this year, as you start your appropriations
process, because so many of those items are dependent upon the
farm economy.
Senator Blunt, I would just say that this is a very tough
economic period, 2015 was tough. We had a precipitous decline
in cash and farm income. As we just heard, we have another
decline in 2016. I would suspect we'll probably have a rough
year in 2017 as well, before we get out of this.
I would also say, prior to that, and I am not talking to
any specific sector or subsector, we had 5 good years. Our
equity is strong. Our debt-to-asset ratio, debt-to-equity ratio
in agriculture, we go into this downturn in pretty good shape.
I think what we really have to do is focus on the longer
term. I personally am very optimistic about ag and food over
the long term. All of you have talked about it many times. I
mean, we are going to grow the world's population to 9.3
billion by 2050. Eighty percent of those people are going to be
in developing countries.
We have a situation where we are going to have to produce
more food in the next 40 years than we did the last 10,000
years combined. That is an amazing kind of situation that we
are facing. Now, does that mean we will not go through some
upturns and downturns, because agriculture is cyclical? We
understand that.
But the future is very, very bright. Also, we are going to
have to produce probably twice as much food in the next 40
years as we have previously. That is a huge challenge for our
sector, but I think we are up to the challenge. But we are
going to have to do certain things in order to get it right.
Let me just tick off four things, then I will yield to others
who may want to comment.
First, we have to have a macroeconomic policy that fuels
growth. What do I mean by that? You look at a situation where
the Congressional Budget Office (CBO) just came out and said
the difference between 2 percent growth and 3 percent growth
over the next 10 years is $4 trillion to the economy. That is
job creation. It leads to lower deficits. And it leads to more
demand. As we just heard here, still 80 percent of farm
production is consumed in the United States, so that is
critically important.
So I think we are in a situation where we need a strong
economic policy to fuel our growth.
Second of all, I think we are in a situation where we need
to have aggressive trade agreements. Look, I would love to sit
here and say we are going to get a World Trade Organization
(WTO) global trade round, and it is probably not going to
happen in the rest of my professional career, and I do not plan
on retiring anytime soon. So I think we have to put our
emphasis on regional trade agreements and bilateral trade
agreements. And I am not going to comment specifically about
the Trans-Pacific Partnership (TPP) or the Trans-Atlantic Trade
and Investment Partnership (T-TIP), but that is really the
future of our growth, in trade agreements. And it is focusing
on nontariff trade barriers. The phytosanitary areas are the
things we really have to aggressively pursue to grow things
like meat and poultry exports and others in the future.
Third, as Senator Blunt talked about, we have to have a
more rational regulatory policy and system in this country. You
go out and talk to farmers, as people do around here all the
time, and what you hear about are Department of Labor standards
and Environmental Protection Agency (EPA) and other things. It
is not one particular reg. It is the cumulation and impact of
those regs on farmers and agricultural supply companies and
people in agribusiness that is really serving as tax on many of
them.
Finally, I would say, and something that this Committee has
been deeply involved with, we need to more effectively reinvest
in what I would call the seed corn of agriculture, and that is
research. You look at the National Institutes of Health (NIH).
And, Senator Blunt, you have been a leader, and others here, on
NIH funding. They stand at $32 billion. The National Science
Foundation (NSF) is at $7.5 billion. USDA ag research is $2.3
billion. Its peak was $2.9 billion in 2003.
So clearly, if we are going to meet this global food
demand, we have to do a better job of reinvesting and doing it
in the right way, in the manner that NIH and NSF do in a more
competitive fashion to ensure that we have investments in basic
and fundamental sciences so that we can meet these food
challenges.
So like I said, I think we are in a very tough period. I
think that period is going to continue for probably another 18
months or so. But overall, I am very optimistic about the
future.
One last point, who knows this best? Our young people. Look
at enrollments at land grant universities. For most of them, it
is going up. They are building new dorm space. They are going
into ag sciences, ag marketing, ag communication, ag
engineering. Why? Because they can get jobs. They see the
future. They see the trendline. And there is a great
opportunity to get jobs in these professions.
So I think investment in the right way, done properly,
leads to a very bright future in ag.
Mr. Moore. Thank you, Senators, for this opportunity. One
of the great things, when you go next to a really smart guy,
you can say ``ditto'' a lot. Randy covered the waterfront. I
want to start kind of from the last point he made about the
young people. It is one of the things that we are picking up. I
have family that is in the banking business. The big concern
that is out there for us when it comes to the credit side of
the equation is the new generation, the youngest generation
that has just gotten started in farming in the last decade.
This is going to be their first downturn, and there is a lot of
concern among our members, whether it is those just getting
started, those who have established, those who finally got
their feet on the ground and now are learning that agriculture
is not always in an upswing.
I am not pessimistic, but more pragmatic than optimistic
because, again, as Randy pointed out, agriculture goes through
these peaks and valleys. We talked about it, day in and day
out. This is why we write farm bills. This is why we need a
safety net that is secure out there. This is why in the rewrite
that has gone through, there are certainly some dollars that
are going out. But we are also spotting some things that are
posing challenges, depending on what part of the country and
which options a producer may have selected when he or she goes
down through the process at their Farm Service Agency (FSA).
We also look across the sector, whether it is the largest
farmers, the smallest farmers, this regulatory creep issue is
something that we really wrestle with. Because, again, you can
deal with Mother Nature and with the protection tools we have,
crop insurance, the safety net, and the farm program. You can
deal with the vagaries of the market cycles. But when you start
getting the margins nicked year in and year out with one more
thing that I have to check the box on, and it is not just on
the potential economic cost of having to comply with the
regulation, but it is time that farmers and ranchers spend away
from managing their operations in terms of the productive side
of it to essentially be paper pushers, checking all the boxes
to make sure they are in compliance so they do not lose out
when that next roll comes around and I have to deal with
somebody looking over my shoulder and telling me I am out of
compliance, and now I am facing penalties, now I am facing
fines, whatever that may be.
We are in a time when we are seeing a lot more bears than
bulls. I look down and think about, when you look at where some
of these prices have been, we talk about historic highs, a lot
of the infrastructure has built in and invested to respond to
that, whether it is in the cattle industry, the row crops,
specialty crops, and a number of things that are now pushing
these numbers down, giving us that much more of a challenge in
terms of having to borrow operating credit and making sure we
get that paid back.
Some of us are old enough to remember when we went through
credit reforms back in the mid-1980s, trying to get that all
lined out. We do not need to go through another cycle like
that. And our hope is that we can get some sort of evening out
of these troughs, get some of the issues, figuring out the
careful way to say this, but those that would like to help us
rearrange parts of the farm bill by chopping things out or
adjusting the numbers in some way, we appreciate the steadfast
support for keeping the farm bill intact and giving us a chance
to make sure it works.
Let's talk about some of those areas where we think we can
see some improvements without having to open up the farm bill.
Senator Moran. Very good. Let me turn to Senator Merkley.
AGRICULTURAL IMPORTS BY CHINA
Senator Merkley. Thank you.
Dr. Johansson, I wanted to ask you about your figure 6, in
your chart. First of all, you have a chart that shows China's
total import of grain, soybeans, and cotton. Is that
specifically from the United States? Is that the import of U.S.
products?
Dr. Johansson. No, these are global imports.
Senator Merkley. Okay, those are global imports.
I found it interesting that the total amount had dropped,
given that while China's growth rate is not as high as it was,
it is still a very positive 5 percent to 6 percent.
Dr. Johansson. That is right.
Senator Merkley. So what do you attribute that? Is that
more domestic production of Chinese grains and soybeans?
Dr. Johansson. This chart actually goes out for 10 more
years. Unfortunately, it was truncated just to make it fit
here, but it does show the upward growth. But in the most
recent period that we are showing here, where you see this
downturn, this adjustment down, that is primarily due to the
fact that, as you mentioned, the Chinese have supported their
domestic producers using support prices for a variety of
products, corn, cotton, wheat, and rice, for example. As a
result, their producers have responded with increased
production. But on the other hand, their prices now sit above
global prices for most commodities, so they need to protect
their markets with quotas.
