Segment 4 Of 5 Previous Hearing Segment(3) Next Hearing Segment(5)
SPEAKERS CONTENTS INSERTS
Page 515 PREV PAGE TOP OF DOC Segment 4 Of 5
THE FUTURE OF FEDERAL FARM COMMODITY PROGRAMS (DAIRY)
THURSDAY, APRIL 5, 2001
House of Representatives,
Committee on Agriculture,
Washington, DC.
The committee met, pursuant to call, at 9:35 a.m., in room 1300, Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
Present: Representatives Pombo, Smith, Lucas of Oklahoma, Moran, Thune, Gutknecht, Simpson, Pickering, Osborne, Rehberg, Graves, Putnam, Kennedy, Stenholm, Peterson, Dooley, Boswell, Hill, Larsen, Acevedo-Vilá, Kind, and Shows.
Staff present: William E. O'Conner, Jr., staff director; Tom Sell, John Goldberg, Alan Mackey, Callista Gingrich, John Riley, and Howard Conley.
OPENING STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
The CHAIRMAN. Good morning. The hearing of the House Committee on Agriculture to review Federal farm policy will come to order.
Welcome back for the tenth in our series of hearings designed to examine recommendations for future farm policy. I thought we would shake things up a bit today with our focus. Rather than working on traditional row crop programs, we are taking a look at Federal dairy policy.
Though our focus this morning is a bit different, the rules are the same. Like every other commodity and farm interest group that has testified, our dairymen will be expected to explain to us exactly what aspects of farm policy they would like to change or keep the same. They will also be expected to explain how their policy recommendations would affect related industries, our ability to move product in the export markets, the effect on farm program expenditures and WTO obligations.
Page 516 PREV PAGE TOP OF DOC Segment 4 Of 5
This committee has had high expectations of each and every witness that has presented testimony. Likewise, our farmers have high expectations of this committee. We have a challenging task ahead as we get down to the nuts and bolts of crafting a farm policy that will impact so many lives. Based on the enthusiasm that I have seen from our Members and the work that has been done by grassroots organizations and farm groups, I am confident that our efforts will have the results and the right policies for our Nation's producers.
Today it is a pleasure to welcome Mr. Jerry Kozak, who is chief executive officer of the National Milk Producers, who will be presenting testimony on behalf of the dairy industry.
I would like to again welcome you, your colleagues, and I would recognize Mr. Stenholm for any comments.
Mr. STENHOLM. Thank you, Mr. Chairman. I, too, join in welcoming the witnesses. I look forward to hearing from you.
The CHAIRMAN. Gentlemen, thank you very much. As always, all Members' statements will be included as a part of the record.
[The prepared statement of Mr. Smith follows:]
PREPARED STATEMENT OF HON. NICK SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
Thank you, Mr. Chairman, for allowing the National Milk Producers Federation to come before the committee today with their views on the direction of future farm policy. National Milk has provided the dairy farming community with a strong and effective voice on national agricultural policy issues for many years. Today, with record low milk prices and many dairy farmers facing bankruptcy or selling out, dairy policy is more important than ever.
As a dairy farmer from southern Michigan, I have witnessed changes firsthand over the years. The difficult task that lies before those of us in Congress is: How do we help maintain the viability of agriculture and rural communities in this country? In addition to this extended period of depressed prices, dairy farmers (as well as most farmers) are faced with the pressures of increased competition and enormous subsidies in foreign countries, as well as costly and burdensome regulations in this country. These factors make the situation even more difficult, but I believe that it is still possible to come up with an effective farm bill to help struggling farmers survive.
Page 517 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. Kozak, I would ask that National Milk Producers review my legislation dealing with CAFOs, H.R. 1138, and let me know your opinion. I thank you again, Mr. Chairman, for holding this hearing today.
The CHAIRMAN. You are free to begin, Mr. Kozak.
STATEMENT OF JERRY KOZAK, CHIEF EXECUTIVE OFFICER, NATIONAL MILK PRODUCERS FEDERATION, ACCOMPANIED BY PETER VITALIANO, VICE-PRESIDENT, ECONOMIC POLICY AND MARKET RESEARCH, AND ROB BYRNE, VICE-PRESIDENT, REGULATORY AFFAIRS
Mr. KOZAK. Good morning, Chairman Combest, Ranking Member Stenholm and the other members of the Agriculture Committee. I appreciate the opportunity to be here today. My name is Jerry Kozak. I am the chief executive officer of the National Milk Producers Federation. With me is Dr. Peter Vitaliano from our economics staff and Dr. Rob Byrne from our regulatory staff. Like the many other witnesses you have heard from the past few months, I would like to spend some time discussing our perspective on the proper role for the Federal Government in assisting the domestic dairy industry through the upcoming farm bill. Although I realize that the primary focus you wish to focus on today is the economic safety net for dairy farmers, our testimony will also deal with more than just the economic regulations.
It is our belief that the economic policies alone do not hold the key to the future for the U.S. dairy producers. We need a much more comprehensive farm policy covering dairy than the one that was contained in the 1996 FAIR Act. Only by addressing all of the individual Government programs affecting dairy farming, each a part of a larger portfolio, can we truly develop a policy framework that addresses all of the concerns of dairy producers.
Page 518 PREV PAGE TOP OF DOC Segment 4 Of 5
Last year National Milk conducted a thorough grassroots outreach effort to obtain input from dairy farmers all across the country regarding the future direction of dairy policy. In order to reach out as broadly as possible in this effort, we called it a dairy producer conclave, and we were joined by a number of the national producer organizations listed in our testimony. The net result of that effort is reflected in many of the items I am sharing with you today.
I used the term ''portfolio'' a moment ago, but rather than present our recommendations as a series of individual items, I believe a more apt metaphor, at least for the dairy community, is to think of our recommendations as various wedges within a wheel of cheese. We can slice and dice that cheese wheel according to our whims, but each piece that is removed is a larger part of the whole.
I will begin by detailing our recommendations on economic policy, but I also want to touch upon the need for programs and other pressing concerns to dairy producers: animal health programs, environmental compliance assistance, trade policy, taxation issues. These are all slices of that big cheese wheel I just described.
The dairy industry is unique among agricultural commodities because milk is highly perishable, bulky and not easily stored. Dairy farmers must market their production every day regardless of price. I would also like to stress that the great majority, over 95 percent, of our dairy operations are family-owned and operated. Contrary to the sometimes popular notion that U.S. livestock operations have become dominated by, ''corporate farms'', virtually all of America's dairy operations are owned, managed and worked by American families.
Let me move on to what I call the dairy safety net. At the present time the National Milk Producers Federation recommends the enactment of the Dairy Safety Net Program with the following features: One, extend the price support purchase program at the current price support of $9.90 per hundredweight; two, maintain the current CCC purchase price for nonfat dry milk of approximately $1 per pound; three, extend the Dairy Export Incentive Program; four, establish a supplemental payment program involving class III and IV milk.
