SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2366 words

COMMITTEE: HOUSE AGRICULTURE

HEADLINE: 2002 FARM BILL

TESTIMONY-BY: DEE VAUGHAN, NCGA BOARD OF DIRECTORS

AFFILIATION: NATIONAL CORN GROWERS ASSOCIATION;

BODY:
July 18, 2001

NATIONAL CORN GROWERS ASSOCIATION;

Dee Vaughan

HOUSE AGRICULTURE COMMITTEE Thank you, Mr. Chairman, for the opportunity to testify here today about future farm policy. My name is Dee Vaughan, and I serve on the NCGA Board of Directors and as the liaison between the Board and our Public Policy Action Team. The National Corn Growers Association (NCGA) represents over 31,000 direct members and the 300,000 corn farmers throughout the country who promote corn and the profitability of corn production through their state check-off programs.

Lee Klein, President of the National Corn Growers Association, joins me today. Lee and his wife raise corn, soybeans, rye, alfalfa and hay and manage a cow/calf operation on the farm near Battle Creek in northeast Nebraska. My wife Terri and I grow corn, wheat, sorghum and soybeans on my farm near Dumas in the northern Texas panhandle. NCGA commends the Chairman and Ranking Member of the House Agriculture Committee for putting forth a farm bill concept paper that continues the production flexibility of the Federal Agriculture Improvement and Reform (FAIR) Act and adds a decoupled, counter-cyclical program as an income safety net when commodity prices fall below target levels.

To help NCGA members evaluate this proposal we applied the concept provisions to the 2000 crop year experience. We looked at both the aggregate effects with regard to how the proposal would fit within our international obligations and then, more specifically, how corn farmers might fare under the proposal. We appreciate this opportunity to share some of our concerns with the committee.

WTO Compliance

Our foremost concern is that a counter-cyclical payment that is commodity specific and linked directly to farm commodity prices will not be exempt from the U.S. WTO commitments to limit domestic farm program spending. Our analysis suggests that if this proposal had been in place for the 2000 marketing year, our domestic farm program spending would have exceeded our WTO commitments. The concept formula applied to the 2000 crop production experience using the most recent USDA price estimates would have resulted in total counter-cyclical payments of over $9.4 billion. For purposes of our analysis we did not change the payment acres for the current program crops. We estimated soybean program acres of 74 million acres, payment acres of 62.9 million acres and the average soybean payment yield as 30 bushels per acre. We did not include minor oilseeds.

We then attempted to calculate the total marketing assistance loan benefits for corn, sorghum, barley, oats, wheat, soybeans, cotton and rice. We used loan activity data from last week to estimate the units using the loan, the average loan deficiency payment (LDP) rate, and the average marketing loan gain (MLG) rate for each commodity. We then adjusted the rates by the changes in the concept proposed loan rates as compared to the 2000 loan rates. We subtracted 34 cents from the soybean rates, added 18 cents to the sorghum rates, 3 cents for barley and 5 cents for oats. This rough analysis does not include any potential marketing loan gains for any 2000 crop that is still under loan, nor does it include any gains associated with the use of certificates. Aggregate loan benefits were reduced by more than $850 million, but we still show loan benefits for the 2000 crop in excess of $6.1 billion.

Finally, we added one-tenth of the ten-year cost associated with the dairy, sugar and peanuts programs to the amounts reported to the WTO for each of those commodities for the 1998 crop. This is nothing more than a back-of-theenvelope approach, but we think it provides a rough indication of what the calculated support would be for the 2000 marketing year. We added just over $460 million to the almost $6 billion that the United States reported for 1998 for a total of $6.4 billion for these three programs.

The above support would total almost $22 billion, would be reported as commodity specific and would be included in the U.S. Aggregate Measurement of Support under the Uruguay Round Agreement on Agriculture. Obviously, the production and price experience of 2000 is not an indicator of future program outlays, but this committee must weigh the very real potential that the United States could exceed our WTO obligations. Further, this approach could make it very difficult for the United States to advance our trade liberalization objectives in the ongoing WTO agricultural negotiations. NCGA has proposed an alternative counter-cyclical mechanism that would have comparable cost and that we believe fits within the WTO exemption from reduction. We believe that moving our domestic policies toward WTO compliance will strengthen our negotiating position and improve the comfort level with trade reform among U.S. farmers.

Target Price,

The draft concept proposes an interesting twist on the old target price system - the fixed payment is included as part of the target price. We first thought that since the fixed payment was subtracted from the target price that we should talk about an effective target price of $2.59 for corn. On further reflection we understand that the target price is the minimum that the producer would receive per payment bushel. That income will come as an automatic fixed payment - 26 cents per bushel for corn - plus any marketing assistance loan benefits plus market returns plus the counter-cyclical payment. By providing a portion of the target price as a fixed payment, there is the possibility that growers will receive more than the target price. On the other hand, since the fixed payments have already been capitalized into land, it is also possible that our initial reaction was correct - that the effective target price is $2.59. Because the counter- cyclical payment is calculated only on the commodity price, it may not provide adequate support in years when national production falls short and prices rise accordingly. The NCGA counter-cyclical income proposal would provide better protection in years of low production.

Marketing Assistance Loan Program

The concept paper includes significant modification of the of the sorghum, soybean and minor oilseeds loan rates. NCGA policy does not address loan rates for other commodities, and we will not comment today on whether the proposed rates are appropriate.

