SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 5032 words

COMMITTEE: SENATE APPROPRIATIONS

HEADLINE: FY 2003 APPROPRIATION

TESTIMONY-BY: KIETH COLLINS, CHIEF ECONOMIST,

AFFILIATION: U.S. DEPARTMENT OF AGRICULTURE

BODY:
STATEMENT OF KEITH COLLINS CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE BEFORE THE U.S. SENATE COMMITTEE ON APPROPRIATIONS SUBCOMMITTEE ON AGRICULTURE, RURAL DEVELOPMENT AND RELATED AGENCIES

March 14, 2002

Mr. Chairman and members of the Subcommittee, thank you for the invitation to discuss the economic situation in U.S. agriculture. The generally weak markets for major crops continues, fueled by the global economic slowdown, the high value of the dollar, and large global production. Despite the reduction in major crop prices over the last several years, the financial condition of the farm sector has remained stable due in part to large government payments. Other contributing factors have been a reluctance of producers to take on new debt, low interest rates, off-farm employment opportunities, and improved prices and returns for livestock. In addition, prices for energy-related farm inputs have dropped over the past year, helping to hold down farmers' production expenses.

Looking ahead, little improvement in major crop markets is expected over the next 12 months, unless global crop production moderates from recent high levels. However, the financial condition of the farm sector is expected to remain stable in 2002 supported by continued strength in livestock prices and returns, low interest rates, stable energy prices, and continued large government payments. Outlook for the U.S. and World Economies

The outlook for the global economy is for a continuation of the current economic slowdown through 2002. The global economic slowdown is expected to constrain growth in demand for agricultural products, but will also help to stabilize farm production expenses in 2002. Prior to last year, the slowdown in the world economy reflected poor economic performance in Asian and Latin American countries. In contrast, a sharp downturn in the U.S. economy is a major contributor to the current global economic slowdown.

U.S. Gross Domestic Product (GDP) registered a strong increase of 5.7 percent during the second quarter of 2000 but then plunged sharply, declining by 1.3 percent in the third quarter of 2001. For all of 2001, U.S. GDP increased by 1.1 percent. Despite the sharp drop in growth and rising unemployment, consumer spending did not contract, helping to avoid an even deeper recession. The U.S. economy is forecast to register a second year of slow growth in 2002, with the rate of growth increasing to 1.6 percent and unemployment holding at about 6 percent. The rate of growth is expected to improve throughout the year, as low energy prices, low interest rates, and tax cuts gradually increase consumer confidence.

Foreign GDP growth in 2001 was a very slow 1.3 percent and is forecast to moderate further to 1.2 percent this year (Oxford Economics). Developed economies will be particularly weak, especially Japan and Argentina, but prospects are improving in the Middle East, and parts of Asia. In addition, Mexico's economy is forecast to grow by 1.4 percent in 2002 after contracting slightly last year.

Outlook for U.S. Agricultural Exports

The value of U.S. agricultural exports peaked at a record $60 billion in FY 1996. Over the next 3 years, the value of U.S. agricultural exports fell by nearly $11 billion, reflecting increased foreign competition and a strong dollar. In FY 2002, the value of U.S. agricultural exports is forecast to reach $54.5 billion, up from nearly $53 billion last year. The value of U.S. agricultural imports is forecast to remain unchanged at $39 billion in FY 2002.

The U.S. real agricultural trade-weighted exchange rate has appreciated by 30 percent relative to the currencies of countries that import U.S. agricultural products over the past 6 years, increasing the price importers must pay in terms of their own currency. And over this period, the U.S. dollar appreciated 40 percent relative to the currencies of U.S. agricultural competitors, serving as an incentive for foreign producers to maintain or even expand production. No major adjustment in the value of the dollar is anticipated-in 2002. Despite the current U.S. economic slowdown and low interest rates, foreign capital continues to flow into the United States as investors continue to view the U. S. economy as providing the most lucrative and least risky investment opportunities.