Page 519 PREV PAGE TOP OF DOC Segment 4 Of 5
The Dairy Price Support Program has proven to be an effective means of stabilizing dairy producer prices and incomes at relatively low cost to the Government. Terminating the Dairy Price Support Program would reduce dairy producer income by $5.6 billion over the 2002–08 period. Producer income would drop by 1.8 billion in 2002 alone, the first year during which the program is assumed to terminate.
Our analysis shows that the Dairy Price Support Program continues to be a very effective program in leveraging Government support for dairy producers. In simplest terms, extending the Dairy Price Support Program would deliver $1.55 of benefits to producers for every $1 of Government cost.
We also advocate maintaining the present level of support of nonfat dry milk. Because of the method by which classified milk prices are now calculated under Federal order reform, reducing the CCC purchase price for nonfat milk, as an example, by 5 cents would reduce dairy producer income by $2.3 billion over that 2002–08 period. Producer income would drop by $416 million in 2002 alone. Maintaining the CCC purchase price for nonfat dry milk at approximately $1 per pound would result in $16 of benefits to producers for every $1 of Government cost over the 7-year period.
In terms of controlling cost, the most effective means of reducing CCC purchases of nonfat dry milk under the Dairy Price Support Program is to limit the imports of milk protein concentrate and casein into the United States as most other dairy products are limited. I will offer additional remarks later in my testimony.
Finally, the basic rationale for enacting a class III and class IV supplement payment component of a dairy safety net is producer equity. Enacting a supplemental payment program for milk used to produce manufactured dairy products would increase dairy producer income by $5.4 billion over the period that we analyzed. Since class III producers would be the primary recipients of this income, the program would go a long way to helping this segment of our dairy farmer community. We believe this Supplemental Payment Program when coupled with the continuation of the Dairy Price Support Program can provide the basis for a dairy safety net for producers throughout the United States.
Page 520 PREV PAGE TOP OF DOC Segment 4 Of 5
As I conclude our industry's recommendations concerning the future of dairy economic policy, let me unequivocally state that National Milk supports the maintenance of the Federal Milk Marketing Order Program. Major changes in the Federal order system were mandated in 1996, and we are still adjusting through the administrative process to the changes made in the current farm bill. Our strong recommendation is that no further changes in Federal orders be made by Congress in the 2002 farm bill.
Mr. Chairman, animal health concerns have been splashed all across the news in recent months and all around the world. The ability to prevent and control diseases such as foot and mouth and BSE is crucial to our livestock industry. Johne's disease is an infectious disorder of the intestinal tract of cattle and other ruminants. Johne's is not a human health threat, but just like foot and mouth, it is a major concern to dairy farmers who have to deal with its economic consequences. This disease, which has no effective cure and a vaccine of limited efficacy, costs the U.S. dairy industry at least $200 million annually in lost production. Thus we are asking for a multiyear program that will help control the problem.
The proposal we are submitting would help fund a national voluntary program under which the cost of testing a farmer's herd for Johne's would be largely underwritten by Federal money and administered by USDA throughout the States. The program over a 7-year period is estimated to be $1.3 billion and approximately $191 million per year, and would be available both to dairy and beef cattle producers.
Additionally we have included in our testimony a number of other animal health programs that we think are crucial to the biosecurity of our Nation's dairy herds. I will not go into detail today.
In addition, dairy producers take great pride at being stewards of their land and their resources. However, this committee should also be well aware that the current and potential financial impact on producers of certain environmental compliance initiatives such as the new animal feeding strategy released by EPA and USDA will cause significant problems for dairy producers. We support sound, science-based environmental regulations, but we can't go out of business complying with them.
Page 521 PREV PAGE TOP OF DOC Segment 4 Of 5
In terms of achieving compliance, we believe the EQIP Program should be increased and restrictions removed so that dairy producers can more participate in this program. We also urge Congress to provide $100 million annually to NRCS and running through the authorization period of the farm bill.
Let me turn to trade policy very quickly. Mr. Chairman, trade policy will continue to play a critical role in U.S. dairy farmer income. Consequently, NMPF believes Congress should be involved in carefully reviewing future trade agreements as well as provide our negotiators with the necessary resources to negotiate and monitor trade programs. We have included in our testimony a number of practical suggestions. In addition, we support Congress granting the President trade promotion authority; however, we do not support, nor should this Congress support, WTO agreements that place our domestic support programs for producers at a disadvantage compared with the domestic support for producers in other exporting areas.
When the United States established the TRQs for other dairy products such as cheese, butterfat, butter and nonfat dry milk, the technology to produce those concentrated milk proteins was in its infancy. Thus, the United States created no significant tariffs or quotas on milk protein concentrate. As a result, 6 years after the implementation of the GATT agreement, U.S. imports of milk protein concentrate have risen more than 600 percent, while other nations are jealously guarding their markets against the importation of such products. Dairy program costs have been increased considerably as a result of increased imports of milk protein concentrate and casein. This is because unrestricted imports of these products increase the sales of domestically produced nonfat dry milk to the CCC under the present Dairy Price Support Program. Thus, we believe this Congress should enact legislation concerning the prevention of such dairy tariff rate quotas. My testimony also contains a number of programs that we have put together.
Dairy products from foreign suppliers are benefiting domestic producer efforts here in this country, and we believe they should be subject to an equivalent assessment to help pay for the promotion program. This is an already established practice in beef, cotton, pork, and we are asking for the same assessment.
Page 522 PREV PAGE TOP OF DOC Segment 4 Of 5
We also support the Dairy Export Incentive Program, and we believe that that should be reauthorized.
Lastly, Mr. Chairman, taxes obviously weigh heavily on dairy farmers. We support your efforts that are already under way to provide some form of tax relief for dairy farmers.
Mr. Chairman, in conclusion, I would like to thank you, Mr. Stenholm and the other members of this committee for the opportunity today to review the dairy producer community's recommendations for a comprehensive set of policies that provide the framework for the next farm bill. We have specifically addressed not only the dairy safety net, but also programs that are integral to the economic health and well-being of dairy farmers all across the country. Our approach has been first to develop the policies themselves, and then calculate the estimated funding to implement those policies. Our end goal is not just defining a dollar amount, but the creation of sensible ideas that have some overall benefit, even if little or no funding is requested.
We recognize that some of the items in our testimony may fall under a different committee's jurisdiction, but we believe it is critical to provide the House Agriculture Committee an opportunity to consider the holistic impact of everything you decide relative to agriculture as you consider the future farm policy. We believe that we have offered you a set of comprehensive dairy framework policies that I mentioned at the start of the testimony.
The recommendations, we believe, do not negatively impact any other agricultural commodity. They do not adversely impact the processing segment of our industry by advocating excessive market intervention. And they do not violate our obligations under the World Trade Organization. Since we do not propose any increase in the price support level nor in any CCC product purchase prices, consumer prices will not be changed by extending the Price Support Program. The class III and IV supplemental payments I described would likewise not increase market prices.
