    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

        RURAL ECONOMIC OUTLOOK: SETTING THE STAGE FOR THE NEXT FARM BILL

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

                                    HEARING

                                   BEFORE THE

                            COMMITTEE ON AGRICULTURE
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 15, 2017

                                   __________

                                Serial No. 115-1

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

                                      ______

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                            COMMITTEE ON AGRICULTURE

                      K. MICHAEL CONAWAY, Texas, Chairman

    GLENN THOMPSON, Pennsylvania         COLLIN C. PETERSON, Minnesota,
        Vice Chairman                    Ranking Minority Member
    BOB GOODLATTE, Virginia,             DAVID SCOTT, Georgia
    FRANK D. LUCAS, Oklahoma             JIM COSTA, California
    STEVE KING, Iowa                     TIMOTHY J. WALZ, Minnesota
    MIKE ROGERS, Alabama                 MARCIA L. FUDGE, Ohio
    BOB GIBBS, Ohio                      JAMES P. McGOVERN, Massachusetts
    AUSTIN SCOTT, Georgia                FILEMON VELA, Texas, Vice Ranking
    ERIC A. ``RICK'' CRAWFORD, Arkansas  Minority Member
    SCOTT DesJARLAIS, Tennessee          MICHELLE LUJAN GRISHAM, New Mexico
    VICKY HARTZLER, Missouri             ANN M. KUSTER, New Hampshire
    JEFF DENHAM, California              RICHARD M. NOLAN, Minnesota
    DOUG LaMALFA, California             CHERI BUSTOS, Illinois
    RODNEY DAVIS, Illinois               SEAN PATRICK MALONEY, New York
    TED S. YOHO, Florida                 STACEY E. PLASKETT, Virgin Islands
    RICK W. ALLEN, Georgia               ALMA S. ADAMS, North Carolina
    MIKE BOST, Illinois                  DWIGHT EVANS, Pennsylvania
    DAVID ROUZER, North Carolina         AL LAWSON, Jr., Florida
    RALPH LEE ABRAHAM, Louisiana         TOM O'HALLERAN, Arizona
    TRENT KELLY, Mississippi             JIMMY PANETTA, California
    JAMES COMER, Kentucky                DARREN SOTO, Florida
    ROGER W. MARSHALL, Kansas            LISA BLUNT ROCHESTER, Delaware
    DON BACON, Nebraska
    JOHN J. FASO, New York
    NEAL P. DUNN, Florida
    JODEY C. ARRINGTON, Texas

                                     ______

                       Matthew S. Schertz, Staff Director

                     Anne Simmons, Minority Staff Director

                                      (ii)

                                 C O N T E N T S

                                  ----------
                                                                       Page
    Conaway, Hon. K. Michael, a Representative in Congress from
      Texas, opening statement.......................................     1
        Prepared statement...........................................     3
    Peterson, Hon. Collin C., a Representative in Congress from
      Minnesota, opening statement...................................     4

                                   Witnesses

    Johansson, Ph.D., Robert, Chief Economist, U.S. Department of
      Agriculture, Washington, D.C...................................     5
        Prepared statement...........................................     7
    Kauffman, Ph.D., Nathan S., Assistant Vice President, Economist,
      and Omaha Branch Executive, Omaha Branch, Federal Reserve Bank
      of Kansas City, Omaha, NE......................................    16
        Prepared statement...........................................    18
        Submitted question...........................................    81
    Outlaw, Ph.D., Joe L., Professor, Extension Economist, and Co-
      Director, Agricultural and Food Policy Center, Department of
      Agricultural Economics, Texas A&M University, College Station,
      TX.............................................................    27
        Prepared statement...........................................    29
    Westhoff, Ph.D., Patrick, Professor and Director, Food and
      Agricultural Policy Research Institute, University of Missouri,
      Columbia, MO...................................................    33
        Prepared statement...........................................    35
    Brown, Ph.D., D. Scott, State Agricultural Extension Economist
      and Assistant Professor, University of Missouri, Columbia, MO..    43
        Prepared statement...........................................    45

                               Submitted Material

    American Bankers Association, submitted statement................    79

        RURAL ECONOMIC OUTLOOK: SETTING THE STAGE FOR THE NEXT FARM BILL

                                  ----------

                          WEDNESDAY, FEBRUARY 15, 2017

                              House of Representatives,
                                      Committee on Agriculture,
                                                       Washington, D.C.
        The Committee met, pursuant to call, at 10:00 a.m., in Room
    1300 of the Longworth House Office Building, Hon. K. Michael
    Conaway [Chairman of the Committee] presiding.
        Members present: Representatives Conaway, Thompson, Lucas,
    Rogers, Gibbs, Austin Scott of Georgia, Crawford, DesJarlais,
    Hartzler, Denham, Davis, Yoho, Allen, Bost, Rouzer, Abraham,
    Kelly, Comer, Marshall, Bacon, Faso, Dunn, Arrington, Peterson,
    Costa, Walz, McGovern, Vela, Lujan Grisham, Kuster, Nolan,
    Bustos, Maloney, Plaskett, Adams, Evans, Lawson, O'Halleran,
    Panetta, Soto, and Blunt Rochester.
        Staff present: Callie McAdams, Jackie Barber, Matthew S.
    Schertz, Stephanie Addison, Anne Simmons, Mary Knigge, Mike
    Stranz, Troy Phillips, Nicole Scott, and Carly Reedholm.

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

        The Chairman. Good morning. This hearing of the Committee
    on Agriculture entitled, Rural Economic Outlook: Setting the
    Stage for the Next Farm Bill, will come to order.
        I would ask G.T. Thompson to open us with a prayer. G.T.?
        Mr. Thompson. Thank you, Mr. Chairman.
        Please join me in prayer. Heavenly Father, we gather here
    today for this hearing, we ask for your blessings over the
    information that is going to be provided that will serve to
    lead us in policy to serve rural America, and as a result of
    the strengthening rural America, serve all Americans. Lord, we
    just ask your presence be in this hearing. Lord, this morning
    we lift up and pray for those hardworking American families;
    the men, the women, the whole families that work so hard to
    provide us the food that we require, the materials for
    clothing, for building materials, and for energy. We just ask
    that you protect and be with them, and strengthen in all ways.
    And I pray this in the name of my savior, Jesus Christ. Amen.
        The Chairman. Thank you, G.T.
        By the looks of the crowd, there must be something
    happening this morning, so that is encouraging.
        Ordinarily, we kick things off every year with the
    Secretary of Agriculture offering testimony as our one and only
    witness. However, our new Secretary has not yet been confirmed.
    I have had a couple of visits with Sonny Perdue on a number of
    items and I believe he is an excellent choice, and I hope that
    he can be confirmed in short order so that he may begin his
    important work as Secretary of Agriculture.
        This is our first full Committee hearing of the 115th
    Congress. And Chairman Emeritus Frank D. Lucas will kick off a
    series of Subcommittee hearings on February 28th. This is also
    the first farm bill hearing as we begin to develop the next
    farm bill.
        America's farmers and ranchers are facing very difficult
    times right now. This is something that the Federal Reserve,
    the Agricultural & Food and Policy Center, the Food and
    Agricultural Policy Research Institute, USDA, and even The Wall
    Street Journal agree upon.
        Farmers and ranchers have endured a 45 percent drop in net
    farm income over the last 3 years, the largest 3 year drop
    since the Great Depression. The most recent ERS report now
    tells us that net farm income will be down again in 2017.
    Overall, ERS is forecasting a 50 percent drop in net farm
    income since 2013. It is hard for any of us to imagine our
    income being sliced in half.
        We are told that one in ten farms are now highly or
    extremely leveraged. Nominal debt levels are at all-time highs,
    and real debt levels are approaching where they were prior to
    the 1980 farm financial crisis.
        Yes, interest rates are lower and that certainly is a
    mitigating factor that differentiates our situation from the
    1980s, but as the recent Wall Street Journal article stated,
    there is a real potential for a crisis in rural America. That
    is why I am so eager for Governor Perdue to be confirmed.
        Even as we work to develop a new farm bill, the Secretary
    of Agriculture may well be called upon to help struggling
    farmers and ranchers. Let's all pray that a good crop and
    better prices this year will make that unnecessary.
        As we begin consideration of the next farm bill, current
    conditions in farm and ranch country must be front and center.
    But there are other important considerations as well.
        Chairman Lucas' strong admonition during the last farm bill
    debate that a safety net is supposed to be there to help
    farmers in bad times, not in good times, is one that Congress
    might better take to heart this go around.
        Every hole in the current safety net that requires mending
    is the result of our not fully heeding that wisdom. Had we
    followed his counsel more wisely or closely, I doubt there
    would be anywhere near the current urgency in writing a new
    farm bill. That wisdom isn't just from a guy who has been
    around the block a few times in writing farm bills, it is from
    a guy who actually farms and ranches.
        Another context we need to take into account when writing
    the next farm bill is this Committee's contribution to deficit
    reduction. I am hard-pressed to admit it but the critics of the
    farm bill were absolutely right. We did not save the taxpayers
    the $23 billion that was promised. We saved them $100 billion.
    We saved more than four times what was promised under the last
    farm bill, and we achieved these savings despite a very severe
    and sharp downturn in the farm economy.
        Because we were asked during the last farm bill, when times
    were good, to cut twice before measuring once, in the upcoming
    farm bill debate we will measure our requirements first and
    then determine what kind of a budget we will need to meet these
    needs.
        I believe the majority of Americans recognize the need for
    a strong farm safety net. They see what Mother Nature can do
    and they strongly support crop insurance. They also see the
    effects of predatory trade practices of foreign countries that
    depress farm prices for our farmers and ranchers at the
    farmgate.
        For example, in a single year on just three crops, Chinese
    subsidies are said to be $100 billion over their WTO limit.
    That is what the entire safety net for all America's farmers
    and ranchers costs over the life of the farm bill, plus more
    than \1/2\ of another farm bill. And that is in 1 year.
        The President of the United States has stated that our
    farmers and ranchers deserve a good farm bill and one that is
    passed on time. This will require resources, bipartisanship,
    and unity in farm country. But, it is also our duty to get this
    done and we aim to do it.
        [The prepared statement of Mr. Conaway follows:]

      Prepared Statement of Hon. K. Michael Conaway, a Representative in
                              Congress from Texas
        Good morning. We ordinarily kick things off every year with the
    Secretary of Agriculture offering testimony as our one and only
    witness.
        However, our new Secretary has not yet been confirmed. I have
    visited with Governor Perdue a number of times now, I believe he is an
    excellent choice, and I hope that he can be confirmed in short order so
    that he may begin the important work of the Secretary of Agriculture.
        This is our first full Committee hearing of the 115th Congress.
    And, Chairman Emeritus Frank D. Lucas will kick off a series of
    Subcommittee hearings on February 28.
        This is also the first farm bill hearing as we begin to develop the
    next farm bill. And it is timely.
        America's farmers and ranchers are facing very difficult times
    right now. This is something that the Federal Reserve, the Agricultural
    & Food and Policy Center, the Food and Agricultural Policy Research
    Institute, USDA, and even The Wall Street Journal agree on.
        Farmers and ranchers have endured a 45 percent drop in net farm
    income over the last 3 years, the largest 3 year drop since the start
    of the Great Depression. The most recent ERS report now tells us that
    net farm income will be down again in 2017. Overall, ERS is forecasting
    a 50 percent drop in net farm income since 2013. It's hard for any of
    us to imagine our income being sliced in half.
        We are told that one in ten farms are now highly or extremely
    leveraged. Nominal debt levels are at all-time highs and real debt
    levels are approaching where they were prior to the 1980s farm
    financial crisis.
        Yes, interest rates are lower and that certainly is a mitigating
    factor that differentiates our situation from the 1980s. But, as the
    recent Wall Street Journal article stated, and as I have experienced as
    a CPA in West Texas, there is real potential here for a crisis in rural
    America.
        That is why I am so eager for Governor Perdue to be confirmed. Even
    as we work to develop a new farm bill, the Secretary of Agriculture may
    well be called upon to help struggling farmers and ranchers. Let's all
    pray that a good crop and better prices this year will make that
    unnecessary.
        As we begin consideration of the next farm bill, current conditions
    in farm and ranch country must be front and center. But there are other
    important considerations as well.
        Chairman Lucas' strong admonition during the last farm bill debate
    that a safety net is supposed to be there to help farmers in bad
    times--not in good times--is one that Congress might better take to
    heart this go around.
        Every hole in the current safety net that now requires mending is
    the result of our not fully heeding that wisdom. Had we followed his
    counsel more closely, I doubt that there would be anywhere near the
    current urgency in writing a new farm bill. That wisdom isn't just from
    a guy who's been around the block a few times in writing farm bills.
    It's from a guy who actually farms and ranches.
        Another context we need to take into account when writing the next
    farm bill is this Committee's contribution to deficit reduction. I am
    hard pressed to admit it but the critics of the farm bill were
    absolutely right. We didn't save taxpayers $23 billion. We saved them
    $100 billion. We saved more than four times what we promised under the
    last farm bill and we achieved these savings despite a very severe and
    sharp downturn in the farm economy.
        Because we were asked during the last farm bill--when times were
    good--to cut twice before measuring once, in the upcoming farm bill
    debate we will measure our requirements first and then determine what
    kind of a budget we will need to meet these needs.
        The vast majority of Americans recognize the need for a strong farm
    safety net. They see what Mother Nature can do and so they strongly
    support crop insurance. And, they also see the effects of the predatory
    trade practices of foreign countries that depress the prices our
    farmers and ranchers earn at the farmgate.
        For example, in a single year on just three crops, Chinese
    subsidies are said to be $100 billion over their WTO limit. That's what
    the entire safety net for all America's farmers and ranchers costs over
    the life of a farm bill--plus more than \1/2\ of another farm bill.
        The President of the United States has stated that our farmers and
    ranchers deserve a good farm bill and one that is passed on time. This
    will require resources, bipartisanship, and unity in farm country. But,
    this is our duty and it's what we aim to do.
        With that, I yield to my friend, the Ranking Member, for his
    opening statement.

        The Chairman. With that, I yield to my friend, the Ranking
    Member, for any opening comments that he might have.

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

        Mr. Peterson. Thank you, Mr. Chairman, and thank you for
    calling today's hearing, and I thank the witnesses for being
    with us.
        As you said, this hearing is going to get the ball rolling
    on the Committee's work to begin the next farm bill. I am going
    to keep my comments brief so we can get to our witnesses and
    the questions.
        As you mentioned, we have had some good years, but the last
    several years have been trending in the wrong direction. We
    have seen significant reductions every year, year after year
    here the last 3 or 4 years in net farm income across the
    country, but that was coming off of some pretty high levels. I
    was expecting that we were going to be facing some really
    significant problems this spring or winter getting financing
    and so forth. I don't know about the whole country, but in my
    part of the world we had such tremendous yields and crops and
    harvest conditions that it offset the low prices. So we are not
    seeing the kind of pressure that I expected we would be seeing
    at this point, but if these crop prices stay where they are at,
    and we get an average crop or a below-average crop, we will
    have big problems. So we have to keep that in mind as we write
    this bill.
        I agree with the Chairman that we should write this bill
    based on what is needed for agriculture, what is going to work
    for our producers, and not be driven by some outside budget
    force that somebody has come up with.
        We haven't received any direction from the Budget Committee
    yet. I hope that whatever we receive it will be something that
    will be good. And I will be working with the Chairman to do
    what I can to make sure that we have the adequate resources,
    and at the same time that areas that need some help, like dairy
    and cotton, can be addressed in this bill so that we have a
    safety net that works for all of agriculture.
        I thank the chair for holding today's hearing, and look
    forward to hearing from our witnesses.
        The Chairman. Thank you, sir.
        The chair would request that other Members submit their
    opening statements for the record so that our witnesses may
    begin their testimony, and to ensure that there is ample time
    for questions.
        I would now like to introduce our witnesses at the table.
    First, we have Dr. Robert Johansson, Chief Economist, U.S.
    Department of Agriculture, here in Washington, D.C. We have Dr.
    Nathan Kauffman, Assistant Vice President and Omaha Branch
    Executive, Omaha Branch, Federal Reserve Bank of Kansas City,
    Omaha, Nebraska. Dr. Joe Outlaw, Professor and Extension
    Economist, Co-Director of the Agriculture Food Policy Center,
    Texas A&M University, Department of Agricultural Economics,
    College Station, Texas.
        I would now like to recognize Mrs. Hartzler to introduce
    our next two witnesses.
        Mrs. Hartzler. Well, thank you, Mr. Chairman. I am very
    honored and pleased to introduce two of our ag economists from
    Missouri from the university, and I am really proud of them. We
    have Dr. Scott Brown, an Assistant Extension Professor at the
    University of Missouri's Ag Economics Department, and the MU
    State Extension Agricultural Economist. Scott has worked with
    the U.S. Congress over the past 2 decades. You may have seen
    him before. He works with us on dairy and livestock policies,
    and like myself, Scott grew up on a diversified row crop and
    livestock farm in Missouri. And we have Dr. Pat Westhoff, he's
    the Director of FAPRI, the Food and Agricultural Policy
    Research Institute at the University of Missouri. He is a
    native of Manchester, Iowa, where he grew up on a family dairy
    farm. And from 1992 to 1996, he served as an economist for the
    Senate Agriculture, Nutrition, and Forestry Committee. He
    joined FAPRI in 1996 and has worked on a range of projects, not
    only in our country, but also in Europe, Africa, and Latin
    America.
        So in Missouri, we are very proud of both of these experts,
    and I appreciate them coming today and sharing their expertise
    with us.
        So thank you, Mr. Chairman, for allowing me to introduce
    them.
        The Chairman. I thank the gentlewoman.
        Dr. Johansson, you are recognized for 5 minutes.

              STATEMENT OF ROBERT JOHANSSON, Ph.D., CHIEF
               ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE,
                            WASHINGTON, D.C.

        Dr. Johansson. Mr. Chairman and Members of the Committee,
    thank you for inviting me here today to discuss the state of
    the agriculture and the rural economy in the United States. I
    have submitted a detailed statement for the record so I will
    direct my comments towards the broader picture of the U.S. ag
    economy, focusing on two main things. I am sure our
    distinguished panelists here will be able to follow me and
    hopefully provide more details on those.
        But first, I want to tell you what the current farm income
    situation look like right now, based on the data that we have
    been collecting at USDA. Second, what is the USDA's outlook for
    prices and production in 2017, and prospects for growth in the
    future?
        First, farm income is expected to remain relatively flat in
    2017. Credit availability continues to tighten, but continued
    resilience in the farm sector is also expected. Reversing the
    direction of the last 2 years, we do expect to see net cash
    income rise slightly from 2016, however, as you mentioned, net
    farm income, a broader measure, is forecast to fall slightly. I
    will just point out that both changes in those measures stand
    in the single digits, and are far less dramatic than the
    declines of the past 3 years.
        And we know that much can happen during the year, as
    Congressman Peterson pointed out. Recall, last year at this
    time USDA had projected net farm income at $54.8 billion for
    2016. Now, we are estimating incomes in 2016 higher by almost
    25 percent, at $68.3 billion, as producers found additional
    ways to lower production expenses. And while the aggregate
    debt-to-asset ratio continues to rise, those levels and an
    aggregate measure still remain low by historical standards,
    supported by continued strength and farmland values. Of course,
    that story varies by type of farm and farmer.
        Looking at farm business operations, which account for more
    than 90 percent of production and about 40 percent of farms,
    approximately 11 percent of crop farms and about ten percent of
    livestock operations have debt-to-asset ratios above 40
    percent, putting them in the highly or very highly leveraged
    category.
        Now, those levels have been trending upwards since 2012,
    but remain below the peak we saw as recently as 2002, which was
    a low point for farm income. Currently, we see that about one
    in five farms specializing in wheat, cotton, poultry, and hogs
    have debt-to-asset ratios above 40 percent.
        We also know that young farmers and those that rent more of
    their land typically have higher debt-to-asset ratios. For
    example, operators 34 years old and younger had debt-to-asset
    ratios in 2015 of 28 percent, compared to 16 percent for those
    aged 45 to 54, and only 11.5 percent for those aged 55 to 64.
        We have seen land value and cash rents decline last year,
    and evidence suggests that they will fall again in 2017, but
    the rate of decline remains relatively slow.
        Recent data from the Federal Reserve Banks indicated year
    over year declines of between one and eight percent in
    agricultural land values across the 7th, 8th, and 10th
    Districts, with differences depending on type of land and
    state. Cash rents and share rents are showing more varied
    declines, but are also adjusting downwards. Still, we know many
    producers face difficulties with low commodity prices as
    operating costs have not fallen as far or as quickly as have
    prices. Some producers may be able to rely on capital reserves,
    but for many, particularly those new to farming, that option is
    no longer an option. Credit availability at commercial banks
    has tightened, although we have seen delinquencies rise only
    slightly. I am sure Dr. Kauffman will talk about this. With
    interest rates still low and farmland values declining
    relatively slowly, farm debt presents a lower risk to the
    sector than it did in the 1980s. Currently, data suggests
    interest payments on current debt relative to net farm income
    is about 20 percent, whereas in 1985 it exceeded 60 percent.
        Farm programs will continue to provide assistance to
    producers. For example, USDA's farm loan demand increased
    markedly last year, reaching record high obligations of $6.3
    billion, including record assistance to beginning and
    historically under-served farmers and ranchers. Demand for USDA
    loans continues to match last year's pace.
        Combined payments under the Agriculture Risk Coverage and
    Price Loss Coverage programs are projected to increase in
    calendar year 2017, before tapering off in 2018 and 2019.
    Participation in the crop insurance programs remains high with
    nearly 90 percent of major crops covered, and steady growth in
    specialty crop participation. Liabilities are likely to grow
    and remain above $100 billion.
        In the near-term, global economic growth is projected to
    remain slow, and consequently, it is likely the dollar will
    remain strong. In addition, another year of record global crop
    production has added to large global stocks. While we expect
    global demand to grow, stocks relative to use are likely to
    remain high, compared to recent history, which will continue to
    put pressure commodity prices.
        Export values though are expected to grow into 2017, and
    over the next 10 years. Currently, we project in 2017 a 3.3
    increase in overall values in 2016, a total of $134 billion.
        To sum up, our long-run expectations for global agriculture
    reflect an assumption of steady world economic growth and
    continued growth in global demand. These are factors that
    combine to support longer run increases in consumption, trade,
    and prices over the long-run. We still see land values
    remaining relatively high. Interest rates and energy prices
    remain relatively low. The severe drought in California, and
    more recently in the Southeast, appear to be significantly
    diminished, and our expectations of the new crop year, farm
    programs, and impacts in the farm economy discussed today, as I
    note, were developed in large part several months ago. We are
    updating our assumptions. We will be publishing our new
    estimates and our first balance sheets for the 2017/18 crop
    year at the forum in a week.
        Mr. Chairman, to conclude, I want to take a moment to thank
    you again for agreeing to participate at the forum next week.
        That concludes my opening statement, and I am happy to
    answer questions right now, or for the record.
        [The prepared statement of Dr. Johansson follows:]

     Prepared Statement of Robert Johansson, Ph.D., Chief Economist, U.S.
                  Department of Agriculture, Washington, D.C.
        Mr. Chairman and Members of the Committee, I am pleased to have
    this opportunity to discuss the state of agriculture and the rural
    economy in the United States.
        Last year, the outlook for the agricultural sector was driven by
    macroeconomic factors, such as economic growth both here and abroad and
    resulting currency adjustments. Those factors continue to be important
    in 2017, as global economic growth continues to be slow, and the dollar
    remains relatively strong. In addition, another year of record crop
    production has maintained large global stocks, but helped meet growing
    global demand as prices moderated. While we expect global demand to
    grow, stocks relative to use are likely to remain relatively high
    compared to recent history, keeping pressure on commodity prices. As a
    result, financial pressures on some producers will continue to grow
    this year as operating costs of production have not fallen as far or as
    quickly.
        But there are some bright spots heading into 2017 as well. Some
    commodities, including cotton, dairy, and soybeans, are projected to
    see better returns in 2017. Interest rates and energy prices remain
    historically low. The severe drought in California and the Pacific
    Northwest appears to be significantly diminished, providing producers
    in California, Oregon, and Washington with much more predictable
    irrigation supplies and improved soil moisture. For U.S. agriculture as
    a whole, U.S. Department of Agriculture (USDA) forecasts that net cash
    income will rise slightly in 2017 and that median farm household income
    is likely to rise. Trade volume and value in 2017 are expected to
    rise--exports are projected up 3.3 percent in overall value and 6.5
    percent in bulk volume, with volumes of bulk commodities more than
    offsetting declines in their unit prices.
        However, many producers face difficulties with continued low
    commodity prices. Some producers may be able to rely on capital
    reserves, but for many, particularly those new to farming, that option
    may not be available. USDA Farm Service Agency (FSA) loan demand
    increased markedly last year, reaching record high obligations of $6.3
    billion, including record assistance to beginning and historically
    under-served farmers and ranchers. Demand for USDA loans continues to
    match last year's pace. However, as credit becomes tighter and
    producers cut back on costs, the number of new operating loans
    originating from commercial banks has begun to level off and even
    decline, although debt continues to increase in the first quarter of
    2017 due to a slower rate of repayment. Interest rates, while low, are
    beginning to increase and credit availability is beginning to tighten.
        Farm programs continue to operate as designed. While the recent
    Economic Research Service (ERS) farm income forecast expects combined
    payments under Agriculture Risk Coverage (ARC) and Price Loss Coverage
    (PLC) to increase in 2017, not all producers have experienced the same
    level of support. ERS projects total direct government payments to
    decline by four percent in 2017. With off-farm income expected to
    increase, however, median farm household income is forecast to rise by
    three percent for all farms, to $79,733.
        Today, I will direct my comments toward the current farm income
    situation, the outlook for prices and production in 2017, and the
    competitive trading environment that faces U.S. producers.