Large foreign crop production for several consecutive years in a row has also contributed to the weakness in U.S. agricultural exports over the past several years. Since the early 1970s, world wheat and coarse grain production per hectare has varied considerably from year-to-year, after adjusting for trend, with yield up one year and followed by a decline the next year. These annual fluctuations in yield primarily reflect fluctuations in weather patterns around the world. There are two notable exceptions to this up-and-down pattern. The first notable exception is the 4-year period of 1984-87 when yields were quite consistent, stocks built up, and farm economic problems occurred. The second notable exception is the 6-year period of 1996-2001, when again yields have been very stable and rising.

Outlook for Farm Income

After bottoming out in 1999 at $188 billion, farm cash receipts reached $202 billion in 2001. In 2002, farm cash receipts are forecast to reach $204 billion, $3 billion below the record set in 1997 of $207 billion. Livestock receipts are forecast to hold steady in 2002 at near the record of $106 billion set last year. Crop receipts are projected to rise $2 billion in 2002 to $98 billion, but remain well below the record of $111 billion in 1997. Cash receipts for grains, soybeans, and cotton declined from a record $57 billion in 1997 to $40 billion during 1999-2001 but are projected to increase slightly to $41.5 billion in 2002.

Despite improving cash receipts, prospects for net cash farm income in 2002 depend on enactment of additional financial assistance to producers either in a new Farm Bill or supplemental assistance legislation. If no legislation is enacted, net cash farm income would decline to under $51 billion, down from the record of $59.5 billion last year. However, if legislation is enacted that provides payments equal to the average of the payments that would likely be made under the House and Senate passed Farm Bills, net cash farm income would be in the range of $56-57 billion, similar to the average of recent years. In 2002, farmers' total production expenses are forecast to increase by $0.6 billion to a record $200 billion. Repair, marketing, and labor costs are expected to increase in 2002, with these higher costs about offset by lower fertilizer and lime, fuel and oil, and interest expenses.

Net cash income, excluding government payments, measures the net income received from the marketplace. Income earned from the market has risen from $34 billion in 1999 to $38 billion in 2001 and projected to increase to over $40 billion in 2002, reflecting a slow but steady improvement in market fundamentals.

Government payments have offset much of the decline in major crop cash receipts since 1998, helping to maintain producers' cash flow. Direct government payments to farmers dropped from the record of $23 billion in 2000 to $21 billion last year, compared with $8 billion in 1997. In 2001, direct government payments included nearly $4 billion in Production Flexibility Contract (PFC) payments, $6 billion in loan deficiency payments and marketing loan gains, $1.7 billion in conservation program payments, and over $9 billion in emergency (crop and market loss) assistance.

For major field crops, such as wheat, rice, corn, sorghum, oats, barley, cotton and soybeans, government payments have been especially important in maintaining cash flow. Net cash farm income for major field crops averaged slightly under $26 billion during 1999-2000 and is projected to fall below $24 billion for crop year 2001, compared with the average of $26 billion for the 1995-99 crops. Direct government payments were equal to one-third of net cash income for major field crops during 1995-99. For the 1999-2000 crops, direct government payments were equal to three- fourths of net cash income for major crops and account for about the same proportion of net cash income for the 2001 crop year.

Outlook for Farm Finance

The overall financial condition of the farm sector continues to remain fairly strong. The value of U.S. farm real estate rose 3 percent during 2001, bringing the value of farm assets to $1.22 trillion, 12 percent higher than at the end of 1998. Farm debt rose 4.8 percent in 2001, surpassing $190 billion for the first time since 1984.As a result, the farm debt-to-asset ratio rose slightly in 2001 .to 15.8 percent from 15.5 percent in 1999 and 2000, but continues to remain well below the level reached during periods mid 1980s farm financial crisis.

In 2002, the farm debt-to-asset ratio is expected to increase slightly to 16 percent, reflecting another year in which the value of farm assets rises by less than the increase in farm debt. The value of farm assets is expected to rise by about 1 percent in 2002, but could be higher depending on farm legislation, while farm debt is forecast to increase about 2 percent. The slight deterioration in the debt-to-asset ratio assumes continuation of current farm programs and may not occur if Congress enacts a new farm bill or provides ad hoc assistance to producers in 2002. Although farm debt has increased the past two years and expected to increase again in 2002, most farmers are not as heavily leveraged as a decade ago, face lower interest rates, and are generally in better financial health.