Page 523 PREV PAGE TOP OF DOC Segment 4 Of 5
I hope you can now understand why we chose the visual metaphor of the cheese wheel to highlight our priorities. You simply don't have a complete round wheel if a piece is missing. I think the same holds true for much of rural America with respect to dairy farmers. As we lose our dairy farm infrastructure, rural and even suburban communities begin to lose key pieces of what makes them unique. Dairy farmers and their families are often important members of their community, through involvement in church groups, school boards, fraternal organizations and other civic and faith-based associations. We have to be mindful that the heritage and the culture of rural America is also contingent to a certain degree on the steps we take or we don't take that affect the economic health of the dairy sector and other agricultural endeavors.
But, more importantly, beyond the often dry, arcane policy initiatives that we discuss in this process, it is important to remember the human dimension of these policies and their impact on dairy producers, their families and their communities.
Thank you. I look forward to answering your questions.
The CHAIRMAN. Thank you very much.
[The prepared statement of Mr. Kozak appears at the conclusion of the hearing.]
The CHAIRMAN. Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman.
Jerry, thank you for your testimony, including that which you did not share with us, that which you gave us in writing today. You have given us a lot of good directions.
I guess my first question today to you is on table 2 of your testimony, you tell the tale of the farmer's declining share of the consumer dollar. In 1980, the dairy farmer received 52 percent of the consumer dollar; in 2000, only 30 percent. Most of my speeches and most of my questioning of previous witnesses at this table has centered around the necessity of farmers cooperating like we have never cooperated before. I am a firm believer that if the farmer, the dairy farmer in this case, is going to get a fair price in the market, they are going to have to change the way they do business. In the case of dairymen, though, 85 percent of all milk produced is handled by cooperatives.
Page 524 PREV PAGE TOP OF DOC Segment 4 Of 5
Now, if this is the case, if we control 85 percent of the milk produced, why have we not been successful in gaining a greater share of the consumer dollar through our cooperative effort for dairy farmers?
Mr. KOZAK. Thank you, Mr. Stenholm.
I am going to ask Dr. Vitaliano to discuss this issue.
You are correct. It is an issue that we have been looking at. It is a difficult issue. We believe we have some pretty good understanding as to what is happening.
Before Dr. Vitaliano responds, I also want to agree with you that we still think seriously that the way we market our milk through cooperatives is the best method. When we have looked at this, we have looked at some issues that would have really caused us a problem had farmers not marketed through cooperatives. But I think Dr. Vitaliano, who is our economist, can give you some insight as to some of the reasons for that.
Mr. VITALIANO. Yes. Congressman Stenholm, I think cooperatives have a very admirable track record in terms of achieving bargaining parity with processors and others they sell milk to. But much of the farm-to-retail value that has been growing as shown on that chart is a little bit further up the marketing chain. For cooperatives to really effectively go after that requires some sort of vertical integration strategy. In order to do that, to sort of move further up the food chain, the level of investment per hundredweight of milk increases, and the level of risk, of return on that investment also goes up. Despite their strengths, in many cases cooperatives have not proven to be the best of vehicles to get that level of investment when that investment is competing with farmers' needs on the farm. That has basically been one of the problems we have found. That would be one of my key answers to your question.
Mr. STENHOLM. Any suggestions of additional tools that you might need in order to achieve a greater degree of market power? It seems to me, and this is true all across agriculture, we are seeing a growing concentration in the area of the buyer. And here where we have a pretty good concentration of sellers—there are two components to my question. One you have answered at least partially. The other is that I ask corporate America, why or what or how can you work together with the dairy farmer to get more of the consumer dollar in the dairy producer's pocket? We are either going to do that through the marketplace, or we are going to do it through a Government program.
Page 525 PREV PAGE TOP OF DOC Segment 4 Of 5
It is beginning to seem to me now after 22 years of experience with the Federal milk market orders that they are not doing for our dairy farmers what we and you and everyone else agrees need to be done. I am hoping that as we proceed down this track, that we can kind of think outside the box a little bit, because when you look at net farm income and you look at what the market is telling us, and then you look at what we are doing, it does not paint a very pretty picture.
Mr. KOZAK. I think that is true. We are trying to think outside the box. We have a Milk Pricing Task Force Committee that we formed with our CEOs. That is a combination of both the CEOs and the producers within our board, and we continue to look at that.
One of the things that I do think, Congressman Stenholm, that is clear that we are moving towards, and that is joint ventures. I think that in a sense is going to be very helpful.
I would like to say this morning that there is a press release out today where the two largest fluid milk processors have now announced their merger. Dairy Farmers of America, our largest member, is involved in that particular venture. We support those things. I think it is good for the dairy industry. And I do think that through those joint ventures, through the business aspects, we will be much more successful of gaining share. We are not in any way relying on Federal milk marketing orders to gain that additional share. We think they work wonderful for us in terms of the base that is needed, but we do think that they alone will not move us towards that area.
I would also like to say something in relationship to the retail price area, because I know that you have looked at this, and there has been some debate. And so I would like to be open and candid here about our view there, and that is this: Lowering dairy prices at the retail level will not necessarily give dairy farmers a higher share. And so this is an area that we need to work hand in glove with the processing segment. It should not be an adversarial issue, and we do not advocate lowering prices, because that would not necessarily result in the most effective means. So we are willing to look at those particular issues.
Page 526 PREV PAGE TOP OF DOC Segment 4 Of 5
The CHAIRMAN. Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman.
Just looking around the room, I think there are probably about half a dozen of us who represent, my guess is, over half of the class III milk produced in the United States. In your written testimony, Mr. Kozak, at the beginning you state that milk marketing orders stabilize market conditions and benefit producers and consumers. It is somewhat interesting, but about nine pages later you say something a little bit different. Let me just read it for you.
The basic rationale for the enacting class III and class IV supplemental payment component of the dairy safety net is about producer equity. As a result of Federal Milk Marketing Order Reform implemented in 2000, the class III price has fallen significantly below the price in other utilization classes and will likely lag in the future. The dairy farmers in regions where a hybrid proportion of their milk is used to produce class III products, primarily cheese, are at a risk of substantial economic erosion.
There seems to be an inconsistency there. In representing people who produce a lot of milk that goes into cheese, I don't see how we square this system.
Mr. KOZAK. Congressman Gutknecht, this has been an issue that we spent a lot of time with this past year. Of course, we represent a lot of cheese as well and appreciate your concerns about this particular issue. As a result of Federal Order Reform, I do think that there were a number of forces that did contribute to dropping the class III price. But every one of the solutions that was proposed in order to, if you will, address the inequity or the disparity only did one thing, and that is it dropped total dairy farmer income nationwide.
And so our goal this past year through the dairy producer conclave, meeting with our membership, was to look at some mechanism to address the inequity issue without lowering producer prices in all of the other regions.