        Farm income remains flat, while credit tightens.

        The USDA's ERS released its first farm income forecast for 2017
    earlier this month. Reversing the direction of the last 2 years, we
    expect to see net cash income rising slightly from 2016. Net farm
    income, a broader measure that includes the value and costs of items
    like home consumption of farm goods, unsold inventory, depreciation,
    and rent and expenses related to a farmer's dwelling, is forecast to
    fall, but the change remains in the single digits and is far less than
    the 25 percent decline of 3 years ago. We also know that projections
    made in February are likely to change as the year progresses and
    production and prices adjust to changing conditions. A year ago, the
    USDA forecast for net farm income in 2016 would be $54.8 billion; last
    week's estimate put it just over $68.3 billion--higher by almost 25
    percent due in large part to lower than expected production expenses.
        The aggregate debt-to-asset ratio continues to rise, up from 12
    percent in 2015 to 13 percent in 2016 and 14 percent in 2017 (see
    Figure 1), but those levels remain low by historical standards (well
    below the 1985 peak of 22 percent). The continuing strength of farmland
    values underlies that low debt-to-asset ratio. Assets buoyed by strong
    land values would have to drop by almost 50 percent to boost debt-to-
    asset ratios to levels seen in the 1980s. That said, we have seen land
    values and cash rents decline last year, and evidence suggests that it
    will fall again in 2017. Recent data from the Federal Reserve Bank of
    Kansas City, noted a six percent fourth quarter, year-over-year decline
    in 10th District agricultural land values. In addition, debt-to-asset
    ratios vary among farm businesses by commodity specialization with
    close to 20 percent or more of farm businesses specializing in wheat,
    cotton, poultry, and hogs showing debt-to-asset ratios above 40 percent
    (see Figure 2). It is those producers that will be most vulnerable to a
    further downturn.
        As mentioned, the latest Federal Reserve report indicates that the
    value of new farm loans was down in the fourth quarter of 2016. Some of
    that decline is a result of tighter lending in the face of continuing
    low commodity prices and some the effect of lower demand from reduced
    expenditures on machinery and other expenses that can be delayed. But
    another reason appears to be input costs, as prices for seeds,
    fertilizer, feeder cattle, and cash rents all declined as producers
    continued to seek cost savings. Delinquencies rose only slightly last
    quarter (0.6 percent) and remain modest by historical standards and
    below levels seen in much of the last decade (see Figure 3).
        Looking at USDA's loan portfolio, demand for Farm Service Agency
    farm loans in Fiscal Year (FY) 2017 has remained steady, with no sign
    yet of increasing over last year's record levels and no sign of
    deterioration in the performance of outstanding loans--delinquencies
    have risen less than one percent. With interest rates still low and
    farmland values declining relatively slowly, farm debt presents a lower
    risk to the sector than in the 1980s. Current data suggests interest
    payments on current debt relative to net farm income is about 20
    percent; whereas in 1985 it exceeded 60 percent (see Figure 4).
        Farm budgets remain tight, however, with commodity prices expected
    to remain flat going into 2017 and beyond. We expect farm bill programs
    to continue to help farmers facing relatively low farm income. ARC, the
    largest program, began making payments for crop year 2015 in October
    and to date those payments have totaled $5.9 billion, with the largest
    shares going to corn, soybeans, and wheat base. PLC payments for crop
    year 2015, which also began going out in October, have totaled $1.9
    billion to date, with the largest shares going to rice, peanuts, and
    wheat base. Recent ERS and Congressional Budget Office (CBO)
    projections estimate payments for crop year 2016, which will be made
    beginning in October of this year, may be around $5 billion for ARC and
    $3.5 billion for PLC. CBO projects steady declines in ARC and PLC
    program payments for the final 2 years of the 2014 Farm Bill, since
    projected prices will remain close to present levels for many
    commodities, reducing ARC program guarantees.
        Dairy producers enrolled production largely at the minimum
    catastrophic coverage level under the new Margin Protection Program for
    dairy (MPP-Dairy). While producers received $11 million in payments
    during 2016, premiums received from producers totaled over $20 million.
    Estimates for 2017 are for minimal or no MPP-Dairy payments given
    moderating feed costs and improving milk prices. Cotton producers have
    the option of purchasing supplemental crop insurance coverage through
    the Stacked Income Protection Plan (STAX), but producers have not made
    much use of the program. Only 29 percent of cotton acres insured in
    2015 and 27 percent of cotton acres insured in 2017 carried STAX
    policies. To assist cotton producers to expand and maintain the
    domestic marketing of cotton, just under $330 million was paid in 2016
    through the one-time only Cotton Ginning Cost Share program. This
    program provided cotton producers with cost-share payments for their
    cotton ginning based on their share of 2015 cotton plantings. In
    addition, producers with former cotton base acres, now generic acres,
    are eligible to receive ARC or PLC payments on that base if they plant
    covered commodities. ARC and PLC payments on generic base acres for
    crop year 2015, which began going out in October with other ARC and PLC
    payments, totaled $444 million to date. In addition, many producers
    have the ability to choose crop insurance to manage risk for their
    crop, to help offset any unforeseen losses. ERS estimates that
    producers receive $3.5 billion in net insurance indemnities in 2017.
    Overall, ERS forecasts government payments, which include conservation
    payments of about $3.3 billion, to fall only slightly in 2017, to $12.5
    billion from $13 billion in 2016.
        Due in part to low commodity prices, demand for enrolling acreage
    in the Conservation Reserve Program (CRP) exceeds the acres available.
    The 2014 Farm Bill capped CRP at 24 million acres for the remainder of
    the farm bill. At the end of December 2016, CRP enrollment stood at
    23.5 million acres, with just 2.5 million acres set to expire at the
    end of this fiscal year.

        Outlook for prices remain mostly flat, with mixed production
    response.

        The backdrop to the 2017 outlook is similar to the last 2 years
    with general softening commodity prices, with narrowing producer
    margins, and a flat farm income picture. The context for that backdrop
    begins with rapid increases in agricultural commodity prices from 2008
    to 2012 that boosted farm incomes. Producers in the United States and
    other countries responded to those price signals by increasing
    plantings and production. Roughly a decade later, stock levels for many
    commodities are up globally as a result of 4 years of record or near
    record production. World consumption has also grown, but increased
    production has outpaced it. Stocks measured by days of use have
    expanded for wheat in particular and remain high for corn, soybeans,
    and cotton.
        Given favorable global harvests and ample stocks, we expect crop
    prices to remain mostly flat into 2017/18 (see Figure 5). Historically,
    changes in prices have provided a signal of where area is likely to
    head in the coming year. Last year's planting time price rally,
    combined with open planting weather that reduced prevent planted area,
    boosted the eight-crop area planted. Conversely, prevent planted area
    was above average in 2015, which contributed to the appearance of
    rising acreage in 2016. For 2017, expectations are for a return to a
    larger prevent planted area more in line with historical averages and
    planting weather. With a flat price signal, what do producers plant in
    the new crop year? Has responsiveness changed, with land improvements,
    reduced production costs, and other factors that keep land in
    production? With a decline in winter wheat seedings, will that land be
    allocated to other crops or go fallow? Or are we seeing a slower
    response to price signals?
        We would expect to see some response to the tepid price signals.
    Based on our recent long run baseline, U.S. planted area for the eight
    major crops is expected to decline in 2017, falling to 248.9 million as
    narrowing crop production margins push some acres out of production and
    we return to a more normal prevented planting acreage. Even as total
    acres fall, prospects for better returns in some crops, notably cotton
    and soybeans, are expected to cause reallocation of acres to these
    crops and their area is expected to increase year-over-year.
        For 2017/18, total corn supply in the United States is projected to
    be the second largest on record at 16.5 billion bushels. The largest
    corn beginning stocks since 1988/89 will dampen the production impact
    of a projected decline in corn planted area in 2017, as relative
    returns are expected to favor increased soybean plantings. The national
    corn yield is projected at a weather-adjusted trend of 170.8 bushels
    per acre, down from the record in 2016/17. Domestic use is forecast to
    decline with lower feed and residual use, largely reflecting a smaller
    crop, and is only partially offset by moderate growth in corn used to
    produce ethanol. Exports are projected to fall with strong competition
    from Argentina and Brazil. The season-average farm price received by
    producers is expected to decline 10 from 2016/17 to $3.30 per bushel.
    Stocks relative to use are expected to decline marginally in 2017/18,
    but are forecast to be well above the tight levels seen during 2010 to
    2013 and will continue to moderate prices.
        For wheat, four consecutive record world crops have pulled prices
    down from their highs of 2012. A record-smashing U.S. yield for the
    2016/17 crop (up nearly 12 percent from the previous record) and ample
    global production has further dampened the season-average farm price,
    which is projected to be the lowest since 2005/06. In response to the
    low prices, farmers have cut acreage sharply for the past 2 years. The
    2017 winter wheat planted area is projected to be the lowest in more
    than a century.
        A sharp increase in rice production in 2016/17 has sent U.S. ending
    stocks to the highest levels since the 1980s, with prices falling 36
    percent from 2013 to 2016. Global stocks are also up and projected to
    be the highest since 2001/02. The 2016/17 rice season average farm
    price is at the lowest level since 2006/07. In response to those low
    prices, U.S. farmers are projected to sharply reduce their rice planted
    area. In turn, we expect a modest recovery in season-average prices for
    2017/18 to $10.70 per hundredweight.

        Lower feed costs provide economic incentives for expansion in the
    livestock sector.

        Turning to the livestock, dairy, and poultry sectors, we project
    that total meat and poultry production will be at a record high of
    100.6 billion pounds in 2017, as production of beef, pork, broilers,
    and turkeys all increase. Milk production is also projected to be at a
    record 217.4 billion pounds in 2017. Those increases top the record
    production levels set just last year. Although prices for livestock,
    poultry, and milk declined in the last 2 years from record highs in
    2014, lower feed costs and, in the case of beef and dairy, improved
    forage supplies, provided the impetus for continued expansion of flocks
    and herds. In the case of hogs and turkey, further support for growth
    reflects recovery from disease outbreaks, which affected hog production
    in 2014 and turkey production in 2015.
        As a result of increased production in 2017, prices for cattle and
    hogs are expected to fall from 2016, but current strong demand has
    tempered those price declines (see Figure 6). Milk prices are projected
    to rise along with supplies, as use expands more rapidly. Fed steer
    prices are forecast to decline to $112.00 per hundredweight, down $8.86
    from the prior year as increased cattle supplies move through feedlots,
    with price declines limited by strong demand. Hog prices are expected
    to fall to $43.50 per hundredweight, down $2.66 from 2016 but supported
    by solid demand while supplies are expected to expand. Broiler prices
    are expected to average 84.8 per pound, up fractionally from 2016.
    With increased production but stronger exports, 2017 milk prices, as
    measured by the all milk price, are expected to gain $1.81 per
    hundredweight to $18.05, a strong rebound from the prior year.
    The Global Trade Environment
        The year 2016 showed some improvement in the global economy and
    trade environment, and this improvement is expected to continue in
    2017. USDA's 10 year baseline used assumptions that showed world GDP
    growth rising slowly and to plateau at three percent. A key component
    of the global slowdown is slowing economic growth in China. Baseline
    projections also assumed China's GDP growth of 6.2 percent in 2017, 5.9
    percent in 2018, and gradually edging down towards 5.5 percent. The
    latest IMF projections now show Chinese growth improving slightly with
    growth at 6.5 percent and 6.0 percent in 2017 and 2018, respectively.
        While that growth is still relatively high, China's adjustment to a
    more consumer-oriented economy implies less rapid growth. Steady growth
    is expected in India, as well as the rest of South and Southeast Asia,
    despite medium-term concerns about debt levels, inflation, and slowing
    demand from China. The Latin American region remains in recession,
    largely due to conditions in Venezuela and Brazil. Recent reforms in
    Argentina have improved its outlook in 2017 and policy shifts there are
    supportive of increased agricultural production and trade.
        The United States is expected to be the growth leader among
    developed countries over the next decade. U.S. economic growth is
    expected to be 2.3 percent in 2017, compared to 1.8 percent in 2016,
    and then gradually move to a longer term growth rate of 2.1 percent.
    Canada's economic growth rates are forecast to improve in 2017, while
    Mexico's near term outlook has become less certain. Over the longer
    run, the USDA baseline projections assume Mexico's GDP growth rate at
    2.9 percent.
        Driven by the relative strength and safety of the U.S. economy, the
    real value of the dollar continued to increase in 2016 relative to
    competitor and customer currencies, and that growth is expected to
    continue through 2017 constraining growth in U.S. agricultural exports
    somewhat in 2017 and into 2018. Since 2013, the real agricultural trade
    weighted exchange rate has risen 14.9 percent. In 2017, it is projected
    to rise by another 1.6 percent. A stronger dollar poses challenges,
    making it more difficult to sell products to countries with weaker
    currencies, such as Egypt and Nigeria (major wheat importers), while
    making it is easier for countries, such as Canada, the EU, Brazil, and
    Argentina to sell their agricultural products abroad, making for an
    extremely competitive trade environment.
        Expanding export opportunities for U.S. farm products is critical
    for the agricultural economy. U.S. agricultural exports account for
    about 20 percent of the value of U.S. agricultural production, nearly
    doubling since 1990. For some commodities, exports account for a
    significant share of production--around 50 percent for soybeans, wheat,
    and rice; 75 percent for cotton, and nearly 90 percent for almonds.
    Trade is not only important to U.S. farm incomes, but to the broader
    U.S. economy. USDA estimates that each dollar of U.S. farm exports
    produces an additional $1.27 in economic activity, and every billion
    dollars in agricultural sales overseas supports about 8,000 American
    jobs.
        The United States is projected to remain competitive in global
    agricultural markets and to grow export values over the next 10 years.
    U.S. agricultural exports were most recently forecast at $134 billion
    for FY 2017. That is up 3.3 percent from last year, pushed up by larger
    volumes even as unit value declines for many bulk commodities. The top
    three customers of U.S. agricultural products remain China, Canada, and
    Mexico, which account for 46% of U.S. agricultural exports (see Figure
    7).
        The FY 2017 forecast for grain and feed exports is flat at $29.6
    billion from FY 2016, with greater volumes, on larger supplies,
    offsetting a decline in unit values in aggregate. Oilseed and product
    exports are forecast at $31.0 billion, up from $29.5 billion the prior
    year as soybean export volumes continue to set records, with soybean
    unit values fractionally higher than last year. Cotton exports are
    forecast at $4.4 billion up a sizable $950 million on a boost in U.S.
    export volumes.
        Rice exports are forecast at $1.7 billion, $200 million below last
    year even as volumes rise as global rice prices soften. Livestock
    products are up $60 million from last year, to $16.5 billion, with
    lower prices largely offsetting an increase in volumes, while dairy
    products increase $720 million due to increasing global prices and
    expanding U.S. exports. Sales of horticultural products, driven by tree
    nut exports, are up by $1.0 billion.
        We expect exports of corn and corn substitutes to China will be
    limited in the near future as China's domestic agricultural policies
    attempt to reduce currently high stock levels. Conversely, for Brazil,
    we expect its producers to continue to expand production through a
    combination of yield increases and area expansion, including double
    cropping, over the next 10 years. That will translate into increased
    Brazilian exports and greater competition for the United States (see
    Figure 8).
        For FY 2017, agricultural imports are forecast to fall $0.6 billion
    to $112.5 billion with horticultural products, including fresh and
    processed fruits and vegetables representing $53.3 billion of that
    total and sugar and tropical products representing another $22.8
    billion. That implies the agricultural trade surplus will grow to $21.5
    billion in 2017 up 30 percent from 2016.
        A large portion of international trade in basic agricultural
    commodities is driven by increasing meat consumption and feed demand
    resulting from the production of livestock. Global meat consumption is
    expected to continue to grow over the next 10 years. Meat consumption
    is projected to grow through 2026/27 at an annual rate of 2.6 percent
    for Sub-Saharan Africa, 2.3 percent for North Africa, 2.2 percent for
    Southeast Asia, and 2.1 percent for the Middle East. By 2026/27, those
    four regions combined are expected to boost meat consumption by 8
    million tons, which is 20.3 percent of the global growth in meat
    demand. Meat imports by these four regions increase by 2.7 million
    tons, accounting for about 34.0 percent of their increased meat
    consumption. The rest comes from increased domestic production. These
    four regions account for almost 52.0 percent of increased global meat
    imports through 2026/27.
        Poultry trade expands the most among livestock products. Poultry
    exports by the major poultry exporting countries increase by almost 24
    percent, reaching more than 14.0 million metric tons by 2026/27 and
    adding nearly 3.0 million metric tons over the projection period. Beef
    exports by the major beef-exporting countries expand by 18 percent,
    reaching almost 11.0 million metric tons and adding 1.7 million metric
    tons to trade by 2026. Major pork exporters expand trade by 11 percent,
    reaching more than 9 million metric tons by 2026.
        Corn is one of the key agricultural commodities used to feed
    livestock. Some countries are not well suited to grow corn or are
    unable to expand corn production to meet increasing domestic demand for
    feed. The regions with the fastest growth in corn imports include Sub-
    Saharan Africa, North Africa, and the Middle East, with annual growth
    rates of 4.3 percent, 3.0 percent, and 2.5 percent, respectively in the
    near term. Over the next 10 years, corn imports for those three regions
    are forecast to account for nearly half of the world's increase in corn
    imports. Southeast Asia's corn imports are increasing due to its fast
    growing meat sectors, mostly poultry and pork. Over the next 10 years,
    Southeast Asia's annual corn demand increases by 3.8 million tons,
    accounting for 15 percent of increased world trade. South America is
    also expanding meat production, leading to increased corn imports of
    2.9 million tons by 2026/27. Together the four regions discussed--
    Africa, Middle East, South East Asia, and South America--account for
    almost \3/4\ of the world's increase in corn imports over the next 10
    years.
        Global soybean trade is projected to increase by 25 percent during
    the projection period, adding 36 million metric tons and reaching
    almost 180 million metric tons by 2026/27. China's soybean imports
    account for 85 percent of this projected increase. While production is
    expected to increase in both South America, specifically Argentina and
    Brazil, and also in the United States, U.S. production growth will not
    result in large growth in trade but will be needed to satisfy domestic
    grown in meal demand. As a consequence, much of the assumed growth in
    global trade, and to China in particular, will be met by growth in area
    and yields in South America, pushing the U.S. share of trade down over
    the coming decade.
    Summary
        Our long-run expectations for global agriculture reflect an
    assumption of steady world economic growth and continued global demand
    for biofuel feedstocks, factors that combine to support longer run
    increases in consumption, trade, and prices of agricultural products.
    However, over the next several years, the agricultural sector will
    continue to adjust to lower prices for most farm commodities both in
    the U.S. and abroad. Although reduced energy prices have decreased
    energy-related agricultural production costs, lower crop prices are
    expected to result in declines in planted acreage. We have seen that in
    the U.S. most recently in the decline in winter wheat area of 3.8
    million acres, the lowest since 1908.
        In addition, many of the cost-saving farm strategies we have
    observed over the past few years will likely continue, such as reduced
    purchases of machinery and more aggressive restructuring of debt and
    rental agreements. We would still expect to see demand for operating
    loans to rise accompanied by tightening availability, which should
    start to put upward pressure on interest rates. Currently, interest
    rates on loans remain very low, so that new debt is still not expected
    to result in a significant increase in operating costs for most
    producers. We would expect land value and cash rent levels to realign
    to the lower price environment. Payments under the ARC program are
    expected to decrease in FY 2018 and FY 2019 (for crop years 2016 and
    2017) after peaking in FY 2017 (for crop year 2015), since projected
    prices will remain close to present levels for many commodities,
    reducing ARC guarantees. The MPP-Dairy program is not expected to
    provide significant outlays in 2017 due to rising milk prices and
    continuing low feed costs. In addition, demand to enroll acreage in the
    CRP is expected to remain strong in 2017 and far exceed the available
    acres. Crop insurance net indemnities were negative in 2016, but would
    be expected to increase in 2017 with more normal weather patterns.
        USDA's expectations of the new crop year, farm programs, and
    impacts on the farm economy this year and through the 10 year baseline
    period were developed in December of 2016. We are updating many of our
    assumptions, and will be publishing our first balance sheets and
    updating our trade outlook for the 2017/18 crop year prior to the USDA
    Agricultural Outlook Forum in just over a week.
        Mr. Chairman, that concludes my opening statement and I am happy to
    answer any follow up questions you might have now or later for the
    record.
                                    Figures
    Figure 1. Debt-to-Asset Ratio Rising As Net Farm Income Falls, But
            Remains Historically Low

            Billion (2009$)                               Percent

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Data: USDA-ERS.
    Figure 2. Financial Stress Varies By Commodity Specialization

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Data: USDA-ERS (November 2016).
    Figure 3. Delinquency Rates on Farm Loans Up Slightly
    Chart 9: Past Due and Nonaccruing Farm Loans

    Percent, seasonally adjusted *        Percent, seasonally adjusted *

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                * Percent of all outstanding non-real estate farm
            production loans at
              commercial banks.
                ** Total non-performing loans includes the share of all
            past due,
              nonaccruing and net charge-off loans.
                Source: Agricultural Finance Book, Table B.2.

              Source: Kauffman, N. and M. Clark (2016) ``Volume of New Ag
            Loans Drops,'' Federal Reserve Bank of Kansas City Quarterly
            Report (January 20; available online at: https://
            www.kansascityfed.org/research/indicators
            data/agfinancedatabook/articles/2017/01-20-2017/ag-finance-dbk-
            01-20-2017).
    Figure 4. Interest Payments Remain Modest Relative to Income

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Data: USDA-ERS.

    Figure 5. Corn, Cotton, and Soybean Prices Soften, But Wheat and Rice To
                                     Turn Up
    ------------------------------------------------------------------------
       Item      2012     2013     2014     2015    2016F    2017 *     %?
    ------------------------------------------------------------------------
    Wheat ($/   87.770     6.87     5.99     4.89     3.85     4.00      3.9
     bu )
    Corn ($/    86.890     4.46     3.70     3.61     3.40     3.30     ^2.9
     bu)
    Soybeans   814.400    13.00    10.10     8.95     9.50     9.35     ^1.6
     ($/bu)
    Cotton (/   72.50    77.90    61.30    61.20    69.00    64.00     ^7.2
     lb)
    All Rice     15.10    16.30    13.40    12.10    10.50    10.70      1.9
     ($/cwt)
    ------------------------------------------------------------------------
    Source: USDA-OCE World Agricultural Supply and Demand Estimates,
      February 9, 2017.
    * USDA-OCE, USDA Agricultural Projections to 2026.
    8Highlight0 denotes record high.

    Figure 6. Cattle and Hog Prices To Come Down, Broiler Prices Up Slightly
                                     in 2017
                                (Dollars per cwt)
    ------------------------------------------------------------------------
       Item      2012     2013     2014     2015     2016    2017F      %D
    ------------------------------------------------------------------------
    Steers       122.9    125.9  8154.60    148.1    120.9    112.0     ^7.4
    Hogs          60.9     64.1   876.00     50.2     46.2     43.5     ^5.8
    Broilers      86.6     99.7  8104.90     90.5     84.3     84.8      0.6
    Milk          18.5     20.1   824.00     17.1     16.2     18.5     14.2
    ------------------------------------------------------------------------
    Source: USDA-OCE World Agricultural Supply and Demand Estimates,
      February 9, 2017.
    * USDA-OCE, USDA Agricultural Projections to 2026.
    8Highlight0 denotes record high.

    Figure 7. U.S. Agricultural Exports Dominated By China, Canada, and
            Mexico
    $Billion

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: USDA. Data are fiscal year.
    Figure 8. Brazil Expected To Capture Much of the Increase in Global
            Corn Exports
    Million Metric Tons

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: USDA.

        The Chairman. Thank you.
        Dr. Kauffman, 5 minutes.

