[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]

HEARING TO REVIEW THE STATE OF THE FARM ECONOMY

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

HEARING

BEFORE THE

SUBCOMMITTEE ON
GENERAL FARM COMMODITIES
AND RISK MANAGEMENT

OF THE

COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

__________

APRIL 1, 2009

__________

Serial No. 111-7

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

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COMMITTEE ON AGRICULTURE

COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania, FRANK D. LUCAS, Oklahoma, Ranking
Vice Chairman Minority Member
MIKE McINTYRE, North Carolina BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa JERRY MORAN, Kansas
JOE BACA, California TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California SAM GRAVES, Missouri
DAVID SCOTT, Georgia MIKE ROGERS, Alabama
JIM MARSHALL, Georgia STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South RANDY NEUGEBAUER, Texas
Dakota K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas JEFF FORTENBERRY, Nebraska
JIM COSTA, California JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER, BILL CASSIDY, Louisiana
Pennsylvania CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho
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______

Professional Staff

Robert L. Larew, Chief of Staff

Andrew W. Baker, Chief Counsel

April Slayton, Communications Director

Nicole Scott, Minority Staff Director

______

Subcommittee on General Farm Commodities and Risk Management

LEONARD L. BOSWELL, Iowa, Chairman

JIM MARSHALL, Georgia JERRY MORAN, Kansas, Ranking
BRAD ELLSWORTH, Indiana Minority Member
TIMOTHY J. WALZ, Minnesota TIMOTHY V. JOHNSON, Illinois
KURT SCHRADER, Oregon SAM GRAVES, Missouri
STEPHANIE HERSETH SANDLIN, South STEVE KING, Iowa
Dakota K. MICHAEL CONAWAY, Texas
BETSY MARKEY, Colorado ROBERT E. LATTA, Ohio
LARRY KISSELL, North Carolina BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi

Clark Ogilvie, Subcommittee Staff Director

(ii)

C O N T E N T S

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Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa,
opening statement.............................................. 1
Prepared statement........................................... 2
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma,
prepared statement............................................. 6
Moran, Hon. Jerry, a Representative in Congress from Kansas,
opening statement.............................................. 3
Peterson, Hon. Collin C., a Representative in Congress from
Minnesota, opening statement................................... 4
Prepared statement........................................... 5

Witnesses

Glauber, Ph.D., Joseph, Chief Economist, U.S. Department of
Agriculture, Washington, D.C................................... 7
Prepared statement........................................... 9
Henderson, Ph.D., Jason R., Branch Executive and Vice President,
Omaha Branch, Federal Reserve Bank of Kansas City, Omaha, NE... 21
Prepared statement........................................... 22
Gruenspecht, Ph.D., Howard K., Acting Administrator, U.S. Energy
Information Administration, U.S. Department of Energy,
Washington, D.C................................................ 29
Prepared statement........................................... 30
Submitted question........................................... 118
Harl, Ph.D., Neil E., Charles F. Curtiss Distinguished Professor
in Agriculture and Emeritus Professor of Economics, Iowa State
University, Ames, IA........................................... 50
Prepared statement........................................... 53
Dumler, Troy J., Extension Agricultural Economist, Southwest
Kansas State Research and Extension, Garden City, KS........... 56
Prepared statement........................................... 57
Angle, Ph.D., J. Scott, Dean and Director, College of
Agricultural and Environmental Sciences, University of Georgia,
Athens, GA..................................................... 63
Prepared statement........................................... 66
Paggi, Ph.D., Mechel ``Mickey'' S., Director, Center for
Agricultural Business, College of Agricultural Science and
Technology, California Agricultural Technology Institute, and
Adjunct Professor, Department of Agricultural Economics,
California State University, Fresno, Fresno, CA................ 69
Prepared statement........................................... 72

Submitted Material

National Corn Growers and Corn Farmers Coalition, submitted
report......................................................... 83

HEARING TO REVIEW THE STATE OF THE FARM ECONOMY

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WEDNESDAY, APRIL 1, 2009

House of Representatives,
Subcommittee on General Farm Commodities and Risk
Management,
Committee on Agriculture,
Washington, D.C.
The Subcommittee met, pursuant to call, at 11:05 a.m., in
Room 1300 of the Longworth House Office Building, Hon. Leonard
L. Boswell [Chairman of the Subcommittee] presiding.
Members present: Representatives Boswell, Marshall,
Ellsworth, Schrader, Herseth Sandlin, Markey, Kissell, Pomeroy,
Peterson (ex officio), Costa, Moran, King, and Luetkemeyer.
Staff present: Claiborn Crain, Adam Durand, Craig Jagger,
John Konya, Scott Kuschmider, Clark Ogilvie, Anne Simmons,
Rebekah Solem, Tamara Hinton, Josh Maxwell, Pelham Straughn,
and Jamie Mitchell.

OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A REPRESENTATIVE
IN CONGRESS FROM IOWA

The Chairman. Okay. Well, thank you very much. We are glad
to have you here, and the hearing for the Subcommittee on
General Farm Commodities and Risk Management to review the
state of the farm economy will come to order. And I will share
a little opening statement, and then recognize my Ranking
Member.
First, I would like to thank everyone for joining us today,
as we take an examination and review, if you will, of the
nation's farm economy. I would like to give a special thanks to
our witnesses for testifying before the Committee, and offering
their insight into current issues facing the agriculture
economy.
I would also like to recognize, of course, a fellow Iowan
who will be on the second panel, Dr. Neil Harl, a distinguished
Professor from Iowa State University, as well as from Iowa. We
very much look forward to hearing all the witnesses and
testimony. We are all aware of the economic crisis our nation
is facing, and the effects the crisis is having on businesses
across the country.
However, oftentimes, the agriculture economy is overlooked.
In recent years, agriculture has seen some of the most volatile
times in our history. With the record high commodity prices and
input costs of last year, farmers took on more and more risk.
In recent months, commodity prices have been declining, yet
farmers tell us that input costs have remained very high. Even
with unpredictable market conditions, crop farming remains one
of the more stable and reliable aspects of agriculture,
particularly when compared with animal agriculture, which seems
to have fared relatively worse than crop farming.
The signals are pointing to a very volatile year ahead for
all of agriculture. One industry in particular, which has been
struggling, is the dairy industry. Dairy prices have been
declining so much over the past several months that in some
parts of the country, prices have dropped below $10 down from
almost $20 just 1 year ago. But the dairy industry is not the
only one feeling the pinch. Cattle ranchers have lost money for
21 straight months, I am told, and hog producers are losing
over $20 per head. So, we will probably hear more details about
these and other agriculture producers from our witnesses.
As we have progressed through the decades, agriculture
farmers have become bigger and less diverse. I would like to
highlight one bright point, that even at this unprecedented
economic time, more and more smaller farmers are getting
involved. In 1952, there were 230,000 farms in Iowa, but by
2002, that number dropped to around 90,000. So, it came as a
surprise when the 2007 Census of Agriculture found the number
of farms in Iowa had risen to 92,800. Some 4,000 new small
farms have been created since 2002. While farmers are not
unlike other industries facing a hard time getting credit,
experiencing instability in the markets, and high input costs,
it is these new smaller farms that are having, perhaps the
toughest time coping with our economic climate.
Personally, having survived the farm crisis of the 1980s, I
understand firsthand what our producers are going through each
day. Even with all the issues facing the agriculture industry,
it is very much better than others, such as the auto industry.
Personally, I believe that American agriculture is one of the
bright spots in our economy, but producers are not immune to
the economic crisis that is going on.
Agriculture is a multi-billion dollar industry in the
United States. Our industry not only helps feed us in this
room, but also helps to feed the world. That is why it is so
important that we make sure, as best we can, that agriculture
economy continues to be strong.
[The prepared statement of Mr. Boswell follows:]

Prepared Statement of Hon. Leonard L. Boswell, a Representative in
Congress from Iowa
I would like to thank everyone for joining me here today as we take
a thorough examination of the nation's farm economy. I would like to
give a special thanks to our witnesses for testifying before the
Committee and to offer their insight into the current issues facing the
agricultural economy. I would also like to recognize a fellow Iowan,
Dr. Neil Harl from Iowa State University. I very much look forward to
hearing all the witnesses' testimony.
We are all aware of the economic crisis our nation is facing and
the effects that crisis is having on businesses across the country;
however, oftentimes the agricultural economy is overlooked. In recent
years agriculture has seen some of the most volatile times in our
history. With the record high commodity prices and input costs of last
year, farmers took on more and more risk.
In recent months, commodity prices have been declining, yet farmers
tell us that inputs costs have remained high. Even with unpredictable
market conditions, crop farming remains one of the more stable and
reliable aspects of agriculture particularly when compared with animal
agriculture, which has fared relatively worse than crop farming. But
signals are pointing to a very volatile year ahead for all agriculture.
One industry in particular, which has been struggling, is the dairy
industry. Dairy prices have been declining so much over the past
several months that in some parts of the country prices have dropped
below $10, down from almost $20 just 1 year ago. But the dairy industry
is not the only one feeling the pinch. Cattle ranchers have lost money
for 21 straight months and hog producers are losing over $20 per head.
We will hear more details about these and other agriculture producers
from our witnesses.
As we have progressed through the decades in agriculture, farmers
became bigger and less-diverse. I would like to highlight one bright
point that even in this unprecedented economic time: more and more
smaller farmers are getting involved. In 1952, there were 203,000 farms
in Iowa but by 2002, the number had dropped to around 90,000. So it
came as quite a surprise when the 2007 Census of Agriculture found that
the number of farms in Iowa had risen to over 92,800. Some 4,000 new
small farms have been created since 2002. While farmers are not unlike
other industries facing a hard time getting credit, experiencing
instability in the markets, and high input costs, it is these new
smaller farms that are having the toughest time coping with our
economic climate.
Having survived the farm crisis of the 1980's I understand first
hand what our producers are going through each day. Even with all the
issues facing the agriculture industry it is faring much better than
others such as the auto industry. I believe that American agriculture
is one of the bright spots in our economy, but producers are not immune
to the economic crisis going on.
Agriculture is a multi-billion dollar industry in the United
States. Our industry not only helps feed us in this room, but also
helps to feed the world. That is why it is so important that we make
sure the agricultural economy continues to be strong.
At this time I would like to turn it over to my good friend and
colleague, Jerry Moran from Kansas for any opening remarks he would
like to make.

The Chairman. At this time, I would like to turn it over to
my good friend and colleague, Jerry Moran from Hays, Kansas,
for any opening remarks he would like to make.

OPENING STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN
CONGRESS FROM KANSAS

Mr. Moran. Mr. Chairman, thank you very much. This is our
first Subcommittee hearing under your leadership, and I want to
be the first to, again, congratulate you on your ascension to
Chairman of this Subcommittee, a role that I played in the
past. My only consolation is that Mr. Peterson used to be my
Ranking Member, and he has become the full Committee Chairman,
so perhaps there is still hope for those of us who fill the
role that I am now in. But, I very much look forward to working
with you throughout this term of Congress, and appreciate the
close working relationship that we have always had.
I, too, welcome the witnesses, and appreciate the
opportunity to hear from them, and garner some expertise from
their expertise. I am particularly interested in issues that, I
hope, will be discussed in regard to budget implications in the
farm bill that are currently being discussed in Congress, and
its impact, or any changes in the farm bill and the budget as
it relates to agriculture. What would that impact be upon
production agriculture across the country. I am interested in
knowing about access to credit, what circumstances our farmers
find themselves in in this current environment. I have
continued concerns about input costs and how to answer the
question of many producers of why commodity prices have come
down, grocery store prices have not come down as much, input
prices have not come down as much, and that relationship
between those prices. I am interested in the global economy,
and its effect upon demand for agricultural products that we
produce in the United States and any indication about what we
foresee, as far as weather and climate changes that would
affect the economy of producers across Kansas and around the
country.
So, this is, in my opinion, a good way for us to begin our
Committee's work, by hearing from folks from across the country
as to exactly what are the circumstances that our producers
find themselves in, and hopefully, they will provide us with
recommendations about how we can be helpful, to see that this
important component of the economy of the United States is
enhanced and has a bright future.
So, Mr. Chairman, thank you very much. I look forward to
hearing the witnesses' testimony and the opportunity to
question and hear their answers. Thank you.
The Chairman. Well, thank you, Jerry. Good to have you
here, and I appreciate our long time friendship, and I always
tell Jerry, when I traveled across, having to go through Hays,
if they get one of those barriers up, why, I don't guess I know
where I am going to head. I hope I can find a basement pad or
something.
Mr. Moran. We have a basement that you are always welcome
in.
The Chairman. Okay, good.
At this time, we would like to recognize the Chairman of
the full Committee, Congressman Peterson, for any remarks he
might like to make.

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

Mr. Peterson. Well, thank you, Mr. Chairman, and thank you
and Mr. Moran for your leadership, calling this hearing, to
take a look at the economic conditions in agriculture.
Most people, with all the stuff that is going on, have not
focused on the farm sector. Everybody is out there focused on
housing, Wall Street, big banks, the auto industry, the G20,
and all the stuff that is going on. But the farm economy, as we
know, is vital to the health of this country, and it shouldn't
be overlooked. And I would argue that some of this financial
crisis that we are involved in has had, well, it has obviously
had an effect on agriculture because of what it has done for
the demand for some of our products. In my opinion, a lot of
this extra money that came into agriculture over the last
period of time, has caused problems, significant problems as
well. And we tried to address that with the bill that we passed
last year, and the bill that we have passed this year out of
the Committee to try to make sure that we don't have people
getting around the speculation limits in the commodity markets
and futures markets and so forth.
You know, people have argued that somewhere or another, all
this extra money that came in from Wall Street didn't have an
effect. I mean, when the money all came in, these prices went
up, oil prices, commodity prices--all the corn, wheat, and so
forth--and then, when the financial collapse happened, and
these people had to take their money out, then the whole thing
collapsed. And so, I mean, I am not an economist, but it just
seemed pretty obvious to me that there is something going on
here. I am not sure we can document how much.
We have problems in ethanol now, and to some extent it was
caused by this outside money that has come into agriculture,
when there was a lot of money being made. There was a period of
time there, if you built your plant at the right time, you
could get your plant paid for in 1 year. And so, all this money
came in from Wall Street thinking they were going to cut a fat
hog, and when it went the other way it--same thing happened,
they abandoned the situation. So, these folks are not
necessarily in it for the long haul, and they are causing us
problems by bringing in money that maybe we don't need.
We have problems in the dairy sector. I commend the
Secretary for buying, now saying that they are going to buy 200
million pounds of dry milk. I wish they would go further and do
the Maximum DEIP Program and some other things, but we will
keep working with them. But by and large, agriculture is--we
are not in the greatest shape, but compared to the rest of the
country, we are doing pretty good. And the one thing that I am
intent on is not screwing up.
And so, that is why I told the President that I didn't
agree that we should be opening up the farm bill. You know, we
just got through doing that. We paid for it, and we made some
cuts. We got it done. The bill isn't even implemented, and so
it is not time to go in and start making changes, and I think
we are. I hope people are listening to us in that regard as
well.
So, Mr. Chairman, I thank you for your leadership. I
welcome the witnesses. I think it is important that we focus on
this, and that we do what we can here, from the Agriculture
Committee, to make sure that we have a profitable and healthy
agriculture sector in this country.
Thank you.
[The prepared statement of Mr. Peterson follows:]

Prepared Statement of Hon. Collin C. Peterson, a Representative in
Congress from Minnesota
Thank you, Chairman Boswell, for calling today's hearing. This is
an important and timely hearing given the tough economic times we are
all facing, perhaps the toughest in several generations.
Most people have not focused on the farm sector when talking about
our economic condition. Instead, they have focused on housing, Wall
Street, the big banks, and now this week, the auto industry. But the
farm economy is vital to the economic health of many areas in this
country and it should not be overlooked.
We have spent a lot of time and effort in highlighting what
unprecedented price volatility has done to the agricultural economy.
Less than a year ago, this Committee held a hearing to examine the
dramatic movements in agricultural and energy commodity markets which
had resulted in record- or near-record levels for vital commodities,
due in large part to high demand and tight supplies. This volatility
caused problems with producers and purchasers alike, hurting their
ability to enter into forward contracts and offset price risk.
However, as 2008 ended, the bottom fell out of many market prices
for grains, dairy, livestock, and energy did snap back from record
highs, and they crashed in a short amount of time.
Oil, for example, went through the $100 barrier, up to $147, and
then bottomed out at $32, all in 1 calendar year. This development, in
particular, has caused a lot of hardships for those in the ethanol
production sector, which is under financial strain and facing
consolidation.
This time last year, there were concerns from many different
quarters on whether or not there would be enough crop production to
meet demand. Now, we are facing a supply glut in many markets, with
rapidly declining prices. But input costs still remain high, creating a
classic price squeeze in the crop and livestock sectors. The price
roller coaster hit the dairy industry very hard, and I'm pleased that
USDA will buy 200 million pounds of nonfat dry milk for domestic
feeding programs in order to support low-income families while
providing relief for America's dairy farmers.
We need to see how agricultural producers nationwide are faring in
the current economic climate. Today's hearing will help this Committee
get a picture of the overall agricultural landscape as we examine what
current prices and trends may mean for the future. We will also look at
farm sector financial health and broad macroeconomic factors that
influence commodity markets. Debt-to-asset ratios, for instance, are
much better in farm country than they are in other places, but that
does not mean there isn't cause for concern. A deflationary economy can
have adverse effects on farmland real estate value and the ability to
repay debt.
I appreciate each of today's witnesses for being here to share your
thoughts with this Committee on the economic factors that influence
farm policy. I look forward to your testimony, and I yield back.

The Chairman. Thank you for those remarks.
I think I will ask the rest of the panel to not share
opening remarks. Anything you want to put in the record will
certainly be acceptable, and then, in the question period, you
can offer it at that time.
[The prepared statement of Mr. Lucas follows:]

Prepared Statement of Hon. Frank D. Lucas, a Representative in Congress
from Oklahoma
Thank you Chairman Boswell and Ranking Member Moran for holding
this hearing to review the state of the farm economy.
And, thank you to our two panels for your time today.
These are difficult and uncertain times for folks all across rural
America. I hear of the specific challenges our farmers and ranchers
face when I go back home to Oklahoma. But, it is important to take a
long and broad look at the challenges our producers, as a whole, are
facing all across the country.
We are facing a global economic crisis, which has weakened the farm
economy. Commodity prices have dropped significantly over the past 6
months. Although input prices have fallen a bit as well, it is not
enough to compensate for the loss in profits and cash flow for our
producers. USDA recently reported that U.S. net farm income is down 20%
from last year.
These are serious issues alone. But, adding to the problem is the
fact that we have an Administration that is intent on eliminating the
farm safety net to our producers. This Administration doesn't seem to
understand the problems facing our agriculture communities, or how
important these communities are to our economy. If this Administration
did, it wouldn't try to eliminate direct payments to those producers
who make $500,000 in annual sales. Sales. Not profit. This is not only
a bad idea, but it's the wrong policy approach and it is a direct
attack on full-time, family-run farmers.
Our farmers and ranchers are some of the hardest working people in
the U.S. and they are struggling to make a living in a difficult
economy. The people who provide us with the safest, most abundant, most
affordable food and fiber supply in the history of the world are being
asked to shoulder the burden of our economic crisis.
My concerns about this Administration only grow when, despite
opposition from House and Senate lawmakers and many farm groups,
Secretary of Agriculture Tom Vilsack and the Director of the Office of
Management and Budget, Peter Orszag both say they believe there will be
a way to reduce farm supports.
This Administration doesn't understand that farm supports,
especially in the form of direct payments, allow farmers to show
bankers and farm credit that they have the income to repay their loans.
This Administration doesn't understand that direct payments provide
producers with the flexibility to respond to market signals when
choosing crops. And, most importantly, this Administration doesn't
understand that direct payments are a commitment we made to our
producers when we passed, with bipartisan support, the 2008 Farm Bill.
I would like to thank Chairman Peterson for continuing to support
the 2008 Farm Bill that he and many of us worked hard to secure.
I look forward to the testimony from our panelists today,
especially as it pertains to credit availability.

The Chairman. So to move us along, I would like to
recognize our first panel, and thank them for being here. Dr.
Glauber, Chief Economist, U.S. Department of Agriculture, thank
you for being with us. Dr. Henderson, the Vice President and
Branch Executive, Federal Reserve Bank of Kansas City, Omaha
Branch, Omaha, Nebraska, appreciate your presence and spending
your time. Dr. Gruenspecht, the Acting Administrator, Energy
Information Administration, U.S. Department of Energy,
Washington, D.C. Good to have you, and I hope I got through
your name okay.
Thank you very much, and we would like to recognize Dr.
Glauber at this time, please.

STATEMENT OF JOSEPH GLAUBER, Ph.D., CHIEF ECONOMIST, U.S.
DEPARTMENT OF AGRICULTURE, WASHINGTON, D.C.

Dr. Glauber. Well, thanks very much. Mr. Chairman, Members
of the Committee, thank you for the opportunity to discuss the
economic outlook for U.S. agriculture.
This time last year, the outlook picture was quite
different than it is today. Prices for most commodities were
near records, record highs and rising, and farm exports and
farm income were projected to be at record levels. There were
concerns about whether there would be enough crop production to
meet global demand. Livestock, dairy, and poultry producers
were seeing their operating margins squeezed, and food price
inflation was being discussed with concern for the first time
in about 20 years.
A lot has changed since then. We have seen prices for most
commodities fall 40 to 50 percent from their mid-year peaks,
and the global economic slump has cast a pall on most markets,
and while net cash income is projected at high levels relative
to historical averages, there remains much uncertainty.
Yesterday, the National Agricultural Statistics Service
released their annual Prospective Plantings Report. The NASS
estimates are based primarily on surveys of producers' planting
intentions conducted during the first 2 weeks of March. They
indicate that farmers will likely plant about 85 million acres
of corn, compared to about 86 million acres last year, 76
million acres of soybeans, about the same level as last year,
58.6 million acres of wheat, down 4.5 million acres from last
year, and only 8.8 million acres of cotton, which would be the
lowest level since 1983, and for many states, the lowest level
since the early 1940s, when we started collecting the data.
It is important to note that actual plantings will likely
differ from intentions. Producers will adjust actual plantings
as more information on price relationships, input costs, and
weather becomes available. Our first official supply and demand
estimates for the 2009-2010 marketing year will be published on
May 12.
In my written statement, I discuss the implications of the
planting intentions for the crop outlook for the 2009/10
marketing year. Most of the row crops will see a drop in prices
from 2008/09 levels, though they will remain above the average
for the previous 5 years. The livestock, dairy, and poultry
sectors are being challenged by weak domestic demand, domestic
and global demand for meat and dairy products.
Uncertain demand, coupled with relatively high feed prices,
caused producers to start cutting back or slow production by
the last quarter of 2008. The pullback in output is expected to
continue throughout most of 2009, with total meat production
down about two percent from 2008, and milk production declining
about 0.8 percent.
Cattle, hog, and turkey prices are expected to be lower,
particularly in the first half of 2009. Broiler prices are an
exception. They are up, but largely due to the fact that they
had sharp production cuts last year.
Average milk prices for 2009 are forecast at $11.55 a
hundredweight--that is the lowest level since 1978--although
they are expected to rise over the second half of 2009, as more
dairy cows are culled and production drops. USDA's Economic
Research Service forecasts net cash income in 2009 at $77.3
billion. That is down $16.1 billion from 2008. Crop receipts
are forecast at $162.4 billion in 2009, down $18.7 billion from
2008, but still the second highest on record. Livestock
receipts for 2009 are forecast at $132.2 billion, down $10.9
billion from 2008.
Lower input costs, such as feed, fuel, and fertilizer, will
lower cash expenses this year. ERS forecasts cash expenses at
$247 billion, down $14 billion from 2008 levels.
Despite the projected decline in farm income, the farm
financial picture going into 2009 remains favorable, with total
farm debt equal to about 9.1 percent of total assets. That is
compared to over 20 percent in the mid-1980s. The debt-to-asset
ratio has declined steadily, from 15.2 percent in 1998 to the
current projected 9.1 percent.
The decline was due to strong appreciation in land values,
which increased by over $1 trillion from 1998 to 2008. ERS
forecasts the value of farm assets to rise by 1.6 percent in
2009. That would be the smallest increase since 1991. While
farm real estate values remain significantly higher than last
year, the recent Federal Reserve Bank survey showing fourth
quarter declines in land values in many bank districts given
further credence to the view that land markets have softened.
Despite the weakened economic outlook for farmers, most of
the districts report that availability of funds was higher in
the fourth quarter of 2008 than in the third quarter of 2008.
However, collateral requirements for non-real estate farm loans
are becoming more restrictive.
The downturn in the general economy may also be having an
adverse effect on off-farm income sources for many farm
households. Two thirds of all farm households reported income
from wages and salaries from off-farm employment, and almost
\1/4\ of farm households reported income from a non-farm
business. That data is from 2007. Dividend earnings were
reported by 36 percent of farm operator households in 2007.
With confidence in financial markets weakened in the global
economy in the worst recession since prior to World War II, the
agricultural economy faces much uncertainty. As expected, most
aggregate measures are forecast to be down sharply from record
highs reached last year. Concerns with deflationary pressures
remain, particularly if lower farm receipts persist over the
long run. This could adversely affect farm real estate values,
and undermine what has been to date a relatively strong
financial position.
That said, the outlook is for a return to higher prices, as
many of the pressures that drove last year's price increases,
like high energy prices, the Renewable Fuel Standard, and
strong economic growth in emerging markets, will return to play
a major role.
In addition, while other sectors of the economy may be
credit-constrained, many farm lenders appear to be in good
financial shape, and access to credit for farmers appears to be
sufficient.
That completes my statement, Mr. Chairman, and I would be
happy to answer any questions.
[The prepared statement of Dr. Glauber follows:]