All major lenders to agriculture, including USDA, continue to experience very low levels of delinquencies, foreclosures, chargeoffs and loan restructurings. No agricultural bank failed in 2001 and only 5 failed during 1994-2000. In the mid 1980s, 60- 70 agricultural banks were failing annually. Surveys find banks healthy, liquid and ready to make loans. Farmers are repaying loans--with the help of government payments--and are somewhat hesitant to take out new loans which shows prudent behavior on their part. However, bankers in a number of regions express pessimism about their borrowers financial positions.

In addition to record government payments, improved off-farm income opportunities for farm households have helped avoid more serious farm financial problems. In recent years, about 90 percent of the total income of the average farm household is derived from off-farm sources. Earnings of farm operator households from off-farm sources averaged an estimated $60,000 in 2001, up from less than $36,000 in 1992. Combining income from farm and off-farm sources, farm operators averaged over $62,000 in total household income in 2001, about 9 percent higher than the average income of all U.S. households.

While national farm financial conditions appear secure, regional and sector problems persist. The combination of low prices and adverse weather in the Southeast, southern plains and elsewhere has contributed to regional pockets of farm financial stress. In addition, production agriculture consists of a diverse group of fauns and ranches with varying degrees of financial success, which a single aggregate performance indicator such as net farm income cannot capture.

Outlook for Major Crop and Livestock Commodities

Major crop prices for the 2001/02 season continue to be pressured by large global production and ample stocks. Nevertheless, market fundamentals are slowly improving. At the end of this season, global grain stocks are projected to be down 8 percent from a year ago and the lowest since 1995/96. Thus, world grain prices could move up significantly in the coming year, if weather adversely affects global crop production.

In 2001, U.S. producers planted the lowest wheat acreage since 1973. Wheat prices this marketing year are forecast to average $2.75- $2.85 per bushel, up from last season's $2.62. The increase in price reflects lower total supplies and declining world and U.S. carryover stocks.

Total use is forecast to decrease by 168 million bushels over last year's nearly 2.4 billion bushels, as food use, feed use, and exports are all expected to decline. Wheat exports are projected to fall to 975 million bushels, down 86 million bushels from last season. A major factor contributing to lower U.S. exports this season is larger wheat production in importing countries. Wheat production in the major importing countries rose from 161 million tons last season to a projected 165 million tons in 2001/02. U.S. ending stocks are forecast to fall for the third consecutive year to 701 million bushels, which would be the lowest in five years.

Winter wheat seeded area for 2002 of 41 million acres was down fractionally from one year ago and the lowest since 1971. Lower plantings and reduced carryin stocks are expected to lead to another year of reduced supplies. Even so, farm prices may be about unchanged during the upcoming season because of increased competition for export markets. Wheat exports could fall to 900 million bushels in 2002, the lowest level in 30 years. Weather reduced wheat production in Canada and the European Union (EU) in 2001. Winter wheat acreage in the EU was up sharply last fall and assuming a return to normal weather, the United States would face increased competition from the EU and Canada in 2002/2003. However, moisture levels continue to remain well below normal in Canada.

The 2001/02 corn crop of 9.5 billion bushels was 4 percent below one year ago, as plantings dropped by nearly 4 million acres, primarily reflecting less than ideal planting time weather. The average corn yield reached 138.2 bushels per acre in 2001, the second highest on record, as the weather was generally good throughout the growing season. The smaller crop more than offset larger beginning stocks, causing supplies of corn to drop from 11.6 billion bushels last season to 11.4 billion bushels in 2001/02. With total supplies down from one year ago, ending stocks are forecast to decrease by 303 million bushels to 1.6 billion bushels, the lowest level since 1997/98.

Total corn use this season is projected to reach a record 9.82 billion bushels, compared with last season's 9.74 billion bushels, reflecting expanding domestic use. Both feed use and food, seed and industrial use are expected to reach record levels. Corn used for alcohol production is expected to reach 690 million bushels, up 11 percent from a year earlier and up 74 percent from a decade ago. Increasing corn production in importing counties is expected to reduce corn exports by 10 million bushels from last season's 1,935 million bushels, even though excessive rains and flooding reduced Argentina's corn crop in 2001 and China's corn exports are forecast to decline because of the elimination of export subsidies following entry into the WTO.