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

        Dr. Kauffman. Thank you, Mr. Chairman, Members of the
    Committee. It is an honor to be here this morning, I very much
    appreciate the invitation.
        My name is Nathan Kauffman. I am an Economist and Omaha
    Branch Executive with the Federal Reserve Bank of Kansas City,
    a regional reserve bank that has long devoted significant
    attention to U.S. agriculture. In my role, I lead several
    efforts to track the agricultural and rural economy, including
    a regional agricultural credit survey, and the Federal Reserve
    System's Agricultural Finance Databook, which is a national
    survey of agricultural lending activity at commercial banks.
        Our bank remains committed to including perspectives from
    rural America and discussions on the national economy, and I am
    here to share with you this morning recent developments in the
    U.S. farm sector. My comments will largely focus on the current
    environment and agricultural credit markets and farm finances.
    Before I begin, let me emphasize that my statement represents
    my view only, and is not necessarily that of the Federal
    Reserve System or any of its representatives.
        The outlook for the U.S. farm economy remains subdued, and
    financial stress has increased modestly for many producers over
    the past year. Following several years of historically high
    farm income prior to 2014, which was primarily driven by strong
    demand for agricultural products and high commodity prices,
    farm income has dropped significantly and is expected to remain
    low in the near future.
        The low price of major agricultural commodities has
    remained a primary driver of the weakness in U.S. farm income,
    despite some reduction in farm production expenses. Put simply,
    the downturn in the agricultural economy appears to be
    continuing into a fourth consecutive year. According to our
    bank's quarterly survey, farm income has declined from previous
    year levels in every quarter since mid-2013. Surveys conducted
    by other regional Federal Reserve Banks have shown a similar
    trend of declining farm income, reduced cash flow, and
    weakening agricultural credit conditions.
        The prolonged downturn in the U.S. agricultural economy has
    led to gradual but steady increases and financial stress among
    agricultural borrowers. Our data show that working capital has
    decreased modestly each of the past 3 years, and the rate at
    which farm loans are repaid has declined in every quarter since
    mid-2013.
        Alongside reduced cash flow and depletion of working
    capital, demand for farm loans has increased, particularly for
    short-term operating loans. The Federal Reserve's Agricultural
    Finance Databook, included with my written testimony, shows
    that nearly 60 percent of new farm loans originated at
    commercial banks are used to finance operating expenses.
    Moreover, data from commercial banks and the Farm Credit System
    both show steady increases in outstanding farm debt in each of
    the past 4 years, which, to reiterate, has been a period of
    declining farm income.
        Recent data from commercial banks suggests the pace of debt
    accumulation may be slowing, however, the debt-to-asset ratio
    in the farm sector, which is a key measure of the financial
    health of farm borrowers, has increased modestly in each of the
    past 4 years, according to USDA, and is projected to increase
    further in 2017.
        A steady decline in farmland values has also contributed to
    a gradual increase in financial stress, and a higher debt-to-
    asset ratio. Regional Federal Reserve surveys show that the
    average value of high-quality cropland has declined by 10 to 20
    percent since 2013 in states with a high concentration of crop
    production.
        Although the downturn in the farm economy has persisted,
    some indicators are more positive. Strong crop yields in 2016
    led to stronger cash flow last year than what was initially
    anticipated, and cash income is projected to remain steady in
    2017. Moreover, the debt-to-asset ratio of the farm sector,
    while rising, is still historically low, and the persistent
    decline in farmland values has, in fact, been quite modest thus
    far.
        The relative strength in farmland values has likely
    shielded the farm economy from potentially more severe
    financial stress, since farmland accounts for more than 80
    percent of the value of farm sector assets, and is an important
    source of collateral for other farm loans. The strength in land
    values has given agricultural lenders some opportunities to
    work with borrowers by restructuring loans and requesting
    additional collateral in response to heightened risk in their
    loan portfolios.
        To briefly summarize, agricultural credit conditions have
    weakened somewhat over the past year, and financial stress in
    the U.S. farm sector appears to have increased modestly as
    commodity prices and farm income have remained low. However, a
    farm crisis on the scale of the 1980s still does not appear
    imminent, as farm loan delinquency rates remain low, and credit
    availability has generally remained strong. But if farm income
    remains persistently low, if farmland values continue to
    decline, and if debt continues to rise, all of which have been
    trends in recent years, it is possible that key indicators of
    financial stress, such as debt-to-asset ratios, could rise to
    levels similar to the 1980s over a longer time horizon.
        This concludes my formal remarks, and I would be happy to
    take questions at the appropriate time. Thank you.
        [The prepared statement of Dr. Kauffman follows:]

        Prepared Statement of Nathan S. Kauffman, Ph.D., Assistant Vice
    President, Economist, and Omaha Branch Executive, Omaha Branch, Federal
                     Reserve Bank of Kansas City, Omaha, NE
        Thank you, Mr. Chairman and Members of the Committee. My name is
    Nathan Kauffman, and I am an Economist and Omaha Branch Executive with
    the Federal Reserve Bank of Kansas City, a regional Reserve Bank that
    has long devoted significant attention to U.S. agriculture. In my role,
    I lead several efforts to track the agricultural and rural economy,
    including a regional agricultural credit survey and the Federal Reserve
    System's Agricultural Finance Databook, a national survey of
    agricultural lending activity at commercial banks. Our Bank remains
    committed to including perspectives from rural America in discussions
    on the national economy, and I am here to share with you this morning
    recent developments in the U.S. farm sector. My comments will largely
    focus on the current environment in agricultural credit markets and
    farm finances. Before I begin, let me emphasize that my statement
    represents my view only and is not necessarily that of the Federal
    Reserve System or any of its representatives.
        The outlook for the U.S. farm economy remains subdued and financial
    stress has increased modestly for many producers over the past year.
    Following several years of historically high farm income prior to 2014,
    which was primarily driven by strong demand for agricultural products
    and high commodity prices, farm income has dropped significantly and is
    expected to remain low in the near future. The low price of major
    agricultural commodities has remained a primary driver of the weakness
    in U.S. farm income despite some reduction in farm production expenses.
        Put simply, the downturn in the agricultural economy appears to be
    continuing into a fourth consecutive year. According to our Bank's
    quarterly survey, farm income has declined from previous year levels in
    every quarter since mid-2013. Surveys conducted by other regional
    Federal Reserve Banks have shown a similar trend of declining farm
    income, reduced cash flow, and weakening agricultural credit
    conditions.
        The prolonged downturn in the U.S. agricultural economy has led to
    gradual but steady increases in financial stress among agricultural
    borrowers. Our data show that working capital has decreased modestly
    each of the past 3 years, and the rate at which farm loans are repaid
    has declined in every quarter since mid-2013.
        Alongside reduced cash flow and depletion of working capital,
    demand for farm loans has increased, particularly for short-term
    operating loans. The Federal Reserve's Agricultural Finance Databook,
    included with my written testimony, shows that nearly 60 percent of new
    farm loans originated at commercial banks are used to finance operating
    expenses. Moreover, data from commercial banks and the Farm Credit
    System both show steady increases in outstanding farm debt in each of
    the past 4 years, which, to reiterate, has been a period of declining
    farm income. Recent data from commercial banks suggests the pace of
    debt accumulation may be slowing. However, the debt-to-asset ratio in
    the farm sector, which is a key measure of the financial health of farm
    borrowers, has increased modestly in each of the past 4 years according
    to USDA and is projected to increase further in 2017.
        A steady decline in farmland values has also contributed to a
    gradual increase in financial stress and a higher debt-to-asset ratio.
    Regional Federal Reserve surveys show that the average value of high
    quality cropland has declined by 10 to 20 percent since 2013 in states
    with a high concentration of crop production.
        Although the downturn in the farm economy has persisted, some
    indicators are more positive. Strong crop yields in 2016 led to
    stronger cash flow last year than what was initially anticipated, and
    cash income is projected to remain steady in 2017. Moreover, the debt-
    to-asset ratio of the farm sector, while rising, is still historically
    low and the persistent decline in farmland values has, in fact, been
    quite modest thus far.
        The relative strength in farmland values has likely shielded the
    farm economy from potentially more severe financial stress, since
    farmland accounts for more than 80 percent of the value of farm sector
    assets and is an important source of collateral for other farm loans.
    The strength in land values has given agricultural lenders some
    opportunities to work with borrowers by restructuring loans and
    requesting additional collateral in response to heightened risk in
    their loan portfolios.
        To briefly summarize, agricultural credit conditions have weakened
    somewhat over the past year and financial stress in the U.S. farm
    sector appears to have increased modestly as commodity prices and farm
    income have remained low. However, a farm crisis on the scale of the
    1980s still does not appear imminent, as farm loan delinquency rates
    remain low, and credit availability has generally remained strong. But,
    if farm income remains persistently low, if farmland values continue to
    decline, and if debt continues to rise, it is possible that key
    indicators of financial stress, such as debt-to-asset ratios, could
    rise to levels similar to the 1980s over a longer time horizon.
                                   Attachment
    Federal Reserve Bank of Kansas City: Agricultural Finance Databook
            (January 2017)
    ``Volume of New Ag Loans Drops''
    By Nathan Kauffman, Assistant Vice President and Omaha Branch Executive
    and Matt Clark, Assistant Economist.
    Summary
        Farm lending activity at commercial banks slowed significantly in
    the fourth quarter as lenders and borrowers assessed economic prospects
    for 2017. Despite persistent increases in the level of outstanding farm
    debt and ongoing demand for loan renewals, new loan originations
    dropped sharply. Some of the reduced loan volume likely stemmed from
    lower costs of farm inputs. However, as the outlook for farm income
    generally has remained weak and farmland values have continued to
    decline, both lenders and borrowers may have been more apprehensive
    about adding new debt heading into 2017.
    Section A--Fourth Quarter Survey of Terms of Bank Lending to Farmers
        The volume of new farm loans dropped sharply in the fourth quarter
    of 2016, according to respondents to the Survey of Terms of Bank
    Lending to Farmers. The survey, which asks bankers about new loans to
    farmers, indicated the volume of non-real estate loans in the farm
    sector dropped 40 percent from a year ago. The 40 percent drop was the
    largest year-over-year decline in nearly 20 years (Chart 1).
        The sharp reduction in the volume of new farm loans at commercial
    banks occurred during a prolonged decline in farm revenue. In 2016,
    prices for most agricultural commodities continued to fall, building on
    the declines of previous years, with soybeans being a notable exception
    (Chart 2). A 30 percent year-over-year drop in the price of feeder
    cattle helped reduce the cost of purchasing the animals and likely
    contributed to the sharp reduction in loan volumes in the livestock
    sector. More generally, lower prices appeared to temper demand for new
    agricultural financing as producers tried to curtail expenditures. Some
    banks, recognizing greater risk in the farm sector, may have been more
    selective in financing new loan requests, and some financing decisions
    may have been delayed in the environment of heightened risk.
    Chart 1: Non-Real Estate Farm Loan Volumes by Purpose, Fourth Quarter

            Billion Dollars                       Billion Dollars

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: Agricultural Finance Databook, Table A.3.
    Chart 2: Agricultural Commodity Prices, Fourth Quarter

    Percent change from previous year     Percent change from previous year

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                          <
              Source: Haver Analytics, The Wall Street Journal.

        In addition to lower commodity prices, lower prices for
    agricultural inputs may have contributed to the drop in loan volume for
    items other than real estate. The cost of seeds, fertilizer and cash
    rents all were down from a year ago (Chart 3). The decline in input
    costs likely was a significant factor in reducing the volume of loans
    used, specifically, to finance operating expenses. For example, the
    U.S. Department of Agriculture (USDA) estimates that the cost of cash
    rent, fertilizer and seed accounted for more than 60 percent of the
    total cost of corn production in 2016.i Because loans used
    for operating expenses comprise about 60 percent of non-real estate
    loan volume, the decline in input expenses likely curbed the volume of
    new farm loans originated in the fourth quarter as farmers prepared for
    the 2017 planting season (Chart 4).
    ---------------------------------------------------------------------------
        [i Data calculated from the United States Department of
    Agriculture - Economic Research Service, Commodity Costs and Returns
    division, "Cost-of-Production Forecasts" available at https://
    www.ers.usda.gov/data-products/commodity-costs-and-returns/commodity-
    costs-and-returns/#Cost-of-Production Forecasts.]
        Editor's note: the above footnote was not included in the submitted
    testimony supplied by Dr. Kauffman. The reference was retrieved from
    the webpage version on the Federal Reserve Bank of Kansas City at:
    https://www.kansascityfed.org/research/indicatorsdata/agfinancedata
    book/articles/2017/01-20-2017/ag-finance-dbk-01-20-2017
    ---------------------------------------------------------------------------
    Chart 3: Farm Production Costs, Fourth Quarter

    Percent change from previous year     Percent change from previous year

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              * Author's estimate using data collected from Federal Reserve
            Banks' Agricultural Credit Survey
              Note: The percentages below the horizontal axis represent
            each input's share of production costs.
              Sources: USDA, Haver Analytics, EIA, Federal Reserve Bank of
            Kansas City, Minneapolis and St. Louis.
    Chart 4: Operating Expenses as a Share of Total Non-Real Estate Loan
            Volume

                    Percent                               Percent

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: Agricultural Finance Databook, Table A.3.

        Although expenses declined, profit margins remained tight and
    bankers responded with further adjustments to loan terms. Bankers
    extended the maturities for feeder livestock, other livestock and farm
    machinery loans by 16, 42 and 13 percent, respectively (Chart 5).
    Longer maturities on intermediate assets may help some producers facing
    short-term cash flow shortages and also may help banks avoid past-due
    payments.
        Bankers also raised interest rates in the fourth quarter on all
    types of non-real estate farm loans. Most notably, interest rates for
    other livestock and farm machinery increased 0.89 and 0.45 percentage
    point, respectively (Chart 6). Farm machinery and other livestock carry
    longer maturity periods and a rate increase may represent a risk-
    compensation measure when profit margins are tight. Because more than
    85 percent of non-real estate loans carried a floating interest rate in
    the fourth quarter, slight increases in market interest rates may have
    led to slightly higher interest rates for short-term operating loans in
    the farm sector. Conversely, interest rates for farm real estate loans
    edged lower to 4.0 percent in the fourth quarter.
    Chart 5: Maturities on Non-Real Estate Farm Loans, Fourth Quarter

                     Months                                Months

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: Agricultural Finance Databook, Table A.4.
    Chart 6: Interest Rates on Farm Loans, Fourth Quarter

                    Percent                               Percent

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Note: Interest rates are weighted by loan volume.
              Source: Agricultural Finance Databook, Table A.8.
    Section B--Third Quarter Call Report
        Despite the sharp reduction in new loan originations, outstanding
    farm-sector debt at commercial banks continued to rise, but at a slower
    pace. Call Report data indicated outstanding debt increased five
    percent from a year ago (Chart 7). Although the volume of new loans has
    dropped recently, a slower rate of loan repayments likely has
    contributed to further increases in the amount of total farm debt
    outstanding at commercial banks. Nevertheless, the five-percent
    increase in outstanding debt was the smallest in more than 3 years.
    Chart 7: Farm Debt Outstanding at Commercial Banks

    Percent change from previous year     Percent change from previous year

                      [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: Agricultural Finance Databook, Table B.1.

        Slower growth in the level of non-real estate farm debt has reduced
    the overall pace of debt accumulation in the sector. For example, from
    the third quarter of 2012 to the third quarter of 2015, outstanding
    debt used to finance non-real estate farm loans grew at an average
    annual rate of six percent following 12 years of growth that averaged
    less than 0.5 percent (Chart 8). In the third quarter of 2016, however,
    non-real estate debt grew less than two percent from the previous year.
    Growth in farm real estate debt also slowed slightly in 2016, but has
    remained relatively steady since 2000.
    Chart 8: Farm Debt Outstanding at Commercial Banks

    Billion Dollars (2016 Dollars), sa    Billion Dollars (2016 Dollars), sa

                      [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: Agricultural Finance Databook, Table B.1.

        An increase in non-performing loans may also explain a portion of
    the slowdown in debt accumulation. In the third quarter, the share of
    non-performing loans increased to 1.7 percent from 1.1 percent a year
    earlier. Although still modest historically, the share of total non-
    performing loans in the third quarter was the highest since 2012, and
    may have caused some lenders and borrowers to moderate their use of
    debt to prevent further financial stress (Chart 9).
        Despite slight increases in non-performing loans, performance of
    agricultural banks remained strong. Returns on assets, a typical
    measure of bank performance, increased to 0.91 percent, the highest
    third quarter rate of return since 1998 (Chart 10). The loan-to-deposit
    ratio at agricultural banks also increased to 0.81 percent, the highest
    since the third quarter of 2009.
    Chart 9: Past Due and Non-Accruing Farm Loans

    Percent, seasonally adjusted *        Percent, seasonally adjusted *

                          [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              * Percent of all outstanding non-real estate farm production
            loans at commercial banks.
              ** Total non-performing loans includes the share of all past
            due, nonaccruing and net charge-off loans.
              Source: Agricultural Finance Databook, Table B.2.
    Chart 10: Rate of Return on Assets, Third Quarter

                    Percent                               Percent

                [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: Agricultural Finance Databook, Table B.7.
    Section C--Third Quarter Regional Agricultural Data
        Regional Federal Reserve surveys also showed that demand for non-
    real estate financing in the farm sector increased, but not as strongly
    as in recent years. According to the surveys, demand for non-real
    estate loans increased in the Chicago, Kansas City and Minneapolis
    districts in the third quarter. However, growth was slower in Kansas
    City and Minneapolis than in 2015 (Chart 11). Additionally, demand for
    non-real estate financing in the third quarter declined in the Dallas
    district for the first time since 2013 and was unchanged in the St.
    Louis district for the second consecutive year.
    Chart 11: Demand for Non-Real Estate Farm Loans, Third Quarter

          Diffusion Index *                     Diffusion Index *

                       [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              * Diffusion Index is calculated by subtracting the percentage
            of respondents who indicated ``lower'' from the percentage of
            respondents who indicated ``higher'' and adding 100.
              Source: Agricultural Finance Databook, Table C.1.

        In addition to loan demand, demand for loan renewals and extensions
    also has continued to rise. The share of bankers that reported an
    increase in loan renewals and extensions was the highest in survey
    history for the Chicago, Kansas City, Minneapolis and St. Louis
    districts and the highest since 2001 in the Dallas district (Chart 12).
    Conversely, the share of bankers that reported higher repayment rates
    was at, or near, historical lows for the Chicago, Dallas, Minneapolis
    and St. Louis districts and the lowest since 1999 in the Kansas City
    District. Elevated demand for loan renewals and extensions and weaker
    repayment rates underscored a growing sense of financial stress in the
    farm sector.
    Chart 12: Selected Agricultural Credit Conditions

     Higher Renewals and Extension Rate         Higher Repayment Rates

    Percent of Bankers, four quarter ma   Percent of Bankers, four quarter
                                                               ma

                          [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: Agricultural Finance Databook, Table C.1.

        Prolonged financial stress in the farm sector also has continued to
    curb farm real estate values. In fact, farmland values in all states in
    the Chicago, Kansas City and Minneapolis districts have declined from
    their recent peaks (Table). Most notably, nonirrigated cropland values
    have dropped by 20 percent, on average, in Kansas and 19 percent in
    Iowa since 2013. Although, this represents an annualized rate of only
    5-8 percent, persistent and gradual declines could lead to further
    financial stress in the farm sector in the coming years.

      Table: Change in the Value of Nonirrigated Cropland (Peak to 2016:Q3)
    ------------------------------------------------------------------------
                                                        Percent Change from
              State                Peak Quarter                Peak
    ------------------------------------------------------------------------
                  Kansas                   2013:Q4                     ^20
                    Iowa                   2013:Q2                     ^19
              Minnesotta                   2013:Q1                     ^16
            South Dakota                   2014:Q3                     ^16
       Mountain States *                   2016:Q2                     ^14
                Nebraska                   2013:Q3                     ^11
       Northern Illinois                   2014:Q2                     ^11
            North Dakota                   2015:Q3                      ^9
        Northern Indiana                   2013:Q4                      ^9
                Oklahoma                   2015:Q4                      ^4
                Missouri                   2013:Q3                      ^2
      Southern Wisconsin                   2015:Q1                      ^1
                   Texas                   2016:Q3                    (**)
    ------------------------------------------------------------------------
    * Mountain States include Colorado, northern New Mexico and Wyoming.
    ** No decline.
    Sources: Federal Reserve Banks of Chicago, Dallas, Kansas City,
      Minneapolis, and St. Louis.

    Conclusion
        A gradual increase in the level of financial stress in the farm
    sector has caused agricultural lenders and borrowers to become
    increasingly cautious. Although declines in the cost of some key inputs
    have provided modest relief, profit margins have remained low and new
    farm loan originations dropped sharply in the fourth quarter. If profit
    margins remain low through 2017, the pace of new debt will be a key
    indicator to monitor in assessing the severity of financial stress
    through the year.

        The Chairman. Thank you, Dr. Kauffman.
        Dr. Outlaw, 5 minutes.

             STATEMENT OF JOE L. OUTLAW, Ph.D., PROFESSOR,
                 EXTENSION ECONOMIST, AND CO-DIRECTOR,
    AGRICULTURAL AND FOOD POLICY CENTER, DEPARTMENT OF AGRICULTURAL
          ECONOMICS, TEXAS A&M UNIVERSITY, COLLEGE STATION, TX

        Dr. Outlaw. Chairman Conaway, Ranking Member Peterson, and
    Members of the Committee, thank you for the opportunity to
    testify on behalf of the Agriculture and Food Policy Center at
    Texas A&M University.
        As many of you know, our primary focus has been on
    analyzing the likely consequence of policy changes at the farm
    level with our one-of-a-kind dataset of information that we
    collect from commercial farmers and ranchers located across the
    United States. For over 30 years, we have worked with
    Agriculture Committees, providing Members and Committee staff
    objective research regarding the potential farm-level effects
    of agricultural policy changes. Working closely with commercial
    producers has provided our group with a unique perspective on
    agricultural policy. I was specifically asked to provide my
    perspective today about the conditions for crop agriculture.
        In 1983, we began collecting information from panels of
    four to six farmers and ranchers that make up what we call
    representative farms, located in the primary production regions
    of the United States, for the major agricultural commodities.
    The results I am going to discuss today focus on the financial
    condition at the end of 2016 crop year for the 64
    representative crop farms located in 20 states.
        Figure 1, included in my testimony, indicates each farm's
    location, type of farm, and the total number of acres on the
    farm. We have developed a color-coding system to provide a
    quick way of showing how the farms are doing. Each farm is
    evaluated based on: first, their ability to cash flow; and
    second, their ability to maintain equity. If a farm has less
    than a 25 percent chance of not cash flowing or losing equity
    then it is coded green. Yellow farms have between a 25 and 50
    percent chance, while red farms have a greater than 50 percent
    chance of not cash flowing and losing equity.
        Figures 2 through 5, provided in the testimony, provide
    maps of all the farms, along with our rating of their financial
    condition at the end of the 2016 crop year.
        To be blunt, these results are bad, with very little hope
    of recovery on the horizon, given current price forecasts by
    FAPRI and USDA. Forty-nine of 64 farms are in moderate or poor
    financial condition. Specifically, 17 of 23 feedgrain farms, 9
    of 11 wheat farms, 11 of 15 cotton farms, and 12 of 15 rice
    farms end the period in moderate or poor financial condition.
    The overwhelming majority of the farms end 2016 with the high
    likelihood of serious cash flow shortfalls. On the other hand,
    the probability of large equity losses are much lower across
    all farms.
        We contact our individual representative farm members when
    we need their feedback on important issues. For this hearing,
    we specifically asked them about their financial situation now,
    relative to last year at this time. How has their equity
    position changed since 2013, which was the height of the
    market, and why their overall observations of the current
    financial environment. Below are a few generalizations I can
    make after reviewing all of the responses. There was only one
    farmer that reported making a profit on the 2016 crop. Corn
    farmers from North Dakota and Iowa, as well as cotton farmers
    from west Texas indicated the only reason they broke even in
    2016 were record yields. Generally, all the rest indicated that
    2016 was a loss year where they had to roll operating notes
    forward or draw from reserves to pay off operating loans. Most
    indicated their equity positions were down at least 20 percent
    from 2013. Land values have declined some; however, many cited
    a substantial decline in equipment values as a major cause of
    lower equity, in addition to having to borrow more. Their
    overall observations about the current financial environment
    were very discouraging, to say the least. They all indicated
    there is nothing else left to cut. They worry about the future
    of farming for younger farmers who are likely carrying more
    debt as they try to build their operations.
        In summary, I want to offer a few points for your
    consideration. First, the producer safety net contained in the
    2014 Farm Bill has worked as intended for all crop farms except
    cotton. The combination of Federal crop insurance and title I
    commodity programs has helped the overwhelming majority of U.S.
    producers stay in business through some very difficult times.
    While the farmers we met with all expressed concern for the
    future, many indicated there wouldn't be a future without crop
    insurance to protect against weather problems, and the PLC and
    ARC programs to protect against low prices and incomes. The
    lone exception is cotton as their STAX program has not provided
    the protection producers were hoping for. Not having title I
    programs to protect from the sustained drop in cotton prices
    has caused severe financial difficulties only overcome by
    occasional record yields. Second, according to USDA, in the 3
    years since the 2014 Farm Bill was passed, crop cash receipts
    have fallen $23.7 billion. During that time, title I payments
    to crop farmers have totaled $13.2 billion, or a little more
    than \1/2\ of the estimated loss in crop receipts. In no way
    are commodity payments making producers whole.
        And finally, it seems like nearly every month there is
    another report issued from interest groups who want to
    dismantle the producer safety net, often saying programs are
    too lucrative. Not only are the programs not too lucrative, but
    there is a growing need to provide additional funding as
    adverse economic conditions are expected to continue.
        Mr. Chairman, that completes my statement.
        [The prepared statement of Dr. Outlaw follows:]

        Prepared Statement of Joe L. Outlaw, Ph.D., Professor, Extension
        Economist, and Co-Director, Agricultural and Food Policy Center,
      Department of Agricultural Economics, Texas A&M University, College
                                  Station, TX
        Chairman Conaway, Ranking Member Peterson, and Members of the
    Committee, thank you for the opportunity to testify on behalf of the
    Agricultural and Food Policy Center at Texas A&M University as you
    focus on the growing farm financial pressure gripping our nation. As
    many of you know, our primary focus has been on analyzing the likely
    consequences of policy changes at the farm level with our one-of-a-kind
    dataset of information that we collect from commercial farmers and
    ranchers located across the United States.
        Our Center was formed by our Dean of Agriculture at the request of
    Congressman Charlie Stenholm to provide Congress with objective
    research regarding the financial health of agriculture operations
    across the United States. For over 30 years we have worked with the
    Agricultur[e] Committees in both the U.S. Senate and House of
    Representatives providing Members and Committee staff objective
    research regarding the potential farm-level effects of agricultural
    policy changes.
        Working closely with commercial producers has provided our group
    with a unique perspective on agricultural policy. While we normally
    provide the results of policy analyses to your staff without
    commentary, I was specifically asked to provide my perspective today
    about the conditions for crop agriculture.
        In 1983 we began collecting information from panels of four to six
    farmers or ranchers that make up what we call representative farms
    located in the primary production regions of the United States for most
    of the major agricultural commodities (feedgrain, oilseed, wheat,
    cotton, rice, cow/calf and dairy). Often, two farms are developed in
    each region using separate panels of producers: one is representative
    of moderate size full-time farm operations, and the second panel
    usually represents farms two to three times larger.
        Currently we maintain the information to describe and simulate
    around 100 representative crop and livestock operations in 29 states.
    We have several panels that continue to have the original farmer
    members we started with back in 1983. We update the data to describe
    each representative farm relying on a face-to-face meeting with the
    panels every 2 years. We partner with FAPRI at the University of
    Missouri who provides projected prices, policy variables, and input
    inflation rates. The producer panels are provided pro forma financial
    statements for their representative farm and are asked to verify the
    accuracy of our simulated results for the past year and the
    reasonableness of a 6 year projection. Each panel must approve the
    model's ability to reasonably reflect the economic activity on their
    representative farm prior to using the farm for policy analyses.
        The results I am going to discuss today focus on the financial
    condition at the end of the 2016 crop year for 64 representative crop
    farms located in 20 states. Figure 1 indicates each farm's location,
    type of farm and the total number acres on the farm. The analysis
    utilizes FAPRI's December 2016 baseline commodity price projections for
    2016 since the actual prices will not be known until the end of the
    marketing year. These prices are further adjusted to reflect local
    conditions for each farm.
        We have developed a color coding system to provide a quick way of
    showing how the farms are doing. Each farm is evaluated based on two
    criteria--their ability to cash flow and maintain real net worth or
    equity. If a farm has less than a 25% chance of not cash flowing or
    losing equity then it is coded green. Yellow farms have between a 25%
    and 50% chance of not cash flowing and losing equity. Red farms have
    greater than a 50% chance of not cash flowing and losing equity.
        Figures 2-5 provide maps of all the farms characterized as either
    feedgrain and oilseed, wheat, cotton or rice along with our rating of
    their financial condition at the end of the 2016 crop year. To be blunt
    these results are bad with very little hope of recovery on the horizon
    given current price forecasts by FAPRI and USDA. Specifically,

       17 of the 23 feedgrain and oilseed farms are projected to be
            in moderate or poor financial condition.