Prepared Statement of Joseph Glauber, Ph.D., Chief Economist, U.S.
Department of Agriculture, Washington, D.C.
Mr. Chairman, Members of the Subcommittee, thank you for the
opportunity to discuss the economic outlook for U.S. agriculture. This
time last year, the outlook picture was quite different than today:
prices for most commodities were near record highs and rising; and farm
exports and farm income were projected to be at record levels. There
were concerns about whether there would be enough crop production to
meet global demand. Livestock, dairy and poultry producers were seeing
their operating margins squeezed, and food price inflation was being
discussed with concern for the first time in almost 20 years.
Recent Developments in Commodity Markets
What a difference 12 months make. We have seen prices for most
commodities fall 40-50 percent from their midyear peaks. The global
economic slump has cast a pall on most markets and, while net cash
income is projected at high levels relative to historical averages,
there remains much uncertainty.
World Economy and U.S. Trade: The International Monetary Fund is
currently projecting global economic output to decline between 0.5 and
1.5 percent in 2009. This would be the first time that global output
has declined in the post-World War II era. Output of the advanced
economies is projected to decline between 3 and 3.5 percent while
emerging and developing countries are projected to grow by just 1.5 to
2.55 percent. According to the World Trade Organization (WTO), world
trade in goods and services is expected to decline by 9.0 percent--the
first decline in world trade since 1982, and the largest drop in the
post-World War II period. Exports by emerging and developing countries
are projected to fall between two and three percent in 2009, after
annual increases of 17 and 20 percent in 2007 and 2008, respectively.
In Fiscal Year (FY) 2008, U.S. agricultural export sales surged by
an unprecedented $33 billion, to a record $115.4 billion. Key drivers
behind the growth were record grain and oilseed prices and volume gains
for virtually all products. Strong global economic growth and a weak
dollar were also key factors along with reduced competition in grain
markets. With FY 2008 imports at $79.3 billion, the net agricultural
trade balance for FY 2008 was a record $36.1 billion (figure 1).
Our export forecast for FY 2009 is $95.5 billion, $20 billion lower
than 2008, but still more than $13 billion above FY 2007's level and
the second highest on record. Mainly due to increased competition, U.S.
wheat and corn exports are expected to account for 60% (down $12.2
billion) of the overall decrease due to falling prices and volumes.
Soybeans and soy products account for another 20% (down $4.1 billion)
of the $20 billion decrease, with lower unit values and volumes for oil
and meal and lower prices for soybeans. While wheat and coarse grain
export volumes are expected to fall about 5 and 6.5 million metric tons
(mmt) respectively, soybeans are actually forecast to hold mostly
steady at about 31 mmt. Foreign demand for U.S. soybeans remains strong
with near record demand from China and reduced South American supplies.
The outlook for cotton indicates sales will fall $1.2 billion and close
to half a million tons as the global recession reduces demand for
textiles.
Like bulk commodities, our export outlook for high-value meats and
other animal products calls for the value of exports to fall $1.3
billion to $19 billion. Here, volume losses could be a more important
factor. Beef and pork prices should hold relatively steady, but pork
volume is down as China's pork industry rebounds. Price and volume
declines are expected for other products like broiler meat, animal
fats, hides and skins, and dairy products. Animal fats follow vegetable
oil markets, and hides and skins (like cotton) are heavily affected by
recession and declining sales of manufactured products. The global
dairy market is once again facing an oversupply situation with weakened
global demand and rising milk production in Europe, New Zealand, and
Australia.
Running counter to the general trend, horticultural exports are
actually forecast to rise slightly to $21.5 billion. The recession's
impact is felt as the growth in export value slows to its lowest rate
in 7 years. Overall volume is likely to remain unchanged, but prices
are sticky and may even rise in some fresh produce categories.
FY 2009 agricultural imports are a record $82.5 billion. This
reflects the slowest growth rate in many years due to the slowing
economy and falling consumer spending. The net trade balance is
expected to fall to $13.0 billion, down $23 billion from FY 2009, but
remains the second highest trade balance since FY 2001.
Crop Prospects: Yesterday, the National Agricultural Statistic
Service released their annual Prospective Plantings report. The acreage
estimates in this report are based primarily on surveys of producers'
planting intentions conducted during the first 2 weeks of March. The
supply and demand estimates that follow are based on the Prospective
Plantings report. It is important to note that actual plantings will
likely differ from intentions. Producers will adjust their actual
plantings as more information on price relationships, input costs, and
weather becomes available. The official USDA supply and demand
estimates for the 2009/2010 marketing year will be published on May 12,
2009, in the World Agricultural Supply and Demand Estimates report.
Cropland area is expected to contract in 2009 as plantings for the
major field crops decline with lower prices and generally less
favorable net returns (table 1). Combined planted area for the eight
major field crops (corn, sorghum, barley, oats, wheat, rice, cotton,
and soybeans) is expected at 245.9 million acres, down 7.1 million
acres from 2008.
Soybean planted area for 2009 is expected to increase for a second
year to a record 76 million acres, 0.3 million higher than last year.
Higher intended soybean and rice plantings are not expected to offset
declines in wheat, cotton, and feed grains. Corn area is expected down
one percent to 85 million acres. Rising mandates for ethanol use are
expected to support demand and corn prices. Net returns for corn remain
favorable to those for soybeans, but the sharp year-to-year drop in
expected returns will limit plantings. Wheat planted area is projected
at 58.6 million acres, down 4.5 million from last year as winter wheat
seedings fell 3.4 million acres last fall and spring wheat acres are
expected to be lower with soybeans a more attractive option in the
Northern Plains.
In 2008/09, global wheat production exceeded expected global
consumption by almost 36 mmt, creating record world supplies of wheat
and declining prices. As a result, pressure to expand wheat production
has receded since last year. Producer incentives to plant wheat were
reduced by lower prices and high fertilizer costs last fall. Late row-
crop harvesting also limited seeding opportunities in the eastern Corn
Belt, Delta, and Central Plains.
U.S. wheat production is expected to decline in 2009/10 with lower
acreage and a return to trend yields following last year's record.
Despite a nearly 15 percent reduction in expected production, wheat
supplies are expected to be up just one percent with beginning stocks
up sharply from a 60 year low in 2008/09. U.S. wheat ending stocks are
also projected to build slightly in 2009/10 as slow growth in domestic
use and lower exports more than offset the expected decline in
production. Wheat exports are projected down three percent as global
wheat production in 2009/10, although down from this year's record, is
expected to be the second highest ever.
Wheat prices are expected to remain under pressure from large
domestic and foreign supplies. The season average farm price is
projected at $5.10 per bushel, down $1.70 from the mid-point of the
2008/09 projection. Limited world wheat supplies last summer supported
U.S. exports and prices during June through September when producers
normally market more than half of their crop. The record 2008/09 farm
price reflects forward contracting last year at prices well above $7
per bushel. Similar pricing opportunities have not been available for
2009-crop wheat.
U.S. corn production for 2009/10 is projected up one percent as a
return to trend yields more than offsets the one percent decline in
planted area. Domestic demand is projected higher as a small decline in
feed and residual use is more than offset by higher corn use for
ethanol. Corn feed and residual use declines two percent as animal
numbers continue to contract through 2009 and higher ethanol production
increases supplies of distillers' grains.
Rising mandates for ethanol use are expected to support corn demand
and prices in 2009/10. Mandated ethanol use less the ethanol derived
from advanced biofuel under the Renewable Fuel Standard (RFS) program
rises from 10.5 billion gallons in 2009 to 12.0 billion gallons in 2010
(figure 2). On a crop year basis, that translates into about 11.5
billion gallons of ethanol demand for crop year 2009/10. Reflecting
this increase, corn used to produce ethanol is expected to increase 11
percent. At the projected 4.1 billion bushels, ethanol use will account
for 33 percent of expected corn use in 2009/10, up from a forecast 31
percent this year.
The U.S. ethanol industry remains under significant financial
pressure as the result of current economic conditions including
historic volatility in energy and corn prices over the past year.
Slowing gasoline consumption and lower prices have reduced incentives
for blending ethanol in recent months. Excess ethanol production
capacity weighs on ethanol producer returns even as more plant capacity
becomes available. Ethanol plant data reported by the Renewable Fuels
Association (RFA) put ethanol production capacity at 12.4 billion
gallons as of January 2009, including plants currently not operating,
with another 2.1 billion under construction or expansion. About 2.0
billion gallons or more of plant capacity has been idled. Excess
capacity is expected to continue to limit returns for ethanol
producers. The 2009/10 ethanol corn use forecast suggests that as much
as 15 percent of ethanol production capacity will be idle during the
2009/10 marketing year (figure 3).
Corn exports are projected nine percent higher in 2009/10. Global
corn imports are expected to show some modest recovery as global
livestock production begins to rebound in 2010. World corn demand is
also expected to benefit from reduced availability and use of feed-
quality wheat.
Ending stocks for 2009/10 are projected to decline as increases in
total corn use outpace the growth in supplies. The season average farm
price is projected at $3.80 per bushel, down $0.30 per bushel from the
mid-point of 2008/09 forecast range. Declines in cash prices are not
expected to be as large as implied by the year-to-year change in the
projected farm price. Farm prices in 2008/09 have been well above cash
market levels as producers benefit from forward prices contracted last
spring and summer. Similar pricing opportunities have not been
available to support farm prices in 2009/10.
Global oilseed production for 2008/09 is projected at a record 408
million tons, up four percent from 392 million produced in 2007/08.
Much of the increase is attributed to a sharp expansion of area planted
to sunflowerseed and rapeseed as producers around the world responded
to high prices. Global soybean area also increased sharply, but lower
yields in South American countries limited the gain in production.
South American soybean production continues to account for almost
half of global production. Brazil and Argentina are projected to
account for 45 percent of global soybean production, up from 40 percent
7 years ago. At a projected 100 million tons, combined 2008/09
production for these two countries exceeds U.S. production by about 25
percent despite drought in Argentina and southern Brazil.
Brazil and Argentina account for just under half of global soybean
trade in 2008/09, with the U.S. accounting for about 43 percent. The
U.S. share has declined from about 55 percent 7 years ago.
China's soybean imports now account for 49 percent of global
imports, up from 34 percent in 2002/03 as soybean import penetration
continues to grow (figure 4). China has accounted for virtually all of
the growth in world trade over the same time period. Soybean imports by
the world's second largest importer, EU-27, have declined over the same
period.
U.S. soybean production is expected to increase from 2008/09 with
record planted area and a return to trend yields. Increased area is
expected to come from reduced wheat, cotton, and peanut plantings.
Although soybean plantings are projected to increase from 2008/09,
lower double cropping of soybeans is expected due to lower soybean
prices and reduced winter wheat area in the Delta and Eastern Corn
Belt. With beginning stocks below year-earlier levels, increased
production will result in a seven percent increase in soybean supply
for 2009/10.
U.S. soybean crush is projected to increase modestly to 1.675
billion bushels reflecting mainly increased export prospects due to
constrained South American supplies for the first half of the 2009/10
marketing year. With minimal growth in animal numbers for 2009/10 and
increased substitution of corn by-products and other protein meals in
rations, growth in soybean meal domestic disappearance is projected at
just above one percent. With the exception of 2008/09, soybean meal
feeding in the U.S. is expected to be the lowest in 10 years.
Total domestic soybean oil disappearance is projected to decline in
2009/10 as biodiesel use remains flat and food use declines. Despite an
increase in the mandated biodiesel level, growth in soybean oil used
for biodiesel is not expected due to the continuing growth in use of
other fats and oils. Soybean oil now accounts for about 50 percent of
total oil used for biodiesel, down from around 85 percent 2 years ago.
Substitution for transfats and slow growth in the economy are expected
to result in the fifth consecutive year of declining soybean oil use in
the domestic food market. Soybean meal and oil prices are projected at
$260 per ton and $0.31 per pound, respectively compared with $285 per
ton and $0.30 per pound in 2008/09.
With drought-reduced crops and lower stocks expected in South
America, and sharply higher domestic supplies, U.S. soybean exports are
projected to reach a record 1.225 billion bushels in 2009/10. With
increased supplies exceeding gains in crush and exports, soybean stocks
are projected to rise 68 percent to 311 million bushels. This would be
the highest level since the record of 574 million bushels in 2006/07.
Prices are projected to decline to $8.50 per bushel, the lowest since
2006/07.
South American soybean production is expected to rebound from
drought-reduced levels of 2008/09 as yields return to trend. Planted
area is not expected to rise significantly due to relatively low
prices. With limited supplies available until harvest in the spring of
2010, trade shares for South America are likely to decrease in 2009/10.
Global demand for soybeans is likely to expand only modestly, mostly
due to growth in China. Shipments to EU-27 could also rise as demand
for soybean meal is likely to be rebound with less availability of
other grains.
U.S. cotton planted area for 2009 is projected at 8.8 million
acres, down seven percent from 2008. Planted area would be the lowest
since 1983 and a 42 percent reduction from the recent high of 15.3
million acres planted in 2006. More favorable returns for alternative
crops, especially soybeans and corn, are the primary reason for the
decline, but reduced access to irrigation in the Far West is also a
factor. Harvested area is projected at 8.0 million acres based on a
historical average abandonment of nine percent, compared with 18.4
percent in 2008. With a projected yield per harvested acre of 810
pounds, production of 13.5 million bales is also the same as last
season. Domestic mill use is projected marginally higher and exports
slightly lower, with a resulting decline of 1.4 million bales in U.S.
ending stocks to 5.9 million bales, or about 40 percent of use. The
U.S. season average price is projected to rise eight percent to
53 cents per pound.
The world cotton outlook for 2009/10 includes slightly lower
production and slightly higher consumption. Global production is likely
to fall once again in response to depressed world cotton prices, tight
credit, and more favorable returns for other crops. In contrast, world
cotton consumption is forecast to rise two percent as the world economy
begins to recover from the current global recession in late 2009 or
early 2010. World ending stocks of 56 million bales are projected about
ten percent below the beginning level but are expected to be adequate
to support demand.
Livestock, Poultry, and Dairy: The livestock, poultry, and dairy
sectors are being challenged by weakening domestic and global demand
for meat and dairy products. Uncertain demand, coupled with relatively
high feed prices, caused producers to start cutting back, or slow
production by the last quarter of 2008. The pullback in output is
expected to continue through most of 2009, with total meat production
down about two percent from 2008, and milk production declining about
0.8 percent.
The recent Cattle report indicated that cattle inventories declined
1.6 percent in 2008 and that producers were holding two percent fewer
beef replacement heifers on January 1. These numbers combined with
downward revisions to January 1, 2008, estimates, point to tight cattle
supplies in 2009 and lower beef production.
Beef production is forecast to decline around one percent in 2009.
Steer and heifer slaughter declines as fewer cattle are available for
marketing, but cow slaughter will likely remain relatively high as the
dairy herd is reduced. U.S. beef imports are forecast to increase about
six percent as foreign exporters increase shipments to the U.S. as
other global markets weaken. U.S. beef exports are expected to be about
unchanged from 2008 as a global recession undercuts exports and a
strengthening of the U.S. dollar makes U.S. beef relatively more
expensive. Per capita disappearance of beef in the United States is
expected to decline about one percent.
The March Quarterly Hogs and Pigs report indicated that hog
producers farrowed about three percent fewer sows during the first
quarter of 2009, and intend to farrow about 3-4 percent fewer sows
during the next two quarters. Recent growth in pigs per litter has been
substantial and expected to partially offset the effects of reduced
farrowings on slaughter levels in 2009. In addition, live hog and pig
imports from Canada are forecast about 25 percent lower than 2008,
further reducing the number of hogs available for marketing this year.
Pork production for 2009 is forecast to decline one to two percent.
Pork imports are forecast about one percent higher than last year's
level. Pork exports are forecast to fall 14 percent to 4 billion
pounds. Strong foreign demand, especially in China, for U.S. pork
during 2008 boosted exports almost 50 percent last year. This year,
weak global demand will dampen export growth. China, which grew rapidly
as an export market last year, is expected to have much lighter demand
for imported pork in post-Olympics 2009 as well as larger domestic
supplies as production recovers from hog disease outbreaks. U.S. per
capita disappearance of pork is expected to increase more than one
percent as a smaller share of pork output enters export channels.
Broiler meat production for 2009 is forecast to decline three
percent and turkey output is forecast to fall about four percent. The
poultry sector was hit hard by high feed prices in 2008. Returns sank
and producers began to reduce chick and poultry placements by the
middle of last year. The production cuts are expected to continue
through the third quarter for broilers and for the entire year for
turkeys. Broiler exports reached a record of nearly 7 billion pounds in
2008, but exports for 2009 are forecast to drop 13 percent because of
across-the-board weakness in demand and downwardly revised quotas by
Russia. Turkey exports also reached a record 676 million pounds last
year, but are expected to drop almost 11 percent this year. Per capita
disappearance of poultry meat is expected to decline one percent in
2009.
Cattle, hog, and turkey prices in 2009 are expected to be lower as
a weak demand outlook more than offsets usual gains from tighter
supplies (table 2). Broiler prices are the exception. Fed cattle will
be about $6 per cwt lower than 2008, and hogs about $1 per cwt lower.
Turkey prices are expected to be 2 cents per pound lower. However,
broiler prices are expected to be about 3 cents per pound higher as
production cuts are fairly sharp and broiler meat's relatively low
price compared to other meats should benefit broiler prices.
Sharply lower returns to producers result in lower milk production
for 2009. The estimated milk-feed ratio for 2009 is expected to be a
contractionary 1.50 (figure 5). Cow numbers are expected to decline
during 2009 with an acceleration in the last half of the year. For
2009, foreign demand for dairy products will be weakened by global
recession, and increased exportable supplies from other suppliers
dampens prospects for U.S. commercial exports. Dairy product prices
dropped sharply at the end of 2008 as demand fell. The much weaker
outlook results in sharp drops in dairy product prices and Class III
and Class IV milk prices. The all-milk price for 2009 is forecast to
decline to $11.25 to $11.85 per hundredweight (cwt), the lowest since
1978.
Farm Finances, Real Estate Values, and Credit
On February 12, USDA's Economic Research Service (ERS) released the
farm income and costs forecasts for 2009. ERS forecasts net cash income
at $77.3 billion, down $16.1 billion from 2008 (figure 6). Crop
receipts are forecast at $162.4 billion in 2009, down $18.7 billion
from 2008, but still the second highest on record. Livestock receipts
for 2009 are forecast at $132.2 billion, down $10.9 billion from 2008.
Lower input costs such as feed, fuel, and fertilizer will mean lower
cash expenses. ERS forecasts total cash expenses at $246.8 billion,
down $14 billion from 2008 levels.
The farm financial picture going into 2009 remains favorable with
total farm debt equal to 9.1 percent of total assets (compared to over
20 percent in the mid-1980s). The debt-to-asset ratio has declined
steadily from 15.2 percent in 1998. The decline in the debt-to-asset
ratio over that period was due to the strong appreciation in land
values, which increased by over $1 trillion from 1998 to 2008. ERS
forecasts the value of farm assets to rise by 1.6 percent in 2009, the
smallest increase since 1991.
While farm real estate values remain significantly higher than last
year, recent Federal Reserve Bank surveys showing fourth quarter
declines in land values in the 5th (Richmond), 7th (Chicago), 9th
(Minneapolis), 10th (Kansas City), and 11th (Dallas) districts gives
further credence to the view that land markets have softened (table 3).
Only farm real estate values in the 12th (San Francisco) district
recorded an increase in farm real estate values in the fourth quarter
of 2008. This follows double digit declines for much of farm real
estate since late 2007.
Despite the weakened economic outlook for farmers, most of the
districts reported the availability of funds was higher in the fourth
quarter of 2008 than in the third quarter of 2008. However, collateral
requirements for non real-estate farm loans are becoming more
restrictive. In the 7th district, 22 percent of district banks raised
their collateral requirements during the fourth quarter and almost 50
percent reported tighter credit standards compared to last year.
Similarly, in the 9th district, only five percent of survey respondents
said they had refused a loan due to a shortage of funds, but 21 percent
of lenders reporting increased collateral requirements during the
fourth quarter. Survey results from the 10th district also showed that
while the funds availability index rose in the fourth quarter,
collateral requirements increased to a 5 year high with more than a
quarter of survey respondents expecting credit standards to tighten
further in 2009. Last, survey respondents in the 11th district also
reported that while there are still funds available for lending, the
amount of collateral required has increased.
The downturn in the general economy may also be having an adverse
effect on off-farm income sources for farm households. Based on the
2007 Agricultural Resources Management Survey conducted by the ERS,
almost all farmer households earn a portion of their income from off-
farm sources (table 4). Two-thirds of all farm households reported
income from wages and salaries from off-farm employment and almost \1/
4\ of farm households reported income from an off-farm business. The
share of households reporting wage and salary income was highest for
the rural residence farms at 73 percent. Nonetheless, more than half
(54 percent) of households associated with commercial farms reported
earning income from off-farm employment. Dividend earnings were
reported by 36 percent of farm operator households in 2007. In contrast
with earnings from off-farm employment, commercial farm households had
the highest percentage reporting dividend income at 50 percent compared
with only 32 percent of rural residence farm households.
Conclusions
With confidence in financial markets weakened and the global
economy in the worst recession since prior to World War II, the
agricultural economy faces much uncertainty. As expected, most
aggregate measures are forecast to be down sharply from the record
highs reached last year. Concerns with deflationary pressures remain,
particularly if lower farm receipts persist over the longer run. This
could adversely affect farm real estate values and undermine what has
been to date a relatively strong financial position. That said, the
outlook is for a return to higher prices as many of the pressures that
drove last year's price increases--high energy prices, the Renewable
Fuel Standard, and strong economic growth in emerging markets--will
return to play a major role. In addition, while other sectors of the
economy may be credit constrained, many farm lenders appear to be in
good financial shape and access to credit for farmers appears to be
sufficient.
Attachments

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

The Chairman. Thank you very much. I appreciate that. Dr.
Henderson.

STATEMENT OF JASON R. HENDERSON, Ph.D., BRANCH
EXECUTIVE AND VICE PRESIDENT, OMAHA BRANCH,
FEDERAL RESERVE BANK OF KANSAS CITY, OMAHA, NE

Dr. Henderson. Thank you, Mr. Chairman and Members of the
Subcommittee. My name is Jason Henderson. I am Vice President
and Branch Executive of the Federal Reserve Bank of Kansas
City, Omaha Branch, and I appreciate the opportunity to talk
with you about some of our findings regarding agricultural
credit demand and availability.
The recession and fragile financial markets have raised
concerns about credit availability for agricultural borrowers.
Farm commodity prices have fallen after last summer's boom,
reducing cash flows, and trimming intermediate and long-term
investment demand for farms and equipment.
At the same time, demand for operating loans has risen, due
to lower cash flows and higher production costs. Shrinking cash
flows and higher costs limited farmers' ability to pay off
existing operating loans, and commercial bankers have reported
an increase in farm carryover debt, with lower loan repayments.
Agricultural bankers appear to have ample funds to meet rising
loan demand. Agricultural lenders are expanding their loan
volume of agricultural loans, and they have done so at
historically low interest rates.
My colleagues and I at the Federal Reserve Bank of Kansas
City survey agricultural bankers in our seven state region four
times a year to track developments in the farm economy. In our
latest survey, few bankers reported refusing a loan due to a
shortage of funds. Nationally, farm loan volumes rose at a
record pace in 2008, and during the first quarter of 2009,
operating loan volumes jumped again. Banks continue to report
they are increasing their use of loan guarantees from the Farm
Service Agency and seasonal credit from the Federal Reserve
discount window, and other agricultural lenders, such as the
Farm Credit System, the Farm Service Agency, and Farmer Mac
appear to have also increased their loan portfolios. Business
contacts also suggest that life insurance companies and vendor
creditors are still active in agriculture markets.
While agricultural lenders are meeting credit needs, they
have altered loan terms and tightened credit standards,
requiring more documentation and collateral to mitigate
increased agricultural risk. Delinquency rates and charge-offs
on agricultural loans have edged up in 2008, but they are
historically low, and well below delinquency and charge-off
rates on other types of loans.
Still, commercial bankers have responded by raising
collateral requirements on operating loans. Banks also reduced
the term of operating loans, as they were more reluctant to
extend loans for longer periods of time. Our research also
indicates that smaller farm operations, and those owned by
young and beginning farmers, are more likely to be denied
credit, but various programs are already in place to assist
these borrowers.
While the recession poses challenges to agricultural credit
availability, agricultural lenders appear to be in a position
to meet agricultural credit demands. Nationally, agricultural
banks are posting stronger returns than their banking peers.
Stronger returns should help underpin agricultural lending.
Banks are raising funds from a variety of sources, equity and
debt markets, deposits, and nontraditional sources, such as
Federal home loan banks, but despite low interest rates on CDs
and other savings vehicles, bank deposits continue to expand,
which will help provide funds for agricultural loans.
The cost of funds for financial institutions has eased.
After soaring in September 2008, the London Inter-Bank Offered
Rate, or the LIBOR, a benchmark for short-term interest rates,
has fallen, lowering the cost of funds. And while our survey
indicates that farmland values edged down at the end of 2008,
land values, which are a major source of collateral, remain
well above year ago levels, and anecdotal reports from our
business contacts indicate that farmland values have
potentially stabilized in the first quarter of 2009.
Finally, in rural America, an interdependency exists
between Main Street and the farm gate. Rural America avoided
the worst of the recession in 2008 due to residual strength in
farm and energy industries, and a shallower decline in housing
activity than elsewhere in the nation. Job losses were less
prevalent, and rural home values continued to appreciate, in
contrast to sharp national declines.
While the recession has begun to weigh on the rural
economy, the relative economic strength in rural communities
could help limit losses on other types of loans and support
world lending.
In sum, economic prospects for the rural economy have
dimmed and raised concerns about the availability of credit for
agricultural enterprises. Delinquency rates and charge-offs
have edged up, and credit standards have tightened on
agricultural loans. While agricultural borrowers are being
asked to accept more of the financial risk emerging from a
volatile agricultural environment, credit remains available for
creditworthy borrowers.
Mr. Chairman, thank you for inviting me today, and I will
be happy to respond to any questions at the appropriate time.
[The prepared statement of Dr. Henderson follows:]