The farm price of corn for the 2001/02 marketing year is forecast to average $1.85- $2.05 per bushel, compared with last year's $1.85 per bushel.

Lower natural gas prices will lower corn producers' fertilizer and irrigation costs in 2002. These lower costs are expected to lead to a slight increase corn plantings in 2002. However, total corn supplies could remain about unchanged from one year ago, assuming normal weather. U.S. corn exports are forecast to reach about 2 billion bushels in 2002/03, as expanding world demand offset the effects of a rebound in Argentina's corn crop and ample supplies of wheat for feeding. Another year of rising exports, an expected expansion of 30 percent in corn used for ethanol, and flat supplies could lead to some strengthening of market prospects for corn in 2002/03.

Soybean production was record-high in 2001, reaching nearly 2.9 billion bushels, up 5 percent from a year earlier. The production increase more than offset lower carryin stocks, causing total soybean supplies to increase by about 3 percent in 2001/02. Most of the increase in supplies is expected to go into higher total use. Domestic crush is forecast to exceed last year's record by 2 percent and U.S. soybean exports could eclipse last year's record of 1 billion bushels. Despite the increase in use, ending stocks are forecast to increase by 7 percent to 265 million bushels. Soybean prices for 2001/02 are projected to average $4.05- $4.45 per bushel, compared with last season's $4.54.

The loan rate provisions of the next farm bill could influence soybean plantings in particular. Under the House-passed version of the farm bill, the soybean loan rate could be no higher than $4.92 per bushel, compared with this season's $5.26, whereas the Senate-passed version of the farm bill would reduce the soybean loan rate to $5.19 and increase loan rates for competing crops. Either version of the farm bill would tend to dampen soybean plantings, compared with current law. The decline in soybean acreage this year could be muted by the timing of the farm bill, since producers may not have much time to evaluate the provisions of the new farm bill prior to spring planting. Assuming soybean plantings for 2002 are about unchanged from last year, U.S. soybean supplies would reach another record in 2002. In addition, large South American soybean inventories going into 2002/03 and further acreage and production expansion in 2003 will also keep soybeans prices under pressure next season.

China is a major market for U.S. oilseeds. Protein consumption in China has increased at above 10 percent per year since 1997, led by increases in oilseed crushing capacity, livestock production and shifts toward feeding more optimal rations. Growth in production of soybeans and other oilseeds has not kept pace, leading to strong gains in Chinese imports of U.S. oilseeds. There is considerable concern that China may use regulations on imports of biotech products to restrict imports of U.S. soybeans and corn. These regulations have led to some cancellations of U.S. corn and soybean export sales destined for China in recent weeks. At this point, it is unclear to what extent China regulations on biotech imports will result in long-term export losses and lower prices to U.S. producers.

Cotton production reached a record 20 million bales in 2001, up 17 percent from one year ago. The increase in production, combined with larger carryin stocks, caused total supplies to increase from 21 million bales in 2000/01 to 26 million bales this season. Despite the increase in total supply, U.S. cotton mill use is projected to decline from last season's 8.9 million bales to 7.3 million bales, as textile imports continue to grow with the strong dollar being a major factor. Excluding Mexico, the textile trade weighted value of the dollar has risen 30 percent since 1997. In addition, the slowdown in the U.S. economy has also hurt mill use. Even though domestic mill use is projected to decline, total use is expected to increase this season, as larger supplies have made the U.S. more price competitive in world markets. Despite a projected increase in exports of 3.5 million bales, stocks of cotton at the end of the 2001/02 season are projected to reach a burdensome 8.5 million bales, a 16-year high. From August 2001 through January 2002, the farm price of cotton averaged 31.7 cents per pound, compared with last year's season average price of nearly 50 cents.

This season's lower price should reduce U.S. and foreign planted area in 2002. U.S. exports should be strong again in 2002/03. Even so, U.S. stocks are likely to remain large, greatly limiting the prospect for much of a rebound in U.S. cotton prices in 2002/03.