       9 of the 11 wheat farms are projected to be in moderate or
            poor financial condition.

       11 of the 15 cotton farms are projected to be in moderate or
            poor financial condition.

       12 of the 15 rice farms are expected to end the period in
            moderate or poor financial condition.

        These results already include any projected ARC and PLC support
    that would be triggered by low prices or low incomes. The overwhelming
    majority of the farms end 2016 with a high likelihood of serious cash
    flow short-falls. On the other hand, the probability of large equity
    losses is much lower across all farm types. Although there are a few
    farms that exhibit strong signs of falling into a cycle of persistent
    cash flow shortages leading to debt accumulation that spirals out of
    control.
        We contact our individual representative farm members when we need
    their feedback on important events or issues. For this hearing, we
    specifically asked them about their financial situation now relative to
    last year at this time, how has their equity positions changed since
    2013 and why, and overall observations of the current financial
    environment. We have received comments from about \1/4\ of the 300
    representative crop producers that make up our panels. Below are a few
    generalizations I can make after reviewing all of their responses:

      1.  There was only one farmer that reported making a profit on the
                2016 crop. Corn farmers from North Dakota and Iowa, as well
                as, cotton farmers from west Texas indicated the only
                reason they broke even in 2016 was record yields.
                Generally, all the rest indicated that 2016 was a loss year
                where they had to roll operating notes forward or draw from
                reserves to pay-off operating loans.

      2.  Most indicated their equity positions were down at least 20% from
                2013. Land values have declined some, however, many cited a
                substantial decline in equipment values as a major cause of
                lower equity in addition to having to borrow more. Many of
                the farmers from the South mentioned a growing number of
                farm equipment sales by farmers who either retired on their
                own or were persuaded to retire by their lenders.

      3.  Their overall observations about the current financial
                environment were very discouraging to say the least. They
                all indicated there is nothing else left to cut. They have
                all cut back on expenses and delayed replacing equipment
                that needs to be replaced to the point that maintenance
                costs are getting tougher to deal with. Several of the
                panel members we have met with since the 1980s indicate
                that they are only still in business because they have been
                frugal during the good times and paid off debt. They worry
                about the future of farming for younger farmers who are
                likely carrying more debt as they try to build their
                operations.

        In summary, I want to offer a few points for your consideration:
        First, the producer safety net contained in the 2014 Farm Bill has
    worked as intended for all crops except for cotton. The combination of
    Federal crop insurance and title I commodity programs has helped the
    overwhelming majority of U.S. producers stay in business through some
    very difficult times. While the farmers we meet with all expressed
    concern for the future, many indicated there wouldn't be a future
    without crop insurance to protect against weather problems and the PLC
    and ARC programs protecting against low prices and incomes. The lone
    exception is cotton as their STAX program has not provided the
    protection producers were hoping for. Not having title I programs to
    protect from the sustained drop in cotton prices has caused severe
    financial difficulties only overcome by the occasional record yields.
    Living without price protection can best be summed up by the response
    from a Texas cotton farmer, ``It's like dancing around a land mine
    without a cotton safety net! When we hit it we will be ruined!''
        Second, according to USDA, in the 3 years since the 2014 Farm Bill
    was passed, crop cash receipts have fallen from $211.4 billion in 2014
    down to $187.7 billion in 2016--a decline of $23.7 billion. During that
    time, title I payments to crop farmers have totaled $13.2 billion or a
    little more than \1/2\ of the estimated loss in crop receipts. In no
    way are commodity payments making producers whole.
        And finally, it seems like nearly every month there is another
    report issued from interest groups who want to dismantle the producer
    safety net often saying programs are too lucrative. Not only are the
    programs not too lucrative, but there is a growing need to provide
    additional funding as adverse economic conditions are expected to
    continue.
        Mr. Chairman, that completes my statement.
                                    Figures
    Figure 1. AFPC's Representative Crops Farms

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Figure 2. Color Coded Results for Representative Feed Grain Farms at
            the End of 2016

            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Figure 3. Color Coded Results for Representative Wheat Farms at the End
            of 2016

            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Figure 4. Color Coded Results for Representative Cotton Farms at the
            End of 2016

            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Figure 5. Color Coded Results for Representative Rice Farms at the End
            of 2016

            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The Chairman. Thank you.
        Dr. Westhoff.

     STATEMENT OF PATRICK WESTHOFF, Ph.D., PROFESSOR AND DIRECTOR,
    FOOD AND AGRICULTURAL POLICY RESEARCH INSTITUTE, UNIVERSITY OF
                         MISSOURI, COLUMBIA, MO

        Dr. Westhoff. Mr. Chairman and Members of the Committee,
    thank you very much for the opportunity to discuss with you
    today the state of the farm economy. I serve as Director of the
    Food and Agricultural Policy Research Institute at the
    University of Missouri.
        For more than 30 years, FAPRI has provided analysis to
    Congress and the public to help people make more informed
    decisions. We do our best to provide objective analysis, and do
    not make policy recommendations. My comments today are my own,
    and do not necessarily represent the views of the University of
    Missouri or of the agencies that fund our research.
        For a wide range of agricultural commodities, prices now
    are far lower than they were a few years ago. Many factors have
    contributed to this downturn, but it makes sense to begin on
    the supply side of the picture. Since 2002, rural production of
    corn, wheat, rice, and soybeans has increased by a remarkable
    49 percent. Most of that increase in production was needed to
    keep up with population growth, expanding livestock production
    in China, and biofuel production in the United States and other
    countries. However, in the 4 years since the drought of 2012,
    global grain and oilseed yields have exceeded the long-term
    trend, and production has outpaced consumption. Result has been
    a sharp increase in carryover stocks for those major
    commodities, and downward pressure on commodity prices.
        Of course, the current situation is not just a supply
    story. Slower expansion of biofuel production, a strong dollar,
    and policies in other countries are just some of the demand-
    side factors that have contributed to the lower farm commodity
    prices.
        Our institute is in the process of preparing its new 10
    year baseline projections for the farm economy. We use USDA
    historical data, economic models, and expert analysis to
    project how commodity markets might evolve if current policies
    remain in place. The remainder of my comments are based on
    point estimates from this new baseline, what the world might
    look like under average weather and market conditions.
        Net farm income averaged $101 billion per year between 2010
    and 2014, as shown in Table 1. Relative to the previous 5
    years, higher prices resulted in dramatic increases in both
    crop and livestock receipts that outpaced a sharp increase in
    production expenses. Commodity prices are now far below their
    peak, and both crop receipts and net farm income have declined.
    For the 2015 to 2019 period, we project that net farm income
    will average $74 billion per year, down by more than \1/4\ from
    the previous 5 years. Correcting for inflation, in fact, real
    net farm income is now less than it was between 2005 and 2009.
        Looking ahead, we project a modest increase in crop prices
    and cash receipts that contributes to a small increase in
    nominal net farm income in 2018 and beyond. However, projected
    real net farm income correcting for inflation remains below the
    2015 level through 2025.
        Higher land values caused the value of farm assets to
    nearly double between 2004 and 2014. In 2016, however, USDA
    reported a slight reduction in farm real estate values and
    total farm assets.
        Looking ahead, we project further reductions in real estate
    values. Crop and rental rates are falling in some parts of the
    country in response to weaker crop returns, and the prospect of
    higher interest rates could also put pressure on farmland
    values.
        Farm debt increased sharply as some farmers borrowed to buy
    more expensive farmland and machinery, and to cover rising
    operating costs. Lower returns are making it harder for farmers
    to service debt, which continues to rise in the face of lower
    farm income and asset values. The result is an increase in farm
    debt-to-asset ratios, which increased from about 12 percent
    between 2010 and 2014, to about 14 percent in 2017, and to
    projected levels that are a couple of points higher by the time
    we get a few years in the future.
        The projected debt-to-asset ratio remains far below the
    1985 peak of 22 percent during the farm financial crisis, and
    interest rates are also far lower than they were at that time.
    Nevertheless, the trend of a rising debt-to-asset ratio is a
    serious concern, and many highly leveraged borrowers may find
    it increasingly difficult to service debt.
        In my written statement, there is a discussion of the
    outlook for particular crops. In brief, returns for most crops
    are far below the peak levels, and are expected to remain near
    those levels over the next decade.
        My final comments: The figures presented here are just one
    way the future might unfold. In reality, the weather is rarely
    average. Policies change, and other surprises will happen. A
    drought could push prices higher, a trade dispute could reduce
    exports, or a change in interest rate policy could make it
    harder for farmers to service debt. Baseline projections are
    not a crystal ball of what will happen, but a rather useful
    benchmark that can be used to evaluate what-if scenarios.
        My colleagues and I stand ready to examine policy
    alternatives and other options that may be useful to you. I
    would be happy to take any questions.
        [The prepared statement of Dr. Westhoff follows:]

    Prepared Statement of Patrick Westhoff, Ph.D., Professor and Director,
        Food and Agricultural Policy Research Institute, University of
                             Missouri, Columbia, MO
    The State of the Farm Economy: Some Big-Picture Considerations
        Mr. Chairman and Members of the Committee. Thank you for the
    opportunity to discuss with you today the state of the farm economy.
        I serve as Director of the Food and Agricultural Policy Research
    Institute at the University of Missouri (FAPRI-MU). For more than 30
    years, FAPRI has provided analysis to Congress and the public to help
    people make more informed decisions. We do our best to provide
    objective analysis and do not make policy recommendations. My comments
    today are my own, and do not necessarily represent the views of the
    University of Missouri or the agencies that fund our research.
    How did we get here?
        For a wide range of agricultural commodities, prices now are far
    lower than they were a few years ago. Many factors have contributed to
    this downturn, but it makes sense to begin on the supply side of the
    picture. Since 2002, world production of corn, wheat, rice and soybeans
    has increased by 857 million metric tons, or 49 percent (Figure 1).
        Some of that remarkable increase in production was needed to keep
    up with population growth, expanding livestock production in China and
    biofuel production in the United States and other countries. However,
    in the 4 years since the drought of 2012, global grain and oilseed
    yields per acre have exceeded the long term trend, and production has
    slightly outpaced consumption. The result has been a sharp increase in
    carryover stocks (Figure 2) and downward pressure on commodity prices.
        The supply side is also very important in explaining low livestock
    sector prices. After meat and milk prices hit record highs in 2014,
    production increased in 2015 and 2016, pushing prices lower.
        Of course, the current situation is not just a supply story. Slower
    expansion of biofuel production, a strong dollar, and policies in other
    countries are just some of the demand-side factors that have
    contributed to lower farm commodity prices.
    Looking Ahead: the FAPRI-MU Outlook
        Our institute is in the process of preparing its new 10 year
    baseline projections for the farm economy. We use USDA historical data,
    economic models and expert analysis to project how commodity markets
    might evolve if current policies remain in place. The remainder of my
    comments are based on point estimates from this new baseline--what the
    world might look like under average weather and market conditions.
    Before we release our full set of baseline projections next month, we
    will conduct what we call ``stochastic'' analysis that considers a
    broader range of weather and other conditions and allows us to talk
    about some of the inherent volatility and uncertainty in commodity
    markets.Farm income and balance sheet
        Net farm income averaged $101 billion per year between 2010 and
    2014 (Table 1). Relative to the previous 5 years, higher prices
    resulted in dramatic increases in both crop and livestock receipts that
    outpaced a sharp increase in production expenses. Commodity prices are
    now far below their peak and both crop receipts and net farm income
    have declined. For the 2015 to 2019 period, we project that net farm
    income will average $74 billion per year, down by more than a quarter
    from the previous 5 years. Correcting for inflation, in fact, real net
    farm income is less now than the 2005 to 2009 average.
        Looking ahead, we project a modest increase in crop prices and cash
    receipts that contributes to a small increase in nominal net farm
    income in 2018 and beyond (Figure 3). However, projected real net farm
    income remains below the 2015 level through 2025.
        Higher land values caused the value of farm assets to nearly double
    between 2004 and 2014. In 2016, however, USDA reported a slight
    reduction in farm real estate values and total farm assets. Looking
    ahead, we project further reductions in real estate values. Cropland
    rental rates are falling in some parts of the country in response to
    weaker crop returns, and the prospect of higher interest rates could
    also put pressure on farmland values.
        Farm debt increased sharply as some farmers borrowed to buy more
    expensive farmland and machinery and to cover rising operating costs.
    Lower returns are making it harder for farmers to service debt, which
    continues to rise in the face of lower farm income and asset values.
    The result is an increase in farm debt-to-asset ratios, which increased
    from about 12 percent between 2010 and 2014 to about 14 percent in 2017
    and to even higher levels in the years ahead.
        The projected debt-to-asset ratio remains far below the 1985 peak
    of 22 percent during the farm financial crisis, and interest rates are
    also far lower than they were at that time. Nevertheless, the trend of
    a rising debt-to-asset ratio is a serious concern, and many more
    highly-leveraged borrowers may find it increasingly difficult to
    service debt.
    Outlook for Particular Crops
        For six major crops, higher prices drove per-acre crop values to
    record levels during the 2009-2013 period (Table 2). Production
    expenses also increased sharply from the previous 5 years, but the
    increase in market sales outpaced the increase in variable production
    expenses, resulting in higher net returns. The increase in returns
    contributed to higher rental rates and encouraged farmers to invest
    more in farm real estate and machinery. These higher fixed costs
    absorbed much of the increase in net returns over variable expenses.
        Since 2014, lower crop prices have reduced the per-acre value of
    crop sales. Although variable expense increases have slowed or even
    reversed for several commodities, net returns are far below 2009-2013
    levels, and in some cases are about the same as they were between 2004
    and 2008, when land and other fixed expenses were much lower. Looking
    farther ahead, the outlook shows fairly steady net returns over
    variable expenses during the 2019 to 2023 period that would be covered
    by the next farm bill.
    Final Comments
        The figures presented here are just one way the future might
    unfold. In reality, the weather is rarely ``average,'' policies change,
    and other surprises will happen. A drought could push prices higher, a
    trade dispute could reduce exports, or a change in interest rate policy
    could make it harder for farmers to service debt. Baseline projections
    are not a crystal ball forecast of what will happen, but rather a
    useful benchmark that can be used to evaluate what-if scenarios. My
    FAPRI-MU colleagues and I stand ready to examine policy alternatives
    and other options that may be useful to you. I'd be happy to take any
    questions.
                                    Figures
    Figure 1. World Production of Four Major Crops

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: USDA's Foreign Agricultural Service, PSD Online,
            February 2017.
    Figure 2. World Ending Stocks of Four Major Crops

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: USDA's Foreign Agricultural Service, PSD Online,
            February 2017. Note: years are crop years (e.g., 2016 = 2016/
            17).

                   Table 1. U.S. Farm Income and Balance Sheet
                                (billion dollars)
    ------------------------------------------------------------------------
    Variable   2005-09 avg.    2010-14 avg.    2015-19 avg.    2020-24 avg.
    ------------------------------------------------------------------------
    Crop                 147             209             191             203
     cash
     receipt
     s
    Livestoc             128             174             174             188
     k cash
     receipt
     s
    Governme              15              11              11               7
     nt
     payment
     s *
    Producti             257             338             354             375
     on
     expense
     s
    Net farm              69             101              74              85
     income
     *
      (in                 80             107              73              75
       2016
       dolla
       rs)
    Farm               1,910           2,571           2,794           2,591
     assets
    Farm                 239             306             383             408
     debt
    Debt/              12.5%           11.9%           13.7%           15.8%
     asset
     ratio
    ------------------------------------------------------------------------
    Sources: Historical data from USDA's Economic Research Service.
      Projections for 2017-2024 are unpublished point estimates by FAPRI-MU.
    * These figures will differ from the FAPRI-MU 2017 baseline to be
      released in March. That baseline will report stochastic analysis of
      500 future market outcomes, and is likely to show slightly greater
      average future payments and farm income than these point estimates,
      which assume average weather and market conditions.

    Figure 3. Net Farm Income

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: FAPRI-MU projections, February 2017.

                        Table 2. U.S. Crop Market Returns
                               (dollars per acre)
    ------------------------------------------------------------------------
                2004/05 to      2009/10 to      2014/15 to      2019/20 to
    Variable   2008/09 avg.    2013/14 avg.    2018/19 avg.    2023/24 avg.
    ------------------------------------------------------------------------
    Corn:
      Market             467             768             614             649
       sales
      Variab             221             327             325             327
       le
       expen
       ses
      Market             246             441             289             323
       net
       retur
       ns
    Soybeans
     :
      Market             316             517             462             465
       sales
      Variab             102             153             174             183
       le
       expen
       ses
      Market             214             364             288             283
       net
       retur
       ns
    Wheat:
      Market             204             295             220             243
       sales
      Variab              93             120             115             121
       le
       expen
       ses
      Market             111             175             106             122
       net
       retur
       ns
    Upland
     cotton:
      Market             488             742             630             667
       sales
      Variab             395             487             511             546
       le
       expen
       ses
      Market              93             255             119             121
       net
       retur
       ns
    Sorghum:
      Market             189             295             237             228
       sales
      Variab             125             145             134             142
       le
       expen
       ses
      Market              63             150             102              86
       net
       retur
       ns
    Rice:
      Market             756           1,056             889             947
       sales
      Variab             413             533             576             622
       le
       expen
       ses
      Market             343             523             313             325
       net
       retur
       ns
    ------------------------------------------------------------------------
    Sources: Historical data based on USDA National Agricultural Statistics
      Service reported yields and prices and Economic Research Service
      reported production costs.
    Projections for 2016/17-2023/24 are unpublished point estimates by FAPRI-
      MU.
    Definitions and notes:

      Market sales are defined as the national average yield per harvested
      acre times the
    national marketing year average price. For cotton, includes lint and
      cottonseed.
      Variable expenses include operating costs and hired labor expenses, as
      defined by ERS.
    They do not include the costs of land, machinery or other fixed
      expenses.
      Market net returns are defined as market sales minus variable
      expenses. From
    this amount and any farm program benefits, producers would have to cover
      land costs
    machinery and other fixed expenses.

                            PowerPoint Presentation

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The Chairman. Thank you, Dr. Westhoff.
        Dr. Brown, 5 minutes.

               STATEMENT OF D. SCOTT BROWN, Ph.D., STATE
       AGRICULTURAL EXTENSION ECONOMIST AND ASSISTANT PROFESSOR,
                  UNIVERSITY OF MISSOURI, COLUMBIA, MO

        Dr. Brown. Chairman Conaway, Ranking Member Peterson, and
    Members of the Committee, thank you for the opportunity to
    discuss the rural economic outlook.
        I am the University of Missouri State Agricultural
    Extension Economist, and I have worked extensively on Federal
    dairy policy.
        The Missouri rural economy has changed quickly, but the
    change has not spread evenly as ARMS data shows that the debt-
    to-asset ratio of all Missouri farms increased by just 1.8
    percent from 2012 to 2015. Yet, in the 35 to 44 age category it
    nearly doubled. Lower 2016 cattle, milk, and hog prices
    resulted in livestock industries facing financial headwinds,
    which continue. Only dairy is anticipating higher prices this
    year.
        A bright spot is that feed costs are lower. ERS reports
    2014 purchase feed expenses reached $63.7 billion, but are
    projected to fall to $57.9 this year. After reaching a 2014
    record level of $24 per hundredweight, the milk price declined
    to $16 last year. Two factors drove this decline. First, the
    value of U.S. dairy exports declined from a 2014 record of $9.5
    billion to $7.1 billion in 2016. Second, milk production
    expanded for the seventh consecutive year, and dairy cow
    inventory increased by 48,000 head. It has become increasingly
    difficult to reduce milk supplies even when financially
    stressed.
        Since 2000, annual milk production has declined twice,
    while it fell five times over the 1986 to 1999 period. Given
    the 2016 economic dairy industry downturn, there was growing
    concern that the Margin Production Program is not providing a
    strong enough safety net. It is extremely difficult to
    construct a stronger safety net program for dairy, while
    reducing Federal spending. Dairy cash receipts have remained
    volatile from $24.3 billion in 2009, to $49.3 in 2014. They
    retreated to $34.2 billion last year, but that is still $10
    billion above the 2009 level.
        CBO currently estimates annual average dairy outlays at $79
    million over the Fiscal Year 2017 to Fiscal Year 2027 period.
    Identifying a dairy safety net that can moderate the large
    change in cash receipts, and yet show an average cost of $79
    million, is a large challenge. There is a high correlation
    between government expenditures and the effectiveness of the
    safety net. Changes to MPP or other alternatives will likely
    result in a more effective safety net, only if these estimated
    costs rise.
        We are ending our third full year of MPP, and participation
    in higher margin coverage levels have fallen. In 2016, 140
    billion pounds of production history was enrolled in the $4
    coverage level. No region of the country has shown an appetite
    for buy-up beyond $4. The 2017 MPP data will show even more
    production history has shifted to $4. The $4 catastrophic
    coverage does show state-level differences. California and
    Idaho have more than 80 percent of their 2016 milk production
    levels covered at the $4 level, while Minnesota and Wisconsin
    have about 60 percent of 2016 milk production covered.
        MPP participation is much lower than originally estimated
    in 2014. During MPP debate, many assumed that 70 percent of
    milk production would sign up for $6.50 coverage. The 2016 MPP
    data shows that only two percent of 2016 milk production was
    signed up. The MPP experience has been very different,
    especially the level of government spending. In May/June 2016,
    the largest payment period since enactment, MPP spent less than
    $12 million. CBO estimated MPP spending at $912 million over
    the Fiscal Year 2014 to 2023 period, with 2014 Farm Bill
    passage. Other estimates even larger topped $2.5 billion. My
    analysis suggested that at a $6.50 margin level, nearly 80
    percent of the outcomes had no MPP payments, yet the remaining
    20 percent of the time when payments occurred, they were large
    enough to offset the times without a payment. Historical data
    would suggest similar findings.
        Projected feed costs are much lower than when MPP became
    law. The 2013 CBO baseline corn prices averaged $4.59 over the
    2013-2023 marketing years, while CBO's current baseline has the
    average corn price over the 2017-2027 marketing years at $3.79.
    Declining feed costs reduce MPP program costs. The decline in
    corn prices and the different CBO baselines provide nearly an
    offset that would return MPP feed coefficients to the original
    proposed levels.
        The 2016 MPP experience left many dairy farmers
    disenchanted. The reduction in feed costs resulted in the MPP
    margin falling less than milk prices declined. Given the
    inelastic nature of dairy supply and demand, the cost of the
    dairy program can go from zero to billions of dollars quickly.
    Finding ways to spread risk against Federal policy and market
    risk tools may be the balance that provides a better safety
    net. Margin risk management is different and requires a change
    in perspective from program return maximization to risk
    management.
        Mr. Chairman, thank you for the opportunity to discuss the
    issues facing livestock and dairy industries, and I look
    forward to working with the Committee to find a better safety
    net for dairy producers in the 2018 Farm Bill.
        [The prepared statement of Dr. Brown follows:]

        Prepared Statement of D. Scott Brown, Ph.D., State Agricultural
     Extension Economist and Assistant Professor, University of Missouri,
                                  Columbia, MO
        Chairman Conaway, Ranking Member Peterson, and Members of the
    Committee, thank you for the opportunity to testify regarding the rural
    economic outlook for dairy and livestock producers in this country. I
    am the state agricultural extension economist at the University of
    Missouri and for the last 3 decades have worked extensively on Federal
    policy issues with a detailed focus on dairy policy issues.
        The rural economy in Missouri has been changing quickly although
    the change has not been spread evenly across all parts of rural
    Missouri. The Agricultural Resource Management Survey (ARMS) conducted
    by USDA shows that the debt/asset ratio of all Missouri farms increased
    by only 1.8 percent from 2012 to 2015. However, Missouri producers in
    the 35 to 44 year old age group saw a debt/asset ratio that nearly
    doubled from 14.5 percent to 28.8 over the same period.
        Lower cattle, milk and hog prices resulted in livestock industries
    facing increased financial headwinds in 2016 which will likely continue
    into 2017. In late 2016, feeder cattle prices were less than 50 percent
    of their value relative to early 2015. They will likely continue to
    move lower in 2017. At this point, the only livestock industry
    anticipating higher prices is the dairy industry as tighter global
    markets suggest milk prices can move higher from recent lows. A bright
    spot for the livestock industries is that feed costs are lower than
    experienced just a few years ago, as the Economic Research Service of
    the United States Department of Agriculture (USDA-ERS) shows purchased
    feed expenses reached $63.7 billion in 2014 but are projected to
    decline to $57.9 billion in 2017.
        The dairy industry faced much lower milk prices in 2016. After
    reaching a record level of over $24 per hundredweight in 2014, the milk
    price declined to almost $16 per hundredweight in 2016. Two factors
    drove this decline in milk prices.
        First, the value of U.S. dairy product exports declined from a 2014
    record of $9.5 billion to $7.1 billion in 2016. A stronger U.S. dollar
    and growing international milk supplies hindered U.S. dairy exports.
    U.S. dairy product exports have been slow to recover although reduced
    global milk supplies should help strengthen U.S. exports. Burdensome
    intervention stocks in the European Union remains one cautionary issue
    to stronger international dairy product prices in 2017.
        Second, despite a tough economic environment for dairy producers in
    2016, milk production expanded for the 7th consecutive year. U.S. dairy
    cow inventory increased by 48 thousand head during 2016 despite the
    financial headwinds experienced by the industry. The growth in dairy
    cow inventories and milk supplies highlights that the lower milk prices
    seen in 2016 had differing effects within the industry as California
    dairy cow numbers declined by 9,000 head while Texas expanded by 35,000
    head.
        It has become increasingly difficult to reduce U.S. milk supplies,
    even when milk returns suggest contraction is needed. During the 1980s
    and 1990s, there were more dairy farmers with relatively higher
    production costs that would exit the industry during tough economic
    times. By the 2000s, the remaining operations tend to have larger fixed
    costs, which makes them less responsive to current financial
    conditions.
        Historical data on U.S. milk production highlights past
    difficulties in reducing milk supplies when producer returns are low.
    Since 2000, annual milk production has only declined in 2001 and 2009.
    Milk production even expanded during the drought-induced record feed
    prices of 2012-2013. In comparison, annual milk production fell five
    times over the 1986 to 1999 period.
        The 2016 economic downturn that the dairy industry faced has
    resulted in many looking for alternatives to the dairy safety net
    program contained in the 2014 Farm Bill. There is growing concern that
    the Margin Protection Program (MPP) did not provide a strong enough
    safety net for U.S. dairy producers in 2016.
        Before examining detailed MPP features, it is important to
    understand the large task of building a solid safety net program with a
    tight Federal budget. It is extremely difficult to construct a stronger
    safety net program for dairy farmers while reducing Federal spending
    remains a priority.
        Dairy cash receipts have remained volatile over the past several
    years. In the economic disaster of 2009, they totaled only $24.3
    billion. By 2014 they had swelled to $49.3 billion. Dairy cash receipts
    retreated to $34.2 billion in 2016. It is instructive to note that 2016
    cash receipts remained $10 billion above the 2009 level.
    U.S. Dairy Products, Cash Receipts

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: USDA-Economic Research Service.
              * 2017 USDA-ERS forecast.