Prepared Statement of Jason R. Henderson, Ph.D., Branch Executive and
Vice President, Omaha Branch, Federal Reserve Bank of Kansas City,
Omaha, NE
Mr. Chairman and Members of the Subcommittee, my name is Jason
Henderson and I am the Vice President and Branch Executive of the
Federal Reserve Bank of Kansas City--Omaha Branch. I appreciate the
opportunity to talk with you about agricultural credit conditions in
the current economic and financial environment.
Agricultural Credit Conditions
The economic and financial downturn has weakened the farm economy
and raised concerns about access to credit for agricultural borrowers.
Shrinking global demand, falling commodity prices, and higher
production costs have trimmed farm profits. As a result, reduced cash
flows have raised the demand for credit by agricultural enterprises.
While agricultural borrowers are concerned about credit
availability, agricultural lenders are equally concerned about the
creditworthiness of their borrowers as the farm economy weakens.
Delinquency rates and charge-offs on agricultural loans remain near
historically low levels but have edged up recently, eroding loan
quality. Consequently, agricultural lenders have tightened credit
standards on various types of agricultural loans. Agricultural
enterprises most susceptible to being denied credit are small farm
operations owned by young or beginning farmers.
Despite these risks, ample credit appears available at historically
low interest rates. Profitability in agricultural banks and relative
strength in the rural economy could support rural lending. Still, the
recent erosion in agricultural loan quality has led agricultural
lenders to tighten credit standards and shift more financial risk to
borrowers.
Agricultural Credit Demand
My colleagues and I at the Federal Reserve Bank of Kansas City
survey agricultural bankers in our seven-state region four times a year
to track developments in the farm economy. Our recent data indicate
weakness in the agricultural economy has shifted demand for loans
toward financing short-term investments. With profits shrinking, plans
have slowed for capital purchases such as farmland and equipment, which
require intermediate and longer term investments (Chart 1). At the same
time, the demand for operating loans has risen, due to lower cash flows
and higher production costs.
Agricultural producers' capital spending plans have fallen amid
weaker farm income expectations. When profits rise, farmers and
ranchers typically use higher cash flows to pay for various types of
capital expenditures. Capital spending was stronger in 2008, coinciding
with stronger farm incomes. Strong farm spending, in turn, helped
insulate the rural economy from the worst of the recession in 2008
(Henderson and Akers).
While strong farm incomes boosted farmland and machinery sales over
the past few years, these sales have slowed recently as farm income
expectations weakened. In the fourth quarter of 2008, farmland sales in
the Kansas City Fed's district had fallen from the previous year.\1\
Moreover, capital spending had slowed markedly with further declines
expected in 2009. Similarly, the Association of Equipment Manufacturers
recently reported slower growth in farm tractor and combine sales.\2\
Anecdotal reports indicate further contractions in machinery and
farmland sales through 2009.
---------------------------------------------------------------------------
\1\ The Kansas City Federal Reserve District covers the states of
Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and
western Missouri. See Henderson and Akers (2008) for more information.
\2\ Tractor and combine sales data were obtained from U.S. Ag Flash
Reports, Association of Equipment Manufacturers.
---------------------------------------------------------------------------
In contrast to capital spending, operating loan demand continues to
rise steadily. Operating loan demand often rises when prices fall and
revenues decline. Shrinking cash flows constrain farmers' ability to
pay off existing operating loans, leading to an increase in carry-over
debt. At the end of 2008, commercial bankers reported an increase in
farm carry-over debt as loan renewal or extensions jumped and loan
repayment rates declined.\3\
---------------------------------------------------------------------------
\3\ Indexes on farm loan renewals or extension and repayments rates
are available from the Agricultural Finance Databook, Board of
Governors of the Federal Reserve System, www.federalreserve.gov.
---------------------------------------------------------------------------
Higher production costs also increased operating loan demand. Since
the 1920s, farm production costs have risen at an average pace of
almost two percent a year, but in 2008, production costs surged 11.7
percent.\4\ The largest gains emerged from energy-derived inputs--fuel,
fertilizer, electricity and pesticides. Livestock producers faced a
surge in feed costs. While some decline is expected in 2009, farm
production costs--especially for crop producers--are expected to remain
historically high, raising the credit demand of agricultural
enterprises.
---------------------------------------------------------------------------
\4\ Farm production costs were obtained from the Farm Income and
Costs Briefing Room, Economic Research Service, U.S. Department of
Agriculture, www.ers.usda.gov.
---------------------------------------------------------------------------
Agricultural Loan Activity
Agricultural lenders appear to be expanding loanable funds to meet
rising loan demand. Commercial banks continue to report ample funds for
agricultural loans. In general, they have expanded their total volume
of agricultural loans, and they have done so at historically low
interest rates. Moreover, government sponsored lenders have also
expanded agricultural loan activity.
According to the Federal Reserve Bank of Kansas City's fourth
quarter survey, 70 percent of bankers reported the same amount of funds
available for farm operating loans as the year before. An additional 14
percent reported having more funds available. Moreover, these banks
expected to have roughly the same amount, if not more funds, available
for lending in the first half of 2009.
Few bankers were refusing loans due to a shortage of funds. In
December 2008, only 4.3 percent of bankers in the Kansas City survey
reported refusing a farm loan due to a shortage of funds. This refusal
rate was up slightly from levels reported in previous quarters and on
par with levels reported prior to 2008.
The Kansas City survey data are consistent with other national
reports, which have also shown increased agricultural loan activity.
Farm loan volumes rose sharply in 2008, led by record gains in farm
real estate loans.\5\ In the first quarter, commercial banks greatly
expanded farm operating loan volumes (Chart 2).\6\ Rising loan volumes
were driven by expanding the number and size of farm operating
loans.\7\
---------------------------------------------------------------------------
\5\ Summary statistics for farm real estate and non-real estate
loan volumes were calculated from the Quarterly Reports of Condition of
Commercial Banks and obtained from the Agricultural Finance Databook.
\6\ Non-real estate loan volumes obtained from the Survey of Term
of Bank Lending to Farmers available in the Agricultural Finance
Databook.
\7\ In the first quarter, loans to the livestock industry declined
as the livestock sector struggled to post profits.
---------------------------------------------------------------------------
Other agricultural lenders are also extending more credit to
agricultural enterprises. For example, the Farm Credit System
significantly expanded its agricultural real estate mortgages and
production/intermediate term loan volumes in 2008. The Farm Service
Agency experienced a rise in its direct operating loan portfolio,
although its guaranteed loan portfolio eased. And, Farmer Mac loans and
guaranteed securities rose in 2008.
Commercial banks appear to be tapping Federal Government and
Federal Reserve funds. In response to higher risk, commercial bankers
indicate they are increasing their use of guarantees from the U.S.
Department of Agriculture's Farm Service Agency. In January 2009,
Farmer Mac and the Independent Community Bankers Association initiated
a program to improve credit availability for farm real estate
mortgages. Moreover, smaller commercial banks have access to primary
and secondary credit funds through the Federal Reserve's discount
window and can request funds for seasonal credit, especially during the
planting and harvest seasons, when funding needs are more
significant.\8\
---------------------------------------------------------------------------
\8\ More information on the Federal Reserve's discount window and
seasonal credit program is available at www.frbdiscountwindow.org/
index.cfm.
---------------------------------------------------------------------------
Agricultural enterprises are also receiving credit at historically
low interest rates. According to agricultural credit surveys by the
Federal Reserve, interest rates on all types of agricultural loans have
dropped significantly below 2006 levels.\9\ In the Kansas City Federal
Reserve district, the average interest rate on operating loans declined
to 7.0 percent in the fourth quarter of 2008.\10\
---------------------------------------------------------------------------
\9\ Data obtained from Federal Reserve agricultural credit surveys
can be obtained from the Agricultural Finance Databook, or from the
Federal Reserve Bank of Kansas City, www.kansascityfed.org/agcrsurv/
agcrmain.htm.
\10\ During the same time, the average rate on farm real estate
loans fell from roughly 8.5 percent to 6.75 percent.
---------------------------------------------------------------------------
Tighter Credit Standards
While agricultural lenders are generally extending credit at lower
interest rates, they have altered loan terms and tightened credit
standards in response to increased risk in agricultural lending.
Agricultural loan quality has declined amid lower farm income
expectations and increased volatility in agricultural markets. In
response, agricultural lenders, and commercial banks in particular,
have shortened loan maturities and raised collateral requirements.
In 2008, agricultural loan quality at commercial banks began to
erode. After improving during the first part of the year, the average
risk rating on agricultural loans edged up heading into 2009.
Commercial bankers reported higher risk ratings, as livestock profits
were elusive and margins declined for the crop sector.
Along with elevated risk ratings, delinquency rates and charge-offs
on agricultural loans also edged up. In 2008, delinquency rates on
agricultural loans climbed steadily, rising 30 percent during the
year.\11\ At the same time, net charge-offs on agricultural loans
doubled. Delinquency rates and net charge-offs on agricultural loans
were higher in the largest 100 U.S. banks.
---------------------------------------------------------------------------
\11\ Charge-off and delinquency rate data were obtained from the
Board of Governors of the Federal Reserve, www.federalreserve.gov/
releases/chargeoff/.
---------------------------------------------------------------------------
Still, delinquency rates and net charge-offs on agricultural loans
remain historically low and well below other types of loans. For
example, in the fourth quarter of 2008, the delinquency rate on all
types of loans and leases was more than triple the rate on agricultural
loans. Similarly, net charge-offs on all loans were more than eight
times the size of net charge-offs on agricultural loans.
Nevertheless, commercial bankers responding to the Kansas City
survey reported raising collateral requirements on operating loans
(Chart 3). In the fourth quarter of 2008, the collateral requirements
index rose well above year-ago levels, as a quarter of the bankers
reported higher collateral requirements. Higher collateral requirements
on agricultural loans were also reported by commercial bankers in other
Federal Reserve districts.
In response to higher risk, commercial banks have also reduced the
length of operating loans. For example, after steadily rising since
2001, loan maturity on agricultural loans dropped 20 percent, to 12
months, in the fourth quarter of 2008. Simply put, as agricultural risk
increased, banks were more reluctant to extend loans for longer periods
of time.
Recent research indicates that smaller farm operations and
operations owned by young and beginning farmers are generally more
likely to be denied credit, due to the limited experience and net worth
and higher debt levels of the owners (Briggeman, Towe, and Morehart;
Harris, et al.). While these types of operations are likely to have
more difficulty obtaining credit in the current environment, programs
are already in place to support their financial needs.
Agricultural Lending in 2009
The recession poses some risks to agricultural lending in 2009.
Concerns about the availability and cost of funds and the
creditworthiness of borrowers remain. However, the robust performance
of agricultural banks and relative strength in the rural economy should
support rural lending.
Access to funds is a persistent concern for agricultural banks.
Banks raise funds from a variety of sources--equity and debt markets,
deposits and nontraditional sources such as Federal Home Loan Banks.
Bank deposits are a major source of loanable funds for agricultural
banks. Lower interest rates on CDs and other savings vehicles could
slow bank deposit growth. Yet, despite lower interest rates, domestic
deposits at agricultural banks continue to expand, which should support
agricultural lending.\12\
---------------------------------------------------------------------------
\12\ Domestic deposit data obtained from Statistics at a Glance,
Federal Deposit Insurance Corporation (FDIC). FDIC identifies
agricultural banks as commercial banks with agricultural loans
accounting for at least 25 percent of their loan portfolio.
---------------------------------------------------------------------------
Managing funding costs is an everyday challenge for commercial
banks. In September 2008, the financial crisis fueled a spike in the
London Inter-Bank Offered Rate (LIBOR), a benchmark for short-term
rates that banks pay to borrow funds from other banks and a measure for
bank funding costs. Since then, LIBOR has declined, suggesting that
funding costs have fallen, which will support agricultural lending.
Agricultural lenders are always concerned about the
creditworthiness of agricultural borrowers. In 2009, profit margins are
expected to narrow for crop producers and remain negative for livestock
producers (Henderson and Akers). While historically low, delinquency
rates and charge-offs on agricultural loans rose in 2008. Weakness in
the agricultural economy could further erode the creditworthiness of
agricultural borrowers and lead to tighter lending standards and higher
collateral requirements on agricultural loans.
Because of their prominent use as collateral, declines in farmland
values at the end of 2008 are a concern. Federal Reserve surveys
indicate that farmland values edged down in the fourth quarter of 2008,
but remained well above year-ago levels. Still, further declines in
farmland values could shrink the amount of collateral available for
agricultural loans, especially at small and mid-sized banks that more
frequently use farm real estate as collateral.\13\
---------------------------------------------------------------------------
\13\ Small and mid-sized farm lenders had less than $25 million in
farm loans. Large farm lenders had more than $25 million in farm loans.
See the Agricultural Finance Databook for a more detailed description.
---------------------------------------------------------------------------
The strong performance of agricultural banks, which are generally
relatively small banks located in rural communities, should help
sustain agricultural and rural lending. The Federal Reserve defines
agricultural banks as commercial banks with agricultural loans
accounting for more than 14 percent of their loan portfolio.\14\ In the
fourth quarter of 2008, agricultural banks continued to post
historically high rates of return, while all commercial banks reported
negative returns (Chart 4). Agricultural banks also had much stronger
performance than other similarly sized small commercial banks--those
with less than $500 million in assets. Stronger returns should help
underpin agricultural and rural lending.
---------------------------------------------------------------------------
\14\ Agricultural banks have an agricultural loan concentration
higher than the average agricultural loan concentration for all
commercial banks. In 2008, the average agricultural loan concentration
was 14 percent.
---------------------------------------------------------------------------
Finally, the relative strength of the rural economy should support
agricultural and rural lending. Last year, the relative strength of the
farm and energy industries and a shallower decline in housing activity
allowed rural economies to avoid the worst of the recession (Henderson
and Akers). In contrast to home prices in most urban areas, rural home
values continued to rise through most of 2008 (Wilkerson 2008). And,
job losses were less prevalent on rural Main Streets as manufacturing
and service firms that supported the agricultural and energy sectors
posted strong gains. More recently, the recession has established a
stronger foothold in rural America, but rural economies continue to
outperform their urban counterparts. While the recession will limit
rural economic gains, the relative strength in rural economies could
help limit losses on other types of loans and support rural lending.
In sum, the global recession has trimmed economic prospects for the
agricultural and rural economy, raising concerns about the availability
of credit for agricultural enterprises. Delinquency rates and charge-
offs have risen but remain at historically low levels. Agricultural
lenders responded by tightening credit standards, especially for those
segments of the agricultural sector experiencing losses. While
agricultural borrowers are being asked to accept more financial risk,
credit remains available for creditworthy borrowers.
References
Board of Governors of the Federal Reserve System. ``Agricultural
Finance Databook,'' www.federalreserve.gov.
Briggeman, Brian, Charles A. Towe, and Mitchell J. Morehart. 2009.
``Credit Constraints: Their Existence, Determinants and Implications
for U.S. Farm and Non-Farm Sole Proprietorships,'' American Journal of
Agricultural Economics.
Harris, J. Michael, et al. 2008. ``Agricultural Income and Finance
Outlook,'' Economic Research Service, U.S. Department of Agriculture,
AIS-86, December, www.ers.usda.gov.
Henderson, Jason. 2009. ``Agricultural Credit Standards Tighten,''
Main Street Economist, Federal Reserve Bank of Kansas City, Issue 1.
www.kansascityfed.org.
Henderson, Jason and Maria Akers. 2009. ``Recession Catches Rural
America,'' Economic Review, Federal Reserve Bank of Kansas City. First
Quarter. www.kansascityfed.org.
Henderson, Jason and Maria Akers. 2008. ``Farmland Values Decline
and Credit Conditions Tighten,'' Survey of Tenth District Agricultural
Credit Conditions. Federal Reserve Bank of Kansas City. Fourth Quarter.
www.kansascityfed.org.
U.S. Ag Flash Reports, 2009. Association of Equipment
Manufacturers, February, www.aem.org.
Wilkerson, Chad. 2008. ``Is Rural America Facing a Home Price
Bust?'' Main Street Economist, Federal Reserve Bank of Kansas City,
Issue VI. www.kansascityfed.org.
Attachments

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

The Chairman. Thank you, Dr. Henderson. We appreciate that.
Dr. Gruenspecht, we would like to hear from you at this time.

STATEMENT OF HOWARD K. GRUENSPECHT, Ph.D., ACTING
ADMINISTRATOR, U.S. ENERGY INFORMATION
ADMINISTRATION, U.S. DEPARTMENT OF ENERGY,
WASHINGTON, D.C.

Dr. Gruenspecht. Mr. Chairman and Members of the Committee,
I appreciate the opportunity to appear before you today.
The Energy Information Administration is the independent
statistical and analytical agency within the Department of
Energy. We do not promote, formulate, or take positions on
policy issues, and our views should not be construed as
representing those of the Department of Energy or the
Administration.
Agriculture is a major energy user. Diesel accounts for 51
percent of total farm energy use, motor gasoline for 16
percent, natural gas and propane for nine percent each, and
electricity for 14 percent.
Agriculture also plays a significant current role as an
energy supplier, as exemplified by the growth in the use of
ethanol as motor fuel, and will play an even larger role in the
future.
Starting with our outlook through the end of 2010, the
world oil market saw a sharp price decline in the second half
of last year. The price of West Texas Intermediate crude oil
averaged $100 a barrel in 2008, and we expect it to be
significantly below that level through 2009 and 2010, as a
rebound in oil demand growth awaits economic recovery in the
United States and around the world. Retail diesel fuel prices
in 2009 are projected to average $2.19 per gallon, down from
$3.80 per gallon in 2008.
Turning to ethanol, we expect only modest growth in ethanol
consumption in 2009. In July 2007, ethanol provided an average
of 425,000 barrels per day, about five percent of 2007 average
daily gasoline consumption volume, or about three percent of
the energy consumed by gasoline-fueled vehicles. Ethanol plants
operated at or near their design capacity limits during this
period. Ethanol production capacity increased by more than 50
percent in 2008, with production in December reaching 656,000
barrels per day. Production capacity grew faster than demand,
and average utilization rates fell from near full utilization
at the beginning of 2008 to about 85 percent by year's end, and
a further drop is expected in 2009.
Before shifting to a long-term perspective, I should note
that any projections are necessarily very uncertain, since
long-term energy supply and demand trends are affected by many
factors that are difficult to predict, such as energy prices,
economic growth, advances in technologies, changes in weather
patterns, and future public policy decisions. The Annual Energy
Outlook reference case, actually just released yesterday,
projects increased consumption of biofuels, including ethanol,
biomass-to-liquids, biodiesel, and other non-hydroelectric
renewable energy sources between now and 2030. The growing use
of alternative fuels reflects both the higher prices projected
for traditional fuels and support for alternative fuels
provided in recently enacted Federal legislation.
Biofuels use in the reference case grows from 7.3 billion
ethanol-equivalent gallons in 2007 to nearly 30 billion gallons
in 2022, and nearly 39 billion gallons in 2030. The projected
consumption in 2022 is less than the 36 billion gallons
mandated in the Energy Independence and Security Act of 2007,
because we see difficulties in rapidly ramping up the
production of cellulosic biofuels. However, the other targets
in that legislation are projected to be achieved.
Our reference case assumes that current laws and policies
continue indefinitely. Other recent EIA analyses suggest that
various policy proposals, including caps on greenhouse gas
emissions or an increased renewable portfolio standard for
electricity sellers, could significantly increase reliance on
biomass as an energy source. Agricultural products and
residues, as well as dedicated energy crops, are a key part of
the overall biomass supply.
The two main concerns that appear to motivate many recent
policy proposals are energy security and the reduction of
greenhouse gas emissions. Our recent policy analyses, many of
which were done at the request of Congress, suggest that there
are both synergies and conflicts between these objectives. The
situation with respect to agriculture and biomass is
particularly complex. A policy focused on energy security would
likely emphasize use of biofuels to decrease our reliance on
imported petroleum. Such a policy would also serve to reduce
greenhouse gas emissions. However, if greenhouse gas emissions
were the primary policy focus, biomass could be used as a
substitute for coal-fired electricity generation, to provide
significantly larger carbon dioxide emission reductions. While
biomass from agriculture and other sources has an important
role to play in either case, the way in which biomass can best
be deployed will depend on how the objectives of energy
security and emissions reduction are prioritized.
That concludes my statement, Mr. Chairman, and I would be
happy to answer any questions you or the other Members may
have.
[The prepared statement of Dr. Gruenspecht follows:]

Prepared Statement of Howard K. Gruenspecht, Ph.D., Acting
Administrator, U.S. Energy Information Administration, U.S. Department
of Energy, Washington, D.C.
Mr. Chairman and Members of the Committee, I appreciate the
opportunity to appear before you today to discuss developments in
energy markets and their possible implications for agriculture.
The Energy Information Administration (EIA) is the independent
statistical and analytical agency within the Department of Energy. We
do not promote, formulate, or take positions on policy issues, but we
do produce objective, timely, and relevant data, projections, and
analyses that are meant to assist policymakers, help markets function
efficiently, and inform the public. Our views are strictly those of EIA
and should not be construed as representing those of the Department of
Energy or the Administration.
Energy Use in Farming and Farming-Related Sectors
Agriculture is a major user of energy. For 2007, EIA estimates that
energy use on farms totaled about 1,142 trillion British thermal units
(Btu), more than one percent of total U.S. energy consumption of 101.9
quadrillion Btu. The components of farm energy consumption are as
follows: diesel accounts for 51 percent of total use, motor gasoline
accounts for 16 percent, natural gas accounts for nine percent,
liquefied petroleum gas (LPG or propane) accounts for nine percent,
electricity accounts for 14 percent, and other fuels account for two
percent. In addition to direct farm use of energy, agriculture is
indirectly affected by energy requirements in the fertilizer industry,
specifically in nitrogenous fertilizers. In 2007, the energy
requirements of this industry, in terms of thermal content, were about
420 trillion Btu, most of which is natural gas. Natural gas is the main
feedstock in the production of ammonia fertilizer. Because of the
volatility and high levels of natural gas prices over the last several
years, several ammonia producers are planning to convert their
facilities to use less expensive coal or petroleum coke instead of
natural gas. Also, as domestic ammonia producers have idled many of
their plants, imports of ammonia have significantly increased, with
2007 reporting a net import reliance of 42 percent, compared to 29
percent in 2002.
Based on energy use on farms and in closely-related sectors, every
dime added to the price of gasoline and diesel oil, sustained over 1
year, costs U.S. agriculture $566 million annually. Every dollar added
to the price per thousand cubic feet of natural gas costs agriculture
more than $96 million annually in direct expense. Every penny increase
in the price per kilowatthour of purchased electricity costs
agriculture about $452 million annually in direct expense. The farm
sector has seen a tremendous increase in fertilizer costs, particularly
ammonia. The average annual ammonia price paid by farmers rose from
$250 per ton in 2002 to $523 per ton in 2007.
Agriculture as an Energy Supply Source
Testimony on the interaction between energy markets and agriculture
would once have focused exclusively on agriculture's demand for energy.
Today, however, the recent increase in the use of ethanol in motor
fuels has focused attention to agriculture's current and potential role
as an energy supplier. Ethanol use in motor fuels has grown from 1.7
billion gallons per year in 2001 to an estimated 9.6 billion gallons
per year in 2008. This growth has had a substantial impact on corn
demand, commodity and land prices, and planting decisions. However,
notwithstanding its recent growth, ethanol still accounts for a
relatively small share of overall fuel use by gasoline-powered
vehicles, which totaled 137 billion gallons in 2008.
While ethanol from grain is by far the most important current
energy supply activity in agriculture, other energy supply
opportunities are also receiving increasing attention. Production of
biodiesel fuel from oilseed crops has grown over the past decade,
supported by Federal incentives. Farm wastes are increasingly being
recognized as an energy resource, and their development is being
promoted by Federal incentives and renewable energy portfolio mandates
in many states. Farm operators are also benefiting from the growth of
wind power, which is providing extra income from leases and royalties
to farm operators in areas with attractive wind resources.
The forward-looking sections of this testimony, which follow, offer
EIA's perspective on the short-term and long-term energy outlooks and
on the future for ethanol and other energy supply opportunities in
agriculture.
Energy Trends Through 2010
Turning first to the outlook through the end of 2010, I will be
relying on EIA's Short-Term Energy Outlook, released March 10, 2009,
which is updated each month.
Global Oil Markets. Following the sharp price decline that occurred
during the second half of 2008, the global oil market has remained
relatively stable since the beginning of the year. This situation is
expected to continue through most of 2009, until economic recovery in
the United States and elsewhere leads to a rebound in oil demand
growth.
Crude Oil Prices. The future direction of world oil prices in the
short-term will largely depend upon the timing and pace of the recovery
of the global economy. The annual price of West Texas Intermediate
(WTI) crude oil averaged $100 per barrel in 2008. The global economic
slowdown is projected to reduce these prices, to an average of $42 per
barrel in 2009 and $53 in 2010.
Motor Gasoline Prices. Gasoline prices have been slowly increasing
over the last 2 months while crude oil prices have stabilized and
refiner margins have recovered from their recent near-historic lows.
After averaging $1.69 per gallon in December 2008, the lowest monthly
average since February 2004, the retail gasoline price in February rose
to $1.92 per gallon. Retail gasoline prices are projected to average
$1.96 per gallon in 2009 and $2.18 per gallon in 2010.
Diesel Fuel and Heating Oil Prices. Retail diesel fuel prices in
2009 are projected to average $2.19 per gallon, down from $3.80 per
gallon in 2008, while residential heating oil prices are projected to
average $2.58 per gallon during the 2008-2009 winter season compared to
$3.31 per gallon last winter. The projected decrease is consistent with
lower crude oil prices and more than adequate levels of distillate fuel
inventories. Total distillate inventories at the end of March 2009 are
expected to be 131 million barrels, up 23.5 million barrels from March
2008 and well above the normal range.
Natural Gas Production, Inventories, and Prices. Total U.S.
marketed natural gas production is expected to remain flat in 2009 and
then fall by 0.8 percent in 2010. Working natural gas inventories by
the end of March are projected to reach 1,628 billion cubic feet, a
level about 251 billion cubic feet above the previous 5 year average
for March.
The Henry Hub spot price averaged $4.65 per thousand cubic feet in
February, $0.75 per thousand cubic feet below the average spot price in
January. Prices continue to reflect demand reductions brought about by
the current economic downturn. As the year progresses, it is expected
that average spot prices will remain near $4 per thousand cubic feet.
On an annual basis, the Henry Hub spot price is expected to average
about $4.67 per thousand cubic feet in 2009 and $5.87 per thousand
cubic feet in 2010.
Electricity Consumption and Prices. An expected decline of 6.4
percent in industrial electricity sales during 2009 leads to a
projected decline in total electricity consumption of 1.7 percent this
year. Total electricity consumption is expected to grow by 1.2 percent
in 2010 as a slowly improving economic climate contributes to a
recovery in the sales of electricity. Despite the recent drop in
generation fuel costs, some electric utilities have proposed slight
rate increases in response to higher costs of securing credit for
purchases of fuel and wholesale power, while other retail electricity
distributors, especially in the West South Central region, have been
able to pass the declining fuel costs on to customers through lower
rates.
Ethanol. EIA projects that the market for ethanol will continue to
grow, although much more slowly than seen over the past 2 years. In
2007, the ethanol industry produced an average of 425,000 barrels per
day, providing about 4.6 percent of 2007 average daily gasoline
consumption volume, or about three percent of the energy consumed by
gasoline-fueled vehicles. Ethanol plants operated at or near their
design capacity limit during this period. Ethanol production capacity
increased by more than 50 percent in 2008 with production growing from
an average of 492,000 barrels per day in December 2007 to an average of
656,000 barrels per day in December 2008. However, high gasoline prices
and the weakening economy contributed to declining gasoline consumption
compared with the year before. Ethanol production capacity grew faster
than the demand for ethanol, and average ethanol capacity utilization
rates fell from close to 100 percent at the beginning of 2008 to about
85 percent by the end of 2008. EIA's forecast for 2009 calls for
continuing but very modest growth in ethanol consumption, with average
capacity utilization rates falling to about 80 percent by the end of
the year. Although farmers should continue to benefit from increasing
corn demand, the availability of underutilized ethanol production
capacity will tend to put downward pressure on the margin earned by
ethanol producers over their variable production cost.
The projected slowdown in ethanol demand growth reflects the
existence of several distinct segments in the fuel ethanol market, each
with a different sensitivity to market price and infrastructure
limitations. The reformulated gasoline market, which represents about
\1/3\ of the gasoline sold and is subject to the strictest
environmental limits, is the least price-sensitive market segment for
ethanol. Demand for ethanol in this type of gasoline, where it is used
in blends of six to ten percent, increased significantly with the
phase-out of methyl tertiary butyl ether (MTBE), which was completed in
2006. Since that time, virtually all reformulated gasoline has been
blended using ethanol.
The next most attractive market segment for ethanol is as a volume
extender for conventional gasoline in blends of ten percent. The high
oil and gasoline prices last year, the availability of a 45 cents per
gallon blenders' tax credit through 2010, and the ``consumer illusion''
that leads to choices between gasoline blended with and without low
percentages of ethanol to be made purely on the basis of their price
per gallon without consideration of the lower miles-per-gallon using
fuel incorporating ethanol, all supported the growing use of ethanol as
a volume extender in conventional gasoline. However, the recent fall in
oil and gasoline prices has reduced the economic incentive for
expanding ethanol blending capacity. While the current level of almost
140 billion gallons per year in national sales for all types of
gasoline could, in theory, accommodate roughly 14 billion gallons of
ethanol in blends of ten percent or less, many regions still lack the
transportation and blending infrastructure to use ethanol. EIA's latest
Outlook projects that 10.7 billion gallons of ethanol are blended into
gasoline in 2009. We are aware of some other projections as much as 1
billion gallons per year lower, which would require the use of RINs
(Renewable Identification Numbers) from prior years to comply with the
renewable fuel standard established by the Energy Independence and
Security Act of 2007 (EISA).
The final market segment for ethanol is use in high-percentage
blends such as E85. Currently, high-percentage blends account for well
under one percent of the overall U.S. market for fuel ethanol. Expanded
use of high-percentage blends is necessary if total ethanol use is to
grow beyond the level of 12 to 15 billion gallons per year that would
saturate the market for low-percentage blends. Based on the Brazilian
experience, consumers would generally expect high-percentage ethanol
blends to be price-competitive with petroleum-based alternatives on an
energy-content basis.
Energy Trends Through 2030
Turning now to the longer-term outlook, the discussion that follows
relies on EIA's Annual Energy Outlook 2009 (AEO2009) and on several
recent EIA analyses of energy and environmental policy proposals that
could have a significant impact on agriculture's role as an energy
supply source.
Overview. Longer-term trends in energy supply and demand are
affected by many factors that are difficult to predict, such as energy
prices, U.S. economic growth, advances in technologies, changes in
weather patterns, and future public policy decisions. It is clear,
however, that energy markets are changing as they adapt to the
significant volatility seen in recent years; higher energy prices since
2000 (notwithstanding the sharp fall in oil and natural gas prices
since mid-2008); the greater influence of developing countries on
worldwide energy requirements; recently enacted legislation and
regulations in the United States; and changing public perceptions of
issues related to the use of alternative fuels, emissions of air
pollutants and greenhouse gases, and the acceptability of various
energy technologies.
The AEO2009 reference case projects an increase in the consumption
of biofuels (ethanol, biodiesel and biomass-to-liquids fuels), even as
consumption of petroleum-based fuels remains essentially flat, and an
increase in other nonhydroelectric renewable energy sources, together
with accelerated improvements in energy efficiency throughout the
economy. The growth in biofuels and other nonhydroelectric renewable
energy consumption leads to a gradual reduction in the role played by
fossil fuels in meeting U.S. energy needs. The oil, coal, and natural
gas share falls from providing 86 percent of total U.S. primary energy
supply in 2006 to 79 percent in 2030, assuming no changes in existing
laws and regulations.
Alternative Fuel Use. The use of non-petroleum liquid fuels is
projected to increase substantially in the reference case as a result
of the higher prices projected for traditional fuels and the support
for alternative fuels provided in recently enacted Federal legislation,
including EISA. Biofuels use grows in the AEO2009 reference case from
7.3 billion ethanol-equivalent gallons in 2007 to 29.8 billion gallons
in 2022 and 38.7 billion gallons in 2030. After 2022, the combination
of the rising cost of petroleum-based fuels and steadily lower costs
for biofuel technology results in the continued growth in biofuels
consumption. The projected biofuels consumption in 2022 is less than
the 36 billion gallons mandated in EISA largely because of the
difficulties that we foresee in rapidly ramping up the production of
cellulosic biofuels to the target levels set in that Act for the middle
of the next decade. However, the targets for the use of 15 billion
gallons of corn-based ethanol and not less than 1 billion gallons of
biodiesel are projected to be achieved.
From a marketing perspective, biofuels that are substitutes for
diesel fuel, such as biodiesel and biomass-to-liquids fuels, are
expected to be blended into the same diesel supply as petroleum-based
diesel. Ethanol use for gasoline blending grows to the 12-13 billion
gallon level between 2022 and 2030, while E85 consumption grows from 11
to 17 billion gallons over that same time period.
The Effect of Lower Oil Prices. The crude oil price can be expected
to have an effect on the longer term outlook for biofuels. In the
AEO2009, the difference in crude oil prices between the reference and
low oil price cases is almost $70 per barrel (2007 dollars) in 2022,
and this price differential continues to grow through 2030. There is a
pronounced lowering of cellulosic ethanol consumption in the low oil
price case by 2030 due to the fact that it is not as price-competitive
with petroleum gasoline, which results in a significant lowering of the
total ethanol consumed by the end of the projection period: 20.6
billion gallons in 2030 in the low oil price case compared to 29.3
billion gallons in the reference case. Biomass-to-liquids production is
also lower in the low oil price case than in the reference case.
Renewable Fuel Consumption and Supply. Total consumption of
marketed renewable fuels in the AEO2009 reference case, including
ethanol blended with gasoline, is projected to grow from 6.7
quadrillion Btu in 2007 to 14.1 quadrillion Btu in 2030. The robust
growth is a result of the nearly 30 state renewable portfolio standard
programs, mandates, and goals for renewable electricity generation;
technological advances; high petroleum and natural gas prices; and
Federal tax credits, including those in the Energy Policy Act of 2005
and the Energy Improvement and Extension Act of 2008.
Outlook Risks. As discussed previously, this longer-term outlook
hinges upon the outcomes of a number of factors in addition to crude
oil prices, which are not known with certainty. For biofuels the
uncertainties include the actual implementation of the expanded
renewable fuel standard in EISA, the continued difficulty second-
generation biofuels technology developers are facing with financing and
building projects in the United States and globally, and whether
intermediate ethanol blends in gasoline above E10 levels will be
allowed.
The Potential Impact of Possible Future Policies on Energy Supply From
Agriculture
As previously noted, the Annual Energy Outlook reference case
assumes that current laws and policies continue indefinitely. Other
recent EIA analyses suggest that various policy proposals, including
caps on greenhouse gas emissions, a renewable electricity standard for
electricity sellers, or a low carbon fuel standard, could significantly
increase reliance on biomass as an energy source. Agricultural products
and residues, as well as dedicated energy crops, are a key part of the
overall supply of biomass in some of our recent policy analyses.
The two main concerns that appear to motivate many recent policy
proposals are energy security and reduction of greenhouse gas
emissions. Our continuing policy analyses suggest that there are both
synergies and conflicts between these objectives. For example,
improvements in vehicle efficiency would advance both objectives. In
contrast, the adoption of coal-to-liquids conversion without carbon
capture and sequestration would advance energy security while
increasing emissions.
The situation with respect to agriculture and biomass is somewhat
complex. A policy focused on energy security would likely emphasize the
use of biofuels to reduce our reliance on imported petroleum. Such a
policy also would serve to reduce greenhouse gas emissions. However, if
greenhouse gas emissions were the primary policy focus, biomass could
be used as a substitute for coal-fired electricity generation to
provide larger reductions in energy-related carbon dioxide emissions
per unit of biomass energy used. While biomass from agriculture and
other sources has an important role to play in either case, the way in
which biomass is deployed will depend on how the objectives of energy
security and emissions reduction are prioritized.
This concludes my statement, Mr. Chairman, and I will be happy to
answer any questions you and the other Members may have.