As a result, they want to bring down the stocks of their
maize, for example, as well as their cotton, not so much for
rice and wheat. That is still projected to continue increasing.
But they have extremely high shares of global stocks. I think
the percentage right now--we are estimating they hold about 60
percent of global stocks of cotton and about 50 percent of
global stocks of corn.
We have known from our experience in the United States that
using those types of policies to support farm income are fairly
inefficient and are very expensive. So they are trying to
unwind those stock levels, as a result. That is why we are
seeing them drop off in terms of the global imports that they
are demanding from other countries.
Senator Merkley. If we had subcategories of the imports of
various countries into China, would we also see specifically a
drop in the U.S. share as a result of that? I think you
referred to appreciation of 18 percent over the euro.
Dr. Johansson. Yes, the major exporters to China--for
example, soybean is their largest import commodity. The United
States has typically been the major supplier to China for
soybeans. That is falling in recent years and being replaced by
increasing exports coming out of Brazil and Argentina, so we
are seeing an increase in South American exports. We expect to
see that intensify this year slightly due to the fact that, as
Senator Moran said, we might expect things to change over time,
but Brazil has seen 4 excellent years right now. They have
essentially rolled sixes on the dice for the last 4 years when
it comes to weather, so they have been producing increasing
amounts of soybeans.
And due to the fact their currency has been depreciating
relative to the dollar, they can be more competitive on the
global market. As a result, they are sending a lot more of
their stocks to China than before, and that has taken over some
of the U.S. share of that.
Senator Merkley. So just to wrap up this particular point
here, you mentioned that you have projections that go out
another 10 years.
Dr. Johansson. That is correct.
Senator Merkley. When you look at the Chinese process of
eating more meat, requiring more grain input and so forth, do
we anticipate that over the 10 years to come that the exports
of U.S. commodities to China will go back up?
Dr. Johansson. I do not know, for example, if U.S. exports
specifically to China are going to go up by a certain
percentage rate, but I can say that, over the 10 years, we
expect China's imports of these commodities to increase by 30
percent over the next 10 years. And that is the majority of
soybeans, soybean products, although they are going to continue
to increase, increasing quantities of grains and cotton as well
over the 10-year period.
In the short term, though, as I mentioned, their stock
levels are extremely high, so they are moving to limit those.
Going forward as far as U.S. exports to the global economy,
which would include China as well, we expect U.S. exports to
continue to increase over time, move up. We expect to maintain
our dominant share of the corn export trade as well as the
cotton export trade over the next 10 years. But we would expect
Brazil to take over the number one place from us in terms of
soybean exports over the next 10 years, and the EU to remain
the number one exporter of wheat over the next 10 years.
Senator Merkley. Thank you.
Senator Moran. Senator Hoeven.
FARM BILL PROGRAMS--HOW ARE THEY WORKING
Senator Hoeven. Thank you, Senator Moran.
Thanks to all of you for being here today. My question
relates to the farm bill and maybe start with the industry
representatives, maybe with Dale.
But for each of you, is the farm bill working, specifically
ARC and PLC? Is it working like it is supposed to? And if there
are things we need to adjust or address, what are they,
particularly given this current downturn in commodity prices?
Mr. Moore. Senator, it is a little hard to say exactly
that, yes, the farm bill is working the way we hoped it would
work. We basically have one data set to work from, the 2014
crops. Those payments were just going out. We know that in
certain parts of the country, I am talking particularly like on
the ARC payments, talk to producers in Kansas, the youngsters
that are farming mom's ground. They farm in four different
counties, and those counties are all adjacent to each other,
but their corn ARC payments, for example, vary dramatically
from county to county.
I talked to a producer just last week in the panhandle of
Texas. The county to the south of them got an $85 corn ARC
payment. They got zero, just right across the county line. Now
we understand part of that is due to some of the data sets that
they have to work with in those counties where those crops may
not be as productive.
Certainly, I am going to shut up and let Reece talk,
because the cotton experience has been more than a little
challenging from the standpoint of the STAX program and how
that has not worked as well as we had hoped. It is probably
working the way the Brazilians hoped it would, but not the way
we hoped it would.
Senator Hoeven. Well, for starters, right on. We need to
address that issue in the ARC payment and have flexibility
where the ag survey does not provide enough information, so
that like counties are treated consistently, and farmers are
treated consistently and fairly. I mean, that is exactly the
kind of thing that can help right now, some flexibility from
USDA to fix that. That is something we need to work on. So you
are off to a good start.
It is tough to follow there, because that was dead on.
Mr. Russell. I will not try.
Senator Hoeven. With Dale, not that we are surprised. But
that was a bull's-eye.
Mr. Russell. I know you have a couple counties in North
Dakota that have had problems because of lack of data. I think
that points to a problem though underlying some of this and
that is the data itself. Rob can talk about this far better
than I can. But you talk to the National Agricultural
Statistics Service (NASS) folks, we were down there a week ago,
talking with them. And the number of farmers who are actually
providing information via surveys is declining. I think that is
part of the challenge. What we are facing now in North Dakota
are a couple of these counties, there is not sufficient data.
Now, is there a solution to that? I am sure there is.
Senator Hoeven. In a sense, almost it would be used against
them, adverse to their interests.
Mr. Russell. Right.
Senator Hoeven. This needs to be fixed.
Mr. Russell. Yes, I am not questioning that. Absolutely,
when you have contiguous counties, in one you are getting large
payments, and some are getting zero payments because of lack of
data, that is a problem.
I do think though, the point I want to make, we need to
look at these surveys and why it is that we are having a
decline in some of the participation in them. I think we have
to look at that because a lot of our information that we gather
are off of these surveys.
Also, while I have the mike and then I will be quiet, I
think we need to take a hard look at the agencies and who they
report to. In the case of NASS, the World Board and Economic
Research Service (ERS), those are all economic and statistics
related agencies. I think they all ought to report to the chief
economist.
They had previously. They were moved. I think that was a
mistake. And I think all the major statistical and economic
agencies ought to be under the Chief Economist. That is a
natural fit. They were removed several years ago, and I think
it was a mistake, and I think they ought to be moved back.
Mr. Langley. Senator, for the cotton industry and specific
to the Stacked Income Protection Plan that was developed for
the 2014 Farm Bill, as you know, that was put together by the
industry working with Congress. Really, that effort started in
2011 in the lead-up to this farm bill. The STAX policy had to
be developed as an alternative to the traditional price and
revenue support programs because of the WTO case that the
United States had lost that Brazil brought where they
challenged some of our cotton policies in previous farm bills.
The difficulty is that STAX was developed at a time when we
had high commodity prices generally, and high cotton prices
specifically. So like any crop insurance policy, it can provide
adequate price and revenue protection at higher prices.
But the situation we are in now is, in the summer of 2014,
just after this farm bill was approved, we saw cotton prices
start to decline. And cotton prices are now 47 percent lower
than they were just a few years ago.
With prices at that level, no crop insurance policy is
going to provide a producer with adequate price or revenue
protection. So that is the situation we are in today. The
original STAX proposal that the council developed did include a
reference price of $0.65 a pound. If that had been included,
that would make a huge difference today, given where we are
with cotton prices. But without that reference price, we are at
the mercy of the futures market, and so it really has left us
without much of a safety net.
Senator Hoeven. Anyone else who wants to weigh in here?
Mr. Sell. This is the kind of question I love. Senator
Hoeven, thanks for asking.
Really, as a backdrop, I thought Senator Blunt's opening
question was great. We had this great long-term, optimistic
view for agriculture. We are going to have to double our
production by 2050, and so everything should be rosy. But we
have these temporary, no one knows how long, swells in the
agricultural economy.
Obviously, every time we go into a downturn, things look
pretty good at the start. We are coming from a good place. We
just do not know how long and how deep this is going to last.
The answer to Senator Blunt's question, what do we have as
tools to get through these things, the answer is the Farm Bill.