        The Congressional Budget Office currently estimates annual dairy
    CCC expenditures at $79 million over the FY2017 to FY2027 period.
    Identifying a safety net program for dairy producers that can moderate
    the billions of dollars change in dairy cash receipts that have
    occurred in the last few years and yet only show an average cost of $79
    million to the Federal Government is a large challenge.
        There is a high correlation between the level of government
    expenditures for the dairy industry safety net and the effectiveness of
    the safety net. Changes to the MPP or for that matter any other
    alternative that may be debated as the 2018 Farm Bill comes into focus
    will likely result in a more effective safety net only if the estimated
    cost of the program rises. It is important to remember that dairy
    farmers will always remain in a better financial situation when market
    conditions result in little to no government spending, as a safety net
    program hardly ever completely offsets lower market returns.
        We are entering our third full year of the MPP. The level of dairy
    farmer participation in the higher margin coverage levels has
    continually fallen as premium costs have exceeded anticipated MPP
    payments. In 2016, 140 billion pounds of production history or about
    \2/3\ of U.S. milk production was enrolled in only the catastrophic $4
    level of coverage. That catastrophic level of coverage is a pretty low
    safety net with margins not falling below that level since 2009. No
    region of the country has shown an appetite for much buy-up beyond the
    $4 level. 2017 MPP enrollment data will show even more production
    history has shifted to the $4 coverage level as many producers are not
    willing to buy up coverage given the low probability of payments.
    MPP-Dairy Production History, by Coverage Level

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Source: USDA-Farm Service Agency.

        The state by state data on MPP participation shows that all states
    have little to no buy up coverage at this point. The $4 catastrophic
    coverage that costs a producer $100 annually does show some variability
    when looking at signup on a state basis. Two of the larger western
    states, California and Idaho, have more than 80 percent of their 2016
    milk production levels covered under the $4 level while upper [M]idwest
    states like Minnesota and Wisconsin have about 60 percent of 2016 milk
    production covered under the $4 level. Many states in the northeast and
    southeast areas of the U.S. are like the upper [M]idwest in terms of
    the amount of milk signed up at the $4 level.
        MPP participation has been much lower than many estimated when the
    program became law in early 2014. When MPP was being debated before the
    2014 Farm Bill was finished, many assumed that 70 percent of milk
    production would be signed up for $6.50 coverage. The 2016 MPP data
    shows that slightly more than two percent of 2016 milk production was
    signed up for the program at the $6.50 level. This data and experience
    should inform that estimates of sign up under similar programs must be
    reevaluated carefully and lowered relative to original estimates.
        The MPP experience has been very different than many projected
    during the debate on the program, especially the level of government
    spending. In the largest bi-monthly payment period since enactment of
    MPP which occurred in May/June 2016 payments totaled less than $12
    million. CBO estimated spending under the MPP as passed in the
    Agricultural Act of 2014 at $912 million over the FY14 to FY23 period.
    Other estimates of government outlays on the program topped $2.5
    billion over even shorter timeframes.
        In my original analysis, the stochastic results suggested that at a
    $6.50 margin level nearly 80 percent of the time there would not be a
    MPP payment. The remaining 20 percent of stochastic outcomes where
    payments occurred they were large enough to offset the 80 percent of
    the time of paying the premium without a payment. Historical
    examination would suggest similar findings of payments that don't occur
    often but when they do they offset the longer periods of time with no
    payments. It would be important that producers are signed up at the
    ``right'' time to make the MPP work for producers over the long term.
        In addition to the experience that participation in the MPP has
    been much less than expected, feed costs have moved much lower than
    estimated when the program was first enacted into law in 2014. The CBO
    baseline as well as other long-term baselines had projected corn prices
    much higher then than are currently forecast. The 2013 CBO baseline had
    corn prices that averaged $4.59 per bushel over the 2013 to 2023
    marketing years. The most recent CBO baseline has lowered the average
    corn price estimate over the 2017 to 2027 marketing years to $3.79 per
    bushel. Other feed costs have also moved lower than originally
    estimated.
        All else equal, the decline in feed costs should reduce MPP program
    costs and reduce the expected cost of alternative programs driven in
    part by feed cost levels. It is interesting that this decline in corn
    prices and feed costs in the different baselines provides nearly an
    offset on average to the policy proposal to raise the feed coefficients
    back to the levels first set in 2012.
        The 2016 MPP experience left many dairy farmers disenchanted with
    MPP. The reduction in feed costs as represented by national corn,
    soybean meal and alfalfa prices resulted in the MPP margin falling far
    less than the decline in national milk prices. The MPP margin seemed
    out of sync relative to many producers who saw their financial
    situation erode much faster than the MPP margin. In some cases weather
    played a role in the disconnect while in other cases farmers that grew
    a significant portion of their feed inputs did not benefit from the
    decline in feed costs suggested by the declines in market prices for
    corn, soybean meal and alfalfa prices.
        USDA-ERS estimates that 63 percent of Wisconsin dairy farmers' feed
    costs come from homegrown harvested feed compared to 26 percent in
    California. Dairy producers that buy a majority of their dairy feed may
    be in a better financial posit[i]on today than those that grow more of
    their feedstuffs, as the total corn production cost reported by ERS has
    changed little over the 2013 to 2016 crop seasons. USDA-ERS reported
    2013 total corn production costs at $676.45 per acre while they
    estimate 2016 at $672.39 per acre.
        An adequate safety net for dairy farmers remains the goal for
    Federal dairy policy. The reduction in financial risk and the stronger
    safety net afforded dairy farmers under alternative dairy polices must
    be absorbed by others. The Federal Government remains the largest
    source of producer risk reduction through government spending on farm
    programs. Given the inelastic nature of supply and demand of dairy
    products, the cost of a dairy program can go from zero to billions of
    dollars quickly. Understanding the most critical risks to cover for
    dairy farmers today is important. One only has to look back to years
    like 2009 to understand that a program like MPP can cost billions of
    dollars. Although the likelihood of 2009 occurring in the future may be
    low, it makes the scoring of these kinds of policy options extremely
    difficult. Finding ways to spread risk across Federal policy and market
    risk tools may be the balance needed to provide a better safety net for
    producers.
        The MPP was a major change in dairy policy relative to the past
    safety net provided to the dairy industry. The move to a policy
    providing margin risk management from one that provided a floor on milk
    prices has required moving from an attitude of program return
    maximization to risk management. More work is needed to help producers
    think through the risk management aspect of the MPP. MPP participation
    has moved to the lower levels of margin coverage when at times
    producers may be better served to participate at higher levels.
        A balance must be struck in setting parameters of Federal dairy
    policy. We have had experience with dairy programs that provided too
    much support to the industry and resulted in large milk surpluses and
    chronically low milk prices or large government expenditures. No one in
    the dairy industry liked these periods. However, setting support too
    low means it may never trigger in those times that it is most needed.
    This tradeoff will always require modifications as future farm bills
    are debated and passed.
        Mr. Chairman, thank you for the opportunity to discuss the many
    issues facing the livestock and dairy industries today and I am looking
    forward to working with the Committee on finding solutions that provide
    a better safety net for dairy farmers that can be embraced by all dairy
    market participants as the 2018 Farm Bill process unfolds.