The Chairman. Well, thank you very much. I appreciate that,
and now we will go to questions.
I would like to remind the Members that they will be
recognized for questions in order of seniority, for Members who
were here at the start of the hearing, and after that, Members
will be recognized in order of arrival. And I appreciate the
understanding.
We will start off with, I just wonder if all of you would
make some comment. The past couple of years, pork and beef
producers in our state and across the country have borrowed
against their equity, equity in land, to continue to operate.
And, about the high cost inputs, and what has happened to the
commodity price; I am wondering just how deep that can go.
Where do you think we might be, and where that might be taking
us, what the effects might be if that is so?
I'll start off with you, Dr. Glauber, whatever you might
want to say, and the rest of you, please jump in.
Dr. Glauber. Well, there is no question that debt has been
rising, and one measure, again, if you look at all of the
aggregate measures for financial stability, that is, the debt
relative to assets, as I mentioned, that at least in the
aggregate, those remain pretty good.
However, there are other measures you can look at it. And
you could look at debt relative to net income, and those
certainly have been rising, and that is, of course, would be of
some concern if your debt servicing, the amount you have to
pay, is large relative to the amount of income that you have
coming in, in a given year.
But that said, I think that generally, again with the
availability of credit, and again, the relatively strong
financial position, that people are coming into with this
downturn, that is one thing that sets agriculture apart from
other sectors of the economy.
The Chairman. Thank you. Anybody else? Dr. Henderson?
Dr. Henderson. Yes. We have spent some time talking with
the agricultural bankers over the last couple of years, and the
mantra that they have been saying in these good times is
remember the 1980s, and encouraging the farmers not to load up
their farm operations with debt. And, I think I am going to
agree with Dr. Glauber's comments if that the farm sector is
able to maintain debt levels at relatively historically low
rates, and that is going to be supportive of the farm sector
going forward.
The Chairman. Okay, thank you. Dr. Gruenspecht. Well, I
will recognize my Ranking Member for any questions he might
have, and move us along.
Mr. Moran. Mr. Chairman, thank you. Dr. Glauber, welcome to
the Committee. You will be very important to us as we make
policy decisions over a long period of time, and I appreciate
your demonstrated expertise.
One of the conversations I had with your predecessor on
numerous occasions, Dr. Collins, was about the definition of a
farm. And I would again encourage the Department of Agriculture
to change its definition for its economic analysis, because I
think it so poorly reflects the reality. Statistics that you
and the Department of Agriculture place to the public, and to
us as policymakers, do not accurately or appropriately reflect
the reality of agriculture, when you define a farmer in ways
that, just a small amount of farm income causes somebody to be
labeled as a farmer.
I would be happy to have your response. I have not been
successful yet in getting USDA to change their position, but I
do think it is important, as we try to analyze what is the
right answer to many questions we face, plus I think it
misleads the public in ways that are detrimental to producers.
Dr. Glauber. Well, thanks very much.
The concern, of course, is the fact that the definition of
a farm is anyone that has grown $1,000 worth of farm produce,
or could have grown $1,000 worth of produce. If you look at the
increase in farms the Chairman alluded to in the Census, almost
all of that increase is in that category of farms who grew
$1,000 or less in the 2007 Census.
It remains the fact that the bulk of production is produced
by those who are at the other end of that sales category. I
mean, you understand the issues on number of farms, and there
are a lot of funding things, of course, that we do in the
appropriations that are determined by the number of farms, so I
am at least a little aware of the politics of how that is
defined. But it is true that the bulk of the farms are in this
category of very small.
For farms reporting sales less than $250,000 class, that is
where you see the majority of farms and their production, of
course, they are important contributors to the total aggregate
production, and they are also, hold a lot of lands, so they are
important from a conservation point of view, as well.
Mr. Moran. Let me--I may come back to you, but you are no
more forthcoming than Dr. Collins, so that--I take that--I mean
that as a compliment.
Dr. Henderson, I am very impressed with the Kansas City
Federal Reserve Board. I appreciate the activities that you all
are engaged in, in regard to rural America. One of the
conversations that I have had, with previous opportunities in
visiting the Federal Reserve is that I think that the Fed--and
again, I know that you are not the person, but you are my
opportunity to speak about this--is that while the Fed has
lowered interest rates, with the desired outcome of increasing
economic activity, increasing borrowing, at the same time, the
regulators have significantly reduced the willingness or
ability of bankers across our, across your region, to be able
to loan money.
To some degree, I think it is in agriculture. I have
community and farm bankers tell me that the regulators will not
allow them to make more farm loans, because they are too
concentrated. But, it is also much more true in our more urban
areas, where a real estate developer is not eligible, or the
bank is incapable of making a loan to a real estate developer,
because there are too many loans in real estate development.
And there is just this constant fear that what a regulator
told a community banker, a small town banker, the last
examination, is going to be something totally different than
what that examiner is going to say during this examination. So,
there is this great retrenchment in loaning money, and so,
while we are making policy decisions designed to encourage the
borrowing of money at low interest rates, the regulators are
making decisions through examinations that are restricting the
ability of banks to loan money to farmers and others across the
country.
And I welcome your reaction or response to that.
Dr. Henderson. Thank you, and you are correct, in terms, I
am outside the regulatory function at the Federal Reserve Bank
of Kansas City.
We do, however, talk with each other, talk about the
situations, and I have spent much time talking with regulators
inside of our bank, but also throughout the country, talking
about this issue. In general, the comments that I am hearing
from them is, that they are asking the agricultural banks to
think about their risk management profile, and how to manage
the agricultural risk that is emerging in terms of your bank's
portfolio, especially high loan concentrations. How do you
manage that risk, and do you have a plan, systematic plan put
in place to manage the volatile markets that are emerging in
agriculture today?
Mr. Moran. My time has expired. My final question, although
I had one from, for our third panelist as well, but when will
interest rates begin to rise?
Dr. Henderson. I assume that question is directed to me.
Mr. Moran. It is. This is similar to the question that I
refuse to answer, from my own constituents, is whether I should
sell my wheat.
Dr. Henderson. This is one of those questions that are
probably best answered by someone else in a different position
than myself.
Mr. Moran. You must have learned from Dr. Collins as well.
Thank you, Mr. Chairman.
The Chairman. It is almost like a virus. Well, I would like
to recognize the gentleman from Georgia, Mr. Marshall, for 5
minutes.
Mr. Marshall. Thank you, Mr. Chairman, and gentlemen, I
apologize. I had to step out, had a meeting on missile defense.
We are busy doing lots of different things up here, and many of
us can't claim a great deal of expertise, certainly with regard
to the issues that you all deal with daily.
I am regularly asked by folks in the poultry business,
livestock business, and others, whether the production of
biofuels is causing price increases in the inputs in those
industries. And there are those who contend that it is, and it
is a serious problem, and then, they will argue that in the
long run, it poses a real threat globally. Projections are, at
least, that arable land is going to decline, population will
continue to increase. Consequently, yields must increase if we
are to feed the globe, and that it doesn't do us much good
globally to devote large swaths of our arable land to the
production of energy, as opposed to production of food.
And so, you have Lester Brown and others out there who,
even if we didn't add in the production of energy, say we are
headed toward disaster. Then, you add the production of energy
in, you have folks that I have known for a long time saying
that this is causing them problems in their business. And I
would ask our two non-financial experts, the ag experts, to
comment on that.
Dr. Glauber. Well, no question that ethanol has caused, or
the increase in ethanol production over the last few years has
caused impacts on, particularly, corn and soybean markets, and
those have radiated throughout the rest of the sector. One
thing that I would point out is that under the Renewable Fuel
Standard, because of the growth in that over the last few
years, we saw sharp increases in ethanol production, certainly,
particularly from 2006.
As we are looking out, however, that growth, the annual
growth, begins to decline a bit. This year, for example, we are
looking at about 3.7 billion bushels of corn being used for
ethanol. And next year, we are projecting that to be closer to
4.1, and the following year, about 4.2, 4.3. So, you see those
increases are smaller, and that will mean that the actual price
effects should be less.
There is no question, though, with the rapid runup
increasing corn grind by about a billion bushels.
Mr. Marshall. You are limiting your reference to corn,
soybeans and other----
Dr. Glauber. Well, soybeans--no, soybeans. It certainly has
an effect as well, because if, indeed, more corn is being grown
for ethanol purposes, that means less area is going to
soybeans, so that means price impact on soybeans, but also
biodiesel, that has an important role, as well.
All I would say is that as we will begin to approach the 15
billion gallon cap, these increases are less sharp than they
were, and over time, with moderation, or excuse me, with
technological developments, we should see yields catch up with
that, as it were. When we look out 10 years, we see the ending
stocks, which is one measure of how tight those markets are,
those begin to build again. As that increase in ethanol
production slows, and the yield increases, which are modest,
one percent per year, catch up.
Mr. Marshall. Sort of bottom line, once we get past the
initial startup phase, you don't think that the devotion of a
fair amount of our acreage toward the production of ethanol is
going to cause problems for other producers?
Dr. Glauber. What I am saying is with average yields. Now,
the problem, of course, is any given year, if you have a
shortfall, then that comes in too, and that is one concern we
would have, even now, with relatively tight supplies. I mean,
we have more carryout than we thought we were going to have,
say, in June of last year, but still, supplies are relatively
tight, and if you were to have a big drought or a big
production shortfall----
Mr. Marshall. Let me move, in the limited amount of time I
have left----
Dr. Glauber. Sure.
Mr. Marshall.--to Dr. Gruenspecht, and just a little
editorial comment before I begin. We ought to, in my opinion,
add nuclear energy to the renewable fuels portfolio, so that
certain parts of the country, the Southeast in particular, can
meet the standards that people want to impose. But having said
that, what is your comment about this competition, energy
versus food for the use of land?
Dr. Gruenspecht. Clearly, any extra demand for renewable
fuels inputs, that are based on land, is going to have some
impact on the rest of the markets, but I would associate myself
with Dr. Glauber's remarks. How that works through is going to
depend on, ultimately, where the demand is going. It is going
to depend on the yield improvements, and really all the factors
that he identified. I think you would have to say it has some
impact. How much and how important in the long term--I would
defer to the ag experts on that.
Mr. Marshall. Thank you, Mr. Chairman.
The Chairman. You are welcome. I would just make this
comment, and maybe our second panel will discuss it somewhat,
but what we have done in increased production, Jim, over the
last few years, is just remarkable. And I don't think we have
tapped what the American farmer can do in production, really,
as we continue to apply science to it. So, that is part of the
consideration as well.
At this time, I would like to recognize for 5 minutes the
gentleman from Missouri, Mr. Luetkemeyer.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
My first question will be to Dr. Henderson, just to like
follow up on Mr. Moran's comment about the examinations. I have
had a lot of discussion with a lot of folks in my district,
including the Fed examined banks, with regards to what seems to
be some overzealousness sometimes, with the examinations,
inconsistencies of how they are looking at loans, and in doing
that, discouraging credit.
Do you care to comment just for a quick second?
Dr. Henderson. Again, I just want to repeat that the
examination function is outside the scope of my
responsibilities. But in general, in terms of my conversations,
and working with the examiners, in our district. The primary
message that I have been hearing from them as they talk to
bankers in meetings, is put in place a risk management
strategy. Agricultural risks in this environment are higher
than what they have been the last couple years. Put your
strategy in place, and manage that risk, going forward.
Mr. Luetkemeyer. My only concern, and the message I would
hope that you take back to your counterpart within your agency,
is that there seems to be a disconnect between those people in
the field and the management here in D.C., who oversee these
things. Because I don't think that the message from what you
are saying and what your counterpart is saying, and I have met
with the FDIC folks as well, seems to be getting back to the
folks in the field, from the standpoint that there is this
disconnect and an inconsistency in how they are doing these
examinations, which they need to be very concerned, obviously.
I am not saying they shouldn't be, but I think that the level
of inconsistency is such that it certainly gives great pause to
those people who are making credit decisions, on what they
should and should not be doing.
As a follow-up to that, I would just like your input with
regards to what do you think of the FDIC proposal of 20 basis
points assessment to all of the banks, to be able to continue
the FDIC insurance fund? What kind of impact do you feel that
is going to have on the farm economy and rural communities as a
whole?
Dr. Henderson. In general, I do not have a personal opinion
on the FDIC's assessment. What we have been hearing from our
bankers, and what they have been telling us, is that the
concern they have is that the assessment is going to reduce the
amount of funds that they have for agricultural lending, rural
lending, and various other types of lending out there, in terms
of their community.
They are talking about it in terms of reducing their
profits. That is going to have a dramatic impact, and then,
that is going to reduce lending activity. So that is the
assessment and the impacts that we are hearing about from our
bankers, and the concerns that they are raising at this point
in time.
Mr. Luetkemeyer. Okay, when you say reduce, do you reduce
it one percent, ten percent, 50 percent? Do you have a figure
on it?
Dr. Henderson. No, we have not done any analysis or
economic impacts to understand what type of reduction it would
potentially have, or the types of impacts it would have on
lending activity.
Mr. Luetkemeyer. Okay. Thank you. Dr. Gruenspecht. I am
very curious, how do you feel about the cap-and-trade systems
being proposed, what kind of effect do you think that is going
to have on the agricultural economy, in particular, on their
input costs of fuel and fertilizer?
Dr. Gruenspecht. Well, I haven't read it yet. It just came
out yesterday, but, we at EIA have done analyses of past cap-
and-trade proposals and, generally, there is an impact on
delivered energy prices and that would potentially affect
things like fertilizer as well as energy commodities, but
certainly, fertilizer, that has a very high content of natural
gas.
Really, in terms of the economic impact on agriculture, I
mean, for all these policy calls, it is a cliche, but the devil
is really in the details. Agriculture, presumably, has some
opportunities to be involved in carbon sequestration and other
things, and a lot depends on exactly what the proposal is. It
is hard to talk about proposals in general, but one can say
that in most proposals I have seen there would be an impact on
energy prices, and that is certainly one part of the equation,
affecting agriculture and other sectors.
Mr. Luetkemeyer. Well, in all due respect, Dr. Gruenspecht,
I have seen you before this Committee before in my short time
here in Congress, and you already understand the realities of
this situation. Can you give me an indication, just from the
preliminary view of what is going on here, what kind of effect
you would think it will have?
Dr. Gruenspecht. We really have not looked at the package.
Frankly, in the package itself, from what I know about it, a
lot of the key things, like the allocation of allowances are
not even specified in the discussion draft. So, without even
that level of detail, it is just very hard to reach a
conclusion.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
The Chairman. Mr. Luetkemeyer, we will have the opportunity
to invite the gentleman when we have opportunity, because we
are going to all see lots more of that as we go down the trail.
Mr. Luetkemeyer. I appreciate that. Thank you.
The Chairman. I appreciate your questioning. I would like
to recognize for 5 minutes the gentleman from Indiana, Mr.
Ellsworth.
Mr. Ellsworth. Thank you, Mr. Chairman. Thank you gentlemen
for being here. I would like to concentrate my minutes on
ethanol production. I can drive about 10 minutes from my house
to a very beautiful ethanol plant that stopped mid-production,
mid-construction, I should say. Another, not too far away, that
stopped mid-production, we all had very high hopes, ribbon
cuttings, and announcing jobs in our area, which we were all
very proud of, only to see things shut down, with a lot of
stainless steel and a lot of piping.
So, I guess my question to you is, if you could explore for
me, and for the folks listening, just where your thoughts are
on the future of ethanol, what do we need to do here in
Washington? Is it going to be a big part of our energy future?
You know, we are hearing a lot of chatter about raising the
blend rate, how do you think that might affect ethanol. What
are the impediments? I think, Dr. Gruenspecht, you had
mentioned, in testimony, that you didn't think we were going to
meet the Renewable Fuel Standards, and just explore into that a
little bit. What we can go home and tell our folks about the
future of ethanol, what we might be doing in that area. And
maybe, Dr. Glauber, you may want to start, if that is----
Dr. Glauber. Well, let me just address the economics first.
There is no question that, if you were to go back 18 months
ago, these guys were getting great margins. And, the Chairman
or someone mentioned, or maybe it was Chairman Peterson
mentioned the fact that a lot of these plants were able to
almost pay for themselves within their first 12 months or so of
operation.
What has happened, of course, then, is that we have seen
first, an increase in feed costs, so feedstock, that is, corn
prices, rose to record levels, and in particular, if you were
an ethanol producer and hadn't hedged those costs, you were hit
very hard, and we know, certainly, of one company that ended up
going bankrupt because of that.
Since that time, margins have been close to zero, and when
I say margins, I am just talking about returns relative to
variable costs. So, we are not talking about repaying capital
and financing costs, which of course, over the long run, you
will have to do that as well. However, they have improved a bit
over the last few months. Certainly, most anticipate, as energy
prices start to increase again, that you will see some
profitability return to that industry.
We also know, however, that since about 2006, the price of
corn has tracked fairly closely to the price of oil, so there,
too, I don't think that anyone is expecting the sort of
heydays, that you might have seen 18 months ago, return. I
think there will be returns in there for the industry. The fact
is the Renewable Fuel Standard creates demand for ethanol, and
if you are a blender, you will need to buy ethanol, which means
you will bid up the price sufficiently, so that someone makes a
profit selling it.
But certainly, in the near term, particularly since we have
a lot of credits from ethanol production that was previous to
this, it wasn't, that was in excess of the Renewable Fuel
Standard, the so-called RINs, they are being enabled to offset
that, so we have excess capacity for the moment. But I expect,
over the longer run, that we should be operating at close to
capacity, as we move towards the 15 billion gallons towards the
Renewable Fuel Standard.
Mr. Ellsworth. Thank you. Dr. Gruenspecht, do you have any
comments?
Dr. Gruenspecht. You know, as Dr. Glauber said, oil prices
matter and corn prices matter. There are really three segments
of the market for fuel ethanol that Dr. Glauber was describing.
It was really a must-have ingredient to make reformulated
gasoline with the phase-out of MTBE, so that really propelled
prices--people would pay whatever, it didn't really matter what
you paid. And there was tight supply.
Then, there is the market segment we are in now, which it
is sort of the volume extender. Sometimes, in internal
discussions, we call it the Hamburger Helper type of thing,
because it increases the volume. That is going to compete with
gasoline on a volume basis, taking account of the tax credit
difference. Right now, there is excess supply, so in fact the
spot price of ethanol doesn't exceed the spot price of gasoline
by the full extent of the tax credit, and that is an indicator
that there is excess production capacity.
The final segment is the one where it competes on its fuel
value basis. That is going to have to happen at some point if
we are going to have a lot more ethanol. In the small volume
blends, I don't think people notice the difference in energy
content, but if you were buying a large volume blend of
ethanol, you would definitely notice that a gallon doesn't get
you as far as a gallon of competing fuels.
So, in the long run, that is a tough segment. The Renewable
Fuel Standard program, obviously, what happens there matters a
lot. You mentioned my testimony. Where we think things will
fall short is on the cellulosic side. Actually, in the
provisions that were enacted, there is a provision that calls
for modification of amounts. The whole 36 billion gallons is
sort of a series of nested sub-targets, almost like a set of
Russian dolls, and each of them has to be met, and if they are
not met, if there is a 20 percent or larger shortfall in any
one of the targets, there is a required rulemaking to modify
the amounts. We actually think the cellulosic ethanol is not
coming along as fast as the targets in that bill had
anticipated.
The other issue that has to be dealt with, I think you
mentioned, is what you might call the blend wall issue. I think
I am past my time, so I should probably stop, but there is a
lot going on in this market.
Mr. Ellsworth. Thank you. We will revisit it.
Dr. Gruenspecht. Thank you. I appreciate it.
The Chairman. You are welcome. The chair recognizes, for 5
minutes, Mr. Schrader from Oregon. Mr. Schrader.
Mr. Schrader. Thank you, Mr. Chairman.
We have had pretty good testimony on the state of American
agriculture. I am curious how the rest of the world is doing in
this global economy and meltdown. And I noticed from the one of
the charts from one of you that there, our imports are still
up, even though our exports are down, and wonder if you could
comment, any of you gentlemen, on that.
Dr. Glauber. Yes, you're right. Imports are up, and they
have been pretty steady, I would say, over the last 10 or 15
years, in terms of the growth in imports. You asked about
conditions worldwide. Certainly, there are serious credit
problems that many countries are experiencing. The former
Soviet Union countries, Russia in particular, there are
indications that there are credit problems there for financing
production. There have been press reports of problems in
Brazil. The question is whether those get sorted out by the
time people are making planting decisions. We aren't foreseeing
great drops in productions, all that said, but certainly, there
are countries that are experiencing difficulties. There are
still countries that are experiencing very high food prices.
Some of that is due to the fact that they can't get exports
into those countries.
There is financing problems with credit. I think the World
Bank just made an announcement that they are going to try to
address that issue by making some funds available for credit
for the purpose of sales, but the financial situation is quite
difficult for a number of countries worldwide.
Mr. Schrader. Just as a follow-up. Are there things that we
should be doing to assist American farmers to be in the best
position as this economy turns around, to compete and improve
our exports?
Dr. Glauber. Well, a couple of things: We are looking at
lower exports this year, but there are some bright spots. I
mean, China continues to import soybeans at very high levels,
and of course, we are very interested in looking at what
happens to China, in terms of their economy. Because hopefully,
that will continue, that they will continue to eat meat. They
will continue to import protein meal and other grains.
The other issue is, just in general, of course, the
currency values. Over the last couple of years, the dollar was
relatively weak, and so, it was not only cheap to import U.S.
goods, we did well vis a vis some of our competitors. The
dollar, of course, has appreciated over the last few months,
and so, that has had some effect on our exports as well.
Mr. Schrader. Dr. Gruenspecht, in my neck of the woods, we
are very interested in biomass and the cellulosic
opportunities. You indicated that we are not meeting targets,
and there are some problems. Could you elaborate a little bit
on that, and also, in your testimony, you talked about the
complex relationship with our energy policy, possibly. Could
you elaborate?
Dr. Gruenspecht. Sure. The Energy Independence and Security
Act of 2007 sets up this 36 billion gallon target, and it is
divided into different categories, and one of the categories is
cellulosic ethanol. We follow pretty closely what is going on
in the industry and when plants might actually be constructed
at various scales, and there is some talk about constructing
some plants at a 20 million gallon a year type scale, which is
a pretty significant scale, but small relative to a full-scale
corn ethanol plant--but definitely more than a demonstration.
The expectation is, the first of those simply aren't going
to be coming online until 2011, 2012 timeframe, and then, I
don't have the number in my head, but for 2016, the target is
4.3 billion gallons of cellulosic ethanol for many of the
issues we have a good vision of there, and we know where here
is, and the question is can you get from here to there, and it
just doesn't seem likely. I think a lot of people will be
looking at these first plants that get built and they won't
quite be ready to go into mass production, in terms of building
large numbers of those plants. I think the thought is they will
learn things from the initial plants, and it will take some
time for the standard type of plant to be developed, and, then,
it will take time for that plant to be built. It is more
complex than a corn ethanol plant.
So, all those things lead us to believe, and the first
Administrator of EIA said there are no facts about the future,
and that is true. It is the future. We don't know, but it seems
unlikely to us that you would get to those type of levels by
2015, 2016. In terms of the interaction with other areas,
biomass can, and already is used significantly to generate
electricity. It is used to generate electricity and provide
energy in the pulp and paper industry, among others. Also, it
is used outside the paper and pulp industry, in some particular
areas--in the South, in Maine, for instance. The Southeast is
very rich in biomass, and there is potential to use the biomass
either for electricity generation, or as a feedstock for liquid
biofuels.
Liquid biofuels could be something other than ethanol. In
fact, in our projections, we tend to think that there will be
compelling reasons to make something we call BTL, biomass-to-
liquids. There already is technology, the Fischer-Tropsch
technology, to make coal into liquids, or gas into liquids, and
the liquids you get out of that are diesel, and diesel has a
lot of advantages, potentially, relative to ethanol, in terms
of its market value, and in terms of its ability to go directly
into the stream of commerce.
So, again, we think there will be some of that, but there
is also an opportunity to make electricity, depending, in part,
on what Congress does. The energy and climate change bill that
was floated yesterday has what is called a Renewable
Electricity Standard. Certainly, one way to go toward meeting
that standard would be to use biomass to generate electricity.
As I said in my testimony, a lot of it comes down to policy
calls, which my organization certainly doesn't make, on how you
prioritize what I would call the two major energy-related
concerns, which are energy security and greenhouse gas emission
reduction.
So, hopefully, that is an answer to your question.
Mr. Ellsworth. Thank you very much. I yield my time, sir.
The Chairman. Thank you. The chair recognizes the lady from
South Dakota, Ms. Herseth Sandlin.
Ms. Herseth Sandlin. Thank you very much, Mr. Chairman, and
thank you for having this hearing. My questions will follow up
on Mr. Ellsworth and Mr. Schrader's questions about the ethanol
industry, as well as a question for Mr. Henderson on the credit
issues facing young and beginning farmers.
But let me first make a few comments for the record with
regard to my colleague, my friend from Georgia, Mr. Marshall,
with regard to this fuel versus feed issue. Certainly, we heard
from our witnesses and from the Chairman the extraordinary
advances that we are seeing in feed technology, that have
vastly improved the yields over the years of corn and other
commodities, but we know that there is more to come in that
area, to be able to meet the needs for fuel, feed, and food.
But I would contend that the overall health of the farm
economy has benefited in years past, and will continue to
benefit in years ahead, when you have competition for
commodities. And unfortunately for some in the poultry
industry, and some in livestock quarters of the industry, that
have been vastly vertically integrated, they benefited for
years, before the ethanol industry developed, from cheap corn,
i.e., taxpayer-subsidized corn, that was sold on the market for
less than the cost of production. And now, they are feeling the
effects of the fact that corn farmers are getting a fair price
for their commodity. And so, yes, they are being squeezed, but
at the same time, with the feed technology advancements, with
the dry distillers' grain, and other research going on in that
area, we would hope that we could find the partnership
necessary, rather than what we saw. Some, regrettably, joined
forces with the Grocery Manufacturers Association, in their
public misinformation campaign at the beginning of last year.
We hope they understand the partnership that is going to be
necessary between livestock producers and grain producers,
going ahead to ensure competition for all of their commodities.
Dr. Gruenspecht, the blend wall issue, you were going to,
if you had had time get to that, in Mr. Ellsworth's question.
Has EIA studied the economic effect for the ethanol
industry of allowing an E15 blend, or even the interim step of
an E12 or E13 blend?
Dr. Gruenspecht. We have not looked at that. As I am sure
you are aware, this is an issue that is the subject of a
petition that has been filed with EPA. There are a lot of
statutory issues. Other parts of the Department of Energy, I
know, are involved in testing of the compatibility of existing
infrastructure and vehicles, and various other types of
engines, with different blends. But EIA itself has not looked
at it. From our perspective, to evaluate it would be a pretty
mechanical thing. We know how much gasoline is projected to be
used. You can figure out what a ten percent blend of ethanol
means and, obviously, a higher percentage mixture of ethanol
would accommodate more ethanol.
There really are four ways of dealing with a blend wall.
There are three ways over it, and one is E85 and flexible fuel
vehicles. One is other biofuels, and the other one is sort of
mid-level blends, which is what you are raising. And the way
around it is to use the waiver authority. So, it has good
policy options.
Ms. Herseth Sandlin. Okay. Well, I am running out of time.
Dr. Gruenspecht. I am sorry.
Ms. Herseth Sandlin. Let me also--given Dr. Glauber's
testimony about how, currently, there is excess capacity. That
is why many of us are looking at this blend wall issue as the
way to maintain an industry that is necessary to get to
cellulosic biofuels, sort of as the bridge to get there to meet
these requirements set forth in the Renewable Fuel Standard.
So, do you agree that there is a nexus, with the credit
crunch that the ethanol plants have been facing, the issue of
gaining better, greater percentage of the market, as it relates
to the blend wall issue, and being able to then meet the out-
year targets in the Renewable Fuel Standard for cellulosic
ethanol?
Dr. Gruenspecht. I am not sure I fully understand the
question. I think the immediate thing that we see with the
cellulosic ethanol is that it is just not, in our view, and
this is the future so we don't know for a fact, but it is not
likely that we will have the levels for 2015 and 2016 and 2017
that are there in the standard. I don't know that that is tied
specifically to the situation now with corn ethanol.
It may be tied somewhat to the situation with the overall
economy and the availability of credit.
Ms. Herseth Sandlin. With the Chairman's indulgence, if I
could rephrase it another way. If we are currently faced with
excess capacity in the corn ethanol, then where will the market
be for cellulosic ethanol? And that is the issue that I think
some out in financing are asking. And so I do think, in my
opinion, there is a nexus between the tools available to us as
policymakers and, hopefully, the approval of the waiver
application at the EPA for a higher blend, as well as getting
over the barriers on infrastructure for E85 and flex fuel
vehicles. We can't move the research and development and the
deployment to get to commercial production of cellulosic
biofuels if we are facing these current issues of excess
capacity and the market available for corn ethanol. The
incentives won't be there. So, I guess I maybe didn't phrase it
as artfully the first time, but I will submit for the record my
question for Dr. Henderson, as it relates to the particular
impact of the current credit crunch on young and beginning
farmers, and how some of the provisions, the loan guarantees
and other programs that we authorize in the farm bill are
affecting----
The Chairman. This is very important, and maybe you would
like to, you want to try and answer her question?
Ms. Herseth Sandlin. Well, if--I know we have other Members
here who have been waiting, but it is just--in terms of
overseeing the implementation of the new farm bill, have some
of those new programs been specifically included for young and
beginning farmers? Are they being utilized, or are they being
helpful in addressing what is happening to some of the smaller
farming operations that tend to be young and beginning farmers?
Dr. Henderson. In general, my colleagues at the Kansas City
Fed, in conjunction with the USDA economists, have done some
recent research, and it has recently been published, upon
denials of credit. What they have been finding is that smaller
farm operations, and those operations owned by younger farmers
with less experience, are more likely to be denied credit.
So now, going forward, I think the implications become,
what are the roles of these programs, are they utilizing these
programs? Are these programs being utilized at the Federal
level? Various different states have their own small and
beginning farmer programs. We have not really conducted any
thorough analysis on that at this point in time, but it is
something that we will be looking at, going forward.
Ms. Herseth Sandlin. Thank you. Thank you very much.
The Chairman. Thank you. The chair at this time would like
to recognize Ms. Markey from Colorado, 5 minutes, please.
Ms. Markey. Yes, thank you, Mr. Chairman, for holding this
hearing, and thank you, panel members.
I want to switch gears just a little bit, and talk about
natural gas, which is important to my district in eastern
Colorado. Mr. Gruenspecht, you mentioned that natural gas
production is likely to fall in 2010. Can you give me, and give
us an estimate, of what percent of this country's natural gas
production is for agricultural purposes, as opposed to, let us
say, electricity generation for residential use? And then,
second, are trends showing more, less, or stable competition
against agriculture for each cubic foot of natural gas?
Dr. Gruenspecht. I probably don't have the numbers for your
first question right at hand. I think that the industrial
sector, as a whole, is a very big user of natural gas. I think
agriculture is a relatively small piece of that. There is
electricity generation, and, then, there is heating in
residential and commercial buildings. But I will get you the
exact numbers you want for the record.
I am sorry, I have forgotten a little bit about the rest of
the question.
Ms. Markey. And, as natural gas production decreases, how
do you think agriculture fares against residential use? Do you
think that the percentage----
Dr. Gruenspecht. Well, natural gas prices this year or next
year we expect to be a lot lower than they were in 2008.
Natural gas prices have come down a lot, in part because non-
agricultural industrial demand has been significantly affected
by the economic conditions, and, in fact, natural gas
production domestically has been a great success story, really
increasing dramatically from unconventional sources of gas, in
gas shales and in tar sands. Some of your neighboring states,
have a lot of tar sands gas production. Colorado has pretty
significant natural gas production as well, and it has been a
strong market and reserves are increasing.
But the issue now is that prices have fallen with, really,
the decline in industrial demand, which has been affected by
the economy, and that, in turn, has led to a reduction in the
number of drilling rigs in use, as the industry looks at what
the near term opportunities are to sell gas. Some of the gas
projects can generate production in a relatively short period
of time. It is not like the offshore oil projects, where the
investments you make today don't begin to pay off for 6 or 8
years.
So, producers looking at the economy and the demand for
natural gas, and the current prices, which have fallen a lot,
have responded by backing off a little bit on their production.
So, it is really a situation of lower demand that has driven
the decline in production and presumably, if the economy would
recover, demand would increase, and one might expect to see
more natural gas production.
But, generally, I would think that this year, 2009, because
of those conditions, is really sort of a buyer's market for
natural gas. So, to the extent that agriculture is one of the
buying sectors, they are going to be seeing pretty attractive
prices.
Ms. Markey. All right. Well, thank you. I would appreciate
that information. Thank you, Mr. Chairman. I yield back.
The Chairman. Well, thank you. The chair at this time would
like to welcome back Mr. Pomeroy from flooded North Dakota. We
feel a lot of concern about what is going on with our good
friends up there. And welcome back. I am sure you have some
things to share with us, but I would like to recognize you to
question the panel for 5 minutes.
Mr. Pomeroy. Thank you very much, Mr. Chairman. Thank you
for your concern, and the concern other Members have expressed.
I am happy to report the water in the Red River continues to go
down, and it looks like this heroic community-wide effort put
forward by Fargo, in putting 43 miles of temporary dike in
place, will have largely saved the city. There will be some
number of residences lost outside city limits, but just an
extraordinary achievement. It was thrilling to be out there and
to be a part of it. Although we have to make sure we get some
permanent flood protection in place, so we don't live with this
Sword of Damocles hanging over our head.
A couple quick questions about CRP. CRP leases expiring in
upcoming years, literally millions of acres enrolled that will
be expiring. What do you anticipate happening? Just run across
the panel on that.
Dr. Glauber. Well, you are right. You know, the farm bill,
of course, limits enrollment to 32 million acres by the end of
this year, starting October 1, 2009. There is currently 33.7
million acres enrolled. I believe at the end of this year, we
have some 3.9 million acres that are on contracts that are set
to expire, and I think if you, when you run through the
eligible acres, that is essentially 1.4 million acres. Most of
that land is located in the plains, in essentially land that is
susceptible to wind erosion. There are some wildlife benefits,
as well, in those lands, but we are talking land, essentially,
that would potentially go into wheat, as opposed to, say, land
further east, where you might see more into soybeans or corn.
Mr. Pomeroy. So, you see a fairly seamless way the acreage
coming out hits our farm bill target?
Dr. Glauber. Yes, the, I mean, there is a slug of land that
is coming out this year, and that is the critical thing. And
when you were debating the farm bill, and looking at getting to
32 million acres, that was taken into account, knowing that it
would be able to reach that.
Mr. Pomeroy. Do you believe we will hold in at about 32
million acres, or do you think----
Dr. Glauber. Well, again, a lot depends on what happens
with this 1.4 million acres.
Mr. Pomeroy. In the years ahead, do you see the----
Dr. Glauber. What--yes----
Mr. Pomeroy.--that land coming back into production, and
going well below 32 million acres?
Dr. Glauber. Well, I think a lot depends on prices. There
is some land that would remain long-term in enrollment, and
some land that, in particular, where the environmental benefits
are so high that a lot of people are going to want to keep that
land in reserve status.
The issue is, well, is there a class of land that is fairly
productive, that the environmental benefits are less than these
more environmentally sensitive lands, whether that will come
in. And I think a lot will depend on prices.
By and large, though, if we were looking at our baseline,
we are looking at CRP levels close to the 32 million acres.
Mr. Pomeroy. I would ask that one across the panel, but in
light of rapidly diminishing time, let me move to my second
one, and it concerns the cost of fertilizer. What will happen
now that energy prices have come down? Are we going to see
substantially better buys on fertilizer, and how does that
relate to the net income position for the farmers?
Dr. Glauber. Yes, if you look at the wholesale prices, they
dropped fairly quickly in the fall, and plummeted. At the
retail level, as you are well aware, a lot of these prices held
strong. In fact, as we were looking at, when we were doing our
outlook projections, for the outlook conference, and that is
one reason why you saw estimates for corn acreage all over the
map prior to those prospective plantings coming out.
Just, for example, at the end of November, anhydrous was
selling, and this is data from the AMS reports out of Illinois,
for which there is variation in pricing, region to region, town
to town, has varied a lot. But just to show you, the anhydrous
prices are down probably 35 percent from where they had been at
the end of November. Same with urea, down about 40 percent. DAP
prices have been down 50 percent. So, they have come down, but
they only have really come down over the last month or so, 6
weeks, and so, as you are trying to figure out what farmers are
going to do, in terms of making their planting decisions, more
importantly, what, as they try to figure out what to do, a lot
depends on what the--a lot of the pricing decisions on inputs
was put off later this year, than it had been in previous
years.
Mr. Pomeroy. You are seeing localized variations at the
retail level. The wholesale prices come down, but basically,
farmers might well be advised, then, to shop closely on this
one. They might be able to find better----
Dr. Glauber. I think that is true. You know, a lot of
things have, with the late harvest, there wasn't a lot of field
work. So, I think that, in some areas--there were delays
anyway--but with the pricing, with the input prices so high, if
you priced your, if you bought those inputs last fall, you are
looking at pretty tough margins. If you were able to take
advantage of the price drops over the last 2 months, you are in
a little better position.
Mr. Pomeroy. Thank you, Mr. Chairman.
The Chairman. Thank you. We are going to dismiss the panel,
but just before we do, I want to thank you very much for your
time. We are going having to call again, I am sure, from time
to time, so you will be hearing from us.
Just kind of a parting shot, though, to Mr. Gruenspecht.
Ms. Herseth Sandlin kind of triggered my thoughts on that, I
realize that the oil industry has got a big investment and so
on, but it just seems to me like we ought to be able to figure
out some way to get some of this alternative product to the
places that can use it. And I won't ask you to speak to it now,
because of the time, but I would like to engage in
conversation. Ms. Taylor will beat you wherever you go, and
maybe we can sit down and visit sometime.
So, thank you very much. We are going to excuse the panel.
We appreciate it, and ask the second panel to come to the
table. Thank you.
Well, I thank the new panel, too, for your patience in
waiting, and we will try to move along. I am going to ask my
colleagues to help me on some of the introductions here, but we
will start off with recognizing Dr. Harl, I have known for a
long, long time. I don't know if we want to reveal that or not,
just as an interest, when he went off to the college and
university, I went off to the Army, and we met again in the
farm crisis, when I came back and took up agriculture. I
attended a lot of your meetings, and got to respect and admire
Dr. Harl very much for his expertise, and drove a lot of miles
at different times to hear what you had to say, and try to put
it into practice. And I appreciate what you have done, and your
accomplishment as the Charles Curtiss Distinguished Professor
in Agriculture and your emeritus position as Professor of
Economics. And you have a law degree, and many other
accomplishments. So, the list is long, and we welcome you to
the panel.
And I would like to, at this time, recognize Mr. Moran to
make the next introduction.
Mr. Moran. Mr. Chairman, thank you. I, too, welcome Dr.
Harl back to our Committee, to our Subcommittee.
Next to him is Mr. Dumler, who is with the Kansas State
University Extension Service. He is an extension economist, and
we are delighted to have him back. Mr. Dumler has testified
here before, and I am very pleased that he has joined us. He
comes from Garden City, Kansas, where we had 16 to 20 inches of
snow over the weekend, and----
The Chairman. Doesn't sound like a garden to me.
Mr. Moran. He is--well, it is very much a garden, assuming
that it stayed on the fields and didn't blow away. It was very
important and necessary. Mr. Dumler is very thoughtful, and I
appreciate his testimony. He is perhaps less flamboyant than
who is usually seated next to Dr. Harl, Dr. Flinchbaugh, and
while today we may miss out on the antics of the two
professors, we are delighted to have Mr. Dumler here instead
of, well, I shouldn't say it quite that way, we are delighted
to have Mr. Dumler, thank you very much.
The Chairman. I would like to recognize Mr. Marshall for an
introduction.
Mr. Marshall. Thank you, Mr. Chairman. Scott Angle is Dean
and Director of the College of Agricultural and Environmental
Sciences at the University of Georgia, and we are just
delighted to have him as our Dean. He is very well known in
farming circles throughout Georgia. He is very good about
outreach, and getting around the state, and meeting with folks,
and runs a very, very important program to all farmers in the
Georgia area. He has access to staff and faculty that have true
expertise with regard to economic conditions throughout the
Southeast, where farming is concerned.
Scott is very, very extensively published, and has had a
distinguished career as an academician in farming, but he also
happens to be a farmer, and he might have the longest commute
in the country. His farm is in Maryland, and he serves in
Athens, Georgia. So, we are very pleased to have you with us,
sir.
The Chairman. Well, thank you, and Mr. Costa got called
away, so we will have to stand in for him to introduce Dr.
Mickey Paggi. He is Director of the Center for Agricultural
Business and Adjunct Professor, Department of Agricultural
Economics, California State University at Fresno.
We welcome all of you to the panel, and at this time, we
would like to recognize Dr. Harl for this remarks.