To your question, how is the farm bill working? I think we can
say definitively, there are farmers--and let me just say it is
a great honor to get to represent production agriculture and
family farms across this Nation. The work they do is a
tremendous blessing to all of us, so it is a great honor to
represent them. I can say with confidence there are farmers
that will be in business this year, this spring 2016, planting
because of the 2014 Farm Bill.
So judged on that, there is definitely success, and we are
grateful to the Senate, to Congress, to those of you in the
production agriculture world for taking the lead to promote a
strong farm bill.
Is it perfect? Certainly not. I think what Dale and Randy
pointed out, and certainly the whole of cotton that Reece
pointed out, it points out some of the difficulties.
But I know one of the challenges you all face, and one that
we as representatives of the agricultural industry face, is
that we always have these wolves at the door. I can pull out
two studies that have been published in the last couple weeks,
one from the Heritage Foundation and one from EWG. These are a
dime a dozen, just tearing us all a part.
So there is a real fear of reopening the farm bill for this
reason. We would love to be able to fix some of these
incongruencies and problems like across county lines, but it is
a real problem that we all have in this great congressional
body, where issues are debated and subject to amendment, the
downside risks of tearing open the farm bill right now look to
be fairly daunting, relative to the upside potential.
Mr. Woodall. Senator, from the cattle perspective, we use
the farm bill a little bit differently than our colleagues
here. But two programs in particular have been very successful,
very useful. The permanent disaster program kept a lot of
producers in business while we went through the drought that we
have finally broken through.
Another program is the Environmental Quality Incentives
Program (EQIP). EQIP is one that I think the vast majority of
cattle producers have utilized at some point in time.
Senator Hoeven. Do you mean livestock indemnity on the
first one?
Mr. Woodall. Livestock indemnity is a part of the permanent
program, yes, sir. EQIP, I actually have a member of ours from
Texas over at the House Ag Committee right now talking about
how he used EQIP in consultation with the Natural Resources
Conservation Service (NRCS) to actually expand his herd in the
middle of the drought. I think that is a great example of how
these programs have been very successful in the cattle
industry, and we are going to want to continue to work to
protect them as we look at future farm policy.
Senator Hoeven. Thank you, Mr. Chairman.
Senator Moran. Yes, sir.
Senator Tester.
FARM BILL PROGRAMS--TITLE I
Senator Tester. First of all, I want to thank you all for
being here. I am an actively engaged farmer. I signed the
papers at the FSA office just about 2 weeks ago.
I wanted to give you a little history. Back in the 1930s,
if it would not have been for FDR's work with the farm program,
I would not be on the farm today. It has been critically
important.
In the 1960s when I was growing up, my folks, I remember
them specifically saying that they were going to sign up for
the farm program because it was the patriotic thing to do.
And now we have a farm program that has changed over the
years, and rightfully so. I guess what comes to my mind is,
what are the goals of the farm program? I would like to ask it
to the Chief Economist of the USDA, since you are a big part of
implementation. What are the goals of the farm program?
Dr. Johansson. I think, as Senator Hoeven mentioned
earlier, and as you are asking right now, we have seen a shift
in the way that we meet the goal. I would describe the goal as
providing a safety net for producers to help get through times
like right now, or sort of adverse economic conditions, whether
it be environmental through weather conditions, or whether it
be economics, to sort of smooth out those peaks and valleys
over time.
We saw big movement in that from the last farm bill, the
2008 Farm Bill, to this farm bill, in the sense that we moved
toward a more countercyclical way of thinking about the
Commodity--Title I Commodity Programs, in the sense of they are
expected to provide a safety net when times are bad, but not
necessarily pay out when times are good. You all were debating
this during record farm income and at a time when Congress was
looking for savings. So it made sense to sort of move to this
ARC/PLC regime where you say, well, if your revenue is high
this year, you do not get as big a payment. That is consistent
with the sort of safety net notion. I point to that as the
overarching goal of the farm bill or farm programs, in addition
to providing technical assistance on the conservation side, to
provide those kind of resources to producers to implement
conservation programs, as well as obviously the food
assistance. Eighty percent of the farm bill is food assistance,
relative to 20 percent that is going to the farm.
Senator Tester. Yes. And having adequate food for the
populace, too.
Dr. Johansson. Of course, yes.
Senator Tester. I certainly do not want to open up the farm
bill for any reason, because I share the same concerns you do.
But I guess the concern I have is, I graduated high school in
1974. And by the way, my community is no different than any
other rural community in the State. There were 165 kids in high
school when I graduated, basically 40 kids to a class. Now
there are 12 kids to a class, the same community. That was a
long time ago, 1974. It should not be, but it is.
All that reduction, actually, is due to agriculture. It is
grasslands, flat, wheat, and cattle. What we have seen is, we
have seen nothing short of a mass exodus. So now the community
is to a point where, if we lose Wells Fargo and we lose our
medical center, that community is going to become a ghost town,
which rips my guts out. But that is where we are headed.
The question is, when we are doing the farm program here in
Congress, and we are doing a nationwide farm program, is that
the best way to approach it? Or should we be in some way maybe
dealing with regions, or may be dealing with crops
specifically? We do irrigated, nonirrigated, that kind of
stuff.
I guess the bottom line is, are we getting out of the farm
program what you said? I agree with what you said. This year,
there are people who are going to be in business because of the
farm bill that would not have otherwise been. But looking at
the overall thing, are we really doing anything for rural
development with the farm bill, considering what has transpired
over the last 40 years?
Dr. Johansson. I mean, rural economic development,
obviously, our Secretary has been extremely focused on that.
Senator Tester. This is not to point a finger at anybody.
Dr. Johansson. No, no. It is a tough nut to crack.
Since the 1980s and going forward, and certainly, if we go
back even further another 80 years to the beginning of last
century, we know that the number of people working on farms,
the number of farms, have been consolidating over time. Now we
have seen that flatten out over the last 10 or 15 years, so we
do not really see the number of farms going much below 2.1
million farms right now. It has been pretty constant over the
last couple censuses.
But that being said, commercial farms are getting bigger,
so there is a lot more retirement farm, residential farms. You
mentioned actively engaged, so I would imagine they are
actively engaged, but they are not certainly producing the 80
percent of the food that we see in the country.
Senator Tester. Right.
Dr. Johansson. How to provide innovation, support and how
to get those rural communities sustainable over a long period
of time, there are a lot of different ways to do that. I do not
know if anybody has settled on the right way to do that, but I
think you have built some of those into the new farm bill. I
would say, give it some chance a chance to work, and we will
see what happens.
Senator Tester. Good.
Dale.
Mr. Moore. Senator, I would say that the parts of the farm
bill--you shared this with folks, it is kind of like the
Olympics. Everybody tunes in to watch the 100-meter dash or
220-meter dash or whatever, the hot-button thing, but they kind
of do not really tune in for curling or when something like
that is going on.
But the rural development title in the farm bill, there is
a lot of work, time, and effort that goes into it. You all
spend time on that every year in appropriations because a lot
of that, having worked for an authorizing committee, I am very
familiar with the phrase ``subject to appropriations.''
Senator Tester. And Senator Moran and I try to get every
nickel we can out of it.
Mr. Moore. Exactly. But one of the things the Farm Bureau
and I know a number of groups--we work with in coalitions and
partnerships on this. For a lot of our young farmers and
ranchers, if you sit in the Farm Bureau's young farmer and
rancher committee, they are focused on how they get started in
agriculture and how they grow their operations. But they also
want to live in these communities.
My high school graduating class was nine kids. With the
exception of myself, everybody else is still back in the
hometown area. They want that quality-of-life. They are looking
for ways on how do they grow that local economy that entices
somebody, not just in the ag sector, but some other business
enterprise. The work you all do on broadband funding, for
example, how that expands opportunity.
Senator Tester. You are exactly right. But here is the
problem. As population decreases, and correct me if it is not
happening in every rural community in this country, then we are
looking at putting money--and I will fight for it until the
last dog is hung, and so will Moran and so will Merkley--but we
are putting it into a larger, more expensive area with fewer
and fewer people, so it makes it harder and harder to justify.