Page 527 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. GUTKNECHT. But it strikes me that you are only going to lower the price in regions like mine.
Mr. KOZAK. No. What we are doing is our class III Supplemental Program will work through the Federal Order Program. It will capture what we think is a sort of countercyclical mechanism in which when the price of class III drops below $11.08, there would be a supplemental payment through the Federal Order Program based on the class III utilization. It is a targeted payment specifically only for the class III producers which will raise the class III price and infuse higher income for the people who you are representing without reducing any of the income in the class I, II and IV side of the equation.
We feel that our proposal is addressing the inequity issue in a way that doesn't pit region against region, one farmer taking money away from another farmer. It is a rising tide specifically for the class III price.
Mr. GUTKNECHT. You also state elsewhere in your testimony that we need to increase Government purchases and donations in programs for class IV milk. The Government is currently purchasing about $13 million a week of dry milk. How much more do you estimate we will have to buy after we pursue this new strategy?
Mr. KOZAK. Dr. Vitaliano could give you some estimates, but let me also bring you back to the real problem that is occurring. The real problem is not with our Federal order system, nor is it with the level of the Price Support Program. The real problem is, as we have outlined, I think, pretty definitively, is that milk protein concentrate, unabated, coming in with either little or no tariffs, is displacing a tremendous amount of nonfat solids in this country. In our testimony and in our analysis, we have shown, I think CCC purchase of skim milk powder are up to about 500 million pounds right now. Our estimates show in our charts that milk protein concentrate even on the most conservative basis is displacing approximately 400 million pounds of that product each year. We think we have it pretty well set, but we think that it is the milk protein imports that are causing us to have a surplus problem of nonfat solids.
Page 528 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. GUTKNECHT. I am aware of the problem of MPC. I have talked to a lot of cheese producers. I can't find anybody who is using it. Everybody denies that they use it. I am not sure where it is going; in fact, I am not even sure where it really comes from.
My time has expired. Is there going to be another round?
The CHAIRMAN. Yes.
Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman. It is a good question. If the co-ops control 85 percent of the milk, and I, like you, have never found a co-op that will admit they are using this stuff, I think that what you have put together here is some good information. Some of it, I think, makes a lot of sense. But one of the things I am concerned about with the proposal that you have got to floor the class III and class IV milk at $11.08 is whether this is going to cause us to have production in excess of what we can sell.
We have just gone through a period where we have been at these really low prices. The reason is because we have been producing more than we can get rid of. Now these low prices and some feed problems have turned us around and production has fallen and we are starting to see the prices come back up, I think it is pretty apparent that the way we get better prices is to limit the supply.
What you are talking about doing here is putting a floor underneath these class III and IV prices, which looks to me like it is going to create more milk, especially on the west coast. Some of my producers view this as just a way to continue to sell cheap milk to cheese manufacturers and have the Government subsidize it, but really not do anything with the underlying problem of going through these periods when we have too much milk.
Some of us in the Midwest are concerned, and you have tried to address this by saying you are not going to pay anything extra over and above what you produced last year, whatever it was, and that might have some effect, but just looking at what has happened in the West over this period of time this last couple of years where we have had these huge increases in production in some areas out there, even though the prices were down, if you increase their last three prices a couple of bucks a hundredweight, it just seems to me you are going to get a lot more milk, and that is going to be a problem that is going to end up on the doorstep of the Midwest. Am I wrong?
Page 529 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. I would never tell you that you are wrong, but I have a different view in terms of this particular issue. We have looked at it pretty hard. Last year we traveled all around the country, just meeting with dairy farmers. Of course, this was one of the issues, as we looked at our class III proposal, that they may be concerned about. In our initial calculations, we put it somewhere around 0.44 percent production increase based on the $11.08. We didn't think that that was that significant.
I don't want to keep coming back to this, but I think it is essential to take a perspective, and that is we don't believe that we do have a surplus of milk. If you look at what we produce domestically and what the commercial disappearance of dairy products are, we are about right.
I have to keep coming back to the issue of milk protein concentrate, because I think that we are really underestimating the impact that this product is having. In our analysis, and we have provided you with much data, this product is clearly coming in at a time when we think we have a fairly good balance of products being produced.
Mr. PETERSON. I agree with you. I think you are right. This is having a big impact. I don't think there is any question about that. I hope that we are successful in getting this put under some kind of tariff regime so we can stop it. I am not too optimistic that that is going to happen. So the bottom line is, whatever is going on here, the prices have been in the tank in the Midwest and other places as well. We don't have quota milk like they have in California to support these low class III prices. Whatever the problem is, it is not working.
I guess I would rather see us have something so we could actually short the market and drive these prices up. I don't think what you have done is enough to do that. I think it will help a little bit, but I think there has to be something with more teeth in this. If we are going to floor the price, in my judgment, we have got to have some kind of mandatory inventory management system that is going to have some teeth in it so we can make sure that production does not increase.
Page 530 PREV PAGE TOP OF DOC Segment 4 Of 5
I have some real questions about whether this 0.44 is what is going to happen. I think it could be considerably higher than that myself.
Mr. KOZAK. We can clearly provide you with some further information about that analytical work, although, I must say, you have used the word ''supply management'' or—not ''supply management''——
Mr. PETERSON. I didn't use ''supply management.'' I used ''inventory management.'' there is no such thing as supply management, only inventory management.
Mr. KOZAK. OK, inventory management. We don't feel that a mandatory program is something that the National Milk Producers Federation would support. I think there are other producer organizations, not all of them, who would also be in the same camp as National Milk.
When I first became CEO almost 4 years ago, the first 2 years we had $16 and $17 milk, and I didn't have one dairy farmer talk to me about that ''thing management,'' OK? I suspect that if we were to put in a blank management program, that after it began working and prices were elevated, our producers would be the first to come back and say, ''We don't want it any longer.'' .
We think we have provided a middle-of-the-road, reasonable approach that most people, producers, would accept.
Mr. PETERSON. Mr. Chairman, could I just clarify something? I am not in favor of a permanent inventory management system.
Mr. KOZAK. I misunderstood.
Mr. PETERSON. I would only advocate doing something that would click in and out when we needed it on a temporary basis. I am not in favor of anything that would be permanent in nature.
Mr. KOZAK. I apologize. I misunderstood that.
Page 531 PREV PAGE TOP OF DOC Segment 4 Of 5
The CHAIRMAN. Mr. Osborne.
Mr. OSBORNE. Thank you, Mr. Chairman.
Thank you for being here today. I just really had two questions. We have heard a lot about other types of diseases. I am somewhat of a novice, Johne's disease, and wondered if you could just take a minute and quickly explain to a novice exactly what this is.
Mr. KOZAK. OK. A fair question. I will ask Dr. Byrne to delineate that for you.