STATEMENT OF NEIL E. HARL, Ph.D., CHARLES F. CURTISS
DISTINGUISHED PROFESSOR IN AGRICULTURE AND
EMERITUS PROFESSOR OF ECONOMICS, IOWA STATE
UNIVERSITY, AMES, IA

Dr. Harl. Thank you very much, Mr. Chairman, and Members of
the Committee. It is a pleasure to be testifying before the
Subcommittee. I am pleased to be back in room 1300. I might
add, parenthetically, the first time I have had an opportunity
to thank Congressman Moran for his kindness the last time I was
here and apologize for leaving in the middle of my testimony,
but I had to catch a plane. You may recall that, July 30, 1998.
So, I apologize for that, Congressman Moran.
Let me say that I want to try to avoid duplication of
comments from the earlier panel. We are all trying to cover
some of the same material, so I will hit the high points, and
leave it to the questioning to draw out any additional details
which you might be interested in.
This is a very grim time for the country. My first
recollection of life is of a hot July afternoon in 1936. I was
not quite 3, looking out the window of my dad's rental home,
rented farm home, which was in foreclosure, I found out later.
And out in front, a strange sight, about 20 men in, with round
point shovels widening the road. My mother later told me that I
asked who those guys were, and she said well, it is a new
Federal program. It is, she said WPA, I might have that wrong,
but she said that, it is close at least. We are quite a way
from that. I can recall from that time forward living on a
farm, and how we coped with the Great Depression. And this
downturn has been compared, excuse me, to the greatest downturn
since the Great Depression.
And I want to stress this morning that the agriculture
sector is not an economic island. The global financial
difficulties that have caused a lot of heartburn for financial
firms and most of the global economy have so far largely
bypassed the agricultural sector. Now, I do see some warning
signs, some danger signals, and I want to identify those in
just a couple of moments. It is clear, though, to me, that if
the meltdown persists, and the longer it persists, the more
serious and far-reaching the effects are likely to be on
farming, on rural areas, and on ranching.
If investor confidence is not soon restored, credit
availability could eventually pose a significant problem. The
worldwide demand for agricultural products would likely
decline, and we know, of course, already, rural areas have
suffered layoffs, with rising unemployment, stock market
losses, they have lost their 401(k)s as well as other areas.
So, we need to separate rural areas, to a degree, from farming,
because farming has done relatively better, because primarily
of better commodity prices, and also, reduced discretionary
spending in rural areas.
Budgetary problems at the state level and at the county
level are serious in much of rural America in the current year.
These effects seem likely to continue for the next several
quarters, and in some instances, beyond. Crop farming has fared
better than livestock farming in recent months, but there are
storm signals that are flying.
Now, in my view, the major unknown is how long this
downturn is likely to continue. And let me offer just a couple
of thoughts on that point, because I have been working on this
off and on for a little over a year. My biggest concern since
last summer has been that the global meltdown that we are
experiencing has not displayed the features of a normal
economic decline. Usually, when we have had a decline over the
last 80 years, since the Great Depression, or 70 years, we
would see a sharp drop, usually a fairly prompt recovery, and
in somewhere between 18 months and 2 or 3 years, we had pretty
well forgotten about it, except maybe the one in the mid-1970s
and the one in the early 1980s. But generally that was the
case.
But the drop in economic activity that began in late 2007
appears to be more of a downshifting of the economy. Now, with
due regard to TIME magazine, the current issue cover story is
about pressing the restart button. I don't really view it as a
restart situation, because that connotes that all at once, we
manage to restore operations, restore the economy at about the
level it was. I don't believe that is the case here, because I
think what we are dealing with is a revolutionary shift in
thinking about debt, the likely result of companies curtailing
the high use, the high levels of debt, the corralling of
patently unwise strategies employed on a widespread basis to
deal with debt. A revolutionary shift by consumers about debt.
So, what we are doing is trying to eat, if you will, to
consume debt, and either we can do it as consumers and
companies, or we can offload it onto government, and so far, we
seem to be doing more of the latter. But however it is done, it
is going to cause a longer term problem for us, for the
economy. Consumers, companies, governments have all been living
beyond their means, and we have been doing it heavily with debt
capital. That bubble has now burst, and adjustments are going
to take quite a while.
And so, that is why I started off my testimony by saying
the longer this continues, the more serious it is for the
agricultural sector. And my concern is that it may last longer
than we anticipate. Although I have been watching carefully,
the stimulus effects, the stimulus programs, and I hope that we
can accomplish a great deal with those. But, I warn that we
have incurred, and are going through a massive shift in
thinking, about debt, and that is going to take a while to work
through. Now, I said that the agriculture sector is not an
economic island, but let me mention that we seem today to have
missed the worst of it. I just don't think it is going to
continue to miss it, if we don't get an upturn soon.
A word or two about ethanol production. That was discussed
by the prior panel, and in a number of the questions. The boost
in commodity prices is heavily related to the growth of the
ethanol industry. The demand of ethanol plants for corn caused
a drop in prices for other commodities, soybeans, and to a
degree, wheat as well. As early as 2009, we had about 170
plants in production, representing roughly 4 billion bushels of
demand for corn. More than 20 have filed for bankruptcy. We
have somewhere around 12 percent of the capacity that is idled,
and some estimates run as high as 30 percent, if you factor in
also the amount of production that is on slowdown.
So, there are two brakes dealing with ethanol. One is the
brake that comes from prosperity in the ethanol, raising the
price of corn because demand goes up, and that, of course,
reduces profitability for the ethanol plant, because they have
to pay more for their raw material that makes somewhere, 60,
70, 80 percent of their input cost. Also, the second brake is
the relationship to the price of crude, and as we have seen
this so very clearly in the last year, the ride up was a lot of
fun. The ride back down again wasn't so much fun.
So, we have two brakes here that are of concern. What about
ethanol plants that are now shuttered, or cannot cover their
variable costs? Some are likely to be sold at a discount. In
fact, that is going on almost as we speak. A government credit
line would help to buy time, but it is not a viable long term
solution. In the long term, ethanol must be a competitive
source of energy to survive, unless subsidies continue,
mandates increase, and tariffs are maintained.
I think we are going to see, going forward, with a huge
amount of economic incentive for alternative energies, we are
going to see a lot of emphasis on new possibilities, and there
is a lengthy list of them. I think that what we need to realize
is that the economics of it are eventually going to have a lot
to say about the role of ethanol. I think it will be with us
for a while, but I don't think it is going to be the dominant
source of energy.
I would like to say a word or two about the impact
worldwide on the demand for food and fiber. The World Trade
Organization, about a week ago, indicated about a nine percent
decline in world trade expected in 2009. That is an awesome
decline in economic activity, and of course, the reverse of
that has been that we saw the buildup of per capita incomes in
a lot of third world countries, as jobs moved overseas, as
outsourcing occurred, globalization took place. And it was a
success story, helping to solve world hunger problems in places
like Bangladesh and India, China, and elsewhere. Now, we are
seeing the beginning, maybe, of the reverse of that, where our
lessened demand for labor intensive products is causing
problems of unemployment in those very areas, and that can
lead, because of the very high income elasticity of demand in
those countries, can lead to a decline in the demand for
agricultural products. So, one of the more important and
enduring components of our increase in demand in recent years
has been the growth of third world incomes, and that could be
at risk if, again, the downturn and the global meltdown
continues.
A word about signs of tightening credit. I have been
looking at the FDIC data from the end of 2008 compared to 2007,
2006, an increase to about seven percent in Iowa banks that
were unprofitable, compared to 4.3 percent a year earlier, and
2.87 percent a year before that. I just picked up a copy of the
annual report of one of our banks in Ames, and their income
dropped by half last year, and a lot of it was because of their
investments in Fannie Mae and Freddie Mac, which was a very
common and believed to be very secure investment. That is
biting a lot of banks that are in the coastal group of banks
that are getting assistance, but it is part of the problem that
they face.
So, to close my comments, the economic state of the sector
depends heavily on whether the world economy continues to
decline. If confidence is not restored, and the financial
systems continue to deteriorate, the agricultural sector will
likely suffer the effects on a widespread basis. I think the
non-farming part of the agricultural sector, of the rural
sector, is already feeling many of those effects. I think it
will eventually embrace even the farming side. We have seen a
sharp drop in commodity prices, notwithstanding yesterday's
increase, spike up, because of the reports from the USDA.
So, the success of the stimulus packages, the efforts to
stabilize the finance institutions, are vitally important to
the agricultural sector. It is just that I have also concerns
about how we really ought to be addressing this very unusual
downturn period in our economy, when it doesn't seem to be the
normal type. It seems to be based on the fact that we have to
deal with a huge amount of debt, either as individuals,
companies, or as governments, and that is a decision for a
higher pay grade than I have, and some question for down the
street as well.
So, thank you so very much for the opportunity to be here.
[The prepared statement of Dr. Harl follows:]