And when we are dealing with a $19 trillion deficit, it becomes
a real problem.
I will give you a real-life example. They are talking about
shutting down a border station in Raymond, Montana, the
northeast corner of the State, just reducing it by 6 hours.
Why? There used to be a lot of trucks going through, and now
there are three a night. I am fighting like hell to keep that
border station open, but, man, it is tough to fight.
If you are fiscally responsible, it really is a conflicting
thing. So that becomes the point.
Go ahead, Randy.
Mr. Russell. Just a couple of observations. I am probably
one of the older people on the panel here, so I have been
through seven farm bills. I can just make an observation about
that.
We spent an enormous amount of time, and rightfully so, on
what I would call Title I, the farm program. Of course, now
crop and revenue insurance are the basic tenet of our farm
program, very important. And I would urge Congress not to do
anything to undermine crop insurance.
We are now in the third year of the 5-year farm bill, and
we need to maintain that and let it work.
But what happens is we spend an enormous amount of time on
Title I, an enormous amount of time on things like crop
insurance, and we have 13 or 14 other major titles in the farm
bill.
Senator Tester. That is true.
Mr. Russell. It is a fact of life, but we do not spend
enough time on things like research and rural development, and
many of the other areas, conservation, that we really need to
focus more time on.
I would hope when we get to the next farm bill that we can
do a little better job of allocating time, energy, effort, and
prioritization to some of these other titles, because it is not
one program that is going to be the silver bullet.
Senator Tester. Yes. Thanks, Randy.
I just wanted to say one thing. In relationship to the
surveys, I bet I get a survey every 2 weeks. The reason people
quit filling them out is because you just get sick of the damn
surveys. They get pretty specific on how much income you made
and what your net value is, some of them, not all of them.
Quite frankly, farmers are pretty libertarian, generally
speaking, and they do not like letting their neighbor know how
much money they got or how many cattle they got or anything
else about their operation. So that is why.
You were going to say something, Tom?
Mr. Sell. I think it is a great question. The thing is that
the technology and research has allowed the American farmer to
become so incredibly efficient. The fact is, one man can do the
work today that in 1974----
Senator Tester. There is no doubt about that.
Mr. Sell. So it is a problem, in that sense. But I would
say, I think the general ag economy is where we need to focus.
When there is money to be made in agriculture, people will be
creative and come to those areas where there is money to be
made.
I would say even in Title I and crop insurance, we do not
talk about crop insurance this way, but it has been a great
rural development tool. You look at communities across this
Nation and the local independent or farm credit agency is one
of the drivers of the local economy. They are employing people.
These are good jobs in rural communities.
Ethanol is another one that has been a big driver in many
rural communities, in the creation of new, value-added plants.
Value-added is a term we used to throw around a lot kind of in
ag policy debates back when I was a staffer on the House side.
Maybe we need to get back to those times.
But it is a tough nut to crack, as Dr. Johansson said,
because of that great efficiency of the American farmer. It is
a blessing in so many ways.
Senator Tester. A blessing and a curse.
I would just tell you this, and then I have to go. I thank
you all for being here. Public education, family farm
agriculture, if we lose either one, this country is changed and
not for the better.
So I appreciate all your work in making sure that people in
production agriculture get a fair shake. They need to get a
return for their investment, too.
LONG-TERM AGRICULTURAL OUTLOOK
Senator Moran. Senator Tester, thank you. I am going to
yield now in just a moment to Senator Merkley, who also has to
depart, and then I will have all of you to myself.
That was my plan from the beginning.
But in response, while Senator Tester is here, you all
responded to Senator Blunt's question about the future of
agriculture and the bright, long-term opportunities. But does
that translate into success in the communities that Senator
Tester described, his hometown, my hometown? Can we take
comfort in knowing that the economy is going to, I guess the
way we would say it is that, so many more mouths to feed, so
much more demand for agriculture products, does that then
translate into a revival of rural communities across the
country? Or is that not a given?
Dr. Johansson. I will just point out a couple things.
Looking out into the future, certainly we know that demand
is going to be increasing dramatically, and we know the
challenges to producers are also going to increase dramatically
too, whether it is water availability or changing climate, or
what have you. Producing that amount of food is going to raise
some obstacles, so I think the R&D component is certainly one
that we should keep in mind.
But just thinking back over the last 5 years or so since
the recession, we know that farm households have generally seen
a rebound in their household income much faster than the
overall U.S. household incomes have. So that is some indication
that, while we are seeing a lot of issues that Senator Tester
just brought up, there are opportunities out there, and off-
farm income opportunities have been growing for the average
farm household much more quickly than they have been for the
U.S. household in general.
So looking forward, I think that we still look at that
trajectory, and it is looking like one of the more positive
aspects of the farm economy right now.
Senator Moran. Again, I will go to Senator Merkley in just
a moment, but one of the points I would make is that there has
been an effort to highlight the importance and the phrase ``do
not open the farm bill,'' crop insurance has value. I would
remind ourselves that while we started down the path of a
bright future, in the absence of that opportunity to hold
things together in down times, the ability to take advantage of
the great times that may follow disappears.
So you lose a farmer today, you lose a farm family, another
young man or woman decides it is not the time to come home to
the farm. When things get good, if we have not sent the right
message and had the necessary safety net today, the chances of
getting them to come then, or those who have experienced
difficult times who have left to come back, disappear.
So if we do not do our correct policy decisions now, and we
do not keep the policies in place that we describe as a safety
net, our ability to take advantage of what was described
earlier as a robust future, mouths to feed around the globe, it
will mean a lot less for the communities that we all represent.
Jeff.
NON-TRADITIONAL FARMING PRACTICES
Senator Merkley. Just to continue this conversation, what
we have seen in a lot of the farming communities in Oregon is a
declining population. It is driven, as was pointed out, by the
change in technology. There was a documentary down on the east
side wheat farming called ``Dryland'' in Washington State,
which is very similar to Oregon State.
It partly tracks the community through 10 years, and each
year revisiting the big event of the year, which is the combine
destruction derby. Not only is that a lot of fun and the kids
have a helluva time welding up the machines to destroy each
other, but it represents that they have all these combines,
because combines just get bigger and bigger and fancier and
fancier, so there are these old ones lying around to be used.
As those combines have gotten bigger and the amount of
labor needed goes down, then the cafe disappears, and then the
school merges with the next school over an hour away, so the
schoolteachers are gone. Then the gas station starts to
thinking about closing up business, and so forth.
I am not sure there is much we can do about that change in
technology, but it does change the character of our towns.
The types of questions that I want to follow up with, which
I will save for another time, are a range of things that are
less macro, but things like we have a new biogas plant going in
that is going to take advantage of a huge range of feed stocks,
from potatoes, the fluids that I guess coming out of the potato
plant, leftovers from the onions, and some local manure, all in
the same place.
I am interested in how much use of agriculture waste is
finding more beneficial use and adding to the local economy.
The aging of the ag economy, we are seeing in Oregon, a lot
of the traditional economy, a lot of aging.
We are seeing a huge influx of nontraditional or organic
farmers, in terms of younger folks getting involved. I was
shocked by the Department of Agriculture's numbers for the
number of new farms in Oregon, but they are not in the
traditional sector.
Mobile slaughter facilities, which is something I hear
about a lot as I rotate through the State in my town halls. I
go to every county every year, and it comes up all the time. We
have one mobile slaughter facility that Oregon State helped
generate, and then one private one for chickens, but nothing on
the cattle side. The economics of that, people are just
spending a lot of money shipping their cattle a very, very long
way to be slaughtered.
OPENING TRADE WITH CUBA
I am also curious about your thoughts about trade with
Cuba, given that we have this opening and kind of a new market.
So I am excited to see what might develop there.
But I am not going to take the time now, because I have to
depart as well. But those are some of the different chapters of
evolving changes in the agriculture world. I thank you very
much for your expertise. Thank you.
Dr. Johansson. Senator Merkley, if I might just point out
one quick thing on the Cuba issue. I just put this slide
together for the outlook last week. I will just mention it
right now.