Mr. BYRNE. Johne's disease is an infectious disease of the intestinal tract of cattle. It is a wasting disease. It causes the animal to waste away. It is caused by a bacteria; it is called microbacterium paratuberculosis. It basically costs producers, cattle producers and dairy producers, because of lost milk production, lost value of the animal and those types of things. It is basically an infectious disease of the intestinal tract that causes the animal to waste away.
Mr. OSBORNE. And it is treatable; is that correct or not?
Mr. BYRNE. It is not really treatable. While it is a microorganism that causes it, there aren't very good antibiotic regimes that you can typically give a dairy cow that can take care of this, or any cattle for that matter. The best means of treatment is to eradicate the animal from the herd. That prevents the animal from spreading the disease to other animals as well.
Mr. OSBORNE. Thank you.
I have one further question. You have mentioned a couple of times imports of milk protein concentrate have increased 600 percent, and I know you are in favor of fast track authority for the President. But in addition to that, can you be more specific as to what you would like to see happen in terms of foreign trade to balance the table? I think we need more specificity in a lot of these items.
Page 532 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. Yes. And we have struggled with this because our association does support expanding exports for trade. But we have a lot of dairy farmers who will come to us and talk to us about this particular issue. Milk protein concentrate is a good example. When we talk to a dairy farmer and we talk to them about the need to expand trade, the first thing that they tell me is, ''But we always seem to be on the losing end of the negotiations.'' so what we are proposing is that as we negotiate out these trade agreements, that we do a better job of protecting our domestic programs, that we don't give away more than what we get. And in dairy, I think unfortunately we are in a situation right now where we have within the whole world structure, that we have the most liberal tariffs and quotas for allowance of dairy products to come into this country.
Let me also say, for instance, on the milk protein concentrate, 70 percent of all the milk protein concentrate that New Zealand produces comes into the United States. That tells you something. That tells us that our import restrictions, our tariffs and quotas especially in the dairy area are not what they should be. We lost section 22, I guess, about in 1994, which was helping us on these particular issues. We negotiated that away. And so although we support the trade promotion authority, we don't want to be the victim or the ones traded off for other political gains.
Mr. OSBORNE. Are you at all in favor of any type of retaliatory tariffs? Do you feel like there have been violations of trade agreements, or is it simply just poor negotiating as far as you are concerned?
Mr. KOZAK. I think that it is a combination of both. I think we are starting out low on dairy. I do think that we are the victims of some poor negotiations in the past. Some of it is not even poor negotiations. As I mention in my testimony, if you again used the example of milk protein concentrate, Congressman, when we were negotiating out those tariffs and quotas, this was not a commercially viable product. There has been an evolution within the industry, so I can't blame necessarily just our negotiators. We should have a system that captures, for instance, dairy solids or dairy skim milk protein equivalents so that if somebody tweaks a particular product, it doesn't come through one of the loopholes. In our press conference about this, we said that we think you could drive a milk truck through the tariff schedule, and we think those need tightening up.
Page 533 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. OSBORNE. Thank you very much.
The CHAIRMAN. Mr. Dooley.
Mr. DOOLEY. Thank you, Mr. Chairman.
Thank you for your testimony. I have a couple of questions based on the analysis of the program that you have proposed, is that what you are suggesting is that we provide what amounts to over $10.5 billion through 2008 in Government payments. And it will be a program that is going to see an increase in Government outlays of about—we will start in 2002—of about a billion dollars and actually increase so that we are spending almost $2 billion a year in 2008. Then when I look at the all milk price that you are suggesting under that program in 2008, it is actually going to be $12.40 a hundredweight. And then you also do the analysis of terminating the program altogether, which would have no Government outlays, yet when I look at the expected price in 2008 under that scenario, we have an all milk price of $12.65 a hundredweight.
I am just struggling a little bit, is that if we are going to be spending $10.5 billion on a program, and in 2008 we end up with a lower milk price than if we just terminated the program altogether. From a public policy perspective, I am kind of asking myself, does this make sense?
Mr. KOZAK. Again, I will ask Dr. Vitaliano to elaborate a little bit more on this. Now, you are talking specifically about the Price Support Program?
Mr. DOOLEY. I am talking about your——
Mr. KOZAK. As well as our Supplemental Payment Program?
Mr. DOOLEY. Right. Appendix 1 is what I was drawing from, which I assume is your supplemental plus the continuation; is that correct?
Mr. KOZAK. I am with you.
Mr. DOOLEY. And compare that to appendix 2, which is the termination.
Page 534 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. OK. I will ask Dr. Vitaliano.
Mr. VITALIANO. Congressman Dooley, it is a good question, but I think the key answer lies in what happens in those 6 or 7 years in between where the prices are going to be significantly lower by our analysis and by FAPRI's analysis and by anybody else who has looked at this, and we see about a 6- or 7-year transition period before we get back to where that market would be setting that price. Our analysis shows a very significant degree of producer income loss during that time that far outweighs the level of Government cost that the program would incur.
Mr. DOOLEY. My concern is, though, is I have some questions about going in this direction if in 2008 we are going to be spending $2 billion a year in taxpayer dollars, and we are going to have an all milk price that is 25 cents a hundredweight lower than if we didn't have a program at all, if we terminated the program.
And so I guess I am a little concerned, if you could take that out, if you keep extrapolating beyond 2008 where we have seen—basically from 2002 to 2008, we see a doubling of Government expenditures under your program, taxpayer dollars, from the $1 billion to almost $2 billion. In the same time, we don't see a significant improvement in prices by any means. In fact, we actually see a reduction in prices than if we terminated the program altogether. In fact, under the program that you are proposing, we actually see an increase in the amount of milk that is being produced in the United States, which must be creating to that.
This, in effect, sending a false market signal that is actually working to the long-term detriment of dairy farmers getting most of their returns out of the marketplace?
Mr. VITALIANO. Congressman Dooley, I think you could probably ask that question of virtually every commodity program, not just particularly dairy. We cannot deny economically that if you reduce the level of Government support as you are suggesting, terminate the program, you will indeed save Government expenditures, but you will go through a period of several years, by our analysis, of very significant producer income loss, which eventually will reduce production. So when you mention that——
Page 535 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. DOOLEY. You are not reducing——
Mr. VITALIANO. Compared to what it would have been. You will have a production effect. When you take that much producer income out of the system, production will be cut back. Eventually at the end of that process, you will have at a fairly significantly lower production level and the same basic level of demand, of course market prices will reassert themselves.
We are not claiming that the program we are recommending will permanently prop prices higher than they would be in the absence of the program. If we were, then there is a question of that would really be stimulative. But the question is that level of income loss, when you get there, to that end point, you have a very different industry. You have far fewer producers, and you have a lot of negative impact in the intervening years.
Mr. KOZAK. Mr. Chairman, could I add something to that?
The CHAIRMAN. Yes.