        The Chairman. Well, thank you, gentlemen.
        The chair would remind Members they will be recognized for
    questioning in order of seniority for Members who were here at
    the start of the hearing. After that, Members will be
    recognized in order of arrival. I appreciate the Members'
    understanding.
        I will be strict on the 5 minute clock, in respect to the
    fact that most all of us are here today. I would ask our
    witnesses when the red light goes on, finish your thought, and
    then for any other comments you would like to make, we will
    take those for the record. But I appreciate my Members being
    respectful to allow us all to get through this.
        So I will now recognize myself for 5 minutes.
        I don't like the lyrics to your song, but you apparently
    are all singing off the exact same sheet of paper. If the mid-
    1980s are the gold standard of crisis in production
    agriculture, I didn't hear anybody say that that is where we
    are today, but how will we recognize that? And, what would be
    your thoughts, on decling prices, collateral values down both
    in equipment and land, all those things that all of you talked
    about? None of that was particularly rosy in terms of the next
    4 or 5 years. Could each of you quickly just say what you think
    the risks are of us moving into something that would approach
    the 1980-level wreck that folks tried to live through? Dr.
    Johansson?
        Dr. Johansson. Thank you, Mr. Chairman. As you mentioned,
    none of us at least are painting the same picture as we saw in
    the 1980s situation.
        Things I would be looking for, continue to look for in the
    data, would be rising interest rates faster than we expect,
    pressuring interest payments, as well as declining land values.
    Repayment delinquencies, they have been trending upward but
    they still remain relatively slow. If we see those continue or
    increase, that would be an increasing cause for concern. And
    similarly, if we see a rapid drop in cash rents, that is likely
    to bring land values down, that is likely to bring the asset
    base down that is underlying the relatively strong debt-to-
    asset ratio we are seeing right now.
        Dr. Kauffman. Thank you, Mr. Chairman. In the 1980s, I
    would say that it was a liquidity crisis that turned into a
    solvency crisis.
        We do have some of those concerns around liquidity today,
    but as I noted in my statement, debt-to-asset ratios remain
    relatively low and historically low. If we were to see more of
    a decline in land values than what we have seen so far, that
    would be an additional risk to the farm sector and to solvency,
    where we haven't seen those kinds of bankruptcies yet. So I
    would list that as one.
        We have seen some pretty significant declines in commodity
    prices and in farm income, but they haven't necessarily been
    coupled with a commensurate decline in land values of the same
    magnitude.
        Dr. Outlaw. We are all about to say the same thing.
    Essentially, the only thing I would like to add is that, from
    our research, they are exactly right. The cash flow situation
    is really bad. The equity situation isn't quite as bad, but we
    can see it really on the horizon. If cash flows continue to
    struggle, then they are going to lose equity.
        Dr. Westhoff. Yes, the same song sheet. Yes, we do expect
    to see continued increases in debt-to-asset ratios, but
    starting from a very low base. What will really be concerning,
    of course, if you had a big increase in interest rates that
    could simultaneously increase interest costs and put further
    downward pressure on land values.
        Dr. Brown. Trying to add something different, I will say
    one of the issues that we see relative to the 1980s, which I
    remember very well, is that I still see a lot of farmers today,
    maybe older in age, that are looking for opportunities to
    purchase land. I don't think it is the same across-the-board
    dire situation that we would have seen in the 1980s. And I
    remind us that, yes, calf prices for my Missouri producers were
    $3+ a pound in early 2015 are now sitting more like $1.50 a
    pound, so they have fallen by \1/2\. But that is a far cry from
    where we were in let's say 2008, when we might have talked sub-
    $1 cattle prices.
        The Chairman. So we are going to be writing a farm bill
    that will become effective October 1, 2018, and then we are
    going to go over that next 5 year timeframe, so about 7+ years.
    Anybody have a horror story where we would be in those kind of
    circumstances within that 7 year period?
        Dr. Outlaw. The only horror story I can say is that
    producers are going to need every bit of the safety net that
    you can provide them. And I know that with resources being as
    tight as they seem to be up here, you are going to have to be
    really imaginative to figure out how to spread that money as
    far as you can.
        The Chairman. Dr. Kauffman, let me ask you real quickly,
    you study the debt of farms, both the official and unofficial
    debt. Do your numbers capture all the unofficial debt; folks
    using credit cards and other things that might not be dedicated
    to agriculture specifically, to try to keep their farms afloat?
    Are your numbers capturing all the debt that would be
    associated with it?
        Dr. Kauffman. The numbers that I reported did refer
    specifically to commercial banks in the Farm Credit System,
    which account for about 80 percent of farm debt that is out
    there. It is true though that there has been a bit of an
    increase over time in debt coming from input suppliers. So that
    is something that USDA and others seek to capture in their
    measures and goes into the debt-to-asset ratios, but the data
    on that is a little bit harder to come by as they are not
    necessarily regulated entities.
        The Chairman. All right, so the debt-to-equity ratios
    wouldn't be any better if you captured that debt?
        Dr. Kauffman. Either of those is measuring debt
    holistically as we are trying to capture all of those main
    categories.
        The Chairman. All right, Mr. Peterson, 5 minutes.
        Mr. Peterson. Thank you, Mr. Chairman. And thank you all
    for your testimony.
        What I am looking at in this next farm bill is looking at
    stuff that needs to get done. And cotton, I don't know a whole
    lot about cotton, but I support getting it back into title I
    and helping the Chairman get that program to work.
        The Chairman. Thank you.
        Mr. Peterson. One of the other things I would like to see
    us do is get the CRP back up to 35, 40 million acres, which is
    where it should be. It needs to be streamlined, and some other
    things. And the other thing is the milk situation. CBO was so
    far off, and I guess we were too in terms of how this was going
    to work. Now, we are still struggling with the situation where
    CBO, when we get these numbers back, when we are looking at
    alternatives, are just completely out-to-lunch, in my opinion.
    So I don't know how we are going to ever fix this thing if we
    can't get CBO to understand what is going on in the real world.
    Maybe we need to send them out and talk to some of these dairy
    farmers that I have been talking to, maybe that will wake them
    up.
        How we are going to fix this with the numbers that I am
    seeing, it just looks like maybe we can do something with the
    catastrophic coverage and raise that from $4 to $5, probably
    wouldn't be too expensive. Would that cost very much, Dr.
    Brown, if we did that, do you think?
        Dr. Brown. Given our experience the last few years, I would
    have to think $5 catastrophic coverage would have a fairly
    small price tag because we have not seen MPP margins below $5
    since we enacted the 2014 Farm Bill.
        Mr. Peterson. And they are probably not forecast either out
    in the future.
        Dr. Brown. Not at this point in time, especially given how
    low crop prices are.
        Mr. Peterson. And what I am worried about is with these
    prices when they collapse, and they will, we are not going to
    have people in the program, we are not going to have the
    coverage for this. And the dairy farmers that I am talking to,
    they think we are going to bail them out, and I don't see that
    happening. So somehow or another we have to fine tune this
    thing, figure out how to get people to participate.
        But I have to tell you, talking to my producers and other
    producers around the country, it is going to be a tough sell
    because they look at this thing and they say if I am not going
    to get any money out of this, then I am not going to do it. And
    we had other people that went with block coverage and didn't
    get paid, and come up to me and said, ``I am never going to go
    back in that program again. I don't care what. I am not even
    going to buy catastrophic coverage.'' And I said, ``Well, what
    are you going to do if this thing goes to heck?'' Well, I mean
    it is a big problem.
        So the only thing I can see, if we can't get CBO
    straightened out, the only thing I can see is we might be able
    to do something for the $4 per hundredweight and below, and
    maybe the CAT coverage, and beyond that I am not sure there is
    anything we can do.
        So one of the other questions that I had though is that one
    of the things that is happening is people are looking at this 1
    year at a time. They are talking to people and saying, ``Well,
    I am not going to get any money so I am not going to sign up.''
    Would it be better if we had a 5 year situation, if we had a
    little better safety net, and we made them make a decision for
    5 years, would we get more people participating, do you think,
    than we have under the current situation, and does it make
    sense to look at that?
        Dr. Brown. It would seem, when you are doing it year by
    year, you give folks the chance to move around a lot, and
    sometimes they don't make the best decision. We know milk
    prices move so quickly that the choice they make turns out to
    be the wrong one. If you have them in for a longer period of
    time, perhaps they rethink that strategy and would pick a
    higher level of coverage.
        Mr. Peterson. Are they going to have to get burned before
    they finally wake up and use this?
        Dr. Brown. Given what we have today, yes. It is going to
    take a situation where payments would have occurred to really
    get folks to understand how the program operates.
        Mr. Peterson. And milk, it has always been a problem, but
    it seems like it is more of a problem now. When the prices go
    down, dairy farmers produce more milk so they can cover their
    overhead. And when the prices go up, they produce more milk. So
    do we have more fixed cost in the system now, more people that
    have come into dairy and they have to have a certain amount of
    cash flow to make things work? Is that what is driving this
    production that keeps going up, even though the prices are
    going down?
        Dr. Brown. When you look at the structure of the industry
    today, and we have a lot of very large dairy operations that
    are in place, even if the current operators were to go out of
    business, what happens to those large operations, someone buys
    them for cents on the dollar and produces milk. So we can't get
    milk out of the system as easily as maybe occurred 10 or 15
    years ago.
        Mr. Peterson. Well, thank you, Dr. Brown, and we look
    forward to working to figure out how we can make this work.
    Thank you.
        The Chairman. The gentleman yields back.
        G.T., 5 minutes.
        Mr. Thompson. Thank you, Mr. Chairman. Thanks to all
    members of the panel for being here as we look at some
    forecasts for the rural economy.
        For me, personally serving on this Committee is about
    making sure that we have a strong rural economy. Specifically,
    the largest commodity, and I really appreciate the insight that
    many of you offered on the largest commodity in Pennsylvania,
    which is our dairy industry, which is hurting dramatically. I
    was very proud to be asked by Pennsylvania Agriculture
    Secretary Russell Redding, to join an appropriately named, a
    dairy development workgroup, to be able to parallel the work
    that we do here but at a state level. We have dairy farmers and
    co-ops and real diverse stakeholders sitting at the table,
    trying to look at what are the local, state, and Federal issues
    impacting the challenging economics of our dairy farm families
    today. We have some of the larger farms that you made reference
    to, but in Pennsylvania it is largely smaller farms, and a lot
    of them.
        Dr. Brown, I want to kind of explore this. One potential
    fix that has been identified on dairy relates to how producer
    feed costs are calculated. Obviously, we kind of went some
    different rounds on this with the farm bill. Specifically, it
    is my understanding that during the drafting of the current
    farm bill that we have, which by and large, actually was very
    successful, but when it came to the feed factor for corn,
    soybean meal, and alfalfa, they were reduced by ten percent
    from those originally proposed in consultation with the dairy
    producers, nutritionists, and economists. Do you believe that
    restoring the feed factor to their original proposed levels
    would help the program, reflect the needs of the dairy farmers,
    and really allow the MPP to be able to be utilized, to have a
    return on investment for those who buy into that risk
    management program?
        Dr. Brown. Well, as you recall during the 2014 Farm Bill
    debate, and this would have been early in the process, 2012, we
    did reduce those coefficients by ten percent, trying to hit
    some budgetary scores that were needed at the time. If you were
    to revert back to the original coefficients, that roughly is
    going to mean another $1-$1.25 in terms of potential payments.
    So it moves the margin $1-$1.25 lower, which, if you look back
    at 2016, that would have made a much larger payment, especially
    in the May/June 2016 time period that what we ended up making.
    So that change all by itself will, in fact, would have made
    larger payments for dairy producers across the country.
        Mr. Thompson. Thank you. Another challenge, and it has been
    referenced in the testimony that was provided today, I
    appreciate it being identified, that we have to look towards
    the next farm bill is how we encourage young people, that
    succession planning, to get involved in farming and to
    contribute to the farm economy, especially now when the net
    farm income is forecasted to be flat or decline.
        The average age of U.S. farmers is 58 years old. As the
    population continues to grow, so does our demand for farmers.
    Dr. Brown testified that Missouri producers in the 35 to 44
    year old age group saw debt-to-asset ratio that nearly doubled
    from 14.5 percent to 28.8 percent from 2012 to 2015. And most
    young people lack the capital to start a farm, and fewer are
    eager to incur large sums of debt needed to grow a successful
    farming operation.
        Now, I am working with my friend, Representative Courtney
    from Connecticut, to reintroduce the Young Farmers Success Act
    that would provide farmers and ranchers with eligibility for
    loan forgiveness under the Federal Direct Loan Program. Do you
    think a program like this is a meaningful way to incentivize
    young people to get involved in agriculture, and how can we
    supplement these efforts in the next farm bill? And that is for
    any of the witnesses that would like to take a shot at that.
        Dr. Johansson. Well, certainly, we had some direction in
    the last farm bill to make the programs a little bit more
    accessible to younger farmers, and that has been, by and large,
    successful, but as you mentioned, it is probably not meeting
    the certain level of farm turnover that we are likely to have.
        I know that Dr. Outlaw's group has seen that happen with
    their representative farms, and I would just turn to him to
    talk more from a farm-by-farm basis.
        Dr. Outlaw. From the discussions and interaction we have
    with farms, it has been shocking how going and updating that
    information every other year or so, we have run across a lot
    more younger farmers than we normally had, and that is a good
    sign for agriculture.
        The bad sign is those folks, according to anybody's
    numbers; ours, USDA, anyone's numbers, they are more highly
    leveraged than your older farmers. And they are going to be
    experiencing the worst of all these financial problems that we
    are talking about.
        The Chairman. The gentleman's time has expired.
        Ann Kuster, 5 minutes.
        Ms. Kuster. Thank you, Mr. Chairman. And thank you to our
    panel.
        I am just going to pick up on this dairy question. I am
    from the State of New Hampshire and we are having problems with
    this Margin Protection Program as well.
        Sadly, we have witnessed 19 of our 120 dairy farms going
    out of the commercial dairy business as a result of a drought.
    We had terrible drought conditions last summer. International
    market instability, high feed costs, and the Federal safety net
    that just isn't working for our producers.
        My question is, in 2015, 81 percent of the dairy farmers
    enrolled in the Margin Protection Program purchased the
    insurance coverage above the $4 catastrophic margin level, but
    in 2016, the figure dropped 68 percent, to the point where only
    13 percent of our dairy farmers had coverage.
        Part of the problem for us is that the MPP uses the
    national average feed cost, and my question is, that fails to
    take into account the higher transportation and labor costs of
    moving feed to the Northeast when producers can't grow their
    own. And I am asking, this is for Dr. Brown, but if anyone else
    has a comment, you talked about the decreased level of
    participation, if Congress passes a new farm bill without
    making the program more responsive or flexible to the regional
    needs, are you concerned that participation could drop even
    further, and do you have any suggestions for how we could
    repair this program, going forward?
        Dr. Brown. Yes, if we make no changes and we continue with
    the current program, we certainly are going to see less and
    less participation, unless we get a serious event similar to
    2009, which was very low milk prices, or 2012, which was very
    high feed costs, those would have resulted in payments under
    that $4 catastrophic level.
        I remind us, $4 is about as good a safety net as a concrete
    floor.
        Ms. Kuster. Yes.
        Dr. Brown. It does not provide much protection. And in
    terms of the question regarding regional effects, those have
    been discussed over the last several months. We are going to
    have to continue to look at exactly what prices we use to
    trigger the feed cost side of the equation. And I will
    sometimes remind us that the risk we want to try to cover from
    feed cost versus milk price. When you look back at 2016, we
    often see the big decline in milk prices that got folks in
    trouble, yet when you look at the feed cost side of the
    equation, it really offset those lower milk prices, yet that
    wasn't felt across the United States, especially for many of
    our producers who grow a large proportion of their own feed.
    Those are some of the issues that we need to continue to look
    at as we think about which prices should be triggering the feed
    cost side.
        Ms. Kuster. Thank you. And then this is just a question for
    anyone on the panel. I am concerned, as I know many Americans
    are, about the impact of these immigration raids on our
    agricultural community, and knowing that access to labor is an
    important component of the economics of any agricultural
    endeavor. Could you comment, and if we have time, also some of
    the statements about trade that are coming out of this
    Administration, I am concerned particularly with immigration
    but if you could comment?
        Dr. Westhoff. Well, on immigration, clearly, anything that
    would reduce the supply of farm labor would raise labor costs
    to producers, at a time of already pretty tight returns. So for
    many people, that would be a very important consideration to
    think about.
        On the trade side, the United States is very dependent on
    international trade for most agricultural commodities. For our
    major fuel crops it can be as high as over 70 percent in the
    case of cotton, over 50 percent in the case of soybeans and
    sometimes wheat, and even a significant portion of corn, even
    though we think about corn primarily being used domestically,
    we export a lot of it directly, and also by means of our meats
    and so on that we export. So if there were changes made in
    international trading rules that resulted in lower U.S.
    agricultural exports, that could have an important effect on
    the farm economy as well.
        Ms. Kuster. Anyone else want to add? We just have a few
    seconds left.
        Dr. Johansson. Well, of course, as you know, the current
    guestworker program for farmworkers has been beset by several
    problems, but there are fixes that have been contemplated, and
    several pieces of legislation that have moved in the past and
    that are being contemplated.
        Currently, the H-2A program in 2006 we saw 72,000 workers
    certified, or 72,500 workers certified. And last year it was up
    over 165,000 workers. So it is certainly providing some access
    to additional labor, but we know it is an issue.
        Ms. Kuster. So my time is up. I just hope that this
    Committee will have the chance to indicate our concerns about
    the raids and the impact on the farm economy.
        Thank you. I yield back.
        The Chairman. The gentlelady's time has expired.
        Mr. Gibbs.
        Mr. Gibbs. Thank you, Mr. Chairman.
        Just quickly, Dr. Kauffman, the current situation and the
    1980s, I can vividly remember the 1970s and 1980s because I
    lived through it. The big difference was we came through the
    mid-1970s with record farm prices, then we had record interest
    and hyperinflation, and then we had the disastrous price crash,
    but farmers were highly leveraged in that period as compared to
    now. Is that a true statement?
        Dr. Kauffman. Yes, certainly, leverage was more of a
    problem, and combined with the interest costs that you were
    describing.
        Mr. Gibbs. Yes. I just wanted to make that clear.
        Two things I want to hit on. One is, first of all,
    obviously we have a totally different situation than we had
    when we wrote the last farm bill, obviously, the commodity
    prices, and with the ARC program, the PLC program, and crop
    insurance. Whatever we come up with, Mr. Chairman, as you know,
    we have to go and sell it to the floor, and we have to sell it
    to the public. And is there a better way to provide protection
    through crop insurance, obviously for crop losses, but also
    revenue insurance compared to doing it in title I? Is there
    something we should be looking at differently? Anybody can
    respond to that.
        Dr. Johansson. Well, certainly, we have seen the success of
    the crop insurance program grow over time. We are now over $100
    billion in liabilities, upwards of 90 percent of the commodity
    crops are covered, and we see continued increase and
    participation by specialty crops in the program. The crop
    insurance program, obviously, there were a lot of changes that
    were introduced in the last farm bill that have had mixed
    responses, as we noted earlier, the STAX program and the SCO
    Program, for example, haven't been viewed as successfully as
    some of the other parts of the crop insurance program.
        Whether crop insurance can be used to provide more of a
    longer-term structural safety net that is typically provided by
    the commodity title I programs, I am sure that there are ways
    to evaluate that. I would say that, at least for right now, the
    crop insurance program seems to be fairly popular amongst most
    producers and seems to be working well. Obviously, as we have
    heard today there are other ways to think about commodity title
    I programs that I am sure you guys will be debating that over
    the next year or so.
        Mr. Gibbs. Specifically in the ARC and PLC program, how is
    that working right now? How would you compare it then?
        Dr. Johansson. Well, as had been mentioned by some of the
    other panelists, ARC and PLC program are functioning as
    designed, although the coverage of those programs vary across
    the country depending on which producer signed up for the
    different program. And obviously, those choices that were made
    in 2014 are held for the life of the farm bill.
        Mr. Gibbs. That is right.
        Dr. Johansson. And, of course, due to the Olympic averaging
    nature of the ARC program, we know that, certainly as revenues
    have come down, that that program has provided substantial
    payments to a lot of producers, but that is expected to decline
    over time as those Olympic averaging revenues start to run out.
        Mr. Gibbs. I need to cut you off. There is one another
    issue I want to bring up, and that is trade. We all know that
    trade is very important to agriculture. The reason we had the
    situation is we were out-producing the demand, and one way you
    can make that up is trade.
        There is talk of tax reform and the border adjustment tax
    could be a tariff. Does anybody have a comment on the effects
    of that, and then the effects with our other countries, our
    trading partners, and with WTO GAAP compliant.
        Dr. Westhoff. And I won't pretend to understand all the WTO
    implications that there might be, but I know that some issues
    have been raised about the border adjustment tax that will need
    to be resolved.
        Clearly, what happens on taxation of anything that crosses
    borders will have implications, and you can expect that there
    will be discussions internationally about them. If we do things
    that, again, restrict our ability to export our products, that
    is also very important for U.S. agriculture for reasons we
    talked about.
        Mr. Gibbs. Yes. I am concerned, because to me, it smells
    like a tariff, 20 percent on imports. And it could trigger a
    trade war, and that would be devastating to American
    agriculture, so I am really concerned. So I know nobody brought
    it up in their testimony, but that is something, if you just
    turn on the cable news TV this morning or read the papers, that
    seems to be the number one issue that is developing and
    impacting. It is raising a lot of red flags for a lot of
    people.
        So thank you, Mr. Chairman. I yield back.
        The Chairman. The gentleman yields back.
        Ms. Adams, 5 minutes.
        Ms. Adams. Thank you, Mr. Chairman and Ranking Member
    Peterson, and thank you, gentlemen, for being here today.
        As we begin a new Congress and the reauthorization of the
    farm bill, it is important to remember that the farm bills have
    only been passed and into law with bipartisan support,
    including with the votes of Members representing metropolitan
    areas throughout the United States. The coalition of Members of
    Congress from both farming communities and metropolitan areas
    are vital for passing a farm bill during this Congress as well.
    It also requires that we continue to use the farm bill as a
    vehicle for developing new policies to further promote and
    improve access in all communities to local fresh foods
    including the many food deserts that are found throughout
    Charlotte, that I represent.
        Dr. Johansson, as a follow-up, in addition to increasing
    local sourcing of foods in Charlotte, there is willing interest
    in promoting food consumer co-ops as local food markets for
    communities where the local supermarket has moved out of the
    neighborhood. Has USDA carried out any research on the economic
    impact of consumer food co-ops and other community-owned food
    retailers in under-served communities?
        Dr. Johansson. I know I saw that local food co-ops were
    going to be an interest of yours, and I looked at some of the
    data that we have collected over the last 5 years or so, and
    since the 2014 passage of the last farm bill we did put some
    more programs in place that would support local and regional
    food distribution, including some work done by the Cooperative
    Rural Development Mission area at USDA to support information
    and toolkits necessary, and some loan programs to support local
    food co-ops. So in that sense, we have certainly looked at the
    issue. A successful food co-op, obviously, that is going into
    an area where you have a lack of other available choices for
    the population in that region, will obviously need a couple of
    things for success. You need to have available funding, you
    need to have the conditions, and certainly demand necessary, to
    keep the food co-op in profitable operation. There is some
    information available on that. I would certainly be glad to
    compile that and get it back to you for the record.
        Ms. Adams. Thank you, I would appreciate it.
        What are the economic benefits of extension programs
    carried out by 1890 institutions in both urban and rural
    communities throughout the United States?
        Dr. Johansson. Well, certainly, the extension service and
    the United States, both 1862 institutions and 1890
    institutions, are sort of a crown jewel of the United States ag
    system. I would say it is certainly something that is envied by
    other countries around the world. The benefits to extension can
    be spoken to much more intimately by the extension folks that
    are here today. I will just note, before turning it over to
    them, that as part of our ag outlook forum we do have the
    student diversity competition that we promoted each year. And
    this year we have 28 graduate students that will be coming in
    for our forum, and of those, we have, I believe, ten coming
    from 1890 institutions and another 11 coming from 1862
    institutions, and several from Hispanic-serving institutions.
        Ms. Adams. Thank you very much. Mr. Chairman, I yield back.
        The Chairman. The gentlelady yields back.
        Mr. Crawford, 5 minutes.
        Mr. Crawford. Thank you, Mr. Chairman. I appreciate you
    gentlemen being here today.
        My colleague, Mr. Gibbs, touched on this a little bit on
    the border adjustment tax. There is some talk about retaliatory
    measures that Mexico is not waiting for those, at least not
    rhetorically, because we have heard some reports coming out
    that they would no longer buy U.S. corn, they would rely
    exclusively on Brazil and Argentina. That may just be pure
    rhetoric. I suspect that it is, in the heat of the moment. But
    in reality, this could happen, correct?
        Dr. Westhoff. Yes. There has been discussion from Mexican
    circles about what they might do, and to try to get peoples'
    attention, if you will. What is very important is to remember
    that we have a global corn market. And certainly, we have lots
    of advantages of selling our corn into Mexico and that is
    hugely important too to our industry. It is also true that if
    you just rearrange trade patterns the net effect on the corn
    market may not be all that huge. And if we sell products to
    countries that Brazil formerly sold things to, and Brazil
    picked up the Brazilian market, the effect on the corn market
    is not as large as if Mexico just disappeared from the corn
    market entirely. So it will be very important to watch this
    discussion as it goes forward.
        Mr. Crawford. Sure. Well, it is particularly important to
    me personally, I represent a big rice district. It is 25
    percent of the U.S. rice market. Mexico is our number one
    customer.
        Dr. Westhoff. Right.
        Mr. Crawford. So while they made that statement about corn,
    I think it is safe to say they would extend that to the U.S.
    rice industry as well. Agree?
        Dr. Westhoff. Yes, certainly. I mean Mexico is our number
    three trading partner on the export side, and so what happens
    there is hugely important to our sector.
        Mr. Crawford. Let me switch gears just a little bit. I want
    to talk about the loss of farms that is taking place. I think
    everybody in this room that has a rural district would probably
    agree that we have seen a precipitous loss of farmers. But we
    haven't really talked about the infrastructure associated with
    that production base. And I am concerned about what kind of
    impact this might have on our ag infrastructure, our equipment
    dealers, our bankers, processing and other components of the ag
    sector. Can either of you comment on that or what you foresee?
        Dr. Westhoff. Yes, I will just start by saying that,
    certainly, we have seen a lot happen already. I mean obviously,
    farm equipment sales are far off the peak levels, and that is
    having ramifications across lots of America. So those things
    are very real, and if the pressures continue, you can expect
    more of that to happen in front of us.
        Mr. Crawford. Yes. Dr. Outlaw, let me ask you, the cotton
    industry, not a real pretty picture over the last few years. A
    lot of factors. A lot of it had to do with China stockpiling
    cotton. As we know, some of it is weather-related. We had a
    steep decline in cotton acres in my district, some 40 percent
    decline year over year in the last crop year. The 2014 Farm
    Bill, cotton was taken out of title I. We touched on that a
    little bit, and opted for the STAX program, which has performed
    much worse than expected. How are farmers going to cope with
    that situation, and what kind of policy recommendations would
    you make in light of the way the STAX program has performed?
        Dr. Outlaw. Well, one of the ways that the farmers have
    coped is that they have used the generic base to plant other
    crops that might have more potential for them. So that has been
    a very big positive, having that generic base available. But
    really, all these crops need some sort of price protection, and
    not having it makes the producers and their lenders, who have a
    partnership, look at other commodities as options a little bit
    stronger than cotton. Cotton's infrastructure is so unique,
    which is how you started this question, when a cotton
    infrastructure moves out of a community it is very difficult to
    get it back.
        Mr. Crawford. Yes.
        Dr. Outlaw. And so basically, I think that there has to be
    some sort of price protection afforded to cotton producers,
    whether it is through the seed, that will work, obviously, but
    there has to be some sort of protection in this next bill.
        Mr. Crawford. In the 45 seconds I have left, if anyone
    wants to comment on the viability of ag trade in Cuba. I have a
    bill that would lift the credit restriction, that is really the
    only impediment to selling U.S. ag commodities in Cuba. Would
    anybody like to weigh-in on that, what the potential there is
    for U.S. agriculture?
        Dr. Johansson. Initial analysis that we have done at the
    Department suggests that we could triple trade to Cuba under
    certain conditions. And certainly as has been noted, improving
    market access and expanding trade is key for U.S. agriculture
    as we continue to see increasing productivity like we did last
    year. We need to find places to sell that overseas.
        Mr. Crawford. Thank you. My time has expired.
        The Chairman. The gentleman's time has expired.
        Mr. Lawson from Florida.
        Mr. Lawson. Thank you. Thank you very much, Mr. Chairman,
    and thanks for this Committee to be here this morning.
        I represent six counties in north Florida, rural counties
    in north Florida, so I know the importance of farm economics
    and recovery. We have watched cattle prices begin to weaken
    over the last year or so, and I can you tell, that is one
    question, can you tell us what is behind your outlook for
    increase in productivity, even as prices continue to decline?
    And second question, we are seeing cotton prices recover some
    time this year, and understand that the outlook is for that to
    continue. What factors are influencing the recovery, and are
    they likely to remain at this pace for a long time?
        Dr. Johansson. Well, I will touch briefly on those, and
    then turn it over to the folks on the panel to chime in.
        Certainly, we are seeing cattle prices pressure downwards.
    We are expected to see record production next year
    nevertheless. A part of that is lower feed costs. The January,
    as has been mentioned, the January cattle inventory estimated
    total cattle and calf numbers in 2017 had increased for the
    third consecutive year. It is still in recovery from the
    drought that we saw in the Southern Plains earlier in 2011,
    2012, and 2013. Beef cattle numbers are above 2016 and
    producers indicate they are holding more heifers in addition
    for the breeding herd.
        The year over year increase in the number of cattle outside
    feedlots is also indicative of increasing production, so we are
    likely to see record production in 2017, meanwhile, as prices
    come down. The cattle cycle is a longer run phenomenon that
    perhaps Dr. Brown can mention in a second.
        On the cotton side, we are seeing China, as had been
    mentioned, had built up significant stocks. As much as 60
    percent 2 years ago of the world's global stocks were held in
    China. They have been unwinding that stock position as well as
    moderating their domestic support policies for their cotton
    producers in China, so we are seeing an increase in the amount
    of auctioning of their stocks that they were holding. They are
    down to about 10 million tons since last year. They are holding
    about 48 percent of the global stock right now. Despite that
    fact, the U.S. continues to sell our cotton at a premium,
    higher-quality cotton, and we expect that to continue, going
    forward. And certainly, we have seen a recovery to a certain
    degree in global economic demand for cotton. An increase in
    price for crude oil, which decreases the attractiveness of
    synthetics as a substitute.
        Dr. Brown. Two back-to-back years of one million head
    growth in beef cattle numbers in the United States is much of
    what is at play in terms of lower cattle prices. When I look
    back, I will say 2014, when we had $3 calves, made the industry
    want to expand, and that expansion is just now what we are
    dealing with as we look ahead. It takes the industry a long
    time to make changes in the supply side because of just the
    biological nature of the industry, and I am afraid we are not
    done with that expansion. Much of the expansion is, again,
    occurring in the Midwest; Texas, Oklahoma, Missouri, where we
    had a lot of drought conditions occur in 2012 and 2013, and we
    are just rebuilding herds back to where they were pre-drought
    conditions. But the supply side of the industry that gives us
    three percent more meat supplies in 2016, another three percent
    in 2017, spells for me that we are probably not done in terms
    of where lower cattle prices hit.
        The Chairman. The gentleman yields back. Thank you, Mr.
    Lawson.
        Mrs. Hartzler, 5 minutes.
        Mrs. Hartzler. Thank you. Sounds like we all need to eat
    more beef, and wear more cotton, I guess.
        But anyway, wanted to ask you, Dr. Brown, about the dairy
    policy, you talked about in your testimony the low
    participation and how it is like a concrete floor, the current
    safety net. And so I want to run a couple of ideas by you, and
    then just ask you generally what you think we need to do about
    the 2014 levels.
        But based on your testimony where you say finding ways to
    spread risk across Federal policy may be the balance needed to
    provide a better safety net. So under the current farm bill
    dairy producers must make a choice between the MPP dairy and
    the Livestock Gross Margin Insurance Plan for Dairy (LGM-
    Dairy), which is run by the Risk Management Agency. Once
    farmers make that choice, they are locked into it for the life
    of the farm bill. However, these programs offer very different
    forms of risk protection. So in your view, what would be the
    policy consequences of either allowing dairy farmers to
    participate in both programs at once, or at the very least,
    allowing farmers to decide each year which program they would
    like to be in?
        Dr. Brown. Yes, that choice is very interesting because you
    could envision a program where MPP provides the catastrophic
    coverage, if you will, and yet you provide producers the chance
    to maybe buy-up via the LGM insurance route. So there may be
    some options as we look ahead into the next farm bill.
        We always have to be careful that those complement each
    other and don't compete, i.e., that producers somehow can't
    double-dip in terms of those two programs, and that we figure
    out how to make them work together, but it might provide the
    ability to use both in a way that is helpful. And I will say
    LGM for dairy might provide a little more short-term decision
    process for producers as they could make that on a month-by-
    month basis, whereas currently when you think about MPP, that
    is an annual decision that we have made. So it might allow
    producers a little more flexibility if we give them the choice.
        We would probably have to talk about uncapping LGM for
    dairy, or at least talking about the cap for LGM for dairy
    relative to where it sits today as well.
        Mrs. Hartzler. Okay, well, that kind of goes into the next
    question which talks about making programs workable and
    responsive. So currently, MPP dairy calculates margins on a
    bimonthly basis, so this could make the program less timely for
    participating farmers as margins can fluctuate on a monthly
    basis. Do you think a monthly calculation would make the
    program more effective and more attractive for producers?
        Dr. Brown. Certainly, going to a monthly calculation means
    that we will get payments more often. If you look back at 2016,
    if we would have done it month-by-month we would have gotten
    larger payments than we ended up with using the bimonthly
    process that was laid out in the 2014 Farm Bill. So I do think
    that is more what the dairy industry is accustomed to is seeing
    month-to-month. They get a milk check every month, so it might
    make more sense to give them payments on a monthly basis as
    well.
        Mrs. Hartzler. Yes. And from both your testimony and Dr.
    Westhoff's, you talked about how the anticipated amount of
    money that was going to go out in these programs fell far short
    of actually what was going out. So it seems to be there is some
    extra money there that had been budgeted that could be used
    perhaps to provide that relief.
        So the last question, just in general, what do you think
    needs to be done to fix the dairy program to make it truly
    responsive?
        Dr. Brown. Well, first, we have to learn from our
    experience. We made a big swing in 2014 in terms of the dairy
    policy change that we made. We are learning that producers are
    not as interested in participation as maybe we thought when the
    2014 Farm Bill was passed, understanding that our working
    assumption was that 70 percent of milk production would be
    signed up at $6.50, to find out now that it is less than two
    percent is signed up at that $6.50 level should tell us
    participation is less, that perhaps government costs are less
    than we expected. That might provide us then what are the
    alternatives that provide a better safety net, and get a more
    reasonable cost estimate for those different alternatives.
        Mrs. Hartzler. Great. Thank you very much. I yield back. I
    appreciate it.
        The Chairman. The gentlelady yields back.
        Mr. Panetta, 5 minutes.
        Mr. Panetta. Thank you, Mr. Chairman. And thanks to all of
    you gentlemen for being here. I appreciate your testimony as
    well as your preparation for being here to testify. Thank you.
        Dr. Johansson, I come from the central coast of California.
    My Committee Members are going to get sick of me saying I come
    from the salad bowl of the world where there are over 100
    specialty crops grown there. Those types of crops, we can't
    just run a machine through the fields, unfortunately. We need a
    labor force to go in there and pick them. Obviously, with the
    immigration issues that we have been having, and you talk to
    farmers for the past year and then some, they basically say,
    even with the drought, water is not the number one issue; labor
    is the number one issue.
        You said that there are some fixes. You mentioned the rise
    in number from 72,000 to 165,000. What else can be done when it
    comes to the H-2A program, what can we be focused on? Because I
    believe that is where we can go to help alleviate the
    situation.
        Dr. Johansson. Yes, and certainly, I would defer any policy
    responses to when we get confirmation of a new Secretary. And I
    was just noting that, over the past several years, Congress,
    both on the House and the Senate side, have contemplated
    adjustments to the H-2A program to make it more workable for
    farmers to use that program to get a more stable supply of
    labor. In those various bills, there are a good number of ideas
    that could work with both Labor or with USDA, depending on how
    those different facilitating adjustments were made.
        I would be glad to put a more formal response together for
    you for the record, and certainly would like to defer to the
    new Secretary when he has a chance to get on-board.
        Mr. Panetta. Understood. I look forward to that response.
        Thank you very much. I yield back my time.
        The Chairman. The gentleman yields back.
        Rodney Davis, 5 minutes.
        Mr. Davis. Thank you, Mr. Chairman. And I am glad I got to
    follow my colleague, Mr. Panetta, because I have actually seen
    his district and it is the salad bowl of America. And I got to
    witness organic leafy greens being put into the bags that end
    up making it to the grocery stores in my district. And
    thankfully my wife was with me because she got to see the same
    greens going into the generic bag and the name-brand bag. So I
    always remind her of that when we are at the store, let's go
    ahead and just buy that one. So thank you for what your
    district does.
        And I am going to segue that into what my district does in
    central Illinois. I don't have a lot of specialty crops, but I
    have what I call our special crops; corn and soybeans. And
    today's hearing is about the farm economy, and the current
    state of affairs in my area, it is pretty troubling in my
    state. What is also troubling to me is that many of my
    colleagues on both sides of the aisle, they rally, and we talk
    about rallying around rural America, and instead of seeing
    that, I see that some trotted out the same proposals to gut the
    Renewable Fuel Standard. And it is a program that I believe
    drives growth in not only rural America but throughout the
    country. And for anyone who still thinks that the RFS was
    causing commodity prices to skyrocket, let me point out the
    following: we are producing more ethanol than ever before, the
    price of corn is lower today than it was when the RFS was
    expanded, last year food prices fell in the longest decline
    since the 2009 recession, and the overall 2016 food price fell
    below 2015, the first annual decline since 1967. Claims of corn
    being diverted from food products ring hollow when we see that,
    even during the drought of 2012, America's farmers produced the
    eighth largest corn crop in history, with record harvests in
    2014, 2015, and 2016.
        I want to ask two questions, Dr. Johansson. What can
    Congress do to encourage growth in the biofuel sector, and
    would repealing the RFS contribute to instability in the
    agriculture sector, particularly in the corn markets?
        Dr. Johansson. Well, it's is a great question.
        Mr. Davis. Thank you.
        Dr. Johansson. Two. First, I will note that in the weekly
    briefing packets we put together for senior leadership, we do
    have two slides in there from central Illinois cash markets;
    one for corn and one for soybeans.
        Mr. Davis. Thank you.
        Dr. Johansson. So those feature prominently in our briefing
    package each week.
        Turning to the Renewable Fuel Standard, as you noted, we
    are currently producing--conventionally, we always thought
    capacity for ethanol production was around 15 billion gallons.
    Annualized basis right now, we are at 16 billion gallons. So we
    are producing more ethanol, and that is primarily a function of
    the fact that we are getting better at it over time, and we are
    exporting more than we have in the past.
        In terms of providing incentives for increased production,
    by and large, from the RFS standpoint, the conventional
    standards capped at 15 billion gallons, so additional gallons
    that are produced above that are going to have to find a home,
    for the most part in the export market, or in higher blends.
        So those are two opportunities for increasing conventional
    corn ethanol production past the 15 billion gallon cap.
        The question about whether or not changing the RFS in such
    a way to get rid of the mandates, essentially, what would that
    effect have on corn production and prices, et cetera, in the
    rural economy, I think is your question. I think that is a two-
    part answer to that, and I will give you an economist's answer.
    All right? So on the one hand, in the near-term most studies
    have shown that you wouldn't see a lot of changes because the
    way that the refineries sector has set itself up, they produce
    a blend stock that assumes that you are going to have a ten
    percent mix with ethanol. So changing the refinery technical
    engineering standards will take some time, if they were to do
    that. I will also point out that you still need octane in your
    gasoline, and ethanol provides the cheapest octane, so you are
    still going to have a good amount of ethanol production. If you
    didn't mandate it, it would vary more by price. So right now
    you have gasoline prices that are relatively low, although they
    have been ticking up lately. As a substitute, ethanol has
    generally been cheaper than gasoline, but right now it is about
    break-even. I defer to people on the panel. If you were to
    change the matter in such a way that it would become more, I
    guess, reflective of the relative price you have between corn
    ethanol and gasoline, similar as to what you see in Brazil with
    respect to the sugarcane and gasoline usage.
        Mr. Davis. Thank you. Thank you, Mr. Chairman.
        The Chairman. The gentleman's time has expired.
        Mr. Soto.
        Mr. Soto. Thank you, Mr. Chairman. And I am hopeful by
    hearing concerns about a potential trade war or immigration