On average, we export about $300 million worth of products
to Cuba each year, a pretty limited set of products. If you
compare that to the Dominican Republic, which is a country of
roughly the same gross domestic product (GDP) and population
size, we export about $1.2 billion, with a much wider variety
of ag products to the Dominican Republic.
So that just gives you a good point of comparison in terms
of what the potential is. Obviously, it could be bigger or
smaller, depending on a lot of other factors. But we could
conceivably multiply our trade there by four times, if we get
normalized relations.
Senator Merkley. I believe that the biggest share is
chicken fryers?
Dr. Johansson. Yes.
Senator Merkley. Chickens. I went down with Secretary
Vilsack's first agricultural visit, the first trip since 1961.
The Cubans are very, very interested in expanding. They do not
have much money to spend, which means we have to provide
credit, which we are not willing to do right now. So they are
buying from other countries that are willing to extend better
credit terms.
So maybe that is a piece of the thawing that we can
rethink, how to match other countries on the credit side.
FARM INCOME AND CROP INSURANCE
Senator Moran. Jeff, thank you very much.
Thank you all for joining me here this afternoon.
I have just a series of questions that are not necessarily
at the moment directed to anyone, in particular, but I want to
start with the economists.
What in your projections do you include as far as farm bill
or program payments and revenue or crop insurance protection?
So when we talk about falling crop prices or commodity prices,
that does not include the safety net features of the farm bill
or crop insurance. Is that true? We are talking just commodity
prices in the broad sense, correct?
So in the reductions that you all are predicting, what
percentage of those reductions will be made better, made whole,
by increasing farm programs or crop insurance payments to
farmers?
Dr. Johansson. Well, we do know that in the farm income
numbers that I mentioned earlier, we are seeing a drop in farm
income, farm cash income to the $90 billion level. We are
expecting this coming calendar year, calendar year 2016, to see
an increase in government payments by about $3 billion over
last year. I have the numbers here, so I can pull this up in a
second, Pat, if you want to talk about what you have in your
numbers?
Senator Moran. Did you say $90 billion?
Dr. Johansson. There is net farm income and net cash income
that are little bit different, so let me just pull up that
exact statistic for you.
Senator Moran. Okay.
Dr. Westhoff. So if you look at crop years 2014 and crop
year 2015, the actual payments for crop year 2014 were about
$5.5 billion for ARC and PLC, so part of the drop that occurred
was in cash receipts. To put that in context, the drop in
overall cash receipts in the crop sector was $232 billion in
2012 to $191 billion last year, so a $40 billion drop in
overall cash receipts.
Yes, ARC and PLC is making up part of that. It is not
making up all of it, by any stretch of the imagination.
Senator Moran. When you say not making up all, it is making
up a very modest amount.
Dr. Westhoff. Making up a modest share of the overall drop
in overall cash receipts for the entire crop sector. For
certain subsectors, it is far more important.
Senator Moran. How would you describe that gap being
filled? I supposed it is not with traditional crop insurance
but with revenue protection. That would be even a smaller
number than the farm program payments, I assume?
Dr. Westhoff. Right. In fact, in terms of crop insurance,
it is going to depend on the yield obviously in a given year
what sort of payments will be occurring.
One important aspect of crop insurance, it is not actually
countercyclical in terms of pricing prices. It is actually
procyclical in terms of prices. The higher the value of the
crop insured, the more the premiums and the more the premium
subsidies. So the actual benefit of the crop insurance program
tends to be higher in dollar terms when prices are high than
when prices are low.
Dr. Johansson. And the way we would count that, certainly
we count expenditures that the producer puts out-of-pocket
toward purchasing crop insurance, but we do not count the
government subsidy as a receipt to him, since we are
essentially just covering the rest of that premium for the U.S.
Government to provide the crop insurance subsidy.
This figure, for example, gives you an indication of how
farm cash income has changed over time, and the light green is
the percentage provided by government payments.
AGRICULUTRAL EXPORTS
Senator Moran. Thank you.
Similarly, in determining the crop prices, what percentage
of crop prices in the aggregate--I realize it would be
different from commodity to commodity--are determined by
exports? So when a farmer tells me, why don't we just take care
of our own selves, take care the United States, kind of my
standard reaction sometimes is, what 40 percent of acres in
Kansas do we no longer want to farm?
But I am not sure that those numbers are really realistic.
What percentage of the commodity prices in the overall
agricultural economy is driven by exports as compared to
domestic consumption?
Dr. Johansson. We have a ballpark figure of about 20
percent to 80 percent.
Senator Moran. Twenty percent to 80 percent?
Dr. Johansson. So 80 percent----
Senator Moran. And you describe that as a ballpark figure?
Dr. Johansson. No, no, no. Meaning that 20 percent of the
ag economy is exported, so our value-added ends up being
exported to other countries, versus 80 percent sold within the
United States.
Senator Moran. Oh, I am sorry. I may end up apologizing to
another USDA ag economist again for rudeness. I have done it
before.
Dr. Johansson. No, what I mean to say is that has been
moving around a little bit in terms of whether or not it is 20
percent or 19 percent or 21 percent.
Senator Moran. Is that the same thing as saying that
exports account for 20 percent of on-the-farm income?
Dr. Johansson. I would defer to Pat on this, but I would
say prices are sort of a nonlinear function, which is
determined somewhat by how many stocks you have out there. So
if you are in a very tight situation, a very small movement
could translate into a relatively large movement in prices,
versus the place we are at right now, we have a lot of stocks
out there. So we can see a big movement. Whether we see
disruption in, for example, European corn production or U.S.
wheat production, that is not going to move prices by all that
much right now just because we do have a lot of reserves out
there.
If you guys want to add to that?
Dr. Westhoff. If you think about the corn market as an
example, the amount of corn we feed to livestock in this
country does vary from year to year, but it is not likely to
change by 20 percent from 1 year to the next very often, where
export numbers can go up and down a lot from 1 year to the
next.
Seeing exports are relatively small share of the overall
market, that may help account for a large variability in
prices.
Senator Moran. Because of the margins.
Dr. Westhoff. Right.
Senator Moran. The last sale becomes more important.
Dr. Westhoff. The last sale is the one that matters. And if
that sale tends to vary more, it will be more important in the
grand scheme of things.
Mr. Sell. Mr. Chairman, I think it does vary a lot by
commodity. Reece can talk about cotton, but I think we mill
about 3 million bales a year in the United States. That means
we have to export about 10 to 12 million. So you could say
cotton is very export-dependent. The same with rice. The same
with some other commodities. So it probably varies a lot by
commodity.
Mr. Woodall. Mr. Chairman, one thing I would add from the
cattle perspective is, even though we export roughly about 15
percent to 17 percent, the value is tremendous on what we get
from just trying to maximize the value of the carcass. We all
know that beef is what's for dinner. Beef tongue is not what's
for dinner in the United States.
So we take something that is worth a few cents a pound and
would otherwise be used as dog food here, we can put it on a
container and send it to Japan and create a premium product
that the Japanese consumer is willing to pay a premium for.
Senator Moran. What you all are trying to point out to me
is that I cannot simplify it into this phrase that I am looking
for.
Mr. Moore. It is way important.
Senator Moran. Way important, that I can say.
I remember, Colin, in the days of trying to open the
Japanese market to all meat products that the argument, the
explanation, the insistence for getting that accomplished was
that our highest quality is in great demand to Japan.
Mr. Woodall. Those are good tongues, you know?
But it is not just that, Senator. We are sending a lot of
our high-quality beef around the world as well, because there
is a demand for our beef. As we see the increasing middle
class, we see people who have more disposable income. They want
to eat better. They want protein. And we want to make sure we
have the opportunity to put U.S. beef in front of them as an
option.
That is one of the reasons why we have spent so much time
pushing TPP, the Trans-Pacific Partnership. For the cattle
industry, it is an extremely good deal.
Right now, all the product that we are sending into Japan
is subject to a 38.5 percent tariff. TPP takes that down to 9
percent on most cuts. And on cuts like tongue, it takes it down
to zero.