Prepared Statement of Neil E. Harl, Ph.D., Charles F. Curtiss
Distinguished Professor in Agriculture and Emeritus Professor of
Economics, Iowa State University, Ames, IA
Although I endeavor to be objective in my testimony, in the
interests of full disclosure, I should note for the Subcommittee that
my wife and I through an entity, Harl Farms, LLC, own farmland in Iowa
which is operated under livestock-share and crop-share leases. I am in
emeritus status from Iowa State University and continue to be engaged
in writing, publishing and consulting. I do not believe that my
testimony is affected in the slightest by any of those activities,
however.
I. Introduction
The agricultural sector is not an economic island. However, the
global financial difficulties that have caused severe heartburn for
financial firms and most of the global economy have largely bypassed
the agricultural sector. It is clear that the longer the meltdown
persists the more serious and far-reaching the effects are likely to be
on farming and ranching and on rural areas. If investor confidence is
not soon restored, credit availability could pose a significant problem
for production credit, land purchases and trade in agricultural
products and the worldwide demand for agricultural products would
likely decline further. Moreover, rural areas have suffered lay-offs
with rising unemployment, stock market losses and reduced discretionary
spending in addition to the long-term adjustments that have been on-
going for decades. These effects seem likely to continue for the next
several quarters and, in some instances, beyond. Farming, particularly
crop farming, has fared relatively better than livestock farming in
recent months but storm signals are flying for crop production.
II. The Danger Signals
Higher commodity prices in 2007 and 2008 and modest debt levels
(compared to the 1980s era) have helped the farming sector in many
areas of the country avoid the worst effects of the global meltdown and
have enabled agricultural lenders, in general, to maintain healthy
balance sheets. But the sharp declines in commodity prices in late
2008, the economic and financial woes of the ethanol industry and the
falling demand for agricultural products, especially in developing
countries, are impacting the sector to a much greater extent in 2009.
Commodity demand and supply
When corn prices were hovering near $8 per bushel, soybeans were
selling at more than $15 per bushel and wheat had skyrocketed to near
$25 per bushel in some specialty wheat markets, optimism was justified
for those who believed that such price levels would continue. An
unprecedented amount of net income was bid into cash rents and
capitalized into land values. But with corn dropping to the vicinity of
$4 per bushel, soybeans in the $9 to $10 per bushel range and wheat
declining to $5 to $6 per bushel, there is less income to capitalize
into land values. Moreover, production costs have risen, almost across
the board, cutting into the net income per acre. Granted, the sharp
drop in crude oil price in recent months has provided some relief on
the cost front with the impact going well beyond the costs for gasoline
and diesel fuel. One sobering factor on the demand side (particularly
on the commodity futures markets) has been the role played in futures
prices by the commodity funds. While the role of the funds in the steep
run-up in crude oil prices is now fairly well established, the role of
the investment funds in the dramatic climb of agricultural commodity
prices (and subsequent declines) is less well accepted. Suffice it to
say, it may not have been all demand and supply in the traditional
sense.
As a consequence of several factors, mostly related to demand,
farmland values declined in late 2008 and are expected to decline
further in 2009 and, possibly, in 2010. Long-term, land prices are
influenced by the net income from the farm commodities produced on the
land in question. While a replay of land value declines in the 1980s is
not anticipated, any decline affects credit availability, especially
for the more heavily leveraged prospective purchasers.
Ethanol production
The boost in commodity prices was heavily related to the growth of
the ethanol industry. The demand of ethanol plants for corn caused a
run-up in the prices for other commodities competing for farmland,
notably soybeans and, to a lesser degree, wheat. As of early 2009,
approximately 170 ethanol plants were in production, representing
roughly 4 billion bushels of demand for corn.
That demand appears less secure in light of the economic problems
faced by the ethanol industry. More than 20 ethanol plants have filed
for bankruptcy in recent months and several more have ceased operations
for various financial and economic reasons. By some estimates, as much
as 30 percent of ethanol capacity is idled or on slowdown.
The economic trauma in some instances has been partly the result of
factors affecting all ethanol plants; in other situations, the economic
hurdles have been more severe for recently-constructed plants. Dramatic
fluctuations in the price of corn (the major input) and in the price of
crude oil (which has a considerable influence on the price for ethanol)
have wrenched the industry well beyond anything that could possibly
have been anticipated by investors in ethanol plants. These are the two
``brakes'' that are faced by the ethanol industry. The steep rise in
construction costs has contributed to the economic problems, also.
Several plants have been shuttered or are in bankruptcy because of
ill-fated steps taken to manage risk with the hedges resulting in huge
losses as the price of corn rose to record levels and then declined
sharply to more normal levels.
The future of the ethanol industry depends heavily upon three
factors--(1) the energy policy of the United States (which has been
friendly to ethanol for several years); (2) the economics of conversion
of feedstock (principally corn) into ethanol fuel; and (3) the emerging
technologies and their competitive positions. Ethanol is likely to
merit a ``place in the sun'' for 3 to 5 more years. Beyond that,
ethanol may well rank as a component of the package of alternative
energy sources for some time in the future. Economic considerations
will almost certainly be the major determinants as to which energy
alternatives survive as energy sources. The energy source that can
produce the units of energy needed at the lowest price and with the
safety factors and reliability factors demanded by consumers will be in
the driver's seat.
As for ethanol plants that are now shuttered or cannot cover their
variable costs, some are likely to be sold at a discount (currently,
variable costs are roughly 90 percent of the cost of producing ethanol,
leaving little for fixed costs and profit for investors). A government
credit line would help to buy time but is not a viable long-term
solution. In the long-term, ethanol must be a competitive source of
energy to survive unless subsidies continue, mandates increase and
tariffs are maintained.
Impact of the meltdown on the demand for food and fiber
In recent years, the gradual increase in per capital incomes around
the world, but particularly in the low-income countries, caused a
steady increase in the demand for food. The income elasticity of demand
for food is high in those countries (as high as 0.7 which means that 70
percent of additional income goes for food). The increase in per
capital incomes was heavily related to trade, outsourcing and
globalization, with production gradually moving to areas of lowest cost
production and with all manner of economic activities shifting to low
wage countries, raising per capita incomes.
All of that has been affected by the global meltdown in recent
months with the demand for the goods and service produced in those
countries declining, in some instances dramatically. This is leading to
reduced demand for food, worldwide. Most of the leading importers of
farm commodities from the United States have reduced imports except for
China. The rising unemployment in China will likely lead to reduced
demands for food in that country as the world-wide demand for the labor
intensive products produced in that country slips. The World Trade
Organization is predicting a nine percent decline in world trade this
year.
Signs of tightening credit
Depending upon how long the economic crisis persists and how deep
the trauma becomes, it will clearly affect credit availability at all
levels. Denial of credit in the short-run results in economic pain and
the disposal of assets serving as collateral which affects asset values
in the markets. Those with weak balance sheets (high debt-to-asset
ratios) generally suffer the greatest. The relatively thin band of
equity capital on the part of lenders makes the lenders particularly
vulnerable.
As an example, as of December 31, 2008, the Federal Deposit
Insurance Corporation (FDIC) reported that as of the end of the fourth
quarter of 2008, 6.93 percent of Iowa banks were unprofitable compared
to 4.3 percent in the fourth quarter of 2007 and 2.87 percent in 2006.
About half of the banks reported non-performing loans above one percent
at the end of 2008. Although agriculture is a major part of the Iowa
economy, these data do not appear to reflect weakness of the
agricultural economy so much as weakness in the general economy.
Agricultural banks in recent months have had a much stronger
performance than similarly-sized commercial banks. However, with lower
commodity prices and higher costs of production in prospect, the
agricultural economy may be a greater contributor to lender problems
going forward.
III. Conclusion
The economic state of the agricultural sector (both farms and
ranches and rural areas generally) depends heavily on whether the world
economy continues to decline. If confidence is not restored, and the
financial systems continue to deteriorate, the agricultural sector will
likely suffer the effects on a widespread basis. The success of the
stimulus packages and the efforts to stabilize the world's financial
institutions are vitally important to the agricultural sector.
My biggest concern is that the global meltdown that is being
experienced has not displayed the features of a normal economic
decline. The drop in economic activity that began in late 2007 appears
to be more of a ``downshifting'' of the economy, due principally to a
revolutionary shift in thinking by consumers about debt, the likely
result of companies curtailing the use of high levels of debt and the
corralling of patently unwise strategies employed on a widespread basis
to deal with risk. Consumers, companies and governments have all been
living beyond their means. That bubble has now burst. Adjustments in
economic activity promise to be profound and far-reaching as the
world's economy comes to reflect a more cautious use of debt at all
levels, at least for the foreseeable future. That is likely to affect
the buoyancy of the general economy for several years.

The Chairman. Well, we appreciate your comments, and we
will have some questions, but we recognize Mr. Dumler.

STATEMENT OF TROY J. DUMLER, EXTENSION AGRICULTURAL ECONOMIST,
SOUTHWEST KANSAS STATE RESEARCH AND EXTENSION, GARDEN CITY, KS

Mr. Dumler. Mr. Chairman, Members of the Subcommittee,
thank you for inviting me to testify. As Dr. Harl noted, I will
try to reduce some duplication of comments that have already
been made here as well.
I appear before the Subcommittee to discuss the
agricultural economy. While many aspects of this discussion are
relevant to producers across the country, my focus will be on
Kansas, and my goal is to provide a snapshot of economic
conditions in the Great Plains.
As an agriculture economist at Kansas State, I have access
to farm level data from farms in the Kansas Farm Management
Association, one of the largest farm management programs in the
country. This information will serve as the foundation of my
comments today, basically providing a farm level view of the ag
economy.
The last several years have been interesting ones for
Kansas producers. Following trends nationwide, average net farm
income for farms in the Kansas Farm Management Association
topped $115,000 in 2007, nearly double the previous record set
in 2004. Final data is not yet available for Association farms
in 2008, but preliminary estimates suggest that net farm income
will again be high for Kansas farms, although likely not as
high as it was in 2007. The record incomes in recent years can
largely be explained by historically high grain prices and
oilseed prices, as noted earlier. But as agriculture commodity
prices increased, so did the production cost. As an example,
total expense for fuel, fertilizer, crop chemicals, and seed
increased 75 percent from 2003 to 2007 for Association farms.
These expenses rose even more dramatically in 2008.
Fortunately, fuel and fertilizer prices have dropped back from
the 2008 peaks, providing the opportunity for Kansas crop
producers to potentially earn a profit in 2009.
The recent record farm income masked the variability
experienced by different types of farms. While farm income for
crop producers has been buoyed by the rise in demand for
ethanol, the higher crop prices have put pressure on livestock
producers. While income on crop farms in 2007 was more than
double that of 2006, it was a different story for livestock
producers. In 2007, beef cattle backgrounding operations
experienced a second year of negative net farm income, and
losses have been historically large for cattle feeders as well.
A colleague of mine is estimating that cow/calf producers in
the state will not be able to cover variable costs in either
2008 or 2009.
Financial data from farms in Kansas show a sector that is
in good financial condition on average. Debt-to-asset ratios
and the percentage of farms that are financially stressed are
substantially lower than they were during the mid-1980s, and
interest rates remain low by historical standards.
Anecdotal evidence says that in spite of tightened credit
market, credit is still available for good credit risks in the
state. Because of the good overall financial conditions of
farms and the continued availability of credit, another farm
financial crisis does not appear imminent.
However, there are currently a small percentage of farms in
Kansas that are financially vulnerable. Consequently, should
farm income or land values decline, or if interest rates would
rise significantly, farm financial conditions could quickly
deteriorate.
Finally, there is little question that commodity subsidies
have reduced the income variability of Kansas farms. Even in
2007, government payments still contributed 20 percent of net
farm income for Association farms. While grain and oilseeds are
well above levels that would generate either countercyclical
payments or loan deficiency payments, the new ACRE and SURE
Programs, passed as part of the 2008 Farm Bill, offer the
opportunity to support crop income in either the event of a
drop in price or a drop in production.
Current discussions with farmers in Kansas, however,
suggests that enthusiasm for these programs, especially the
ACRE Program, may not be as high as originally anticipated.
Mr. Chairman, thanks, again, for inviting me to testify,
and I look forward to an opportunity to answer any questions.
[The prepared statement of Mr. Dumler follows:]

Prepared Statement of Troy J. Dumler, Extension Agricultural Economist,
Southwest Kansas State Research and Extension, Garden City, KS
Prepared by Troy Dumler, Michael Langemeier, Allen Featherstone, and
James Mintert \1\
---------------------------------------------------------------------------
\1\ Respectively, Extension Agricultural Economist, Professor,
Professor, and Professor in the Department of Agricultural Economics,
Kansas State University.
---------------------------------------------------------------------------
Introduction
Recent years have brought challenges and opportunities to producers
across the United States. Historically high grain and oilseed prices,
spurred by demand for biofuels, have pushed farm income to record
levels. While this scenario has presented tremendous opportunities for
crop producers, it has been burdensome for livestock producers, who
have seen production costs increase dramatically. The increased
production costs have not been exclusive to livestock producers,
however. Fuel, fertilizer, seeds, and chemicals have all increased over
historical levels. While some of these production costs have fallen
over recent months, the downturn in the global economy has presented
some additional challenges for agricultural producers. The global
recession has put downward pressure on agricultural commodity prices
and tightened credit markets. Coupling these events with a new farm
bill that offers two new, complex programs designed to help farmers
manage risk, makes for an interesting time in agriculture. Following is
a discussion of the challenges facing Kansas producers.
Farm Income
Data from the Kansas Farm Management Association (KFMA) indicates
that net farm income in Kansas has mirrored U.S. net farm income (Table
1). After experiencing a drop in income in 2006, net farm income, both
nationwide and in Kansas, recovered to record levels in 2007. But there
were some differences between Kansas and the rest of the U.S. Though
U.S. net farm income was barely a record in 2007, net farm income in
Kansas was actually 84 percent higher than the previous record set in
2004. Supported by historically high grain and oilseed prices, U.S.
farm income is forecast to set another new record in 2008. Final KFMA
data is not yet available for 2008, but preliminary data suggests that
net farm income will again be high for Kansas farms--although perhaps
not as high as it was in 2007.
The variability in income in recent years can largely be explained
by widely fluctuating commodity prices and production costs. Following
the energy markets, agricultural commodity prices increased rapidly
from 2006 to 2008. Figure 1 shows prices for diesel fuel and natural
gas, two of the primary energy sources used in agriculture, from 2000-
2009. The increasing energy costs and rising demand for crop inputs
resulted in increased crop production costs. Table 2 shows the selected
crop input expenses for KFMA farms from 2003-2007. In fact, there were
significant increases in crop input expenses each year from 2003 to
2007. This was especially the case for fertilizer and diesel fuel,
which increased 105 percent and 110 percent, respectively, over the 5
year period. Total expenses for the four crop inputs listed in Table 2
increased 75 percent from 2003 to 2007.

Table 1. Net Farm Income in the U.S. and Kansas (2003-2008).
------------------------------------------------------------------------
Year U.S. (Total, $Billion) Kansas ($/Farm)
------------------------------------------------------------------------
2003 60.5 51,051
2004 85.8 62,604
2005 79.3 56,982
2006 58.5 46,593
2007 86.8 115,035
2008 89.3 N/A
------------------------------------------------------------------------
Source: USDA-ERS and the Kansas Farm Management Association.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Although crop input expenses increased dramatically from 2003 to
2007, the largest increase occurred in 2008. According to the prices
paid indexes published by USDA-NASS, fertilizer costs increased 80
percent from 2007 to 2008 (Table 3). That increase was coupled with a
56 percent increase in fuel costs, a 27 percent increase in seed costs,
and a nine percent increase in chemical costs. However, as energy and
agricultural commodity prices declined with the global economy in late
2008, fuel and fertilizer prices also declined. Using the price indexes
in Table 3, it is estimated that KFMA farms would have spent $23.77 per
acre and $65.71 per acre on fuel and fertilizer, respectively, in 2008.
Based on current prices, KFMA farms are estimated to spend $12.42 per
acre and $48.90 per acre on fuel and fertilizer, respectively, in 2009.
While the estimated fertilizer costs still remain above previous
levels, fuel costs are estimated to fall to levels not experienced
since 2005. So, even though commodity prices have dropped significantly
from the historically high levels experienced in 2008, the drop in fuel
and fertilizer input costs provides the opportunity for crop farmers in
Kansas to earn a profit in 2009.

Table 2. Energy Intensive Expenses for Non-Irrigated KFMA Crop Farms
(2003-2007).
------------------------------------------------------------------------
Expense Category 2003 2004 2005 2006 2007
------------------------------------------------------------------------
Fertilizer and
Lime:
Crop Expense $22,649 $25,556 $32,231 $33,847 $46,348
Expense/Crop $18.50 $21.19 $25.91 $26.67 $35.54
Acre
Annual Change 10.2% 26.3% 1.6% 33.3%
(%)
Gas, Fuel, and
Oil:
Crop Expense $10,545 $13,102 $17,730 $20,493 $22,179
Expense/Crop $8.62 $10.86 $14.25 $16.15 $17.01
Acre
Annual Change 16.6% 26.5% 13.8% 5.3%
(%)
Herbicides/
Insecticides:
Crop Expense $14,438 $15,030 $16,519 $18,017 $21,513
Expense/Crop $11.80 $12.46 $13.28 $14.20 $16.50
Acre
Annual Change 5.6% 6.6% 6.9% 16.2%
(%)
Seed:
Crop Expense $15,455 $18,348 $20,498 $21,877 $27,484
Expense/Crop $12.63 $15.21 $16.48 $17.24 $21.08
Acre
Annual Change 20.4% 8.4% 4.6% 22.3%
(%)
Total Expense:
Crop Expense $63,087 $72,036 $86,978 $94,234 $117,524
Expense/Crop $51.55 $59.72 $69.92 $74.26 $90.13
Acre
Annual Change 15.9% 17.1% 6.2% 21.4%
(%)
------------------------------------------------------------------------
Source: Kansas Farm Management Association.

Table 3. Annual Prices Paid Indexes (1990-1992), USDA-NASS.
------------------------------------------------------------------------
Feed Hay/
Year Fertilizer Chemicals Seed Index Forages
Index Index Index
------------------------------------------------------------------------
2003 124 121 154 115
2004 140 121 158 116
2005 164 123 168 124
2006 176 128 182 139
2007 216 129 204 164
2008 388 140 259 195
2009 * 294 143 275 172
------------------------------------------------------------------------
* Monthly Prices Paid Indexes, February 2009.

As higher commodity prices resulted in increased profitability over
the last 2 years, demand for crop land increased as well. This increase
in demand resulted in higher cash rents and land values. Table 4 shows
the average land value and cash rent for irrigated and non-irrigated
crop land in Kansas from 2003 to 2008. Although land values increased
each year, the largest increases in both irrigated and non-irrigated
land values occurred in 2008. Given that crop production is expected to
remain profitable in 2009, albeit at a much lower level than 2008, land
values are expected to hold relatively steady.

Table 4. Crop Land Values and Cash Rental Rates in Kansas (2003-2008).
------------------------------------------------------------------------
Value Rent
---------------------------------------------------
Year Non- Non-
Irrigated irrigated Irrigated irrigated
------------------------------------------------------------------------
2003 $1,080 $645 $68.00 $36.00
2004 $1,110 $665 $72.00 $37.50
2005 $1,240 $810 $73.00 $38.50
2006 $1,300 $890 $74.00 $39.00
2007 $1,410 $980 $82.00 $41.00
2008 $1,660 $1,130 $88.00 $45.00
Annual Avg. % Change 10.7% 15.1% 5.9% 5.0%
------------------------------------------------------------------------
Source: Kansas Agricultural Statistics Service, Agricultural Land Values
and Rents.

Livestock Operations
The recent record farm income in production agriculture masks the
variability experienced by different types of farms. While farm income
for crop producers has been buoyed by the rising demand for ethanol,
the higher crop prices have put pressure on livestock producers.
Evidence of this occurring may already be evident in the KFMA data.
While income on crop farms in 2007 was more than double that of 2006,
it was a different story for livestock producers (Table 5). In
particular, losses have been historically large for cattle feeders and
for cattle backgrounding operations, which experienced another year of
negative income. The extended period of large losses for commercial
cattle feeders is without precedent over the last 3 decades, resulting
in a huge equity drain for the industry.

Table 5. KFMA Net Income per Operator by Farm Type (2003-2007).
----------------------------------------------------------------------------------------------------------------
No. of Farms Net Income per Operator
Type of Farm -----------------------------------------------------------------------------------
(2007) 2003 2004 2005 2006 2007
----------------------------------------------------------------------------------------------------------------
All Farms 1,453 $52,410 $63,491 $57,584 $46,804 $116,130
Cash Crop Dryland 1,010 51,424 57,087 49,422 49,366 120,594
Cash Crop Irrigated 62 57,580 62,729 64,955 92,335 280,585
Stock-Ranch Cowherd 21 34,148 51,366 45,396 35,986 23,633
Cowherd 15 22,458 32,088 24,914 13,344 34,948
Dairy 35 24,484 71,192 52,658 25,663 82,088
Backgrounding 11 63,035 82,252 63,279 ^5,823 ^941
Cash Crop-Cowherd 137 33,879 49,613 50,149 31,132 61,588
Cash Crop-Dairy 11 49,643 81,068 72,799 55,538 161,507
Cash Crop-Backgrounding 29 87,728 79,308 83,820 1,203 74,803
----------------------------------------------------------------------------------------------------------------
Source: Kansas Farm Management Association.

Financial Condition of Kansas Farms
The economic downturn in 2008 was remarkable in both depth and
breadth. Widely regarded as one of the most severe financial crises in
recent times, there are few industries unaffected by its impact.
Agriculture in the U.S. is no exception. The decline in demand for
energy has resulted in a similar decline in demand for feed grains and
oilseeds. While the primary consequence of the drop in demand for
agricultural commodities has been a drop in price, a major consequence
of the economic downturn has been a lack of available credit to
businesses and consumers. In regard to the overall credit freeze,
however, agriculture may be the exception. The Survey of Tenth District
Agricultural Credit Conditions conducted by the Federal Reserve Bank of
Kansas City indicates that although demand for agricultural credit has
fallen somewhat during the fourth quarter of 2008, there are still
funds available to lend to credit worthy agricultural producers.\2\ In
addition, from a historical perspective, interest rates remain low.
Figure 2 shows the annual average interest rates for operating and real
estate loans in Kansas from 1988-2008.\3\ The average operating loan
interest rate was the third lowest over the 21 year period, while the
real estate interest rate was the second lowest during the same period.
---------------------------------------------------------------------------
\2\ The information on credit conditions are from the Kansas City
Federal Reserve Bank,
http://www.kc.frb.org/Agcrsurv/CreditConditions_KC.xls.
\3\ Agricultural interest rates are from the Kansas City Federal
Reserve Bank, http://www.kc.frb.org/Agcrsurv/InterestRates_KC.xls.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

The Kansas City Federal Reserve Bank also surveys for information
on loan repayments and loan collateral requirements. The survey
indicates that the average repayment rate was lower in the fourth
quarter 2008 than it was early in 2008, but was still much higher than
it was from 1998 through 2003, when farm income was lower. In addition,
the survey indicated that collateral required for agricultural loans
increased from the fourth quarter of 2007 to the fourth quarter of
2008.
The survey from the Kansas City Federal Reserve Bank gives some
indication of the financial condition of farms in Kansas, but does not
tell the entire story. Given the current macroeconomic environment, it
is important to examine long-term trends in financial measures. In
1985, the debt to asset ratio for U.S. farm businesses was 0.222 (USDA-
ERS). In contrast, in 2007, the debt to asset ratio for U.S. farm
businesses was only 0.096 (USDA-ERS). The average current ratio for
U.S. farms was 3.40 in 2007. The USDA-ERS noted that the average
current ratio in 2007 was considerably higher than the average current
ratio of 2.90 exhibited a decade earlier. In Kansas, the change in the
current ratio and the debt to asset ratio is not as dramatic for KFMA
farms. Table 6 illustrates trends in the 5 year average of the current
ratio, debt to asset ratio, and financial stress from 1973 to 2007.
Given variability in weather and prices, it is often useful to examine
5 year average financial measures rather than examining the averages
for a single year. The 5 year average current ratio for KFMA farms for
the 2003-2007 period was 2.47, which was the highest average since the
1996-2000 period. Using Table 6, the debt to asset ratio peaked during
the 1985-1989 period at 0.330. The average debt to asset ratio for the
2003-2007 period, 0.279, was the lowest 5 year average since the 1979-
1983.
Averages often hide the variability in financial measures among
farms. Consequently, it is useful to examine the number of farms with
low net farm income, high debt, or both. The USDA-ERS defines
vulnerable farms as those with a negative net farm income and a debt to
asset ratio above 0.40. Approximately 3.5 percent of U.S. farms were
classified as vulnerable in 2007 (USDA-ERS). Using these criteria to
define vulnerability, approximately 6.8 percent of KFMA farms were
vulnerable in 2007.
Negative earnings and a debt to asset ratio above 0.70 are used in
Table 6 to define financial stress for KFMA farms. Earnings are
computed by subtracting unpaid operator and family labor from net farm
income. Approximately 45 percent and 11 percent of the farms had
negative earnings and a debt to asset ratio above 0.70, respectively,
for the 2003-2007 period. Combining these two items, approximately 6.4
percent of the KFMA farms were financially stressed. The level of
financial stress is substantially lower than that experienced in the
mid-1980s, but is still higher than the averages experienced in the
1970s. The percentage of farms with negative earnings and a debt to
asset ratio of 0.70 was 45 percent and 15 percent during the 1985-1989
period, the most recent peak financial stress years in the U.S.
Farms with negative earnings and/or high debt to asset ratios are
more vulnerable to the current credit crisis than farms that have lower
debt levels and that have experienced relatively high net incomes in
recent years. These farms may find it increasingly difficult to
generate a positive cash flow and repay debt.
To summarize, credit is available for the 2009 planting season for
good credit risks. Certainly, the underwriting standards have increased
in order to obtain that credit, but farmers with good repayment
histories and fairly strong balance sheets are able to obtain the
credit they need. Borrowers should expect to be required to put up more
collateral going forward than in the past. Borrowers of marginal credit
quality in the past may see more difficulty in obtaining credit in 2009
than in the past. In addition, there likely will be larger differences
in interest rates among borrowers than in the past. Because of the
overall good financial condition of farms in Kansas and the U.S., and
the continued availability of credit, another farm financial crisis
does not appear imminent. However, should farm income and/or land
values decline, or interest rates rise rapidly, farm financial
conditions could deteriorate quickly.

Table 6. Trends in Liquidity, Solvency, and Financial Stress for KFMA
Farms.
------------------------------------------------------------------------
Debt to Asset
Years Current Ratio Ratio Financial Stress
------------------------------------------------------------------------
73-77 2.23 0.217 0.69%
74-78 2.06 0.225 0.01%
75-79 1.97 0.236 1.38%
76-80 2.03 0.237 1.45%
77-81 2.08 0.245 1.83%
78-82 2.08 0.256 2.31%
79-83 2.16 0.265 3.14%
80-84 2.12 0.281 6.73%
81-85 2.06 0.294 7.61%
82-86 2.11 0.304 8.77%
83-87 2.13 0.313 9.49%
84-88 2.17 0.320 10.10%
85-89 2.24 0.330 10.84%
86-90 2.36 0.320 8.51%
87-91 2.51 0.310 8.34%
88-92 2.50 0.306 7.29%
89-93 2.56 0.302 7.21%
90-94 2.56 0.301 8.10%
91-95 2.52 0.304 9.20%
92-96 2.55 0.299 6.87%
93-97 2.58 0.295 6.79%
94-98 2.61 0.291 8.15%
95-99 2.54 0.290 6.98%
96-00 2.51 0.296 7.03%
97-01 2.43 0.301 8.20%
98-02 2.35 0.301 9.67%
99-03 2.31 0.301 9.47%
00-04 2.32 0.302 9.11%
01-05 2.34 0.299 9.89%
02-06 2.36 0.293 8.92%
03-07 2.47 0.279 6.39%
------------------------------------------------------------------------
Source: Kansas Farm Management Association Newsletter, Volume 2, Issue
12. December 2008.

Government Payments
Government payments have contributed significantly to farm income
in Kansas over the past 10 years. As shown in Figure 3, from 1998-2001,
government payments (including all commodity, conservation, and
disaster assistance payments) averaged over 100 percent of net farm
income for KFMA farms. From 2002-2007 government payments averaged 54
percent of net farm income. As market prices have increased in recent
years, the relative importance of government payments as a contributor
to net farm income has decreased, as government payments were only 20
percent of net farm income in 2007.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Three factors could have a negative impact on crop income in 2009:
a decline in commodity prices, an increase in production costs, and a
drop in production. While grain and oilseed prices are well above
levels that would generate countercyclical payments or loan deficiency
payments, two new government programs could potentially provide
significant payments to producers in the event of a decline in crop
revenue. The Average Crop Revenue Election (ACRE) and Supplemental
Revenue Assistance (SURE) programs each offer the opportunity to
support crop income in the event of drop in price and/or production.
Because the final details of these programs have not been published, it
remains to be determined how large payments from these programs may be.
However, preliminary analysis suggests they could offer significant
support in scenarios in which prices or production falls significantly.
With the ACRE program specifically, the question remains whether
producers will participate in large numbers. The Food and Agricultural
Research Policy Institute (FAPRI) estimates that the majority of corn,
soybean, and wheat producers will choose to participate in ACRE while
the majority of cotton, rice, and peanut producers will not
participate.\4\ Anecdotal evidence suggests producers in Kansas may not
sign up for ACRE in large numbers. The reasons for the lack of interest
in ACRE likely include understanding the complexities of a new program,
the unwillingness to give up guaranteed money (a 20 percent reduction
in direct payments) for potential payments, and concerns that farms
will incur revenue losses but the state will not--resulting in no
payments to the producer. Although ACRE may offer some risk management
protection not available in previous commodity programs, the overall
level of support it offers could be mitigated by the level of
participation.
---------------------------------------------------------------------------
\4\ FAPRI U.S. Baseline Briefing Book #01-09, available at: http://
fapri.missouri.edu/outreach/publications/2009/
FAPRI_MU_Report_01_09.pdf.

The Chairman. Thank you. Dr. Angle.