Mr. KOZAK. We didn't provide it in our testimony, and I don't know if it is appropriate to hand out here, but one of the things that we did look at just recently is the 1999 commodity program outlays versus the 1999 farm cash receipts, and the percent of those cash receipts. And this, of course, is something that I hadn't looked at specifically until we did it.
Let me just add here that dairy, for instance—and we calculated including the export program, so we took the worst case scenario in terms of program outlays for 1999, which was $607 million for dairy, which we think is fairly modest, against farm cash receipts for dairy, which is $23.204 billion which means that the percent of cash receipts that dairy gets from the Government is only 2.6 percent. Now, when you compare that to all of the other commodity programs like wheat, which is 60 percent, and rice, which is 58 percent, and cotton, which is 48 percent, and grains, 37, I could go down the list, I must say that what we are asking for is a very small percentage compared to the other programs.
Page 536 PREV PAGE TOP OF DOC Segment 4 Of 5
And so I think Mr. Dooley does have some valid points, but the problem is there would be mass destruction, if you will, of a number of dairy farmers, and specifically farmers in Mr. Gutknecht's area and Mr. Kind's area, that would suffer through the elimination of the price support program. And so it would be the last man standing policy, which we do not advocate as a farm policy for the Congress. But I agree that there are some economics involved.
The CHAIRMAN. You referred to material in part of the record. You are certainly welcome to do so.
Mr. KOZAK. I wanted to be clear that I wasn't castigating in any shape or form the other programs. We support their testimony, felt they have done a good job. I was trying to give some perspective, Mr. Chairman, only as to where dairy is compared to others.
The CHAIRMAN. Mr. Simpson.
Mr. SIMPSON. Thank you, Mr. Chairman.
I have been told by my dairy producers that you have to be involved in this discussion of the dairy program for about 10 years before you start to understand it. I think it is longer than that. Clearly I am not there. I have also been told that no matter how long you are involved in it, you will never fully understand it, and I have found that to be true.
One question: If 85 percent of the milk goes through cooperatives which are exempt from the Federal Milk Marketing Order, why do you support that, the Federal Milk Marketing Order?
Mr. KOZAK. Let me make sure I am clear. Eighty-five percent of the milk goes through cooperatives, but most all of that milk is in the Federal Milk Marketing Order system.
Mr. SIMPSON. You are exempt from that, aren't you?
Mr. KOZAK. No. All of that milk goes through the Federal Milk Marketing Order system.
Page 537 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. SIMPSON. OK.
Mr. KOZAK. I can help you rephrase it.
Mr. SIMPSON. Go ahead.
Mr. KOZAK. Perhaps what dairy farmers may be asking, which was a similar question earlier this morning, was since we control 85 percent of the milk, why are we having so many problems? Dr. Vitaliano responded to an earlier question. I would be happy to do that again. But all of our milk that is marketed, it goes under a Federal Milk Order Program. In your particular case in Idaho, there is a lot of nonpooled milk, and I think maybe that is where the confusion is.
Mr. SIMPSON. OK. Did I understand you correct just a minute ago when the suggestion is that if you do away with the program, you end up with a higher whole milk price in 2008, but you have a different industry, obviously. And that increased price would be through reduction in production. But are you saying that artificially increasing the price doesn't stimulate production?
Mr. KOZAK. I don't believe we are artificially stimulating the price at this point, given the $9.90 price support level. If you look at the $9.90 price support level in the Price Support Program, we are not purchasing any butter, which means that we are producing that product, and it is being commercially disappeared. We have very little cheese that is being purchased. Some have been purchased recently, but there is a need for that cheese in some of the Government programs, so we don't have major stocks of cheese. The only major surplus that we have is really on skim milk powder, and as I have mentioned earlier, we think that that is a direct result of the unabated surge of milk protein concentrate coming in which is displacing our own solids.
As Mr. Peterson had talked about earlier, an inventory control, it would seem rather difficult for us to agree to some sort of inventory control when there are no import restrictions on the product. We would be clearly escalating the increase. So we think we have it right in terms of the $9.90, and I think the Congress had it right, and we don't think that that is very stimulative.
Page 538 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. SIMPSON. In my district I have got—obviously it is a very large, growing industry, the dairy industry is. It seems like half of the producers want to do away with the program and go to a free market, just total free market, and half of them want to maintain the program. It depends on their size, obviously. That is a discussion that continues to go on. I don't know if other districts have this issue, but I continually hear from some of the producers that the processors are able to effectively determine what the price is going to be by how much cheese they produce. Is that a concern? They can manipulate the production of cheese in order to affect the price?
Mr. KOZAK. I will ask Dr. Vitaliano to answer that.
Mr. VITALIANO. There is a lot of cheese-making capacity that is being added in this country. That is the product where the greatest demand growth has been seen. We produce about 8 billion pounds of it a year, and I think close to 50 percent of the milk goes through cheese and whey.
We are not really aware of instances where somebody has been able to really manipulate the production. Many producers have options for sending their milk to other operations if they find one particular cheese processor wants to restrict the amount of milk they will produce. I think in your area you are going to find with all that new capacity that there is going to be a lot of competition for the milk amongst all of those cheese plants.
Mr. SIMPSON. I appreciate that. I hope that should I be fortunate enough to stay in Congress another 8 or 10 years, that I will understand this program.
Mr. KOZAK. I probably won't, but I did learn one thing on the dairy producer conclave because I did not grow up in the producer community. The only thing I learned from all the dairy farmers was that when the price of milk is high, dairy farmers put cows on, and when the price of milk is low, dairy farmers put cows on. So I am still struggling with that, Congressman, about how we deal with it. I appreciate your——
Page 539 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. SIMPSON. I was surprised. The first dairy farmer I actually went out and talked to when I started to run and we were getting a pretty good price at the time, he said, ''Yeah, things are great. The price is too high.'' I said, ''What do you mean?'' he said what it means is that there is going to be a fall pretty soon because people are going to put more cows on, and we will have an overproduction.
Mr. KOZAK. May I, Mr. Chairman?
The CHAIRMAN. Yes.
Mr. KOZAK. I had the pleasure of addressing the Idaho Dairymen's Association this summer. In fact, we were supposed to be on the program, but you were voting. I was there in person, so I——
Mr. SIMPSON. We were probably voting on a dairy program.
Mr. KOZAK. I realized how smart Senator Craig and you were when I was the only one that physically showed up. In any event, I had to tell your members and my members that they were part of the problem, that they were producing more milk, that it wasn't necessarily processor manipulation, it wasn't necessarily the Federal Order Program not being right, and not necessarily anything about the pice support program.
But we do have some additional milk and of course, I was surprised as to the dialogue we had, but I do think subsequently we have talked to them about our class III proposal, and I think they are intrigued, at least through that, because of it.
Mr. SIMPSON. Thank you.
The CHAIRMAN. Mr. Kind.