Our concern with the draft concept is that it does not address the implementation problems of the marketing assistance loan program. The national average loan rate of $1.89 per bushel for corn is available at the county level at rates that range from $1.69 in several counties in North Dakota and one county in Minnesota to a high of $2.61 in Los Angeles County, California. Many of these loan rates reflect outdated price relationships, in part, because of the political difficulty of adjusting the local rates. The Commodity Credit Corporation designates one or two terminals for each county and differentials to adjust the daily terminal price to the local price. This antiquated system is tolerable when harvest prices are strong, but when harvest prices fall below loan rates, all of the problems become obvious to producers. For the last three corn harvests, farmers have been frustrated by loan repayment rates that are significantly higher than the available market price in the county and by higher available LDP rates in adjacent counties or states.

As we suggested in our testimony before this committee last April, NCGA believes that merely rebalancing the loan rates will not address the underlying dissatisfaction. However, if the committee decides to retain the marketing assistance loan, then the following changes should be made to make the loan program work more equitably for U.S. growers:

-Allowing growers to determine their LDP rate on any or all eligible commodities after harvest or beginning September 1 of the crop year.

- Continued LDP eligibility for silage, high moisture, mycotixin- infected and damaged corn.

-Revising the rules to give a producer the choice to have their LDP set in the country grown or marketed.

-Directing USDA to set the Posted County Price as the average of the two adjusted terminal prices for the county. Aside from the implementation problems, many producers have objected that the loan program does not protect those who may have suffered a natural weather disaster and who do not have a crop from which to collect an LDP. We appreciate that the concept draft includes a decoupled counter-cyclical payment that will be available to those producers who lose their crops and that Congress has provided a crop insurance program that producers can use to reduce weather-related losses. However, the continuation of the marketing assistance loan program will prolong the disparity for those who suffer production shortfalls. The NCGA counter-cyclical proposal would not link any portion of the payment to current production.

Payment Yields

NCGA proposed a counter-cyclical income program that would use more recent acreage and production experience to determine the eligible payment units. We think the counter-cyclical support should reflect the actual production rather than the outdated bases and yields. For corn the national average program payment yield is a fraction of the actual yields over the last five years. The CBO baseline assumes an increase in the average corn yield of 1.7 bushels per year - an impressive upward trend. The average program yield is a depressingly low 102.3 bushels per acre about 75 percent of the trend yield today, but only 67 percent of the 153 bushels per acre projected for 2011. Because corn has experienced the greatest increase in productivity over the 15 to 20 years that program yields have been frozen, corn producers have the most frustration with the current payment yields. Outdated payment yields effectively reduce the level of support and threaten to disrupt the balance of support between commodities. (See Attachment A)

Program Bases

If soybeans and other oilseeds become program crops, it is necessary to establish acreage bases for those crops. We believe the committee concept proposes a reasonable compromise that allows each producer to decide whether to keep the base they have today or to update their bases to add oilseed acres or to reflect the changes in the planted acres with the flexibility of the current farm program. However, producers who currently have program base on more than half of their crop acres may find that the decision to update bases is far from obvious. They will have to make some assumptions about future crop prices to estimate whether they will be better off with updated program bases. The wrong price assumptions could prove costly in terms of future program support.

Another consideration for producers deciding whether to update their program base is the potential loss of flexibility to plant fruits and vegetables on land that does not currently have a base.

The program base is only the beginning of the calculation. The Committee Concept retains the automatic reduction in payment acres that was carried over in the FAIR Act from the triple base of the old budget reconciliation days. This constitutes another reduction in the effective level of support.

Timing of Payments

Finally, the committee needs to consider whether the proposed counter-cyclical payment will provide adequate revenue when farmers need the assistance. The national 12-month season average price received by producers will not be calculated until the end of the marketing year. Producers who have come to rely on timely assistance over the past several years, will be in the thick of the next harvest before they receive their counter-cyclical payment.

Conservation

Regarding the conservation section of the proposal, NCGA is encouraged to see the increased funding available for conservation. NCGA still believes that the focus of the conservation title in the next farm bill should be on incentive payments for conservation on land in production. As our growers face increasing environmental pressures due to changing regulations on animal feeding operations and total maximum daily loads, we see the need for financial assistance for environmental practices for crop and livestock production. Conservation practices, such as intensive resource management or conservation tillage, can become as important as a filter or buffer strip in achieving conservation goals, but these management practices or choices frequently add to the costs and risks of the farming operation.

NCGA does not support increasing the acreage cap for the Conservation Reserve Program (CRP). We believe that given the limited funding available for all programs, there should be a focus on providing a greater role in voluntary, incentive-based assistance for making the right management choices on individual farms and allowing growers to maintain the productivity of that land. We have adequate resources allocated to existing CRP acreage. The $1.4 billion cost of the proposed increase in CRP acreage should be reallocated to Environmental Quality Incentives Program (EQIP) funding with direction given to the Natural Resources Conservation Service to include production practices, such as conservation tillage or timing of nitrogen application, as well as the broader management and structural options. In addition, we encourage the committee to seriously consider modifying the priority area structure and reducing the contract term for EQIP.

Trade

We applaud the committee concept for designating $900 million over ten years for trade promotion. The Market Access Program (MAP) and the Foreign Market Development (FMD) Cooperator program enable the private sector to leverage federal dollars to provide the in-country presence that we need to effectively market our agricultural products. We believe that the additional funding will be better utilized if it is allocated between the MAP and FMD programs, and if the total funding is gradually increased. Both of these programs provide invaluable



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