So when you look at the issue we have right now with the
strong dollar, that all three of our economist friends talked
about, we are seeing a hidden value. But if we can take that
tariff down, that helps recover some of that cost.
That is why we are really pushing to get TPP done sooner
than later because Australians currently have a 10-percent
tariff advantage over us. So we had a high of $1.6 billion in
2014. That has eroded by about $300 million just because the
Australian product is cheaper. When TPP is put in place, we
will be on the same level playing field as they are, and we can
regain some of that market access.
ETHANOL AND COMMODITY PRICES
Senator Moran. Thank you.
It was Tom who indicated that ethanol, and he is seated
next to Colin, so I understand what circumstance I now found
myself in, but, again, going back to commodity prices, is there
a ballpark number that tells me what percentage of commodity
prices--I suppose, in this case, it is grain, sorghum, and
corn--is determined by ethanol production, is a significant
component in determining the price of corn and grain sorghum?
Dr. Johansson. Well, the grind right now for corn going
into ethanol is about 5 billion bushels, give or take a couple
100 million bushels on that. That translates into roughly 14
billion gallons of ethanol right now.
If we increase that by a couple 100 million gallons here or
there, it is going to move prices of corn around by a nickel or
less. It is not moving around by anything more than what you
would see in a regular market fluctuation based on some report
of dry weather in part of Brazil right now.
So that does not move prices around all that much at this
point, because it is a relatively mature market. You go back 5
years ago when we were really ramping up production, and that
was again leading to a situation where we were pulling corn out
of stocks. Stocks-to-use was relatively tight at that point
time.
It goes to my point about, at certain times, you see a
small change in demand that is going to have a big impact on
prices. Right now, I would not characterize us as being in that
situation.
Mr. Moore. Mr. Chairman, I would also point out, coming
back to something--Senator Merkley mentioned how things change.
I am glad I am sitting all the way down from Colin.
When corn prices shot up when they had the drought in 2012,
soybean prices followed. We were talking with livestock
producers. And given everyone we represent, how do we address
this and how we keep peace within the family? We had a number
of our producers in poultry, beef, and pork, all indicate to us
that we would like you to get those prices down, but do not get
carried away to the point that you screw up how we have
changed--``we'' depending on what part of the country, but the
dried distillers' grains (DDGs). The byproducts from the
distilling process had essentially become an important part of
their feeding infrastructure, their component in their feed
sources.
So as these things change, farmers and ranchers adapt. If
the weather changes, Mother Nature changes, demand for labor
changes, they are going to figure out a way to solve it. They
get kind of cranky when you start turning around and saying we
are going to fix this, this, and this, and throw another wrench
into something that they sort of figured out how to deal with
one way or the other.
But back to what the doc was saying, when you look at these
numbers, you are moving prices up and down a nickel or a dime
in markets where we have lost dollars.
COTTON SURPLUS IN CHINA
Senator Moran. Okay.
Reece, in cotton, a significant part of the challenge that
we face in cotton is a significant amount of surplus stocks in
China, in particular, true?
Mr. Langley. Yes.
Senator Moran. And is there any policy decisions made by
the United States that contributed to that circumstance? Or is
this totally a Chinese issue?
Mr. Langley. It is largely a result of policies that China
has put in place over the last 5 or 6 years. We go back and
look, and 5 years ago, China was importing 25 million bales of
cotton globally, and they were the largest export market for
U.S. cotton. Today, they are importing only about 5 million
bales, and they are about our sixth largest market.
So we have lost a huge market share there, and that is
because they basically pulled out of the market and are
importing only what they are required to under their WTO
agreement. The reason for that is the 60 million bales of
cotton stocks that are sitting in warehouses in China, which is
the result of their own policies that they put in place when we
saw global prices spike for all commodities a few years ago.
So for several years now, China has been supporting their
cotton producers, or a big portion of them, at about $1.40 a
pound, which is more than twice the global price.
Senator Moran. The way you describe it, is it true then
that China is interested--they only get out of the circumstance
that they are in. This is not a desirable place for them to be?
Mr. Langley. That is true. They are trying to figure out
now how to unwind this stock situation that they are in. But it
this going to take several years to do that.
EXPORT INFRASTRUCTURE
Senator Moran. In a broader sense of exports, what evidence
do we have that we have sufficient infrastructure in place that
allows us to export efficiently? Again, the way we started this
conversation was about the bright future that comes with
opportunity to feed a growing population in a hungry world.
My view is that, in order to do that, we have to be very
efficient in our ability to export. I think you translate
efficiency in a number of ways, but one of the significant ones
is transportation. Therefore, what economically do we need to
be doing to be in a position to compete in a global economy
when better days return, exports increase? Where are we on our
infrastructure investment?
I do not know whether that is an economist question or not.
Dr. Johansson. Certainly, we looked at the railcar
situation about a year and half ago when in the upper Midwest,
there were a lot of capacity issues caused by a variety of
factors. It was very cold that winter, if you recall. So a lot
of producers in the upper Midwest were having a difficult time
getting their commodities to either the Pacific Northwest ports
or down to the Gulf of Mexico. So that raised some red flags
that year.
We saw a lot of basis effect for corn, soybeans, and wheat
in those areas. Railcar companies, BNSF and others, have
invested heavily in improving that condition, and I think that
has helped a lot.
We also obviously have the benefit in the United States of
a very good river system for transporting our commodities down
to the Gulf of Mexico and, of course, through the Great Lakes.
I think there are infrastructure issues. And certainly, in
a drought year, we will hear about the pinnacle rocks. And then
certainly in a high-rain year, we will hear about the locks
closing as well due to the level of the river being too high in
certain parts of the Mississippi.
Other than that, I know there are investments that often
need to be made on the barge system. I know they have been
occurring on the rail system. There is another issue on the
West coast ports as well. There needs to be some investment
made in some of those port facilities on the West Coast, but I
do not have any specifics in terms of numbers.
Senator Moran. A potential competitor today, a competitor
today and a potential competitor in the future, is Brazil. What
is the consequence of the expansion of the Panama Canal? Does
that benefit us or them?
Dr. Westhoff. Brazil is a country that obviously has
transportation issues internally, and getting things from the
interior of Brazil to a port has been a huge challenge over the
last several decades. They are still moving incredible amounts
of grain a very long distance by truck in Brazil, not the most
efficient way of doing things. So as they are able to evolve
their internal transportation system, that is hugely important.
I do not think the Panama Canal is going to be where we
move huge amounts of grain. I do not think. There will be some
other higher value products.
CONSERVATION RESERVE PROGRAM
Senator Moran. Okay. Perhaps more to the economic report,
one of the things that caught my attention, Dr. Johansson, was
you indicated there were falling CRP acres.
That caught my attention because one would think, with
declining commodity prices, that the Conservation Reserve
Program (CRP) might be an alternative, but that is not what
your statistics indicate.
Dr. Johansson. I think the demand for enrolling in CRP is
up. It is just that I believe the farm bill restricted the
number of acres.
Senator Moran. So it is not that there is not demand for
CRP acres. It is that they were capped.
Dr. Johansson. That is correct.
Senator Moran. Okay.
Dr. Johansson. So I think in a prior farm bill sort of
programmatic sense, you would see increased enrollment in CRP
taking up those acres.
LAND VALUES
Senator Moran. Okay. The conversation about land values,
which maybe this is Dr. Kauffman, but land values matter
greatly, as far as the consequences to a credit worthiness of a
farmer. I think the indication, at least by one or more of you,
was that we have seen a modest decrease in land values. I would
describe it as a much more dramatic decrease in commodities or
farm income, commodity prices or farm income.
How do you explain the modest decrease in farm values, in
land values? And what would your prediction be for that in the
future?
Dr. Kauffman. So land values, to your point, account for a
very large portion of the balance sheet. I think it is
something like 85 percent of farm assets. So in terms of the
asset side, it is important. In terms of lending, it is
important, for bankers who are looking for collateral and other
things. In terms of being able to provide credit, that is
obviously an important factor.