Mr. KIND. Thank you, Mr. Chairman. Mr. Simpson, if you figure out this program, I hope you would educate me sometime soon as well, but I, for one, was very appreciative of your cheese wheel metaphor. And perhaps your testimony would have been a little more dramatic, if you wore a cheese wedge on your head here today given who I represent.
Page 540 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. My staff stopped me.
Mr. KIND. I thank you for your testimony today, the work product that you produced, many of which I support, as far as the income assistance, trying to get to some type of countercylical program, areas and land conservation that we should be looking at in this next farm bill.
I appreciate your recognition of the Johne's Disease problem that we have out there, and I am not quite sure where we go with that, in light of some of the cattlemen's concerns with the issue; but at the very least, we need to test. I think we should help our producers to test to find out more accurately how many of the livestock are affected and where we go from there.
I also want to make clear that there is no adverse human impact with the Johne's Disease. It is just something that affects the producing animal, and so we can rest reasonably assured that there is no consumer impact, at least in that regard; some serious issues in regard to trade.
I appreciate your stance on giving the President trade promotional authority, but in light of the fact, we have not done a very good job in past trade agreements in representing our agriculture industry generally, and dairy more specifically, that is going to be a tough issue.
We will have to have a lot of conversations, especially with Bob Zellick on how we can get to a fair trade policy that is going to adequately represent our producers in the country.
I mean, you talked a lot about the problem with the MPCs right now, but let me ask you specifically, in regard to your supplemental income program. I, too, share concerns that Representative Peterson has that we have to be very careful in whatever we might propose or enact does not encourage more production in this country. You are calling for $11.08 target price for just III and IV; is that right? Not I and II, just III and IV.
Page 541 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. Right.
Mr. KIND. And I think that is probably in light of the fact that III has been in relative isolation in regard to the higher III and IV and how it affects class I prices. But you are not advocating any types of caps on production, you are not advocating any inventory management with the countercyclical program.
The proposal I have been floating out there and trying to get more support that would treat all classes of milk the same, I have a $12.50 target price for I, II, III and IV, cap it, because of economic considerations, to 2.6 million in production every year, and also look at some form of voluntary incentive-based inventory management so that farmers are rewarded if they keep their production levels in check at a reasonable growth rate rather than some type of an assessment system.
Because I have to admit to you, this is a tough issue, given my interest and my involvement in it. I do not know how in this time we are developing national dairy policy if we cannot get past the regionalism, and the fact that there is so many strongly-held parochial interests in dairy policy. I mean, it is like banging your head up against the wall right now trying to talk to representatives across the country on developing a national policy, when all they want to talk about is compacts. How do we get behind the compact debates so we can develop a national policy that is going to start benefiting our dairy producers regardless of what region they happen to be in?
Mr. KOZAK. I appreciate all of those comments, and you are right, it is a difficult area. Let me first start by saying that is why we attempted to do what we have done, recognizing that there are a lot of things that are impacting the farmers' ability to survive and to stay in business, and we have tried really hard this past year to get away from the regionalism.
I couldn't agree with you more that that is a destructive element within the dairy producer community that mostly dairy producers suffer by, because we were not united. And we didn't have common goals. We reached out.
Page 542 PREV PAGE TOP OF DOC Segment 4 Of 5
My therapist told me after the dairy legislation 2 years ago that I better get out there, because we could not go through what we went through 2 years ago. So we have attempted, Congressman, to look at not only milk pricing, but all of these other areas. Because some of them we won't absolutely resolve.
There will always be some hard feelings that are harbored by different regions, but I think we moved past that now. As I travel around the country, and I have been up in your area many times, et cetera, I think dairy farmers—we have done a good job now of focusing them on the things that are really going to make them profitable.
The class III issue particularly—there is nothing wrong with your bill. Ours is different in that it takes that money that you have allotted and specifically targets it only to the class III utilization area. We think it helps Wisconsin, Minnesota, Idaho, California, other areas of class III utilization in a more specific way than just giving out a payment of which everybody gets.
If I understood your proposal, it still is based on the class III target price, correct, $12.50?
Mr. KIND. It would be a $12.50 target for all classes, I, II, III and IV?
Mr. KOZAK. Right. But a dairy farmer who had only a class I utilization would still be eligible for the payment, and what we tried to do is to be fair. In other words, National Milk members have come together—if you sat there with 35 CEOs who unanimously agreed with the class III proposal, it was probably the best day I have ever had in the dairy industry, because what they said is, the Florida dairy farmers recognize that perhaps there is some disparity in the class III price, and they were willing, OK, to forego that payment that they were getting to target that money in the class III area. That is across the board at National Milk.
Page 543 PREV PAGE TOP OF DOC Segment 4 Of 5
I do not think there is anything wrong with your proposal, but we were trying to do something, which I thought was in fairness to the class III areas, much more specific, the money goes only to those utilization areas.
As far as the cap is concerned, since our program runs through the Federal order pools, with the exception of those areas that are in nonpooled which would get a direct payment, we don't support the cap. We don't think it is necessary. We think it is based on the class II utilization. So you would not have just the money going directly, it would go through a blend price, and it would only address that class III issue.
We are able to bring to the table complete agreement as long as there is no cap, but I think when you start imposing a cap, you then find other regions, for instance, in Mr. Simpson's area, where farmers are much larger, who would object to it. So we have been able to put all of that into one melting pot, as it is, and get our association to agree under this, under our proposal.
Mr. KIND. Thank you. Thank you, Mr. Chairman.
Mr. Smith.
Mr. SMITH. Thank you, Mr. Chairman. Gentlemen, thank you for being here. I have been in the dairy business for 40 years, so it might take more than 10. I want to ask a question on K-Phos in our Clean Water Act.
I have got legislation that I have introduced—I do not know if you had a chance to look on it—H.R. 1130. H.R. 1130 says that a State, that it implements and administers their own animal waste management program including—with the provisions that it helps water quality, that there is a nutrient management aspect to it, and it addresses waste management would have their own program rather than EPA coming into our farms.
So if you hadn't looked at that, I would appreciate your looking at that and analyzing it and see if you support it. That is now over in Committee on Transportation and Infrastructure. Have you looked at it?
Page 544 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. Just give me one moment.
Mr. SMITH. That is OK. Get back to me, it doesn't matter.
Mr. KOZAK. We have looked at it. Carissa Itle, who is our director of environmental programs is here, and we will get back to you on that particular issue. As you know in our testimony, we, like you, are very much concerned about that particular area.
Mr. SMITH. It makes me nervous. I think it should make the whole animal agriculture somewhat nervous with EPA having that kind of jurisdiction where—right now they are coming in from Chicago and walking on Michigan farms and deciding what I consider not practical decisions on licensing.
Mr. Chairman, you handed out this, and I do not know if you have seen it, but to make it part of the record, the world's most influential animal rights organizations, their president, Ingrid Newkirk, said Friday that she openly hopes that the foot and mouth comes here to the United States. It will bring economic harm only for those who profit from giving people heart attacks and giving animals a concentration camp-like existence.