STATEMENT OF J. SCOTT ANGLE, Ph.D., DEAN AND DIRECTOR, COLLEGE
OF AGRICULTURAL AND ENVIRONMENTAL SCIENCES, UNIVERSITY OF
GEORGIA, ATHENS, GA

Dr. Angle. Thank you and good morning. Again, I am Scott
Angle, the Dean and Director of the College of Agricultural and
Environmental Sciences at the University of Georgia. I am also
a farmer.
I am here to give you my assessment of agriculture, in
light of the current economy, and to discuss what I see as the
primary issues facing us both in the long and the short term.
Most of what I will discuss today will relate to the
southeastern region part of this great nation. Much of my
testimony will focus on issues that seem like problems, and
indeed, many are.
However, please know that for the long run, I remain quite
positive. I say this for several reasons. It is crystal clear
that rising population and enhanced nutritional demands of
emerging societies will require food production to double by
the year 2050, yet the amount of land available for food
production is unlikely to increase. In fact, as reforestation
removes land from agricultural production, the amount of land
used for food production may actually decline during this
period. Therefore, the amount of food produced per acre will
have to double by the year 2050.
Just where this increase will occur will depend on
geopolitics, climate, climate change, and a variety of
environmental considerations. For example, it is unlikely that
Europe will adopt new and emerging technologies to increase
food production. In the United States, agricultural patterns
are changing as our climate changes. In particular, climate
change is likely to exacerbate drought conditions in much of
the western part of the United States. The drought we now see
in California may actually become a permanent feature as the
climate warms.
This suggests that the eastern half of the United States
will need to produce greater amounts of food than it does
today. The Southeast is blessed with a long growing season,
abundant sunlight, good soils, and reasonable amounts of
rainfall and irrigation water. Thus, it is clear that
agriculture in the southeastern part of the United States must
continue to grow if world food demand is to be met.
I also remain fundamentally optimistic for U.S. agriculture
for two additional reasons. I believe there is an inherent and
lingering appreciation of the rural lifestyle, the values held
by our rural citizenry, and the cultural heritage that exists
only in these areas of our country. These are vital components
of our culture that no one wants to lose. And last, I also
believe that you, our elected political leaders, understand
better than anyone that food production is an issue of national
security. We can't always count on other countries to produce
for us. Previous food safety incidents have shown how a single
accident can close imports of an entire commodity. Intentional
contamination of the food supply would not be difficult, and
can paralyze an entire products' entry into the United States
for an extended period of time.
Despite the long term positive potential, we are facing
several very significant and complicated challenges that will
make the next 2 years difficult for both southeastern and U.S.
agriculture. There are few sectors of agriculture that
traditionally, and certainly, in the current economic downturn,
will not do well. For example, the green industry and high
priced foods will not do well. These items tend to fall more
within those areas that customers can do without when
disposable income is reduced. Meat sales are also likely to
decline further, as the U.S. dollar strengthens. A high dollar
hurts exports and aids imports. This is especially important
for the poultry industry, the largest segment of Georgia
agriculture, where exports are an important component of that
overall market.
Macro trends will also have a significant impact on the
future of southeastern agriculture, and I would like to discuss
a few of these, and how they may shape our future. The
unprecedented droughts in the Southeast over the last 2 years,
which by the fact, are still far from over, despite recent
rainfall, has clearly demonstrated that water is not an
unlimited resource, and that we will have to better plan for
its use, if agriculture is to be sustained and even grow.
Southeastern states need to do a much better job of
planting and developing and deploying infrastructure policies
and technologies to be able to move to meet future demand for
water in both agricultural and nonagricultural use. This issue
is particularly critical during drought periods. There is no
reason to dump millions of cubic meters of water into the Gulf
of Mexico at the expense of agriculture.
As a resident of Georgia, the country's largest producer of
peanuts, I cannot go without discussing food safety. The
reported incidents of foodborne illness has increased in recent
years. Two major steps need to be taken to stem this trend.
First, we need to institute improved, science-based food safety
standards, and we need to establish audit-compliant programs
that identify the gaps in the network, that is to provide field
to fork safety of the entire food supply. Both programs
necessitate an investment in the understanding of production,
harvest, and processing of all aspects of the food supply
chain.
Labor is obviously an area that has been hotly debated for
decades, and one that still cries out for a solution. Whatever
the solution, it is imperative that Federal policies enable
agricultural producers to have access to competent field labor
at reasonable wages. As the market for locally grown,
sustainable food increases, more and more of our food will be
grown within a few hundred miles of where it is consumed. The
concept of food miles is a driving factor that will assure
increases in local production. However, without competent field
labor, none of this will be possible, and the potential
increase in food and fiber production will not be realized.
One of the most pressing issues for the southeastern
agricultural community is the most recent farm bill. Nearly the
entire southeastern farm community does not want the farm bill
to be reopened. Most Farm Bureaus, I believe, have gone on
record to this effect. Any changes to the farm bill are likely
to be less favorable to the southeastern farms in this region.
A related issue is that the U.S. needs to more aggressively
promote sales of U.S. agricultural products around the world.
Foreign sales of agricultural products remain one of the bright
spots for U.S. trade. We hope future trade agreements will not
be made which benefit other sectors of our economy, at the
expensive of agriculture. In the year 2007, agriculture was one
of the areas that alleviated our trade deficit. This year, we
imported $79 billion of food and fiber, while we exported $116
billion in exports.
One last area that is important is in the area of farm
finance, which you have already heard. The farm credit industry
has been regulated through the USDA, and has been successful
even during most of the credit crunch. Indeed, this is one of
the reasons why agriculture has been able to move forward,
while so many industries have been suffering. Please don't lump
the farm credit system in with solutions for Fannie Mae and
Freddie Mac. We should not attempt to fix that which is not
broken.
Finally, I cannot leave this testimony without mentioning
biofuels. The southeastern part of the United State has been
labeled the Saudi Arabia of bioenergy. This is because we have
abundant sunlight, a long growing season, adequate rainfall,
and a long history of pine production. The exact role plants
will play in energy production, in my opinion, remains to be
seen. Nearly everyone agrees that energy production from
grains, especially corn, is only a short-term solution.
Cellulosic ethanol is the long-term hope for ethanol from
plants, especially pine. However, important technology
breakthroughs must be developed before we can expect to see
widespread use of cellulosic ethanol in the United States.
Whether or not this breakthrough come next year or 20 years
from now still remains to be seen.
There are serious issues facing agriculture today and in
the future. Some, we can control, others we cannot. We are good
stewards of the land and our natural resources, and we are a
strong and stable segment of our nation's economy. My message
to you today is relatively simple. Given sound policies, strong
support, solid investment in research and education, and
stepped-up focus on food safety, security, science, and trade,
the agricultural industry of the United States is poised to
meet the demand for feed and food, and to nourish a growing
population.
Thank you for the opportunity to be with you today.
[The prepared statement of Dr. Angle follows:]

Prepared Statement of J. Scott Angle, Ph.D., Dean and Director, College
of Agricultural and Environmental Sciences, University of Georgia,
Athens, GA
Thank you for the opportunity to speak to you today. I am the Dean
and Director of the University of Georgia College of Agricultural and
Environmental Sciences. My background is in soil science. I have
specifically worked to develop agriculturally friendly ways to clean
polluted soil. I am also a farmer. My farm is just east of Frederick,
Maryland.
I am here to give you my assessment of agriculture today and to
discuss what I see as the primary issues facing agriculture both in the
short term and the long term. Most of what I discuss today will relate
to the southeast region of our nation.
Much of my testimony will focus on issues that seem like problems,
and, indeed, many are. However, please know that for the long run, I
remain quite positive. I say this for several reasons. It is crystal
clear that rising population and enhanced nutritional demands of
emerging societies will require food production to double by the year
2050. Yet, the amount of land available for food production is unlikely
to increase. In fact, as reforestation removes land from agricultural
production, the amount of land used for food production may actually
decline. Thus, the amount of food produced per acre will have to double
by 2050.
Just where this increase will occur will depend upon geopolitics,
climate and climate change, and environmental considerations. For
example, it is unlikely that Europe will adopt new and emerging
technologies needed to increase food production. In the United States,
agricultural patterns are changing as our climate changes. In
particular, climate change is likely to exacerbate drought conditions
of the western U.S. The drought we now see in California may become a
permanent feature as the climate warms.
This suggests that the eastern half of the U.S. will need to
produce greater amounts of food than it does today. The Southeast has a
longer growing season, abundant sunlight, good soils and reasonable
amounts of rainfall and groundwater for irrigation. Thus, it is clear
that agriculture in the southeastern U.S. must continue to grow if
world food demand is to be met.
A brief review of recent history tells us it is certainly possible
to increase crop production on static land resources in this country.
Remember, for years Malthusian predictions were that mass starvation
was inevitable as populations increase and food production could not
keep up. The evidence has been just the opposite.
Food production has kept up both with population and improving
nutrition of those living in less-developed societies. In fact, there
is currently a surplus of food worldwide. We all know that there are
still starving populations in the world. Most often the situation is
not a lack of ample food, but rather the result of an inability to move
food to where it is needed. Frequently, food delivery is impeded by
local political instability.
There is every reason to believe that rising yields and improved
nutrition in agriculture will continue for many years to come. Most
yield increases have come from the introduction of new technologies. I
can promise you, as someone who works in the area, the U.S. system of
agricultural research and education will continue to produce the
incredible discoveries that have driven the success of American
agriculture.
Recent evidence from Georgia, for example, tells us that farm
production continues to increase. Just look at changes from 2007 to
2008. The year 2008 was a terrible year for Georgia farmers. One of the
worst droughts on record played havoc on nearly every aspect of
agriculture. Some commodities like the green and landscape industries
were decimated when watering bans assured your new plants would not
survive. But, despite the drought and emerging economic downturn, 2008
was better in terms of farm-gate value than 2007.
This is a testament to the tenacity and creativity of our farmers
who can still make money in the face of so many problems. For 2008, the
total value of farming and processing in Georgia was $55 billion. The
industry generated 356,000 jobs for the state--a source of jobs that
has remained relatively stable even as the economy continued to
deteriorate. This only confirms what we have known for many years;
agriculture, while not immune from economic downturns, is less impacted
than most sectors of our economy.
By the way, two other interesting facts about farming in the
southeast: The general perception is that we have fewer farms than in
the past and that farms are getting larger due to consolidation.
Instead, just the opposite is true. We have more farms than we did just
10 years ago, and the farms are actually smaller by compared to the
same time. This does suggest that more and more farming families are
working off the farm to support their weekend work on the farm.
I also retain a fundamental optimism for U.S. agriculture for two
additional reasons. I believe there is an inherent and lingering
appreciation for the rural lifestyle, the values held by our rural
citizenry, and the cultural heritage that exists only in these areas of
the country. These are vital components of our culture that no one
wants to lose.
Last, I also believe that you, our elected political leaders,
understand better than anyone that food production is an issue of
national security. We can't always count on other countries to produce
for us. Previous food safety incidents have shown how a single accident
can close imports of an entire commodity. Intentional contamination of
the food supply would not be difficult and could paralyze an entire
product entry into the U.S. for an extended period of time.
For this reason, no one wants to have our food production shipped
overseas. We have seen clearly with imported energy supplies how easily
we can be at the mercy of others who may not always like us. It's bad
to be dependent on imported fuel. It would be disastrous if we depended
on other nations for our food. Remember, we have only an 11 day supply
of food in our food chain. If that chain is broken, critical problems
arise almost immediately.
We never want to be in a position where food can be used as a
political weapon against us. We must not forget the lessons the French
learned during World War II when Germany stopped imports of food into
France. That single Act helped to pacify the French population with
relatively little effort on the part of the Germans.
I know I am preaching to the choir, but this is a message some, who
have absolutely no connection to agriculture, seem to have forgotten.
Unlike other industries that can be brought back online after a
prolonged period of inactivity, agriculture is very different. It is
not just training workers in the science and practice of agriculture.
Rather, agricultural knowledge is learned over generations, is
location-specific and is part of the ingrained heritage of a farming
community. It may be impossible to ever bring back this knowledge once
lost.
So, to reiterate, despite many of the problems I will be
discussing, there is a crucial need for agriculture to continue to grow
and there are unique opportunities in the southeastern U.S. to meet
this demand. I remain very optimistic.
Despite the long-term, positive potential, we are facing several
very significant and complicated challenges that will make the next few
years quite difficult for U.S. agriculture.
I noted previously that agriculture is in relatively good shape
over the coming years. However, there are a few sectors of agriculture
that traditionally and certainly in the current downturn, will not do
well. The green industry and high-priced foods will not do well. These
items tend to fall more within those areas that consumers can do
without when disposable income is reduced. Meat sales are also likely
to further decline as the U.S. dollar strengthens--a high dollar hurts
exports and aids imports. This is especially important for the poultry
industry, the largest segment of Georgia agriculture, where exports are
an important component of the overall market.
Again, in the short term, we expect to see some commodities perform
better than others. The prediction for the southeast for 2009 is that
there will be an increase in acres of soybeans and grain sorghum while
the acreage of corn, peanuts and wheat will decline. There will be no
change for cotton and tobacco.
Broiler production will continue to decline, which is good for the
overall industry because prices will increase to the point where many
integrators will become profitable. Unfortunately, if you are one of
the growers or factory workers affected by reduced production, the
change is clearly personally devastating.
Red meat production is predicted to increase over the next few
years. Whether producers make any money depends upon input costs,
something that so far has been very difficult to predict. Dairy
production is the one area where we remain relatively pessimistic. We
see few scenarios where the price of milk will improve and dairy will
resume a profitable upward trend.
Macro trends will also have a significant impact upon the future of
southeastern agriculture. I would like to discuss a few issues and
suggest how each may shape our future.
Water is an overarching factor affecting the future of agriculture.
The western U.S. has worked for years to develop good water policies
and agriculture has responded to these policies in terms of growth,
location and profitability. The Southeast, however, has always assumed
that our water supplies were unlimited. Rainfall was deemed to be
nearly adequate with abundant surface and groundwater supplies
available for irrigation when needed.
The unprecedented drought over the past 2 years (which still is far
from over despite recent rains) has clearly demonstrated that water is
not an unlimited resource and that we have to better plan for its use
if agriculture is to be sustained and even grow. States need to do a
better job of planning and developing/deploying infrastructure,
policies and technologies to be able to meet future demand for water in
both agricultural and non agricultural use. This issue is particularly
critical during drought periods--there is no reason to dump millions of
cubic meters of water into the Gulf at the expense of agriculture.
Water shortages in agriculture during prolonged droughts can
irreversibly harm agriculture. The current drought has done just that
to the green industry in the Southeast. A significant percentage of
landscape, nursery, and horticulture businesses went out of business in
the face of falling sales to homeowners who could not water recently
installed plants. Coupled with the region's building bust, huge
declines in sales to contractors who were not building crippled the
industry.
As a representative from Georgia, the country's largest producer of
peanuts, I can not go without discussing food safety. The incidence of
foodborne illness has increased in recent years. Two major steps need
to be taken to stem this trend. First, we need to institute improved,
science-based food safety standards. And, we need to establish audit
compliant programs that identify the gaps in the network that is to
provide ``field to fork'' safety of the food supply. Both programs
necessitate an investment to understand the production, harvest and
processing aspects of the food supply chain.
It is well recognized that animals and plants can be contaminated
with human pathogens in many places along the food chain. The
significance of food safety can be seen in the impact of the 2008
Salmonella-tomato debacle which had a $25.7 million negative impact on
Georgia's economy. In conjunction with the relevant Federal agencies, a
coordinated research and development effort to gain fundamental and
practical knowledge of the interactions of human pathogens with the
plants and animals that become our food is paramount.
We can never compete with a number of lesser developed countries
where labor costs are low, land costs are a fraction of that in the
U.S., and environmental regulations are rarely enforced. Our only
competitive advantage is for our farmers to be on the cutting edge of
the technology curve. The unique partnership of land-grant
universities, the Federal Government through the USDA and private
industry has allowed the American farmer to maintain the technological
advantage for over 100 years. Yet, as other countries adopt the
technologies we develop then modify these technologies for low-cost
production, we are under constant stress to push farther ahead of the
curve. This issue is particularly important for labor-intensive crops.
Labor is obviously an area that has been hotly debated for decades
and one that still cries out for a solution. Whatever the solution, it
is imperative that Federal policies enable agricultural producers to
have access to competent field labor at reasonable wages.
As the market for locally grown, sustainable food increases, more
and more of our food is being grown within a few hundred miles of where
it is consumed. The concept of ``food miles'' is also a driving factor
that will assure increases in local production. However, without
competent field labor, none of this will be possible and the potential
increases in fruit, vegetable and tree nut production will not be
realized.
One of the most important issues for the southeastern agricultural
community is the most recent farm bill. Nearly the entire southeastern
farm community does not want the farm bill to be reopened. Most farm
bureaus has gone on record to this effect. Any changes to the current
farm bill are likely to have less favorable impact on farms and
farmers.
A related issue is that the U.S. needs to more aggressively promote
sales of U.S. agricultural products around the world. Foreign sales of
agricultural products remain one of the bright spots for U.S. trade. We
hope future trade agreements will not be made which benefit other
sectors, but at the expense of agriculture.
In 2007, agriculture was one of the areas that alleviated our trade
deficit. That year we imported $79 billion versus $116 billion in
exports. Don't kill the golden goose.
One last related area is farm finance. The farm credit industry has
been regulated through USDA and has been successful even during the
most recent credit crunch. Indeed, this is one of the reasons why
agriculture has been able to move forward while so many other
industries are suffering. Please don't lump the farm credit system in
with solutions for Freddie Mac and Fannie Mae. We should not attempt to
fix that which is not broken.
A seldom considered issue, but one that will have a significant
impact on the future of agriculture, is that we must consider
supporting the economic development of less-developed countries. As I
noted previously, much of the future demand for U.S. agricultural
products will come from rising incomes, and thus rising consumer
demand, for our products. It is rare when we can help agriculture while
at the same time ``doing the right thing'' for many of the world's
poor.
I want to call your attention to a few other issues that farmers
tell me are important problems for the industry, yet do not fall into
the ``macro'' category. One is Roundup resistant pigweed. This invasive
weed threatens to significantly reduce yields of a variety of crops.
Roundup is the primary tool to manage pigweed. As this weed develops
greater tolerance to Roundup, the primary weed control technology used
in the U.S., we face losing entire crops, especially cotton, or at
least the use of no-till cultivation which has many useful
environmental benefits. Research is desperately needed to find
alternative strategies to control pigweed.
Second, methyl bromide is used to sterilize soil prior to planting
disease-sensitive crops. Methyl bromide is being taken off the market
in stages, depending upon the crop and need. However, there are few
effective replacements available and yields are likely to be negatively
affected. Again, research is needed to find suitable replacements.
Finally, I can not leave this testimony without mentioning
biofuels. The southeastern part of the U.S. has been labeled the Saudi
Arabia of bioenergy. This is because we have abundant sunlight, a long
growing season, adequate rainfall and a long history of pine
production.
The exact role plants will play in energy production remains to be
seen. Nearly everyone agrees that energy production from grains,
especially corn, is a short-term solution. Cellulosic ethanol is the
long-term hope for energy production from plants, especially pine
trees. However, important technological breakthroughs must be developed
before we can expect to see widespread use of cellulosic ethanol in the
U.S. Whether this breakthrough comes next year or 10 years from now
remains to be seen.
There are serious issues facing U.S. agriculture today and in the
future. Some we can control, others we cannot. There are few we cannot
overcome. We are good stewards of the land and our natural resources.
And, we are a strong, stable segment of the nation's economy. My
message to you today is: Given sound policy, strong support, solid
investment in research and education, and stepped-up focus on food
safety, security, science and trade, the U.S. agricultural industry is
poised to meet the demand to feed and nourish the growing world
population.

The Chairman. Thank you, sir. I recognize Dr. Paggi.

STATEMENT OF MECHEL ``MICKEY'' S. PAGGI, Ph.D.,
DIRECTOR, CENTER FOR AGRICULTURAL BUSINESS,
COLLEGE OF AGRICULTURAL SCIENCE AND TECHNOLOGY, CALIFORNIA
AGRICULTURAL TECHNOLOGY INSTITUTE, AND ADJUNCT PROFESSOR,
DEPARTMENT OF AGRICULTURAL ECONOMICS, CALIFORNIA STATE
UNIVERSITY, FRESNO, FRESNO, CA

Dr. Paggi. Thank you, Mr. Chairman, Members of the
Committee. Again, my name is Mechel Paggi. I am the Director of
the Center for Agricultural Business at California State
University, Fresno, and I appreciate the opportunity to testify
today on the state of the farm economy in California.
Today, the economic viability of California agriculture is
being challenged. Arguably, the most important and immediate
challenge facing California agriculture is the availability of
water. California is currently in the third year of a drought,
with conditions among the worst in recent memory. In addition,
Federal judicial action has restricted deliveries of water from
the North to the South in efforts to enhance the environment
for certain endangered fish species.
A recent study estimates that as a result of the cutback in
water availability, we will lose about $2 billion in income in
the Central Valley of California. Excuse me. The same study
estimates about 850,000 acres of cropland in California will be
idle. The study estimates a loss of 70,000 jobs in farming and
support industries, jobs in many of the small towns and rural
towns in California, towns like Firebaugh, Mendota, where
unemployment is likely to reach 40 percent.
At the same time, California producers are struggling under
drought conditions, the worst economic recession in 26 years in
the U.S., and a related global economic downturn has created a
whole other set of problems for California agriculture.
Declining export demand has contributed to collapse in
commodity prices. The decline in the demand for cheese has
contributed to a rapid decline in California milk prices. The
current downturn in the dairy industry has negative spillover
effects in the California feed and hay market as well.
A few specific examples help demonstrate the magnitude of
the problems facing California agriculture. Over the past year,
the price for Class I milk has declined by over 38 percent. At
the same time, the price of supreme alfalfa hay delivered to
those dairies in Tulare, Visalia, and Hanford Counties, were
sold for around $265 a ton last year. That same hay is selling
for about $163 a ton this year.
These problems are hopefully cyclical in nature. However,
there are elements of the issues facing California agriculture
that involve programs and policies affecting the agricultural
economy that persist across markets and climate fluctuations.
The current problems associated with the lack of water
availability to agriculture will not disappear with a return to
normal weather. California water use, within the context of the
existing storage and conveyance systems, is likely not
sustainable. The solution to this problem will require a
combination of increasing storage capacity, increased
conveyance capability, and increased adoption of conservation
practice among all users.
Another area of concern is linked to California
agriculture's dependency on a reliable agriculture labor
supply. California agriculture producers, particularly grape,
tree fruit, and berry farmers, employ around 450,000 workers
during the peak harvest season. Some reports indicate that as
much as 85 percent of this farm labor payroll is made up of
undocumented workers. The development of a program to establish
a legal and reliable agricultural workforce is critical to the
agricultural economy of California.
Food safety: Not too long ago, an outbreak of Salmonella
saintpaul was initially attributed to fresh tomato consumption.
Ultimately, the outbreak strain of Salmonella saintpaul was
traced to Serrano peppers grown on a farm in Tamaulipas,
Mexico. Not a single tomato linked to ill persons was found to
test positive for Salmonella, but the damage was done. Industry
estimates put the loss to the tomato industry in excess of $100
million. In California, retail sales of tomatoes were down more
than 50 percent, even after tomatoes had been cleared from
suspicion. These events suggest the need for an examination of
FDA programs and policies, with a view toward discovering what
can be done to prevent future unsubstantiated warnings and
related disruptions, market disruptions.
Trade policy: California agricultural products are highly
dependent on export markets. However, in some cases, producers
are subject to market disruptions that result from trade policy
decisions over which they have no control. The recent canceling
of the NAFTA cross-border trucking program with Mexico is a
ready example. The most disturbing aspect of this immediate
dispute is Mexico's intention to place a 45 percent tariff on
the imports of fresh grapes to Mexico. Mexico is the second
largest market for California fresh grape exports, accounting
for almost $50 million in 2008. Clearly, this is policy action
that has a negative effect on the growing market for California
agricultural products in Mexico.
There are many areas that need to be addressed, and the
time is short: the infrastructure, a revitalization of roads,
ports, and rails; the development of programs designed to
promote agricultural contributions to carbon sequestration; the
role of biofuels; the improvements to border security, to
prevent entrance of damaging foreign pests and disease, to name
a few. The agricultural community in California and our elected
representatives will need to work together with our colleagues
from other states and other industries and interest groups, to
develop innovative policies and programs that address the
issues discussed here today.
Thank you again for arranging for this public hearing to
better understand the state of the agricultural economy, and
for allowing me to share my views on the current issues facing
California agriculture.
Thank you.
[The prepared statement of Dr. Paggi follows:]