There are a lot of I think drivers behind why we have seen
only a modest decline in land values. When we have talked to
lenders and when we have done surveys and other things to look
at this, some of those are simply the fact that the wealth that
was generated in agriculture during those 5 years or during
that time period was significant. So in terms of the number of
producers that were able to deleverage, and many of them using
cash to be able to purchase land, we definitely saw some of
that.
Clearly, interest rates, in terms of the amount that
producers or their investors would need to spend on mortgage
payments, is a different number when interest rates are at the
level that they are.
There are other factors I think involved in that. But I
think those are a couple of them that we hear the most. I think
we do hear going forward that there is likely to be additional
modest pressure, but because of the interest that has been in
farmland, there have not been as many sales as what we seen in
previous years. So I think there have been a lot of folks
sitting on the sidelines waiting to see what might happen
before really moving back in.
So in terms of the volume, it has been a little bit lower.
So we have not seen the kind of pressure.
There have not been a lot of forced asset sales. It has not
gotten to that point, as I noted with the delinquency rates
being low. So we have not seen the kind of forced asset sales
that you might have seen in the 1980s that would have
perpetuated this cycle back downward.
Senator Moran. Is the same analysis true for cash rent?
Dr. Kauffman. So on the cash rent side, I would also say
that we have seen only modest reductions. There, too, there are
a number of reasons why I think that you have seen only some
modest changes there. I think part of that has simply been,
again, the fact that there has been the kind of wealth that has
been generated, so it has taken some time to get to a point
where producers maybe have to think more carefully about their
operation going forward.
They have had the ability and they would be reluctant, many
farmers would be reluctant, to give up the ability to farm that
land, for fear of not getting it back. If they were to do that,
so far there have been other others who have been willing to
step in and take on that land, so it continues to be farmed.
I think that is one of the reasons there has been a
significant run-up on working capital, and a lot of farmers had
the cash to be able to pay some of those things. Now the
concern, I think, going through 2015 and into 2016, is some of
that working capital has deteriorated. So as we go forward,
that is why I think there is some of that expectation that you
would need to see some of the reduction in cash rent simply
because of the working capital.
Senator Moran. That answer reminds me of the question about
consolidation, fewer farmers farming greater acres. I assume
that downtimes exacerbate consolidation?
Dr. Kauffman. That is what we have heard, that there could
be some pressure on consolidation from the fact that there are
some producers who put themselves in a very good financial
position during these very good years. They maybe have been
careful in taking on new debt and maybe careful in terms of
expenditures. So their breakeven costs may be lower than some
others that had a different set of circumstances.
So I think when you have some producers that face a
disproportionate amount of financial stress, it is clear that
there are others that may be looking at some of these other
long-term opportunities that have been discussed in terms of
profitability for agriculture and recognizing that, the saying
is you buy low and sell high. So I think there are some who are
looking at that as a potential opportunity, which obviously
points to the possibility of consolidation.
AGRICULTURE ECONOMY
Senator Moran. The comparison between now and the 1980s,
the days that we all remember with such disdain, such fear, it
is different. I do not know what it was like going into the
1980s with what you described as the built-up reserves, the
cash income, the income that preceded that fall. Was that
present then?
Dr. Kauffman. Debt measures were certainly higher going in
through the 1980s than where we are sitting right now when we
look at things like debt-to-asset ratios. That is certainly
true.
I think part of it, when you look at why things are
different though, that is a significant part of it. Certainly,
the leverage is not the same. Clearly, interest rates, that
environment is different going into the 1980s and what
inflation had looked like leading up to that. So the
expectation, then, of what might happen with high inflation I
think is part of that.
So we are in a different environment as it relates to those
sorts of things and coming off of the kind of years that we
had. And a lot of producers remember the 1980s, so as to not
want to repeat it.
Senator Moran. In your analysis, did you determine that the
president of your bank is going to prevail on increasing
interest rates or is she going to be on the losing side of that
debate?
Dr. Kauffman. I appreciate that question.
Senator Moran. You're welcome.
Dr. Kauffman. I certainly cannot speculate as to where
future interest rates may be.
Mr. Russell. You know, Senator Moran, just to put it in a
little perspective, during the 1980s, I was at USDA. I was
Deputy Assistant Secretary for Economics and chief of staff. We
lost 30 percent of the equity value in agriculture in a very
short period of time, 30 percent. I mean, it was an enormous
amount.
We had double-digit unemployment. We had double-digit
inflation. The prime rate went over 20 percent. It was probably
the most difficult period we have had, and I was not there
during the Depression, but clearly, it was a very difficult.
As you may recall, the farm credit system needed bail out.
It was an extremely, extremely tough period.
I am not trying to say what we are going through now is not
a difficult one, but, again, relatively speaking, it is one of
these periods that it is a downturn and it will turn around.
Senator Moran. Randy, you described the broader economy in
those days, and that is reminder to me. As policymakers, one of
the things that we can do that would benefit everyone,
including agriculture, is to have a growing economy generally.
I am often asked to visit with an industry sector and speak in
front of a group of folks who are in the particular business,
and I think about, well, what are their issues? What do they
want to hear about? What do they request of Congress?
I often take a step back to say, I think the best thing we
can do to help your industry is to have growth of GDP, which is
true of agriculture as well.
Mr. Russell. To your point, Mr. Chairman, I totally agree.
We are now entering the 10th consecutive year of sub-3 percent
growth. We have never had a 10-year period like this since
1929. So, I mean, that is an amazing thing.
As I cited earlier, the difference between 2 percent GDP
growth and 3 percent GDP growth over the next 10 years is $4
trillion to the economy. So it is an enormous compounded
economic benefit.
OIL AND INPUT COSTS
Senator Moran. Thanks, Randy.
Again, Dr. Kauffman, in our part of the country, the price
of oil is an important component on both sides of the equation.
Many of our communities in Kansas, their prosperity certainly
rests with agriculture, but it is a different world when we are
producing oil and gas at prices different than they are today.
But a common question of me as a Member of Congress is, why
has the input cost not diminished as rapidly as the underlying
price of oil? I am looking for that two-sentence answer that I
can provide folks who ask me that question. Does that exist?
Dr. Kauffman. I am trying to think of how I might put that
into two sentences. I mean, I think that, in general, you do
tend to see prices can be sticky. That is what we see in
agriculture, in general, to the question about cash rents and
some other things, that we do tend to see that prices can be
sticky coming back down.
I am probably not the best person to speak to gasoline
prices, as it relates to oil prices, but certainly there has
been a pretty significant drop in gasoline prices as well.
Senator Moran. I think maybe it was you, Dr. Johansson,
said that the input costs have not diminished in a comparable
way--these are my words, not yours--in a comparable way to the
reduction in commodity prices or farm income.
Dr. Johansson. Yes, typically you see, for a variety of
reasons, the cost side lags a little bit. We are seeing today's
prices for gasoline, for example, or for corn cash in the
Midwest, and what we are seeing in terms of input prices, we
are certainly seeing what those are in the newspaper or through
the Agricultural Marketing Service (AMS) reports. But producers
have those inputs on hand and they paid a higher price for
those several months ago, or maybe over the winter. So it takes
a while for them to go back out repurchase those inputs at the
lower prices that are going to be available.
So when you try to add those into a farm income statement,
you are going to see they are selling their commodity, whether
they forward-contracted or not, they are selling it at more
contemporary prices relative to cash inputs that they are using
to produce those, right? So there is a certain lag in that in
farming in general, because you incur the costs much prior to
the time you are getting your revenues. So I would say that.
But there is also this phenomenon that we see across all
sectors. Most sectors in terms of prices go up a lot faster
than they come back down, sort of the rocket and feather
phenomenon that you see a lot of times.
We see this, for example, if we look at farm income from
last year, our farm income estimate that we put out in February
relative to what we put out in November, our final one, cost
did decline over that time period. So we had higher costs at
the beginning in February, when we initially estimated,
compared to November, when we finally had a much clearer
picture of what the tally was going to be.