    crackdown, since either of those things would be a disaster for
    our farmers, for rural America, particularly when we see that
    agriculture is just getting by now.
        I am from Florida's Fighting Ninth, which we have the top
    cattle producing county in the state, Osceola County, and
    Congressman Lawson already touched on that. And I also have the
    second highest citrus producing county in the state, Polk
    County, and we are taking a beating on citrus right now due to
    the greening disease. So I was wondering what you all could
    advise us as far as what we should be putting into the farm
    bill. Citrus is a huge crop in Florida, Texas, California, and
    many other states, I would love to hear your thoughts on that.
        Dr. Johansson. As you mentioned, well, the Florida citrus
    crop has been getting hammered by citrus greening over the last
    5 years or so, probably even a little bit longer, and we have
    noted that decrease in production in our reports at USDA. We
    are down to one of the lowest Florida orange crops that we have
    seen, probably since back to the 1960s, if I am not mistaken,
    even perhaps further back.
        Mr. Soto. We are down 70 percent from over a decade ago.
        Dr. Johansson. Yes. So in terms of assistance that can be
    provided, we are certainly working--as the Chairman of the
    Federal Crop Insurance Corporation, we are certainly looking to
    find new products that provide help to tree crop growers, and
    we have added a number of tree crops, including citrus crops,
    to the crop insurance portfolio. I think that will continue on
    into the future. Research and development on ways to address
    diseases like citrus greening are another way that USDA has
    been active in trying to find a solution for producers down in
    Florida.
        Regarding new farm bill proposals, I will turn that to
    folks that can speak more freely about that.
        Dr. Westhoff. Just to add a quick point as to university
    research. It might be a little self-serving to say that we need
    more university research, but we are obviously trying to get on
    top of the issues. It is obviously a very critical industry.
        Mr. Soto. Well, thank you, and we were blessed to have over
    $125 million in assistance through the last farm bill, and the
    situation is dire in our state and in our nation, and we will
    be drinking mostly Brazilian orange juice if we don't get
    active on this, and so I just wanted to make sure we
    highlighted it.
        The other issue I wanted to hear you all speak about is,
    found it a little disturbing that young farmers seem to be in
    far more debt than older farmers, and it seems to trace a
    similar line with student loans and the like of young
    professionals, as opposed to 10, 20 years ago. So what can we
    do to help our young farmers get out of debt like the
    generation of farmers before them?
        Dr. Outlaw. Well, I will add a few things and then defer to
    probably Rob. But the programs that had been put in the
    previous farm bill seemed to work very well. I have received
    quite a bit of feedback from the producers we work with; the
    young producers, saying they really appreciate the
    consideration that was provided in the past farm bill, with
    lower interest rates and things like that, that that has been
    helpful to a good extent.
        The big question is, and it is not easy to handle, is,
    agriculture is a very capital-intensive occupation, and if you
    want to have control of land where you control the outcome of
    getting to farm it every year, you have to buy it, and that is
    the problem. And so I know there are a lot of programs geared
    towards new farmers, but anything you can do to try to help
    alleviate some of that cost would probably be appreciated.
        Mr. Soto. Thank you. I yield back.
        The Chairman. The gentleman yields back.
        Mr. Allen, 5 minutes.
        Mr. Allen. Well, thank you, Mr. Chairman. As you know, in
    my home State of Georgia, agriculture is the number one
    industry. And according to the Georgia Cotton Commission, in
    2014 Georgia planted around 1.38 million acres of cotton, and
    had an average yield of about 900 pounds per acre. In my
    district, cotton is among the largest crops planted, and
    currently many of my farmers are very concerned with; and
    obviously the gin folks, the folks that make the equipment,
    everybody has great concern about what is the future of our
    economics as far as cotton.
        And in speaking to the farm people, when I have talked to
    our farmers, they are particularly concerned with two things:
    first, crop insurance is a big deal; and then second, some type
    of price support. And, for the last farm bill, commodity prices
    were at all-time highs, and today, obviously, they are very
    low. And I have talked to commodity people to try to understand
    that market, and maybe how we can smooth out that line, because
    that seems to be the biggest problem is in planting, and our
    farmers say, ``Let us worry about the yields, we will deal with
    that,'' but we have kind of got to know what and where these
    things are going to be.
        What is really driving this commodity, like the high prices
    before and now the low prices, and is there a fix, is there
    something we can do? And is it caused by trade? I don't know.
    Dr. Johansson, do you want to start with that and tell us how
    we can stabilize that thing?
        Dr. Johansson. Well, not so much for cotton prices, I
    guess, but I would say that volatility and commodity prices in
    general would be expected, going forward, to be less volatile
    than we have seen, both in the upside and the downside. Our
    projection is for relatively flat prices, going forward, and
    over the next 10 years, we don't expect to see dramatic
    increases or decreases. Dr. Westhoff mentioned that, of course,
    things can change, that will change that situation, whether it
    is a drought or a change in policy, or a change in trading
    arrangements could affect that, either for a positive or a
    negative. Just due to the fact that we do have so many
    relatively high global stocks right now, I would say that that
    is going to minimize any upward or downward movement in the
    near-term. Going out 10 years, we do still forecast the U.S. to
    be the number one cotton exporter, going forward. And by that
    time, China is going to be the number one cotton importer. So
    to the extent that we maintain a good trading relationship with
    our number one customer, I think that will keep the picture, in
    terms of at least our outlook for trade, stable.
        Mr. Allen. What drove up the commodity prices that we saw a
    few years ago?
        Dr. Westhoff. Well, it was any number of factors,
    obviously. We did have 3 straight years, from 2010 to 2012,
    when global average yields for the grains and oilseeds were
    below trend. And so that made not as much commodity available
    in the world. China was increasing its consumption very
    dramatically, and we also had the biofuel revolution had just
    passed its most extreme phase in this country. So you had a
    very severe shortage of stocks in many commodities across the
    board, drove prices dramatically higher.
        Since 2012, we have now had 4 straight years with above-
    average yields. It has pushed prices lower. And that suggests
    as we go forward if we had more normal yields, going forward,
    that might give you a bit of a price recovery, but we are
    starting from very high levels of stocks, as Dr. Johansson
    indicated, so it will take some time to work through those.
        Mr. Allen. Okay. Obviously, cotton was pretty much ignored
    in the last farm bill. What, going forward, can we do as far as
    cotton is concerned in the new farm bill?
        Dr. Outlaw. I have already said it once, but cotton needs
    to have some sort of price protection on either lint or seed,
    and it looks like seed is an avenue that might work. So that
    has to happen.
        Mr. Allen. Okay. All right, well, I yield back, Mr.
    Chairman.
        The Chairman. The gentleman yields back.
        Dr. Kauffman has a 12 o'clock hard stop, which we are
    running past. Dr. Kauffman, just leave when you need to, sir.
    Thank you very much for being here this morning.
        Ms. Lisa Blunt Rochester, 5 minutes.
        Ms. Blunt Rochester. Thank you, Mr. Chairman, and Ranking
    Member Peterson. I also want to thank the panel. I feel like
    you have simultaneously given us a glass half empty and full.
    So thank you for that.
        And my question is actually for Dr. Kauffman. I represent
    the State of Delaware, and so many of you might know we have
    farmers, as many chickens as people, we also have financial
    services sector that is very important.
        And so first, I wanted to clarify. Did I understand you to
    say in your testimony that there has been a reduction in loan
    volume for operating expenses? That is the first part of the
    question. And then is this solely due to lower input prices,
    because farmers don't need loans to pay for fuel or fertilizer
    or seeds, et cetera, or is it a result of lenders being
    skittish about extending credit to farmers, or both?
        Dr. Kauffman. It does seem like it is a combination of
    several things.
        To clarify first to the first question. Outstanding farm
    debt has still been rising. So looking at last year, it had
    been increasing but perhaps at a slower pace. Some of the data
    that we collect that reflects new loan originations shows that
    there was a notable slowdown in the fourth quarter of last year
    in terms of loan volumes at commercial banks, and that is due
    to a couple of factors. First, as you noted, on the input cost
    side, certainly lower fertilizer prices, lower livestock prices
    in terms of inputs, that has represented some reduction.
    Anecdotally, we have also heard some statements that prepaid
    expenses were a bit lower in the fourth quarter. So farmers
    perhaps delaying some of those decisions. We did in many areas
    see stronger than expected crop yields. And so in terms of the
    timing on cash flow and when some of those loans might be made,
    I think that was also a contributing factor.
        And then certainly, to your point, there has been a bit of
    hesitation and apprehension going through this loan renewal
    season, just making sure that finances are in order before
    getting to the next phase of production.
        Ms. Blunt Rochester. Got you. Does anybody else on the
    panel have a comment?
        Okay, thank you. I yield back my time.
        The Chairman. The gentlelady yields back.
        Mr. Marshall, 5 minutes.
        Mr. Marshall. Good morning, panel. Let me add my gratitude
    for being here, and bring greetings from the State of Kansas.
        As I think about Kansas, I would bring to you just not the
    macroscopic level. When you talk about income of $150 billion
    of income, it doesn't mean much to me, but the average income
    for the farmer in Kansas for 2015 was $6,000. For 2016, it will
    be less, and in 2017 it will be even less. And it is very hard
    to raise two kids on $6,000 a year.
        As a physician, I hate to use the term crisis ever, but it
    is certainly nearing that. The economy in my district is 60
    percent agriculture, so when you have an ag economic issue, you
    have a statewide economic issue, and the dominoes are starting
    to fall. So we are very, very concerned in Kansas.
        My first question is for Dr. Kauffman, who probably has the
    closest connection to Kansas. How severe have low commodity
    prices been on farmers' bottom lines, and are we seeing farmers
    going out of business yet, or are they still managing to live
    off equity?
        Dr. Kauffman. So to the first question on low commodity
    prices, it certainly is having an impact. We aren't seeing a
    great deal of an increase in bankruptcies, in farm
    bankruptcies, and even loan delinquency rates have been
    relatively low. That said, most of us often report things in
    averages when we talk about the farm sector overall, but
    certainly, there are pockets, there are areas where things have
    perhaps been worse than some others, as we look at the downturn
    in commodity prices, and as we hear concerns being voiced by
    agricultural lenders. Certainly, we know that the environment
    in wheat has been particularly pessimistic, with prices much
    lower in wheat than they had been in other commodities. And as
    we look at the cattle sector, though prices have improved over
    the past couple of months, the previous 18 months had not been
    so good. And so in terms of lenders expressing some concern
    about cash flow in those areas, and obviously, both of those
    sectors are important for the Central Plains, so that has been
    an area where that there has been more concern.
        Mr. Marshall. Okay, thank you.
        Well, my next question is for Dr. Brown. Most people don't
    realize this, but I represent the fastest-growing dairy sector
    in the country, so dairy is becoming a bigger issue as well.
    And you have answered bits of this question, and maybe all of
    it, this is real important to my dairy people, so in your
    opinion, what combination of improved payments and reduced
    costs to participate would induce significant numbers of dairy
    farmers to sign up at more effective, higher margin coverage
    levels of the MPP program? And again, you have answered bits
    and pieces of that, but I certainly want you to know we are
    concerned about it too.
        Dr. Brown. Yes, absolutely. So I will start, first, with
    talking about premiums for a minute.
        Mr. Marshall. Okay.
        Dr. Brown. It seems to me that one of the options that we
    have talked about is lowering premiums for different levels of
    MPP participation as a way to get increased use of the program.
    However, I found dairy producers very disinterested in making
    payments for premiums and getting nothing in return. And so I
    am not certain that lowering premiums, all else equal,
    generates a lot of additional participation in the program.
    However, premiums have been higher than have been needed to pay
    for the program thus far. That is one area we have to think
    hard about how that affects participation if we were to lower
    premiums.
        The other side of it is, what is an appropriate safety net?
    We talk about currently with $4 to $8 coverage options, and $4
    being the catastrophic, how do we help pull that catastrophic
    level up. It is just very important that we think carefully
    about the policy as we move forward as, if we end up with
    policy that is too lucrative, we have all experienced that from
    the 1980s dairy programs that we had, and that was not much fun
    either. So it is a tightrope we have to walk between providing
    a safety net, without it becoming too lucrative.
        Mr. Marshall. Okay. Quick question to Dr. Johansson. We are
    all awash in supply of many of our major commodities. What can
    we do to increase demand for these products?
        Dr. Johansson. Certainly, we know that, as I mentioned
    earlier, coming off of the record harvests we have had, where
    we had all three major commodities; corn, soybeans, and wheat,
    have record yields, first time in 40 years that that has
    happened. Agricultural productivity continues to move forward
    and it is essential that we find new markets for those
    products. Certainly, we are putting R&D into trying to develop
    new products from corn, for example, but the key will be trade.
    We need to find the ability to continue to move our products
    overseas to new markets.
        The Chairman. The gentleman's time has expired.
        Ms. Plaskett, 5 minutes.
        Ms. Plaskett. Yes, thank you, Mr. Chairman. And thank you,
    witnesses, for being here.
        I have a question for you, and I don't know who would be
    the appropriate person to respond to this. However, we have
    seen in recent months the discussion of rural America, and its
    emergence is really a real focus of many of us here in
    Washington and in terms of politics. As we move from a post-
    industrial society in many respects, there seems to be, and
    tell me if I am correct or incorrect, a tension in the rural
    areas between agriculture and that post-industrial sector. I
    know in the Virgin Islands, where I am from, we are now seeing
    the closing of so many of our industries, and people are going
    back to agriculture as a source, as an economic driver. What do
    you see is the emergence of agriculture? Will it remain the
    strongest economic driver in rural areas? Is it changing, as we
    see the changing in pricing happening? What is the outlook for
    that? I see they are looking over in that corner to Dr.
    Johansson.
        Dr. Johansson. Well, it is a great question, it is really
    interesting, and you will get five different answers when you
    ask five different economists.
        Ms. Plaskett. You sound like us up here, saying the same
    thing.
        Dr. Johansson. We have seen consolidation occur in
    agriculture in the United States, as well as in the sectors
    that are upstream and downstream of agriculture. When you enter
    into a tight economic situation like we are seeing right now,
    that you are likely to see additional consolidation occur.
    Obviously, that consolidation has slowed down substantially
    from what we had earlier, over the last 50 years or so, but I
    would suspect that we do see additional consolidation as
    producers that have more liquidity and have better financial
    bottom lines are able to increase the size of their production,
    despite the fact that prices are relatively low, but we project
    them to be stable. In that situation you could see additional
    consolidation in several sectors.
        Ms. Plaskett. Well, when you talk about the consolidation
    of the products and what is happening in the industry, what is
    the support that we in the farm bill could give to expanding
    other markets? We are looking at the global market, but as my
    colleague, Ms. Adams, was talking about, there is also the
    urban markets that could be an additional market that we have
    not really supported and allowed growth in. If there are food
    deserts in America, then that is obviously a marketplace that
    we should be moving into. How do we as Members of Congress
    support that?
        Dr. Johansson. Well, the business sector is very good at
    finding ways to meet demand. And when we have demand occurring,
    certainly, for diverse products like organics or other types of
    products in that sector, we are seeing producers in the United
    States as well as processors respond to that demand. I think
    that is likely to continue trying to pick winners and losers
    is, from my perspective, never a very easy thing to do when we
    look towards creating particular provisions. In general, I like
    to say that if you let the business opportunities operate
    transparent to market signals, then you are going to see the
    most efficient allocation of resources. But, again, that is
    sort of a----
        Ms. Plaskett. Okay. So that is interesting you talk about
    demand because I believe that there is a demand in these food
    deserts, it is we haven't found a way to bring the pricing or
    the support for them to be able to meet the demand of their
    pallets, to be able to have those foods.
        But another question I had is, in the period of low pricing
    that we have now, there seems to be, and will there be a delay
    in purchasing of equipment or machinery among farmers? Are
    there ways for us to encourage purchasing of products? I know
    in the Virgin Islands we have cooperatives that are looking at
    food processing plants to support production. What are the ways
    that the farm bill can support that?
        Dr. Westhoff. Well, just make the point that obviously,
    when agriculture suffers, it has an effect on lots of upstream
    and downstream industries.
        Ms. Plaskett. Yes.
        Dr. Westhoff. And so we have seen that play out the last
    couple of years here, and it is going to be an issue, going
    forward. So trying to make agriculture healthier will, of
    course, have ramifications for the rest of the economy as well.
        So just general things you do to support agriculture will
    have an effect.
        Ms. Plaskett. Yes, because I am just concerned because I
    know that having the equipment will assist them, but if the
    prices are low that is going to mean a delay in them being able
    to purchase those things.
        Dr. Westhoff. Right.
        Ms. Plaskett. Thank you. Thank you, Mr. Chairman.
        The Chairman. The gentlelady's time has expired.
        Mr. Dunn, 5 minutes.
        Mr. Dunn. Thank you, Mr. Chairman.
        I would like to address my question to Dr. Johansson. The
    greatest concerns that I hear from timber owners in my district
    and harvesters regard policy variables related to regulatory
    and tax uncertainties, which impact their management practices
    and business models. Certainly, wildfires, insects, and disease
    all are concerns, and I will recognize them only to bring them
    up at a later time. But what I would like to have from you, if
    I could, is any additional indicators that you are tracking
    that, and can you discuss your outlook for the timber industry?
        Dr. Johansson. You are correct that the Forest Service is
    part of the USDA, although the Forest Service economists and
    folks that work at the Forest Service generally provide that
    outlook. I don't focus a great deal of attention on that
    outlook when I develop the outlook, which I will be doing next
    week for the agricultural sector. That being said, we know
    that, as you mentioned, timber production and timber resources
    in the United States has been responding to a lot of signals.
    You have the private-sector forests and you have the public-
    sector forests. They are managed slightly differently. Interest
    rates are certainly going to play a big role in how those are
    managed in terms of timber managers looking at what their
    optimal harvest schedule is.
        There is a lot of, obviously, interaction with our trading
    partners on some timber issues. Certainly, in California we
    have seen, due to the drought there, there are a lot of timber
    issues in terms of trying to remove a lot of that dead timber
    that we are seeing as a result of the drought. Of course, in
    the Southeast you have completely different issues where we are
    trying to make sure that we continue finding opportunities to
    export a lot of those wood pellet products overseas to a lot of
    demand that is coming from Europe. And so I would imagine that
    it is a tough question to answer, a lot of issues that are tied
    up in timber, and I would certainly be happy to get back to
    you.
        Mr. Dunn. Let me turn your attention to a different one
    then. Let's pay attention to dairy just for a moment there.
    Producers are faced with very poor returns currently in the
    price of milk, they are very low, and they remain concerned in
    my district regarding outlook for the dairy sector. However,
    the USDA's report called for increasing milk production and
    increasing milk prices. Can you address that in 2017?
        Dr. Johansson. Yes, and I will just touch on it briefly,
    and I am going to let Dr. Brown speak because he is the----
        Mr. Dunn. Yes, and I was going to ask Dr. Brown the same
    question.
        Dr. Johansson. You are right, our 2017 dairy outlook right
    now is for all-milk price to be upwards of about $17, $18 a
    hundredweight. That is up from the previous year. And in
    addition, we are seeing increasing productivity in milk per
    cow, increase in the dairy herd, due to some stronger signals
    from abroad in terms of being able to export that. I will stop
    there.
        Mr. Dunn. Do you think exporting is key to that?
        Dr. Johansson. I think exporting is key to that, yes.
        Mr. Dunn. All right. Dr. Brown.
        Dr. Brown. Yes, I would agree, higher milk prices in 2017
    are not coming from less supply. We are going to have more milk
    supplies again in 2017. It is a combination of demand for U.S.
    dairy products abroad, as well as you look at a number of other
    countries, ASEAN (Association of Southeast Asian Nations) in
    particular, where milk supplies are down relative to a year
    ago, that I think are important to the higher price outlook.
        I remind us the risk around these outlooks, and I will say
    when you are very much dependent on increases in exports, we
    could look back a few months here down the road and not get the
    kind of milk price increase that we think if we don't get a
    strong increase in U.S. dairy exports in 2017.
        Mr. Dunn. Well, let's hope we do. Thank you very much.
        Mr. Chairman, I yield back.
        The Chairman. The gentleman yields back.
        Mr. Arrington, 5 minutes.
        Mr. Arrington. Thank you, Mr. Chairman. And thank you,
    panelists.
        I think you will agree with me, but I certainly believe
    strongly that if we are going to make America great again, we
    need a strong and sustainable rural America. I don't know who
    is going to feed and clothe the American people if rural
    America isn't healthy, and I don't know who is going to fuel
    the American economy if rural America isn't healthy. I know
    there are a lot of factors. I serve on the Committee on the
    Budget, we have been talking about regulatory burden, the $58
    billion in additional regs burden to our community hospitals
    out of ACA. I have more rural community hospitals in my
    district than any other in the State of Texas, and they are
    just getting crushed and they are going out of business. And
    there are 600 on the brink of going out of business around the
    country, and I think that having viable health care is about
    sustaining rural communities. No greater effect than our
    agriculture though, especially where I come from. Twenty-nine
    rural counties in west Texas.
        And I just came from a Budget hearing and I have to say it
    has kind of thrown me off. I had a really good statement or two
    about rural America and free trade and fair trade, and a good,
    strong farm bill. I don't think it is drought, I don't think it
    is insects, I don't think it is trade wars, the meeting I just
    came from where we have a fiscal crisis, and where we have
    mandatory spending eating away at very important discretionary
    investment, domestic investment, is going to be the biggest
    challenge of the 21st century, and every committee, every
    policy committee, every authorization committee.
        I represent the largest cotton patch in the world, and I
    want to ask you, if I may, some questions about cotton. And I
    am just going to tee them up, and if you guys would knock them
    down in any order that you so choose.
        What was the rationale behind the Brazilian case that they
    made to WTO in pulling cotton out of the farm bill, out of the
    title I as a covered commodity, what was the rationale? Just
    real quickly.
        Dr. Johansson. The argument was that the U.S. support for
    cotton via both its direct payment programs as well as some of
    the other programs was causing adverse harm to Brazilian
    producers, due to the fact that prices were low.
        Mr. Arrington. Could that argument or that rationale be
    applied to other crops?
        Dr. Johansson. Yes.
        Mr. Arrington. What would happen if all of our crops were
    outside of the safety net?
        Dr. Johansson. I mean essentially, if we were to not have
    any farm bill?
        Mr. Arrington. Yes. Yes, let's apply that rationale to
    every crop, pull it out of the safety net, the word disaster
    comes to mind, or would be a challenge and adjustment? Anybody?
    Federal Reserve, Dr. Kauffman?
        Dr. Kauffman. Certainly, if it were to happen immediately
    it would be a shock, as there are a number of lenders that
    would look to crop insurance as one of the risk management
    strategies, and borrowers, as Dr. Johansson reflected, are
    primarily interested in the products----
        Mr. Arrington. I will tell you, with cotton in west Texas,
    it has been a disaster. I can't imagine if it were the citrus
    guys or the soybean and corn it has been a disaster.
        Let me move on to the next question. How much does China's
    dumping and their mass subsidization, I understand that they
    are allowed to subsidize because they are a developing nation,
    which I find hard to believe that we have agreed to do any kind
    of trade deals when those are provisions, but how does their
    dumping and mass subsidization of cotton affect the global
    market, and specifically the U.S. cotton producer? Significant,
    slight, de minimis?
        Dr. Johansson. As I mentioned earlier, China did have, and
    still does have significant cotton stocks relative to the
    global level of stockholding abroad. They are currently about
    50 percent of total global stocks, and they were about 60
    percent as recently as last year. The way that we have
    addressed that in terms of our outlook is that it does put a
    damper on the potential for upward price movements due to the
    fact that you have that many stocks out there.
        Mr. Arrington. National security, I think it is number one,
    and this is a big part of it.
        I have one last question, if the Chairman will allow me.
        The Chairman. Sorry, the gentleman's time has expired.
        Mr. Arrington. Okay.
        The Chairman. Mr. Faso, 5 minutes.
        Mr. Faso. Thank you, Mr. Chairman. I appreciate the panel
    coming today, and I very much appreciate your advice and
    expertise in terms of dealing with the 2018 Farm Bill.
        I represent a district in the Catskills in Mid-Hudson
    Valley in Upstate New York, and I can tell you I have talked to
    dozens of dairy farmers and not a single one of them thinks the
    Margin Protection Program works, they are very cynical about
    it, and some are angry and some are just resigned.
        We have listened to a number of the discussions, depending
    on what commodity we are dealing with or whether it is dairy,
    about the need for exports and the need for trade. I am a
    little concerned about the border adjustment issue, especially
    when I hear that the value of the dollar will rise, and it is
    somewhat speculative in terms of that rise, but what are the
    consequences, what are the unintended consequences of it.
        So I guess this is to Dr. Johansson, as well as the other
    panelists, but particularly Dr. Brown. What can we be doing,
    because it seems to me we just go through this boom-bust cycle,
    what can we be doing to expand the domestic market for fluid
    milk and other dairy products? We are spending more now for
    this stuff; bottled water, than we are for milk. And I look at
    the USDA that says we can't sell a whole or two percent milk or
    flavored milk in a school lunch program, and yet the other
    parts of the government are saying how do we come up with
    programs to shield people from the results of lower prices. And
    yet we don't seem to be spending enough time and effort to
    actually increase our consumption of what many of us would
    argue is a much more desirable product than some of the other
    things that we may be consuming as Americans and as school
    children. So perhaps we could address the question of what
    should we be looking at, what could we be doing to increase our
    domestic consumption of fluid milk and dairy products.
        Dr. Brown. Consumer trends have, of course, always been
    very difficult to follow. We have gone through the boom and
    bust of consumers wanting more dairy fat, less dairy fat in
    their diets. When you look at the very recent data, however, we
    are starting to see some signs of some more positives occurring
    with some of the more whole milk products starting to share a
    little bit of growth in terms of demand that we haven't seen
    for a long time.
        There is a lot of work left to do in terms of product
    innovation. I see the industry spending a lot of time trying to
    figure out an answer to that question with some of the new
    products that are on the marketplace today. But we have to
    continue to think about the packaging and delivery of fluid
    milk products to consumers, trying to find new experiences for
    them to consume milk products. Some of the few things that are
    available to us right away that might help stem what has been a
    long-term decline in fluid milk consumption.
        Dr. Johansson. And I agree. We are seeing a projection for
    increased domestic milk consumption through the products that
    Dr. Brown had talked about, and I would expect some of those
    trends to continue. In addition, marketers are finding ways to
    get milk into the grocery store and find margin there for
    producers, such as through organic programs and organic
    production. But again, with the forecast, at least that we
    have, and it is a little bit more optimistic than the FAPRI
    forecast in terms of production, going forward, over the
    baseline period, trade will be essential for making sure that
    we are able to move those products overseas and maintain margin
    for dairy producers.
        Mr. Faso. Right. And I realize that Dr. Johansson might not
    be able to comment on this, but one thing that you just
    mentioned, when you mentioned organic, I have an organic yogurt
    producer in my district, they are paying $38 a hundredweight
    for milk, and certainly, we will see more and more producers
    looking in that direction.
        But, Dr. Brown, and perhaps the others, what about this
    whole business of school lunches and two percent and whole
    milk, I mean does this make any sense whatsoever?
        Dr. Brown. We are going to have to continue to evaluate
    what we see in the school lunch side to make certain that we
    put in front of students what is nutritionally sound. We do go
    through ebb and flow in terms of what we think is good, if you
    will, and we have gone through a period of time where maybe we
    were avoiding some of the higher-fat products that are out
    there, to now maybe realize that, in correct quantities, we can
    talk about a different makeup of school lunch than we have had
    in the past. So perhaps that is more debate that we need to
    have as we move forward.
        The Chairman. The gentleman's time has expired.
        Mr. Lucas, 5 minutes.
        Mr. Lucas. Thank you, Mr. Chairman. And I appreciate the
    opportunity to be here today. And I would be remiss if I didn't
    note that your comments were very kind at the beginning of this
    hearing, and yes, on February 28, we are going to launch into a
    Subcommittee hearing. And for those of you who might be
    surprised that there are even trees in Oklahoma, I can assure
    you that forestry is a crop, to be planted, to be nurtured, to
    be harvested, to be replanted. So like all other good
    commodities that fall under this Committee's jurisdiction, we
    are going to work aggressively on that at the Subcommittee
    level.
        That said, I have listened with great interest and
    enthusiasm to my colleagues' comments and the comments of the
    panel. I would hope everyone on the panel would acknowledge
    that the biggest miracle of all is the fact that we are
    operating under the 2014 Farm Bill. And as the Chairman, who
    was my loyal and dedicated wingman, and I hope to cover his
    back in this farm bill process, will attest to, there were
    times in that 2\1/2\ years not everybody in this town thought
    we would have a farm bill, and that we would wind up reverting
    to 1938 and 1949, and that the forces who didn't understand
    rural America would repeal those Acts and we would have
    nothing. Think about where we would be today with nothing, and
    that is the direction we were headed. So it is an
    accomplishment. It is a miracle that we have this farm bill.
        And I know, gentlemen on the panel, that you appreciate
    this more than anyone, but the very basic concept in production
    agriculture, I guess, goes all the way back to my ag policy
    class 35 years ago at Oklahoma State, when Dr. Ray put so much
    effort into trying to explain the inelasticity of demand for
    food and fiber. And for some of my other colleagues, what that
    simply means in a rational way is, either you have enough to
    eat or you don't. And if you don't have enough, you will pay
    whatever it takes to get it, and if you have more than you
    need, you won't pay anything for the next. Is that a fair
    layman's assessment, gentlemen? And that is what drives ag
    policy to be such a complicated thing, compared to most other
    things in this building or in this town, or in this legislative
    process.
        Then-Chairman Peterson and I had a long series of
    discussions in 2009 and 2010 that, whether it was in the feed
    cycle or in the grain cycles, or the indirect consequences of
    Renewable Fuel Standard, that we were building up productive
    capacity. Now, the drought in my region, from 2011 through
    2014, and the drought that hammered my friends in the Midwest
    in 2012, distorted where we thought we would be, gave us a few
    more years of nice prices, and in some cases record prices, but
    reality came crushing back to us. And that is what farm bills
    are all about, as the Chairman alluded to earlier. We don't do
    farm bills for the good times, but we try to do farm bills to
    address the bad times. And that is where we are.
        That said, at least, unlike Dr. Flinchbaugh and Chairman
    Roberts in 1996, we don't have to reinvent the wheel, or like
    Collin and myself and Chairman Conaway, reinvent the wheel
    again in 2014, we have something to work from. Not perfect. No
    legislative products are ever perfect, but at least we have
    something to work from. And my colleagues on this Committee,
    pardon me for raving and ranting just a little bit, you are
    going to find out over the course of the next 18 months or 2
    years how tough this is. The pressures that we will encounter
    from our rights on the right, who, as I like to say back home
    in my town meetings, don't want to spend any money on anybody
    for any reason, and some of our friends on the left who don't
    want to spend any money on rural America or the concept of
    modern wondrous production agriculture in this country. We have
    to bridge that. We have to create a product that will meet the
    needs of our citizens, because after all, if those folks on the
    farm can't produce that food and fiber or that milk, then it is
    not going to be in the store, it is not going to be on the
    shelf. And in that strange concept called inelasticity of
    demand will kick in, and there will be a rumble. There will be
    a rumble.
        So with that, I look to the panel and say, not a perfect
    document, but it is a document. And I look forward to working
    with each and every one of you, and with our new Secretary,
    when confirmed, and with our Chairman and Ranking Member, as we
    all together try to make sure that our fellow citizens have
    enough to eat, and that our friends on the farm have the
    capacity to provide that food and fiber, even if perhaps they
    don't always understand each other, or in some instances, at
    the end of the food chain they don't have a clue where it came
    from, we are still doing important work here, no matter what
    the think tanks may think scattered around this town.
        And with that, Mr. Chairman, I feel better. I have gotten
    it off my chest. I yield back.
        The Chairman. Well, I am sure the audience appreciates the
    therapy.
        Mr. DesJarlais, 5 minutes.
        Mr. DesJarlais. Thank you, Mr. Chairman.
        Dr. Johansson, I don't know how much has been discussed
    today about trade, but probably the question I get most from my
    ag folks back in Tennessee, in addition to saving crop
    insurance, is what is going to happen with trade, because there
    was some great opportunities through the Trans-Pacific
    Partnership for our cattlemen, country-specific like Japan or
    South Korea, and with the current Administration not viewing
    those agreements favorably, what advice can you give us and how
    can I reassure them that things are going to be okay in terms
    of trade with the new Administration? What strategies do we
    need to be looking at?
        Dr. Johansson. Certainly, that is a question that is on a
    lot of folks' minds, and we did talk about trade a lot today. A
    lot of our baseline forecasts at USDA looking forward in terms
    of our price estimation and in terms of our production
    estimation for the major commodities have built into those
    assumptions that trade is going to continue on as-is going
    forward. It didn't have TPP built into it, but it has our just
    general trends in trade that we have seen occurring over the
    recent history. And I would say in that forecast we still
    foresee a role for trade, an increasing role for trade. As I
    mentioned earlier, as U.S. producers continue to become more
    productive, we are going to need to find a place to sell those
    products. And selling those products overseas is something I am
    pretty sure that we are going to continue to do, going forward.
        Mr. DesJarlais. Okay, so right now, what you are telling me
    is that you see the status quo as being the policy until we are
    told otherwise?
        Dr. Johansson. I am just saying for our forecast that I
    base a lot of my testimony on that is based on the status quo.
    Certainly, the new direction that we are going to get on trade,
    or the current direction that we have right now, is going to
    continue to have to focus on trade for agriculture. In
    particular for this sector, it is important that we continue to
    trade, and I don't see that changing any time soon. I don't
    know if the other panelists want to take a bite at that one.
        Mr. DesJarlais. Okay. Anybody else want to chime in?
        Dr. Westhoff. No, I just certainly agree that trade is
    absolutely essential to many sectors in U.S. agriculture. What
    happens to trade policy, what happens to trade arrangements
    with other countries matters a lot. Our own baseline, likewise,
    assumes a continuation of current policies, going forward. We
    stand ready to look at what happens if there are alternatives.
        Mr. DesJarlais. Okay. And have you reached out with the new
    Agriculture Secretary Purdue, do we have a strategy for
    addressing trade with him or has that not started yet?
        Dr. Johansson. Well, we are eagerly awaiting confirmation
    hearings, and we are looking forward to having the new
    Secretary onboard. And at that point in time, I am sure that we
    would be more than happy to provide some more responses to
    comments for the record.
        Mr. DesJarlais. Okay. Any concerns with the proposed tax
    reform and the border adjustment tax in regards to trade? How
    will that affect our exporting?
        Dr. Johansson. I know there has been a lot of folks that
    have been studying that issue lately in Washington, and
    certainly, the border adjustment idea has a lot of question
    marks around it in terms of what I have looked at in the past
    in terms of border adjustments, but we haven't conducted any
    analysis on that at this point in time in my office.
        Dr. Westhoff. Just to add, there are questions about the
    WTO compatibility of some of the proposals that have been made,
    different arguments, and I don't pretend to know the answer.
        Mr. DesJarlais. Yes.
        Dr. Westhoff. But clearly, that is when you want to get a
    handle of it before it goes forward.
        Mr. DesJarlais. Maybe a question I shouldn't ask in an open
    forum, but I have asked several people and haven't got an
    answer, and I am sure it is simple. Are our exports taxed now?
    If we are sending beef to Japan, is it taxed on the way out?
    You will make me feel better by----
        Dr. Westhoff. Well, there is no different tax treatment for
    exported product than domestically consumed product today.
        Mr. DesJarlais. Right.
        Dr. Westhoff. So it would be taxed the same way and be
    consumed domestically.
        Mr. DesJarlais. Okay.
        Dr. Westhoff. Under the border adjustment, the exported
    products would not be taxed, imported products would be taxed.
        Mr. DesJarlais. Okay, but they are currently being taxed?
        Dr. Westhoff. The same as----
        Mr. DesJarlais. The same as tires or cars.
        Dr. Westhoff. Same as anything else. Yes.
        Mr. DesJarlais. All right. Thank you.
        I yield back.
        The Chairman. The gentleman yields back.
        Mr. Arrington, do you have another question for a minute?
        Mr. Arrington. Thank you, Mr. Chairman.
        The Chairman. And that is 1 minute.
        Mr. Arrington. Yes, real quick. I won't editorialize on
    this round.
        Has there ever been a cost-benefit analysis with respect to
    our investment in agriculture, and my understanding is with
    direct support for farmers it is about a \1/4\ of a percent
    relative to the Federal budget that we invest in an ag safety
    net. Has anybody done the cost-benefit analysis on the cost to
    providing that and the return in national security, that is, to
    quantify the national security implications to not being able
    to feed your own people? Are you aware of any study, or have
    you yourself, Dr. Johansson, ever conducted such a study?
        Dr. Johansson. Well, I will turn it over to, actually,
    these guys. They may have looked at this in the past. We
    certainly do a lot of cost-benefit analyses, and in terms of
    the projections of national security implications of not being
    able to feed ourselves, that has occurred in the past. I don't
    really have any idea of what the numbers are on that. I was
    certainly more familiar with research that has been done on the
    returns to providing investments in agriculture in terms of
    basic research and development. Generally speaking, in those
    types of analyses you find for every dollar that is invested in
    research, you get a return of between $10 and $20 in
    agriculture in benefits. And that spans a pretty large area.
    But I will see if other folks might have other things to add.
        Mr. Arrington. Thank you for your time.
        The Chairman. All right.
        Well, gentlemen, thank you very much for being here today.
    You have clearly laid out for the Committee and for Congress,
    and hopefully the other folks watching, the clear need for a
    safety net that is reliable, multi-year, and that can be
    counted on by not only producers but lenders and implement
    dealers. We intend to get this done and done on time. It hasn't
    been done in 16 years.
        The 2014 Farm Bill could make this argument that we needed
    it, but it was harder to say in good times that you needed a
    safety net. That will not be the case over the next 2 years. My
    colleagues and I will have a little less difficulty, hopefully,
    explaining to our colleagues why it is needed.
        The one group that is underrepresented in the conversation
    though are consumers, not just SNAP consumers but all
    consumers. You can love the current farm bill or you can hate
    the current farm bill, but it delivers, along with, quite
    frankly, our producers, the most abundant, safest, and most
    affordable food supply in the developed world. And it is their
    hard work, it is their sweat equity, it is their risk-taking,
    and it is relies on a safety net to be there during hard times.
    And we are clearly in hard times, based on the conversations
    you have had. We need to be engaging the consumer so that they
    understand the deal. Everybody likes to get a deal. They get a
    deal every time they go to the grocery store, every time they
    eat in a restaurant they pay less for their food than anybody
    else in the world, and that is a result of hard-working farmers
    and ranchers across this country, and yes, reliance on this
    safety net.
        So engaging those consumers to help them understand why it
    is important to them: national security interests that my
    colleague just mentioned, and their own personal pocketbooks,
    that we have a strong production agriculture, and that, by
    extension, rural America continues to prosper. So you have laid
    out the why very well this morning, and I appreciate each of
    you coming to join us this morning, and whatever personal
    efforts you had to make to get here. I appreciate Dr. Kauffman
    swinging in from Omaha as well.
        So with that, under the Rules of the Committee, the
    Committee's record of today's hearing will remain open for 10
    calendar days to receive additional material and supplementary
    written responses from the witnesses to any question posed by a
    Member.
        This hearing of the Committee on Agriculture is adjourned.
    Thank you all.
        [Whereupon, at 12:18 p.m., the Committee was adjourned.]
        [Material submitted for inclusion in the record follows:]
              Submitted Statement by American Bankers Association
        Chairman Conaway, Ranking Member Peterson, and Members of the
    Committee, the American Bankers Association (ABA) writes to thank you
    for holding a hearing on the ``Rural Economic Outlook: Setting the
    Stage for the Next Farm Bill.'' On behalf of the approximately 2,000
    agricultural banks we represent, the ABA wishes to provide for the
    record our views and perspective on the state of the agricultural
    economy.
        Banks continue to be one of the first places that farmers and
    ranchers turn when looking for agricultural loans. Our agricultural
    credit portfolio is very diverse--we finance large and small farms,
    urban farmers, beginning farmers, women farmers and minority farmers.
    To bankers, agricultural lending is good business and we make credit
    available to all who can demonstrate they have a sound business plan
    and the ability to repay.
        In 2015, farm banks--banks with more than 15.5 percent of their
    loans made to farmers or ranchers--increased agricultural lending 7.9
    percent to meet these rising credit needs of farmers and ranchers, and
    now provide over $100 billion in total farm loans. Farm banks are an
    essential resource for small farmers, holding $48 billion in small farm
    loans, with $11.5 billion in micro-small farm loans (loans with
    origination values less than $100,000). Farm banks are healthy and well
    capitalized and stand ready to meet the credit demands of our nation's
    farmers large and small.
        In addition to our commitment to farmers and ranchers, thousands of
    farm dependent businesses--food processors, retailers, transportation
    companies, storage facilities, manufacturers, etc.--receive financing
    from the banking industry as well. Agriculture is a vital industry to
    our country, and financing it is an essential business for many banks.
        As agricultural banks we have a vested interest in the success of
    the agricultural economy. These banks have significant investments in
    agriculture, and as an industry we monitor with diligence the
    performance of the sector. This statement informs you of the following
    developments which we discuss:

       A summary of the state of the different sectors that
            agricultural banks finance;

       The need for tools to enable banks to help finance farmers
            and ranchers; [and]

       The need for more appraisers in rural areas.

        We thank you for the opportunity to provide our comments for the
    record. The ABA staff stands ready to answer any questions on these
    topics and looks forward to providing you with any additional
    information.
    A Summary of the State of the Different Sectors that Agricultural Banks
            Finance
        As has been reported in the press and based on feedback from our
    bankers and from agricultural economists, there has been a gradual
    increase in the level of financial stress in the farm sector which has
    caused agricultural lenders and borrowers to become cautious.\1\
    ---------------------------------------------------------------------------
        \1\ Ag Finance Databook, Federal Reserve Bank of Kansas City, 1/20/
    2017.
    ---------------------------------------------------------------------------
        The agricultural economy has been slowing, with farm sector
    profitability expected to decline further in 2017 for the fourth
    consecutive decline. However, farm and ranch incomes for the past 5
    years have been some of the best in history. As a result of the passage
    of the 2014 Farm Bill, farmers, ranchers, and their bankers achieved a
    level of certainty from Washington about future agricultural policy.
    Interest rates continue to be at or near record lows, and the banking
    industry has the people, capital and liquidity to help American farmers
    and ranchers sustain through any turbulence in the agricultural
    economy.
        Although declines in the cost of some key inputs have provided
    modest relief for farmers and ranchers, profit margins have remained
    very low and new farm loan originations dropped sharply in the fourth
    quarter as reported by the Kansas City Federal Reserve Bank. If profit
    margins remain low through 2017, the pace of new debt will be a key
    indicator to monitor in assessing the severity of financial stress
    through the year. As bankers, continued declines in farm income, and
    any potential leveraging of the sector, would be a cause for concern.
        There are several economic factors in the agricultural economy
    impacting farmers and ranchers \2\ thereby affecting the agricultural
    banking sector as well as follows:
    ---------------------------------------------------------------------------
        \2\ Farmer Mac, The Feed, Winter 2016-2017; Kansas City Fed
    Agricultural Outlook 02/01/2017 and USDA Economic Research Service.
    ---------------------------------------------------------------------------
        Community banks are declining in number as a result of over-
    regulation and unfair competition. Most existing agricultural banks are
    purchased by other, expanding agricultural banks. This leads to the
    polarization of banks and communities not having a local agricultural
    bank.
        Weather remains the biggest source of uncertainty in projections.
    There has been a dramatic improvement in drought conditions throughout
    California, and conditions in the Midwest are shaping up for a
    favorable spring plant. This bodes well for continuing record yields,
    but depending on the commodity, reduced prices.
        After a down year in 2016, corn and soybean production in South
    America looks to rebound in 2017, which combined with record corn,
    soybean and wheat yields in the U.S. and worldwide, helped contribute
    to an excess of grain stocks this winter, however, prices are at multi-
    year lows, although soybeans have held up better on strong demand from
    China. Large corn, soybean and wheat crops have driven ending supplies
    higher and kept downward pressure on market prices. This lower
    commodity price cycle continues to be of concern to the agricultural
    banks.
        Beef, pork, and poultry prices are down as a result of abundant
    supplies, but dairy prices are holding due to strong export demand and
    durable cheese demand. Lower retail prices have put downward pressure
    on profitability in the cattle industry, but market equilibrium may be
    in sight. Milk prices are up due to greater consumer demand for cheese.
        A record U.S. rice crop in 2016 has contributed to lower prices,
    but strong global demand should provide a backstop for further drops.
    Cotton prices stabilized in 2016 due to weather disruptions in global
    production, but cotton continues to lack adequate support from USDA
    programs.
        The new Administration's positions on agriculture are unknown at
    this time, which adds some uncertainty to the sector. With a new
    Secretary in place soon, these concerns should be allayed.
        Markets are expecting two additional interest rate hikes in 2017,
    which would put the expected average farm operating interest rate
    between 5.2 and 5.7 percent by the end of 2017.\3\ Banks will be stress
    testing their portfolios to address any potential repayment problems.
    ---------------------------------------------------------------------------
        \3\ Farmer Mac, The Feed, Winter 2016-2017.
    ---------------------------------------------------------------------------
        Debt-to-earnings and interest expense-to-earnings are climbing in
    the agricultural sector, however current and projected levels are still
    far below levels experienced in the 1980s. It would take a debt-load
    increase of more than ten percent, combined with a rate increase of
    more than 300 basis points and an income decline of more than 50
    percent, to shock the interest expense-to-earnings ratio in 2017 to
    1980 peaks. Agricultural banks will continue to monitor debt levels for
    overleveraging.
    The Need for Tools To Enable Banks To Help Finance Farmers and Ranchers
        Based on the above factors, and as the agricultural sector
    experiences stress as a result of 4 years of reduced farm income as
    reported by the USDA,\4\ it will become increasingly important for
    banks to have the tools available to assist farmers and ranchers.
    ---------------------------------------------------------------------------
        \4\ USDA ERS 2017 Farm Sector Income Forecast.
    ---------------------------------------------------------------------------
        For agricultural banks to have the ability to assist farmers and
    ranchers to the full extent possible, it will be necessary to address
    the unfair competition in the agricultural credit markets. Increasingly
    tax-subsidized entities such as the Farm Credit System, utilizing their
    GSE status and other benefits, have migrated to lending beyond their
    mission, cherry picking the better credits while minimizing their
    lending to young, beginning and small farmers and ranchers. The ABA
    advocates for leveling the playing field by removing taxes from all
    banks that lend to agricultural real estate, reforming the Farm Credit
    Administration to make it more transparent and accountable, and
    requiring the Farm Credit System to stick to their Congressionally
    mandated mission.
        Banks work closely with the USDA's Farm Service Agency to make
    additional credit available by utilizing the Guaranteed Farm Loan
    Programs. The repeal of borrower limits on USDA's Farm Service Agency
    guaranteed loans has allowed farmers to continue to access credit.
    These programs become vital in the current state of the agricultural
    economy. We ask that funding for these programs be increased to an
    amount necessary to refinance and take care of potential borrowers in
    distress, and take care of those borrowers, large and small that will
    need the credit to expand. Accordingly, with increases in funding
    levels, a corresponding increase in staffing and IT infrastructure will
    be needed to be able to deliver these valuable programs.
        One success of the 2014 Farm Bill was the continued support of crop
    insurance programs. Agricultural lenders use crop insurance as a
    guarantee for repayment of their loans in the event of disaster. Crop
    insurance helps secure financing for operating credit. With crop
    insurance, a lender has the ability to provide support based on
    individual producers' proven crop yields. This allows lenders to tailor
    a loan to a producer's operation and allow for year-to-year adjustments
    within that operation. Crop insurance has allowed lenders to provide
    the best possible terms for operating loans because it helps to lower
    the risk for the lender. ABA has been a long-time supporter of crop
    insurance programs and would like to see the programs expanded to help
    as many producers as possible.
    The Need for More Appraisers in Rural Areas
        We call to your attention the rapid aging of the agricultural
    appraiser workforce, with retirements exceeding new entrants, thereby
    leading to shortages in several rural areas of the country.\5\ Our
    agricultural bankers are concerned that if measures are not taken to
    encourage the recruitment and reduce the onerous requirements to become
    an appraiser, there will be delays and missed opportunities to provide
    credit at a time when the agricultural sector needs it most. We thank
    the Congress for the hearing entitled ``Modernizing Appraisals: A
    Regulatory Review and the Future of the Industry'' held by the
    Financial Services Subcommittee on Housing and Insurance on November
    16, 2016. ABA supports the continued Congressional efforts in this
    area.
    ---------------------------------------------------------------------------
        \5\ Appraisal Institute--U.S. Appraiser Population Estimates 06/30/
    2016.
    ---------------------------------------------------------------------------
    Conclusion
        In summary, the agricultural sector for the most part is doing
    well, however there are continued signs of distress as we enter the
    fourth year of reduced farm income and low commodity prices. With no
    expectations for increased commodity prices in the near future, and the
    potential for interest rates to start rising, it will be crucial for
    agricultural banks to have the flexibility to help our farmers,
    ranchers and rural areas through programs like the Farm Service
    Agency's Guaranteed Loans Program, Crop Insurance, the availability of
    qualified rural appraisers and a leveling of the playing field with the
    Farm Credit System. While the current state of the agricultural economy
    is not near the experiences of the 1980's, it does merit continued
    monitoring and the help of Congress in the coming farm bill.
    Agricultural banks across the country stand ready to assist farmers,
    ranchers and agribusiness in meeting their credit needs.
                                     ______

                               Submitted Question
    Response from Nathan S. Kauffman, Ph.D., Assistant Vice President,
            Economist, and Omaha Branch Executive, Omaha Branch, Federal
            Reserve Bank of Kansas City
    Question Submitted by Hon. Don Bacon, a Representative in Congress from
            Nebraska
        Question. As you mention in your written testimony, the debt-to-
    asset ratio in the farm sector has increased over the trailing 4 year
    period and is projected to continue rising in 2017. You state that this
    benchmark is still significantly below levels during the farm crisis of
    the 1980s. Many in the farming industry have resorted to borrowing
    money to maintain the current level of their operations by leveraging
    the value of their farmland. If the current trend in borrowing persists
    while farmland values decline, how distant is the horizon where we
    might see debt-to-asset ratios reach a level similar to the 1980s farm
    crisis?
        Answer. In the 1980s, farm bankruptcies in the U.S. began to surge
    when the debt-to-asset ratio for the U.S. farm sector reached, and
    exceeded, 20 percent. According to USDA, the debt-to-asset ratio is
    forecasted to rise to 13.9 percent in 2017, which is up from 11.3
    percent in 2011, but is still low from a historical perspective.
    Recently, however, farmland values have been trending lower while debt
    in the farm sector has continued to rise. Specifically, farmland values
    throughout the Midwest have declined by approximately five percent
    year-over-year in each of the past 3 years and U.S. farm debt has also
    increased by about five percent annually in recent years. If these
    trends were to persist at this same pace in the coming years, the debt-
    to-asset ratio for the U.S. farm sector could reach 20 percent in
    approximately 5.5 years.

                                      [all]