[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
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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\
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\1\ Ag Finance Databook, Federal Reserve Bank of Kansas City, 1/20/
2017.
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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:
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\2\ Farmer Mac, The Feed, Winter 2016-2017; Kansas City Fed
Agricultural Outlook 02/01/2017 and USDA Economic Research Service.
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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.
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\3\ Farmer Mac, The Feed, Winter 2016-2017.
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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.
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\4\ USDA ERS 2017 Farm Sector Income Forecast.
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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.
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\5\ Appraisal Institute--U.S. Appraiser Population Estimates 06/30/
2016.
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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]