I would expect, so long as prices stay low, I mean, oil
prices have continued to come down since November, I would
imagine that if they stay low through the summer into the fall
that we will see a lot of those other chemical input prices
coming down over time over the summer as well. And by the time
we get to November, we will likely see lower input costs on the
balance sheet.
So the farm income number, it is always going to log just a
little bit. We do not really know what final prices are going
to be for the commodities, nor do we know what costs are going
to be.
But typically, over the space of the year, so long as input
commodity prices are coming down for oil, for chemical
fertilizer, for pesticides, that type of thing, we will see
that come down over the summer as well, and it will be
reflected in our November numbers.
INTEREST RATES AND FARMLAND
Senator Moran. I am going to bring this to end in just a
moment, otherwise it will just become an ego trip for me to sit
here and ask you all questions.
In regard to interest rates, how sensitive is farm income
to interest rates? Are most farmers leveraged in a significant
way?
Dr. Kauffman. So leverage is certainly lower, and Rob may
be able to speak to the exact number. But it has been on the
order of 15 percent or less, as it relates to a debt-to-asset
ratio, for the last number of years. So I think you have seen a
lot of producers take that opportunity to deleverage.
When we look at our lending data, certainly producers have
been advised over the last number of years to take advantage of
low interest rates, so they have sought to lock in some of
those lower fixed-rate loans. So I think to some extent, that
has limited their exposure.
As I noted, I obviously cannot speculate on the future path
of interest rates, but I think it has been well-known that the
path so far has been a fairly gradual process. We have been in
this low environment for some time. So I think that has limited
the interest expense payment of that, as it relates to
producers.
It is a relatively small number. We did a calculation, and
I presented this last week at the forum, in looking nationally
for a corn producer, as an example, if you put the interest
expense payment in cents per bushel on corn, it is somewhere in
the vicinity of $0.12 to $0.13 per bushel. When you compare
that with just the average fluctuations in the price of corn
over any given timeframe, those average fluctuations swamp the
interest payment that is there. Again, part of that is because
of the deleveraging but it is also because of the low interest
rate.
So I think in terms of what producers may stay awake at
night thinking about, it has not necessarily been the interest
rate side of things, partly because they are so low.
So I think you can obviously envision an impact, but
because the path of interest rates out there, private
forecasters and others are looking at where we might be in a
couple of years, I think that no one is looking at something
that would be on the order of what we saw in the 1980s, so I
think that has given people----
CROP REVENUE
Senator Moran. In regard to the 1980s, I was thinking as we
talked about input costs as well as commodity prices, I assume
that our farmers today are much more--they are hedging. Their
risks are reduced as a result of using hedging and other
financial techniques, more than they would have been,
certainly, in the 1930s, but I guess in the 1980s as well. Is
that true? We are better protected for ups and downs in both
input costs and commodity prices?
Dr. Kauffman. There certainly is a lot, and there have been
a lot of services that have come onboard to help offer farmers
the tools they need for marketing. And marketing certainly has
become a more important part I think of a producer's toolkit.
I think one area there to think about is, as we have come
off very good times, the 5 years of crop prices, when prices
were only ever going up, it was in the farmer's best interest
to wait and not hedge. So they may have learned that rather
than hedge the crop in advance, let's say in the spring, that
they get a better price by waiting in the fall.
So some of what we have seen now has been, to some extent,
less hedging, simply because in past years, it has been better
to wait.
So that is some of the concern. When we talk to lenders,
certainly from a lender's perspective, cash is king, so they
are talking about wanting to see, as it relates to working
capital, may be more cash, as it relates to the financials. So
there has been maybe more of a tendency more recently to wait
and hold onto some of that grain.
Mr. Moore. Mr. Chairman, if I could, one of the things that
we keep an eye on, talking about the commodities that have a
futures market product and the commodities that have the crop
insurance product, we have a number of commodities out there
that do not have a revenue product or any kind of crop
insurance beyond the gap type coverage or the noninsured type
coverage, and certainly do not have a pit in Chicago that is
setting a price for them.
So there is some volatility in specialty crops.
Senator Moran. Thank you for reminding me that you are with
the American Farm Bureau and not the Kansas Farm Bureau.
Message received, Dale.
Mr. Moore. I love my home State, but I have lots of----
LENDER EXPERIENCE
Senator Moran. We work hard at caring about all of
agriculture. But you did remind me I was stereotyping.
Really, bringing this to conclusion, I read several months
ago about reduction--that is not the way to say it. A number of
bankers with experience are retiring. We are at that age in
which people with experience in lending are not as prevalent as
they used to be.
Do you see that in your region and farmers now dealing with
less experienced loan officers, credit specialists?
Dr. Kauffman. We certainly do see that. In fact, there is a
program at the University of Nebraska that tries to bring in
young, aspiring ag lenders to be involved in the industry. So I
do think that you see programs out there to try to get people
involved. Some of this may go back to the earlier discussion
surrounding some of the urban migration where some of the kids
are looking at jobs outside of rural areas.
I think as you see in agriculture, yes, some of those same
trends are there. As you see aging farmers, you also see ag
lenders. Where there is maybe some concern, just as you noted,
as it relates to the experience, as it relates to this maybe
being a time when they are experiencing a downturn and how do
you lend in that environment, and what is the best way to do
that. So I think there are people actively looking at that, but
I think it is something that we have heard.
FEED LOT MARKET VOLATILITY
Senator Moran. Colin, last question. I was mentioning about
the $500 reduction in the feed yards. What about the cow-calf
operation? Is there something similar going on there?
Mr. Woodall. They have seen a reduction, but they are still
profitable. We expect them to remain profitable.
When you look at the feed lots, one thing that concerns us
more than anything right now is the volatility in the futures
market because, as we have seen this reduction, it makes risk
management that much more important for us. When you look at
the CNB groups, live cattle and feeder cattle futures, the
volatility has been unbelievable.
When you look at the fact we have transitioned away from
open outcry trading in the pits, it is all automated trading
now, we saw several runs in the fall where we went limit up and
limit down without any fundamentals to drive that. So that
means the computers are doing that.
It has actually been a good thing for us because we have
been able to get the attention of the CME. Terry Duffy, the
Executive Chairman himself, came to our annual meeting to talk
about this. We have formed National Cattlemen's Beef
Associations (NCBA)-CME working group to look at ways we can
address this volatility, knowing if we can bring that
volatility down, make it more manageable, restore the faith in
futures as an actual risk-management tool, it is going to go a
long way in helping our feeders trying to manage through these
next couple of years.
Senator Moran. Do any of you have something you want us to
know, the record to reflect, before we conclude the afternoon?
Mr. Moore. I think it has been said, but I just want to
thank you. I cannot remember the last time this has occurred. I
have been in town for 30 years, and I just want to tell you I
very much appreciate your taking this leadership and giving us
a chance to share this with you. Tell Judd to holler at us when
you have more questions.
Senator Moran. Thank you very much.
Mr. Russell. I just want to add one comment, just that this
is as close as you are ever going to get to seeing a white
shirt out of Dale, so thank you for having us.
Mr. Sell. I just want to echo what Dale said in his yellow
shirt.
Senator Moran. He described that to me as Fort Hays colors.
Mr. Sell. What you said earlier about the cyclical nature
of agriculture and the goal of kind of preserving our
infrastructure so that we can take advantage of the next good
time is key, from my perspective. We have a unique farm sector.
It is dynamic. It is made up of family farms. There is a lot of
disagreement as to what that looks like, but there are not many
of them, and they do tremendous good for this Nation.
We have always had a policy of standing by those family
farms through the bad times, so that we could take advantage of
the good. It has worked to this country's great benefit.
So I just greatly appreciate your care.
CONCLUSION OF ROUNDTABLE
Senator Moran. Thanks.
Anyone else? I think they are ready to leave, too.
Thank you all very much for joining us this afternoon.
Thank you for your testimony, especially for those of you who
came from out of town. We are pleased that you did, and thanks
for sharing your expertise. Thank you.
[Whereupon, at 4:33 p.m., Tuesday, March 1, the roundtable
was concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]