Rice production, in 2001, reached 213 million cwt., up 12 percent from the last year and surpassing the previous record of 206 million cwt. set in 1999. The strong increase in production caused total supplies at the beginning of the crop year to rise by 26 million cwt., up 11 percent from the previous year. Both domestic use and exports are projected to exceed year ago levels, with total use rising by over 10 million cwt., as increased supplies and lower prices have made U.S. rice more competitive in world markets. Total carryover stocks are projected to rise from 28.5 million cwt. last season to nearly 44 million cwt. at the end of the 2001/02 season, which would be the largest carryover in 15 years. The farm price of rice is forecast to average $4.00$4.20 per cwt. this season, the lowest since 1986/87 and down from last season's $5.61 per cwt.

Sugar production dropped below 8 million tons in 2001, down 8 percent from a year earlier. In order to reduce government inventories of sugar and prevent additional forfeitures, USDA announced Payment-in-Kind (PIK) Programs for the 2000 and 2001 crops under which producers could elect to divert a portion of their contracted acreage from production in exchange for in-kind payments in the form of CCC-owned sugar. At the end of the current marketing year, the CCC is projected to hold about 300,000 tons of sugar in inventory, down from nearly 800,000 tons at the end of last season. The PIK programs have reduced stocks and strengthened prices near term. Looking ahead over the next several years, import commitments under existing international trade agreements (including Mexico), the potential for over quota or second tier imports from Mexico, and trend growth in U.S. yields are likely to continue to pressure sugar prices, possibly again resulting in CCC loan forfeitures and stock accumulation.

In 2001, hog prices averaged $46 per cwt. for the year, up 2 percent from a year earlier and up one-third from two years ago. Despite relatively favorable returns in recent years, production has not expanded as in the past. In 2001, the number of sows farrowing was below a year earlier in each quarter, except for a slight increase in September-November. In addition to a smaller number of sows farrowing in 2001, the average number of pigs per litter declined slightly for the first time since 1988 and for only the third time in the past 20 years. As a result, the 2001 pig crop was down 1.3 million head from 2000. However, higher U.S. imports of hogs and an increase in dressed weights caused pork production to increase by 1 percent in 2001.

Commercial pork production is forecast to be up slightly in 2002 due primarily to heavier slaughter weights. Hog prices are forecast to average $42-$45 per cwt. in 2002, but rising seasonal production could push hog prices to the upper $30 range during the fourth quarter. U.S. pork exports are forecast to drop off somewhat from the brisk pace of one year ago. U.S. pork exports were up about 21 percent in 2001, reflecting increased consumer demand for pork in Japan because of Bovine Spongiform Encephalopathy (BSE) and other animal disease concerns.

In 2001, liquidation of the nation's cattle herd finally led to reduced beef production. Beef cow slaughter rose sharply in 2001 and large numbers of heifers were moved into feedlots rather than retained for herd expansion, as the most severe winter since 1992/93 increased cow slaughter during the first quarter of 2001 and drought in many areas caused producers to reduce their herds. Despite large numbers of heifers moving into feedlots, the number of cattle placed on feed dropped 6 percent causing beef production to decline by 2.6 percent in 2001. Fed cattle prices averaged $72.43 per cwt. in 2001, compared with $69.65 the previous year. Fed cattle prices peaked in the first quarter with prices declining through the year as the effects of last year's winter weather dissipated and exports slowed. The economic slowdown and the September terrorist attacks further pressured prices along with rapidly rising slaughter weights in the fourth quarter.

Beef production in 2002 is expected to decline 2 percent from last year. Choice steer prices are expected to average $72- $77 per cwt. in 2002. The February 1 Cattle report indicated that the total number of heifers 500 pounds and over is fractionally below last year. This would imply that the number of heifers which will be. available to be bred in late spring or early summer for calving next spring will be about the same as last year. If the liquidation phase of the cattle cycle is to end, the majority of the herd retention will have to come out of calves born this year. These animals would be bred in 2003 for calving in 2004. If this occurs, it is likely that beef production will not expand before 2005. The major constraint to expansion appears to be availability of forage. Given dry conditions in many cattle areas, producers appear to be holding back on expansion until the forage base shows improvement.