Prepared Statement of Mechel ``Mickey'' S. Paggi, Ph.D., Director,
Center for Agricultural Business, College of Agricultural Science and
Technology, California Agricultural Technology Institute, and Adjunct
Professor, Department of Agricultural Economics, California State
University, Fresno, Fresno, CA
Chairman Boswell, and Members of the Subcommittee, my name is
Mechel Paggi, I am the Director of the Center for Agricultural Business
at California State University, Fresno. I appreciate the opportunity to
testify today on the state of the farm economy in California.
California has the largest agricultural economy in the United
States. If California was a country it would be the fifth largest
agricultural producer in the world in terms of agricultural revenue as
a percentage of GDP. Farm production generates around $36 billion in
annual revenue to our state. In addition, activities related to the
processing, transportation, handling and marketing of products such as
milk, tree nuts, grapes, processing tomatoes, cotton, vegetables and
nursery products create additional jobs, income and tax revenues that
are vital to state. For every $1 billion in farm sales, there are about
18,000 jobs created in the state in the farm sector itself plus another
7,000 in other industries.
About \1/2\ of all the fruits, vegetables and nuts grown in the
United States come from our state. California products play a major
role in programs designed to enhance child nutrition by supplying fresh
fruits and vegetables for school lunches and snacks.
California agriculture is also integrally linked to the global
economy. On average 28% of California's agricultural products go to
international markets. Exports of some important crops such as tree
nuts regularly amount to over 50% of California production. The on-farm
value of California's agricultural exports exceeds $10 billion and the
final export value is many times greater. For every $1 billion in
exports 16,000 jobs are created. Our nation's agriculture is one of the
few segments of our economy that enjoys a positive world trade balance
and California is a big part of that accomplishment.
Unlike many other states the majority of California agricultural
producers are not participants in commodity programs that provide
direct income and price supports. Government payments make up less than
3% of gross farm revenue in California compared to areas like the
Midwest where farm payments account for around 11%. However, California
agriculture does benefit from some Federal and state programs and
policies that provide support in areas such as marketing and market
information and plant and animal health and safety.
Today the economic viability of California agriculture is being
challenged. A number of factors have combined to create an environment
that is making it difficult, if not impossible, for growers who are
among the nation's most innovative, in one of the most productive
agricultural areas in the world, to maintain their current operations.
Arguably the most important and immediate challenge facing
California agriculture is the availability of water. California is
currently in the third year a drought with conditions among the worst
in recent memory. The lack of adequate rainfall and snow pack has
resulted in the lowest average reservoir levels in 17 years and
severely diminished recharge of ground water supplies. In addition
Federal judicial action has restricted deliveries of water from the
north to the south in efforts to enhance the environment for certain
endangered fish species.
The climate related drought and legal restrictions will combine in
2009 to severely restrict the flow of water from the two largest water
storage and conveyance projects in California. The U.S. Bureau of
Reclamation has informed producers in the western central San Joaquin
Valley they can expect to receive zero deliveries of water from the
Federal Central Valley Project (CVP) this year, down from 45 percent
last year. The CVP supplies about \1/4\ of the water used by California
farmers and is the primary source of water for the 600,000 acre
Westlands Water District (WWD) in western Fresno and Kings Counties.
The WWD is the largest irrigation district in the United States; farms
in the district produced about $1.3 billion in agricultural products in
2008. Reports indicate deliveries from the State Water Project (SWP)
are expected to decline to 15 percent, from 35 percent last year. The
SWP is the state's largest water delivery system serving Southern
California
A recent study by UC-Davis estimates that as a result of the
cutback in water availability we'll lose about $2 billion in income
Central Valley. That same study estimates about 850,000 acres of
cropland in California will be idled resulting in a reduction of about
$800 million from lost farm revenue and additional $1.2 billion decline
in income associated with a loss of some 70,000 jobs in farming and
support industries, many in the valley's small, rural towns. Towns like
Firebaugh and Mendota, where unemployment is likely to reach the 40
percent range. While conditions are most severe in the San Joaquin
Valley, the Department of Water Resources estimates indicate losses of
around $300 million distributed across the North, Sacramento Valley,
Central Coast and Southern regions.
At the same time California producers are struggling under drought
conditions, the worst economic recession in the 26 years in the U.S.
and related global economic downturn has created another set of
problems for California agriculture. For example, the tightening of
credit markets has made access to funds for investments in water saving
technologies (e.g., subsurface drip systems) and new wells for
supplemental ground water supplies, more difficult. Declining export
demand has contributed to a collapse in commodity prices. The decline
in foreign demand for cheese has contributed to a rapid decline in
California milk prices. The current downturn in the dairy industry has
negative spillover effects in the California feed and hay markets as
well as support industry services. Cut backs in orders from China,
India and other important overseas customers in the face of another
record crop have contributed to a fall in almond prices. Few, if any,
agricultural products in the state have not seen negative effects from
current economic environment.
A few specific examples help demonstrate the magnitude of the
problems facing California Agriculture. The statewide average price for
Class I milk was $18.81 May, 2008; the March 10, 2009 reported price
was $11.60 a decline of over 38%. The reference prices for dairy
products (butter, cheddar cheese, non-fat dry milk and dry whey) have
declined from $18.91 per lb. to $12.05 per lb. State average milk
production costs, even with reduced feed costs are in the $12 to $14
dollars per cwt range.
As one California analyst put it, when the buyer of 75 percent of
the hay and feed produced in the state is hurting financially we have a
problem. The weighted average price for supreme alfalfa hay delivered
to dairies in the Tulare-Visalia-Hanford area sold for around $265 last
year, on March 27, 2009 that same class of hay is selling for $163 per
ton.
These problems are hopefully cyclical in nature; rain and snow will
return to replenish our reservoirs and recharge the ground water; and
the economy will recover here and abroad. However there are elements of
the current water crisis and other issues facing California agriculture
that involve programs and policies effecting the agricultural economy
that persist across market and climate fluctuations.
The current problems associated with the lack of water available to
agriculture will not disappear with a return to normal weather
patterns. California water use within the context of the existing
storage and conveyance systems is likely not sustainable. Department of
Water Resources reports indicate that even in periods of average
precipitation California has an overdraft of around 2 million acre-
feet. The solution to this problem will require a combination of
increasing storage capacity, increased conveyance capability and
increased adoption of conservation practices among all users. To
implement these solutions will require a public-private sector
partnership at the local, state and Federal level. In addition some
consideration must be given to modifications of existing Endangered
Species Act provisions. In periods of extreme drought short-run needs
to make water available for citizen use and food production may take
precedent over the long-run species protection goals, an issue that
will need to be addressed at the Federal level.
Another area of continued concern is linked to California
agriculture's dependence on a reliable supply of agricultural labor. In
a recent poll of California Grape and Tree Fruit League Board of
Directors, immigration reform was rated the number one priority issue
for 2009. The single biggest expense for these producers is labor
costs. Since the fresh market is the first choice for most fruit
producers, hand picking insures minimal damage to the fruit, insuring a
greater share of the crop will meet the qualifications for selling in
the fresh market. Farm labor is also critical to tree nut production,
dairy operations and to a lesser extent in grain production. California
producers, particularly grape, tree fruit and berry farmers, employ
around 450,000 workers during peak harvest season and 300,000 in off
peak periods. Some reports indicate that as much as 85 percent of this
farm labor payroll is made up of undocumented workers. The development
of a program to establish a legal and reliable agricultural workforce
is critical to the California agricultural economy.
California producers have adopted farming practices that comply
with most stringent standards for food safety in the world. Our
dependence on foreign markets and reputation for high quality require
it. Despite these efforts the difficulties associated with the existing
programs and policies related to the detection and control of outbreaks
of foodborne illness in the U.S. can result in substantial negative
economic consequences for the agriculture industry. Most recently an
outbreak of Salmonella saintpaul was initially attributable to fresh
tomatoes consumption. Ultimately the outbreak strain of Salmonella
Saintpaul was traced to Serrano peppers grown on a farm in Tamaulipas,
Mexico. Not a single tomato linked to ill persons and randomly
collected from the distribution chain in outbreak states were found to
test positive for Salmonella. But the damage was done. Industry
estimates put the losses to the tomato industry in excess of $100
million. In California retail sales of tomatoes were down more than 50
percent even after tomatoes had been cleared from suspicion. These
events suggest the need for an examination of FDA programs and policies
with a view toward discovering what can be done to prevent future
unsubstantiated warnings and related market disruptions.
As mentioned earlier, the returns for many California agricultural
products are highly dependent on export markets. However in some cases
producers are subject to market disruptions that result from trade
policy decisions over which they have no control. The recent canceling
of a NAFTA cross-border program that gave Mexican truckers access to
U.S. markets is a ready example. In retaliation Mexico has targeted a
total of 36 agricultural products for increased import tariffs.
Included in the 36 agricultural products targeted for tariffs are:
onions, strawberries, cherries, pears, wine, almonds, juices and
peanuts. Some will be taxed at 10-15 percent, some at 20 percent. Among
the most disturbing for California producers is the intention to place
a 45 percent tariff on imports of fresh grapes. Mexico is the second
largest market for California fresh grape exports, accounting for over
$49 million in 2008. Clearly this policy action can have negative
effects on the growing market for California agricultural products in
Mexico. In contrast Congressional inaction on pending trade agreements
with Columbia, Panama and South Korea may prevent California and other
U.S. producers from capitalizing on potential market opportunities. To
provide a more competitive international market place for California
and U.S. agricultural products will require Congressional action
leading to the adoption of pending beneficial trade agreements,
compliance with obligations under existing agreements and continued
efforts to secure meaningful trade liberalization with increased
agricultural market opportunities in a multilateral setting (Doha).
There are many other areas that need to be addressed such as
infrastructure revitalization for roads, ports and rail; the
development of programs designed to promote agricultural contributions
to carbon sequestration; the role of biofuels; improvements in border
security to prevent entrance of damaging foreign pests and diseases to
name a few.
The agriculture community in California and our elected
representatives will need to continue to work with our colleagues from
other states and in other industries and interest groups to develop
innovative policies and programs that address the issues discussed
today. Identifying areas of concern and understanding the issues
involved is a first step in that direction. Hopefully the information
provided in this hearing has helped in that regard. At the end of the
day we all need to work toward improving the system that can provide
assistance to the resolution of immediate crises and establish the
elements of a strategic pathway to a prosperous future for U.S.
Agriculture and rural America.
Thank you again for arranging this public hearing to better
understand the state of the agricultural economy and for allowing me to
share my views of current issues facing California agricultural
interests.

The Chairman. Well, thank you, Dr. Paggi. The largest
agriculture producer has some real challenges. We all have
challenges, but you are painting a pretty tough picture there.
I hope we can do something to help.
I would just address this to all of you, to start off with
the questions. You know, bankers look at farmers' participation
in the farm programs, as they sit down and go over their
program for the year, and the analysis and so on, and I am just
curious what your thoughts might be. Do you anticipate bankers
weighing in with, or even pushing producers on whether to
remain in the Direct and Countercyclical Program, or sign up
for the Average Crop Revenue Election Program? What are your
thoughts on that? Anybody.
Dr. Harl. Just to be sure I understand, the traditional
program or the new program, that they can sign up.
The Chairman. Yes.
Dr. Harl. For the first time, well, if we had perfect
foresight, as perfect as our hindsight, in terms of what is
going to happen to prices, that would be an easy one.
The Chairman. Yes.
Dr. Harl. I have been, a lot of the producers in Iowa have
been saying I am going to sign up for the new program. I have
been cautious. I have, in my testimony, a statement of
disclosure that I am involved, with my wife, in owning farmland
in Iowa, and we have share-rent leases, so we are as involved
as our tenants are on this issue.
But I am so concerned about the commodity prices, going
forward, that I am putting off that decision as long as I
possibly can, and anyone who asks me, I am telling them the
same thing, because we just don't know. But it can be costly,
if we have a shift against us in commodity prices, which I fear
could happen.
Philosophically, what we have in the Federal programs is a
safety net, and we are beginning to change our philosophy a
little bit out in the country that this is a way to maximize
our income without looking at the basic nature of the program,
which is to catch us from a freefall in a bad year or series of
year, like we had from about 1998, when I was here, up through
about 2005, when ethanol pushed us up into the stratosphere.
That is unnatural. It is unusual to have that kind of thing
happening.
So, I think we need to keep our eye on what is the basic
purpose of Federal farm programs.
The Chairman. Thank you for that comment. You went right to
the heart of what I was getting at. Anybody else?
Mr. Dumler. My experience so far this year in Kansas is I
don't think the lenders are pushing farmers one way or another.
I think they are trying to figure out the programs just every
bit as much as farmers are. And, as Dr. Harl noted, it is
unknown right now.
I think, personally, in Kansas, it is a toss-up as far as
which direction may be the right one to go, and I will tell
farmers they will know in 2013 what the right decision was. So,
at this point, it is that farmers and lenders are both in an
information gathering stage at this moment, and putting off the
decision, for the most part.
The Chairman. Okay. The chair recognizes Mr. Moran.
Mr. Moran. Mr. Chairman, thank you very much. I want to try
once again. Apparently, I didn't ask my question seriously
enough to the Federal Reserve, but I am interested in someone's
analysis as to the expectations for interest rates. While you
have testified that at the moment, interest rates are low, debt
service is not a significant problem for most farmers, there
has to be a day of reckoning that is coming, based upon a
number of factors, including Federal spending.
Mr. Dumler. Right.
Mr. Moran. Is there a prediction, an estimation of when
this becomes a serious problem for agriculture?
Dr. Harl. My position has been we will eventually face
enormous inflationary pressures. We will eventually face higher
interest rates. What most of us don't know is when that is
going to happen, and it really depends upon when things begin
to turn, because as soon as the Federal Reserve sees that the
economy is turning, my prediction is that they will shift their
philosophy from trying to save us from a freefall to trying to
control inflation. Because the 1970s are not totally lost on
the building down in the flats.
I remember sitting with Mr. Volcker shortly after he became
Chair of the Fed, and they slammed on the monetary brakes. So,
agriculture has been through this. We know what happens, and we
need to be very alert to this. And we should now, with low
interest rates, be taking advantage of those low interest
rates, although, in the long part of the yield curve, it is not
as dramatic as it is on the short term money. I think that the
safe thing to do, for farmers and others, is to try to lock in
the longest terms they can get at the current cost of money,
knowing that we are going to have inflation, because you just
don't pour the kind of money into the economy without
consequences. And we can pretty well predict what those
consequences are.
Dr. Angle. Excuse me. Could I add a footnote. I think the
earliest we can see is a turnaround in Q4 of 2009, but more
likely, in 2010, and so, I don't think it is imminent. I don't
think these efforts that are being made are going to give us a
great deal of buoyancy this year, but it could happen as early
as the fourth quarter of this year, I think. But nobody really
knows. We are all trying to see around corners. And this is a
difficult corner to see around.
Mr. Moran. I see no one else jumping at the opportunity to
answer my question. Projected percentage of farm income,
someone mentioned this, and I want to make sure I understand
it, and it may have been you, Mr. Dumler, I am not certain
about projected percentage of farm income that is coming from
government programs. What is the trend?
Mr. Dumler. The trend has definitely been down. Obviously,
with the commodity prices, the programs that make payments
based off of low market prices don't kick in. So, we went from
levels in Kansas, looking at a 5 year average, 50 to 60 percent
of net farm income coming from government payments down to 20
percent in 2007. I would expect numbers in 2008 would be very
similar to that.
That includes, though, and you need to keep in mind, that
includes actually all government payments, commodities and
conservation payments in the data that we have. So, that may
be, perhaps, a little overstating some of those values, but the
trend has certainly been down the last couple of years.
Mr. Moran. I don't know that anybody mentioned this, but I
am interested in the percentage of farm income that is based
upon exports.
Dr. Harl. Exports.
Mr. Moran. Is that a number that anybody has, and do we
know what the trend is there?
Dr. Harl. Well, exports have been growing, and the
difficulty is, in trying to calculate how much of that increase
is attributable, or should be attributable to the export
activity, because of the way it works out in the markets. There
is no question, but what our exports have been rising
generally. I used to, in fact, I still have a slide that shows,
going back about 40, 50 years, showing the trend, and it was up
and down, but basically, we are moving up.
I think that one thing we need to be very cautious about
here is the question of competitive position that we are in in
the country. Most sectors of the U.S. economy are having
difficulty because they are losing jobs, they are losing
economic buoyancy abroad, because we are in a period when
everyone is seeking the lowest cost place to produce. But we
have an advantage in agriculture, in the sense that our soils
are not mobile, and our climates are not mobile, and as long as
they are not mobile, then we will probably be producing crops
in the United States. They are not going to get outsourced like
a lot of other things are.
Livestock is mobile, and livestock could move. And we are
seeing a dramatic increase in livestock production in Romania,
in Poland, in a lot of the Central and Eastern European
countries. But generally speaking, livestock production is
pretty tightly tethered to feed grains, and we have the
advantage, of course, in feed grains, and probably will for
some time.
So, when we take the very long view here, we can take
comfort in the fact that we are a little different from most of
the sectors. It is a very serious problem for almost every
sector, including the service sector, because a friend of mine
just had a knee surgery in India, and that means movement of a
lot of value overseas rather than here. So, trade is good if
your unit of observation is the globe. Trade is not so good if
your unit of observation is Newton, Iowa, that lost the Maytag
plant, and they are still recovering from it.
So, this is part of a much broader issue, as to where we
are going in the world, and of course, we have one overarching
objective, and that is to try to increase the level of harmony
in the world, and that is best done by raising people's
incomes. And so, this is long term, but it is kind of a hard
sell to someone who just lost their job.
Mr. Moran. I describe that as trade is always good in the
macro sense, but difficult to explain in the micro sense.
Dr. Harl. Exactly.
Mr. Moran. My time has expired. I hope that, I want to give
everybody a chance. We have votes soon, and I hope to be able
to ask another round of questions if the votes haven't been
called.
Mr. Chairman, thank you.
The Chairman. Mr. Marshall.
Mr. Marshall. Thank you, Mr. Chairman.
Just an observation, in light of Mr. Moran's questioning
concerning interest rates. Some argue, at least, that our
current circumstances are a good bit different than those in
the 1970s. Yes, it is true that a huge amount of liquidity,
hopefully, is being injected into the market by the Fed, by
stimulus packages, et cetera. But that is in response to a
massive contraction in the money supply that has occurred, and
if managed appropriately, it may not lead to--it certainly does
not inevitably lead to inflation. If the right kind of measures
are taken, judgment is exercised, and the effect of this is to
simply stop the contraction, and then gradually build it back
up as the economy builds back up. And if it occurs, if there is
a harmonious relationship between our efforts where the money
supply is concerned and the economy, then we ought to be able
to avoid deflation and inflation, both those things. There are
plenty of people who are saying that now.
My question, though, is, it has to do with Dr. Angle's,
Dean Angle's testimony. I am struck, in your testimony, the
written testimony, some of which you read to us in your opening
remarks. You say that it is just a given, ``crystal clear'' is
the term that you use, that rising population will lead to food
production having to double by the year 2050, and arable land
is going to decrease. We have climate change issues that you
discussed in your piece, and the solution to, getting to,
despite the smaller available land, getting to doubling the
food production by 2050 is going to be increase as a yield, as
a result largely of technological improvements.
And I guess my question is this. Are any of you aware of
what you would view as credible agricultural economists who are
pessimistic about the ability of technology, scientific
advances in crop yields, to keep up with the need at this
point? I have read a few pieces that, where people who purport
to be experts are saying gosh, the huge technological
improvements that we have seen, starting in the 1950s to the
present day, are slowing down, and as they look at how things
are likely to evolve, we are not going to see that kind of
improvement in the future. So, it is unrealistic to think that
somehow, we are going to get out of this problem, well, it
would be a problem if, in fact, we can't keep up food
production in light of population.
Any of you know of credible economists, this reminds me of
somebody who doesn't have expertise in this area, it sort of
reminds me of the argument over global warming. And if the mass
of scientists who are experts in the area are saying yes, we
have a problem with this, and a small number are saying no, we
don't, policymakers like me sort of feel like we better go with
the mass here, because the consequences of being wrong are
pretty significant. And so, maybe we need to take some
reasonable measures to try to address the problem.
I guess the same thing is true here. Are there credible
agricultural economists out there who say we are not going to
be able to keep up?
Dr. Angle. Let me discuss this historically. Fifty years
ago, there were the same, ``type'' of economists saying that
food production could never keep up with the increase in
population, Malthus and some of the other experts back at that
time were predicting in the year 2000, that we would be looking
at mass starvation on a global basis. That didn't happen.
Technology is what kept up with the growth in population, and
our ability to double food production on a fairly regular
basis.
The same type of people are saying those same things now.
My argument against that is that while the easy things have
been done in agriculture, our advances in technology, genetic
engineering, improved understanding of genetics, both plants
and animals, has given us tools that did not exist 50 years
ago. We have the opportunity to make incredible advances over
the next 50 years. Again, the easy things were done 50 years
ago. The hard things are left, but we have some tools in our
tool belt now that did not exist 50 years ago, and so----
Mr. Marshall. If I could interrupt. You said--it is the
same, you are saying, it is the same type of person, the
generally pessimistic----
Dr. Angle. I would call them more futurists than true
economists, the people who look at some of these macro trends
that were making these predictions 50 years ago. Those same
type of people are still out there today, making predictions.
Mr. Marshall. So, what you are saying, I guess, in response
to my question, is that you are unaware of what you would view
as credible agricultural economist, experts in the field of
food production, who themselves believe that we are not really
going to be able to increase crop yields to the degree we need
to, in order to meet the challenge. You are just not aware of
people like that.
Anybody on the panel aware of folks like that? The industry
is pretty much unanimous, you experts are pretty much unanimous
that we are going to be able to move forward?
Dr. Harl. It is very difficult to get a group of economists
to agree on much of anything, but I would say that the majority
view is that this does not pose an earthshaking problem for us.
And I think there are a number of reasons for that. There is a
lot of potential supply response. We have not really----
Mr. Marshall. I have to interrupt for a second here. I am
really just sort of interested, my time has expired, we are
going to have votes, there is another person who wants to ask
questions. I am interested in not the details, as much as I am
whether or not there is a substantial minority view here.
You said just a minute ago, you just said in your opening
remarks responding, ``that the majority of.'' Had you not
spoken, had we just left with Dr. Angle's remarks and nobody
else, I would have said not a majority, it is like a super-
majority. There is just nobody out there who is viewed as a
credible agricultural economist that would think we are not
going to be able to keep up. That is really the issue for me.
Is there a real substantial view among credible agricultural
economists that we are not going to be able to keep up? Dr.
Harl.
Dr. Harl. I would have to say that the majority view is
clearly that that is not a huge problem facing us, that we
will----
Mr. Marshall. Fifty-one percent say it is not a huge
problem, 49 percent say it is an overwhelming problem. From a
policymakers' perspective, that is something for us to worry
about.
Dr. Harl. I have never seen agricultural economists lined
up in a row, and then, to see how many were over on one side of
the line or on the other side of the line, but it is not the
view of the profession, as I would put it, that this is a huge
problem. And part of the reason is, we all lived through the
last 80 years, and those who argued in the 1930s that we had a
problem on our hands have been proved pretty much wrong over
the years. As I started to say, there is a huge supply response
we could exploit here if we have higher commodity prices. And
the technology is going to be very significant, too.
Mr. Marshall. Thank you all for your testimony. My time has
expired.
The Chairman. Thank you. I now recognize, my colleague from
Iowa, Mr. King.
Mr. King. Thank you, Mr. Chairman, and I do thank all the
witnesses, and Mr. Dumler, I recall your testimony down there
in the rain-drenched land of the purple tie, long ago. I tease
you a little bit as I do my colleague here, Mr. Moran, for that
reason, to catch Kansas while it was raining.
But as I listened to all the testimony here, I want to just
make the comment that the Malthusian's have always been wrong.
We have always risen to all of those challenges, and that is a
thread that I think, came from the witnesses. And in the time
that I have, I have a lot of questions, but I would like to
take this opportunity to direct my first question to Dr. Harl,
and that is, what we have seen happen, and especially in the
feed grains commodities, and in our part of the country, is
that grain prices have been strong. The demand for
countercyclicals and LDPs have been essentially eliminated for
at least a couple of those crop years.
In the middle of that, we have a little bit of EQIP funding
that has been going to our livestock producers primarily. If we
were to lose the funding for direct payments, would there be
anything that existed in Federal policy that would provide an
incentive for soil conservation, protecting our water quality,
and preserving the productivity of our soil?
Dr. Harl. Well, as long as the prices stay high enough, so
that we don't have countercyclical and we don't have market
assistance benefits, because we have the cross compliance rules
that really are the stick to keep people doing the right thing.
So, the loss of direct payments would mean that there would be
less penalty for doing the things that people might be inclined
to do.
I guess I would be, to be fair, I would have to say that
most of the people I know aren't terribly willing to tear up
terraces and that type of thing, even with high prices. There
is a great stewardship feeling among farmers and landowners as
well. So, I have argued against direct payments from a public
relations point of view, and when farmers are having good
commodity prices, I think it is difficult to justify to a
person who sees in the papers payments of significant size
going out to individuals.
Mr. King. What if we just renamed them conservation
compliance payments, then? Would that be more accurate?
Dr. Harl. That would be--I really think we should start
working on something to make these closer tied, more closely
tied to those things that the public believes are really
important. We have data back many years showing 60 to 65
percent of the population will be supportive of programs to
help family farmers, if they think they are needed, or it is
serving a good purpose. And this is what we have to do here is
to reinvent direct payments in another form.
Mr. King. You know, if I might pick up on that, Dr. Harl,
and I appreciate that, because I think we go to the same place
eventually. And the culture that is there for land stewardship,
I believe, is something that has been built, because we have
had incentives in place, and I, of course, have spent a lot of
my life engaged in that, and it is one of the reasons my focus
comes on that. And I am concerned about losing the direct
payment component of this, because it remains a last hook if
countercyclicals and LDPs would no longer be demanded because
of market prices.
But I wanted to take you to another question. And that is,
I just put some numbers together here as I was listening to the
testimony, and it really goes to the food versus fuel argument.
And in the 2007 crop, we raised more corn than ever before, and
that would be about 13.1 billion bushels, and we exported more
corn than ever before, that would be 2.5 billion. We committed
about 3 billion bushels to ethanol production out of that crop.
But then, I would also calculate that, make your argument,
whether you add a third of it back in or half of it back in,
but since half of the waste is also lost in feed, I would argue
you would have had half of that back in, mostly in the feed
value, in the form of DDGs. So, I end up with a net domestic
consumption out of the 2007 crop for corn of 9.1 billion
bushels, effectively.
And when I look at that, and I look at the average that has
been available for domestic consumption over the previous years
and the decade, that is 7.5. So, we really had 1.6 billion more
bushels of corn available out of the 2007 crop for domestic
consumption than we had seen in any other year of the decade.
How could we then have the demand for fuel drive up food prices
as high as the people that are on that side of the argument
say? Dr. Harl.
Dr. Harl. The issue of the relationship of the price of
corn and soybeans, and to a degree wheat, to the price of food,
is a very complex issue, and to understand that, you have to
look at the structure of the segments of the supply chain. Most
of the producers are in perfect competition, and before we see
livestock, the corn that goes into livestock production, cause
an increase in, beyond the farm gate price, you have to have
forces squeezing the producer to reduce supply, and that takes
a while. And I was questioning, in the articles I was writing
over the last several months, that livestock production isn't
forcing up prices.
Now, it is a little different story where corn is used
directly in production. But you move one step up the processing
side, and that is not as competitive. That is not perfect
competition, and the retail side in the stores, that is not
perfect competition, either. And so, where we have seen a great
deal of concentration occur, they are always slower to drop
their prices when the price of raw materials goes down, and
they are very quick to raise their prices. That is really the
reason why I consider the structure question in agriculture one
of the most important, going forward, of any of our policy
issues.
I think the public is best served when we have as much
competition as we possibly can get, not only in the production
side, but in the processing and every other step. And so, I am
strongly supportive of everything that will make the price
system, the market system work better.
Mr. King. Well, thank you Dr. Harl, and just if I could
conclude with a question, thank you, Mr. Chairman, for the
deference. As I listen to this, I also am aware that during the
same period of time, this would be about a little over a year
ago, we saw food prices go up about 4.9 percent, and we saw
energy prices go up about 18 percent. So, I would submit that
at least the ethanol and the market had to lower the, keep the
price of gas from inflating as it might have otherwise. But I
would just like to conclude with a question to Dr. Angle, and
that would be that if we are concerned about meeting these
goals of doubling food production by 2050, and concerned about
water and the things that you talked about, then how do we
justify, then, subsidizing non-food commodities such as cotton?
Dr. Angle. Well, it is certainly a local issue. Cotton is a
very important part of the Georgia economy, and despite what we
heard recently, and despite some of the programs, we are
starting to see an increase in the desire to plant cotton in
Georgia and neighboring states. You know, I don't feel
qualified to give you any better answer.
Mr. King. Can I just summarize that.
Dr. Angle. I understand.
Mr. King. It becomes a local economics question, and
parochial.
Dr. Angle. Yes, sir.
Mr. King. And I really shouldn't have been presented that
question to you. I must have gotten up on the wrong side of the
bed this morning. So, I thank you all for your testimony very
much. It is very engaging and enlightening, and I appreciate
it, Mr. Chairman. I would be happy to yield back.
The Chairman. We have been called for a vote. However, we
can take a couple of minutes, yet. And so, I would recognize
Mr. Moran for his last question, and any closing remarks he
would like to make as the Ranking Member.
Mr. Moran. I thank the Chairman, and I will try to avoid
asking questions, because there is a tendency out there to have
long answers, at least by some of the witnesses.
And Dr. Harl, I do appreciate very much what you had to say
about the political nature of direct payments. I am one who
believes they are a very important component of the safety net
that we provided farmers, which came about in the 2000 Farm
Bill, that so-called three-legged stool. I understand the
difficulty in explaining why a payment would be made when
commodity prices may be higher than they are historically. But
I certainly would encourage you to make the case, based upon
what you said subsequent to that, about the role that the
market should play in making decisions, and those direct
payments are the least trade distorting, and they are the most
market oriented, and at a time when commodity prices are what
they are, and there is no other payment being made. But, input
costs, again, we don't take into account, except in a small
way, in regard to those revenue payments, what the cost is of
production. And those direct payments are a very important
safety net at the moment, when fertilizer, fuel, and natural
gas matter. And I would love to have you talking about yes, it
is difficult to explain this politically, but they matter.
And I also wanted to just ask, or comment to Mr. Dumler
about I wish we had had more time to explore the circumstances
that our livestock and dairy industry are facing in Kansas and
across the country. You, Dr. Paggi, mentioned that in
California, it is a huge issue, with tremendous consequences,
and then, it spills over into the grain side. It also creates
difficulties when it comes to ethanol and biofuels, and kind of
the consequences to our livestock and dairymen. On one hand,
when we promote the use of grain for fuel purposes, yet, at a
time in which livestock and dairymen have such dire
circumstances that they face.
I have spent some time in California with producers,
specialty crops, cotton, rice. Your university gets great
commendation from the producers that you serve in California,
and I appreciate very much the relationship that you apparently
have in promoting agriculture.
Dr. Angle, this Subcommittee has spent time in Georgia. I
look forward to working with you in regard to the issues that
matter in the South. And I thank the Chairman for allowing me
at least, not asking questions, but to express an opinion.
The Chairman. Well, we appreciate that, and we have had the
second call, so we are going to bring this to a close. I just
want to thank the panel for giving us the time you have given
us.
I think you have told us pretty clearly that it is a
challenging time, and we need to stay tuned in, and I can't
appreciate you bringing your expertise and coming to use, can't
say it strong enough. Please stay in touch with us. We will
probably stay in touch with you.
And so I am going to bring this a close, and under the
rules of the Committee, the 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
questions posed by a Member.
The hearing of this Subcommittee is now adjourned.
[Whereupon, at 1:35 p.m., the Subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Submitted Report of National Corn Growers and Corn Farmers Coalition

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Submitted Question
Response from Howard K. Gruenspecht, Ph.D., Acting Administrator, U.S.
Energy Information Administration, U.S. Department of Energy
Question Submitted By Hon. Betsy Markey, a Representative in Congress
from Colorado
EIA estimates that in 2007 2.6 percent of total U.S. natural gas
consumption was used for on-farm activities such as facility heating
and grain drying, and as the primary feedstock and process energy
source to produce required farm chemicals and fertilizers. Feedstock
and process energy uses of natural gas to produce farm chemicals and
fertilizers are roughly five times greater than on-farm uses of natural
gas.
In the updated Annual Energy Outlook 2009 reference case (including
the impact of the American Recovery and Reinvestment Act), the share of
total U.S. natural gas used on-farm and to produce agricultural
chemicals and fertilizer is expected to increase to roughly three
percent by 2016, then decline towards the 2007 share of total gas used
by 2030.