Last year, U.S. beef exports dropped by 8 percent, as Japanese consumers reduced beef consumption because of concerns related to animal diseases. Prospects for recovery in U.S. beef exports in 2002 appear remote, as economic conditions in Japan, the strong dollar, and continued concerns about the safety of beef will likely prevent a rebound in sales to Japan.

Broiler prices are projected to average 57-61 cents per pound in 2002, compared with 59 cents per pound in 2001. In response to declining prices and returns, producers began reducing the rate of expansion in broiler production in 2000. Broiler production rose 2.5 percent in 2000 which followed a 7-percent increase in 1999. In 2001, broiler production increased by 2 percent and is forecast to increase by 2.8 percent in 2002.

Broiler exports continue to show considerable strength. In 2001, broiler exports reached 6.2 billion pounds, up 15 percent from a year earlier. Increased shipments to Russia accounted for most of the increase in U.S. broiler exports in 2001. In 2002, broiler exports are expected to total about 6.35 billion pounds, as the slowing world economy and the continuing strength of the dollar are expected to moderate the growth in broiler exports. This forecast assumes Russia does not ban U.S. exports of chicken and turkey meat because of concerns related to the use of antibiotics in U.S. broiler production and anti-microbial rinses in U.S. poultry processing plants. Since Russia accounted for 37 percent of U.S. broiler exports in 2001, such a ban would have a very negative effect on leg quarter prices and U.S. exports.

The largest annual drop in milk production since the mid 1980s caused milk prices to rise sharply in 2001. In 2001, the all-milk price averaged $14.93 per cwt., up from $12.40 in 2000 and surpassed only by the record of $15.46 in 1998. The drop in milk production in 2001 reflected declining cow numbers and lower milk production per cow. After increasing in both 1999 and 2000, cow numbers reverted back to the much more typical downward trend of the past several decades in 2001. Milk production per cow in 2001 was adversely affected by stressful winter weather, higher than normal summer temperatures, below normal forage quality, and tight supplies of replacement heifers.

Increasing milk production at the end of last year caused milk prices to drop sharply and the Commodity Credit Corporation (CCC) to resume purchasing nonfat dry milk under the price support program. In calendar year 2001, 353 million pounds of nonfat dry milk were purchased under the price support program, compared with 558 million pounds the previous year. In addition, 141 million pounds of nonfat dry milk were exported under the Dairy Export Incentive Program (DEIP). At the end of 2001, the CCC held 776 million pounds of nonfat dry milk, less than 1 million pounds of butter, and about 4 million pounds of cheese in inventory.

Milk production is expected to grow by about 2.5 percent in 2002, assuming a return to more normal summer temperatures and some improvement in forage quality. In contrast, commercial dairy product demand is expected to increase by less than 2.5 percent in 2002, as softening economic conditions lead to less rapid growth in demand for dairy products than in recent years. With supplies rising faster than demand, the all-milk price is forecast to average $12.85-$13.45 per cwt. in 2002, and nonfat dry milk purchases under the price support program could continue to remain near last year's pace, unless the purchase price is lowered.

The outlook for horticultural crops is very uneven. As a group, cash receipts for horticultural crops are projected to be up in 2002 and the value of exports is forecast to reach a record $11.3 billion in FY 2002. However, farm prices for some horticultural crops, including apples, grapefruit, and pears are being adversely affected by large supplies.

Conclusion

Despite continued low returns in some commodity markets, a strong balance sheet, off-farm opportunities, lenders in good shape with ample loanable funds, and the prospect of new farm legislation with continued financial support, all suggest the farm sector is secure and in reasonably good shape as the planting period for the 2002/03 season approaches. A few key factors to watch in the coming months that will shape this outlook include:

- The pace of Chinese imports and exports and crop supplies in the major exporters.

- Resolution of the U.S. farm bill debate, which will affect the amount of support provided to producers and could potentially affect relative loan rates and planting incentives.

- Transparency of China's biotech regulations to be implemented beginning March 20.

- Evolution of WTO implementation in China, particularly with respect to the relative incentives provided to grains and oilseed producers, which may affect domestic production of these crops.

- South American crop developments in the months ahead.

- The U.S. and global economies.

Mr. Chairman, that completes my testimony and I would be pleased to respond to questions.



LOAD-DATE: March 19, 2002