So there is a lot of public relations, but for a person to be that uninformed of the consequences and the devastation that something like that and to take that so cavalierly should disturb us all.
I want to talk a little bit and get your ideas on another area that I do not understand, and that is maybe putting—how high should stockpiles be of powdered milk in this country? How much does that 500 million pounds inventory have to grow before it pushes us to change the tilt between butter and dried powdered milk, in terms of the suggestion that it is 10 cents overpriced?
I mean, the stockpiles are building up. We took in 12 million pounds last month. That is simply adding to the problem. Eventually, we have got to deal with it.
Mr. KOZAK. Well, I sound like a broken record this morning, but I think that one of the ways we have to deal with it is to seriously restrict milk protein concentrates from displacing our skim milk solids.
Page 545 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. SMITH. But the reason those are coming in—we can go to tariff rate quotas, maybe that is a solution. We were already doing it with sugar, maybe we can do it. But the reason, as I understand it, those products are coming in is because of the high price of the powder is allowing the imports of those MPCs to come in because the powder price is higher than it should be, some suggest 10 cents higher than it should be.
Mr. KOZAK. I do not think it is 10 cents higher than it should be. Just let me say, because in our analysis——
Mr. SMITH. Not higher than it should be—10 cents—it would take a 10-cent reduction to start having it clear the market.
Mr. KOZAK. Well, I think, Congressman, that the basic problem is that it is not so much that the nonfat price is too high, it is that this milk protein concentrate is coming in from two sources. The first source it comes in from is the European Union, and we know they are heavily subsidizing these products. So, therefore, when you look at whether or not our price is too high, I reverse that and say, we cannot compete because they are heavily subsidizing the product, and it is coming in on unabated.
The other source is New Zealand and Oceania. And, of course, New Zealand is a single death seller. They have attributes in their country that no one else has in terms of grass pastures, and there is no way we maintain that that is also a problem.
Mr. SMITH. Does your organization support tariff free quotas?
Mr. KOZAK. Yes.
Mr. SMITH. You are saying, let us go the distance and start—I mean, maybe you could do it by saying it has got to be produced with the same health and environment requirements that we produce that product in the United States, maybe you can do an end run down on it, if we could cut off half of those products coming in, half of the milk protein concentrate products coming in, we wouldn't have to have a Government support rate price probably on milk.
Page 546 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. I think that is our point. We are not claiming that there is a one-for-one displacement, but it is fairly close and, therefore, if you were to look at how much product that we put in our report was displaced as a result of milk protein concentrate, you would not, in any shape or form, have 500 million pounds of skim milk powder here.
So we think that the loophole that exists because of this is really where our attention should be, not dropping the powder price, which, if you dropped the powder price 10 cents—in our report we did 5 as a small example, but if you were to drop the powder price 10 cents, that would result in a 86-cent drop in the class IV price, and an 86-cent drop in the class II and I since that price is what is used to formulate the class I and II price.
Mr. SMITH. But on the USDA analysis, that would last maybe for 2 or 3 years. By the fourth year the actual price farmers receive would be going up, according to USDA's estimates. So it is the short term that really complicates the problem of farmers going out of business and not being able to get back in.
May I ask the chairman and you for permission to send you in writing additional questions since my time is up?
The CHAIRMAN. All members may submit questions. I am sure there will be some coming in the future.
Mr. SMITH. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Pombo.
Mr. POMBO. Thank you, Mr. Chairman.
Mr. Kozak, I appreciate the hard work that you and your organization have put in over the last couple of years to try and come up with solutions for some of the problems that we are having in dairy, and I would have to agree with you that in many ways, this is the most united that we have seen the dairy industry in a long time.
Page 547 PREV PAGE TOP OF DOC Segment 4 Of 5
Obviously, there are still major differences, regional differences, and by that I mean, two farmers that are across the road from each other are regionally different and disagree, as I found out in my district.
But there are many things that are in your testimony that are in the document that you have put together that I think are doable; that we can use as part of the farm bill, part of an ultimate dairy policy and what comes out of that.
There are some things here that, as you know, that are going to be very, very difficult for us to do, and whether we like them or not, whether this committee likes them or not, it ultimately comes down to getting 218 votes on the floor and 51 in the Senate; and that gets real tough to do sometimes. But I do appreciate the effort that has gone into putting this together.
Getting back to the issue on the MPC, it is my understanding that that particular product is more expensive to produce than dry milk, dry powdered milk; is that accurate?
Mr. KOZAK. I would say it could vary, but I would say, generally, that is a fair statement.
Mr. POMBO. If it is more expensive to produce, there is some that have suggested that if we create a new price to go along with producing that particular product in this country that we develop a new price that would be less than the powdered milk price, and I am not exactly sure how that follows, that we come up with a new price, we end up with four or five or six different classes of milk, and it is confusing enough to try to figure out how this all gets put together.
But the idea of putting in even more different classes of milk, I think, probably complicates things even further. But let me ask you this: What would happen if we did away with the current pricing structure and just had one price for milk, if you produce milk, this is the price?
Page 548 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. I am going to have to defer to Dr. Vitalino from an economic standpoint.
Let me comment on the issue of protein concentrate. I agree with you, creating more classes of milk doesn't necessarily seem like it is the most beneficial way for us to proceed. I also should clarify, too, is that it depends on—when we say ''milk protein concentrate,'' it depends on what the product is.
We maintain that milk protein concentrate is strictly an ultrafiltered product that has been sprayed dried. I think once we are in the process of doing our own report, as you know, the GAO issued one, we have taken it much farther. And we maintain that a lot of the product coming in is blended product, it is a blended product of dry whey, skim milk powders and casein, that is not milk protein concentrate, as far as we are concerned in the classical definition.
We could make the blended product pretty cheaply, but we cannot, because we have definitions in our standards and in our regulations for the use of particular products. So if we are talking about true milk protein concentrate, there is additional costs.
If you are talking about what we think are these fraudulent blends that are purporting to be milk protein concentrate, that is a different situation. But I will ask Dr. Vitalino to answer your other question.
Mr. VITALINO. Yes, Congressman Pombo, your suggestion about a single milk price, I mean we can get into a lot of Archean discussions about whether we should have five classes or four classes or three classes, but when you get down to the idea of just a single class of milk, I think we have a very strong history and a lot of analytical basis to show that if you tried to force a single price on milk, you are going to end up in a situation where processors, particularly class I fluid milk processors, are going to find it very, very difficult to get an adequate supply of milk for putting in the bottle and it getting it away from manufacturing plants. That is really why we set up the whole Federal order system in the first place.
Page 549 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. POMBO. Why is that?
Mr. VITALINO. It is just that it is more expensive to produce and deliver milk in fluid form to milk plants, many of them that are in cities, some distance away from farms, if you get a single price, it is much more attractive to the industry to put the milk into manufacturing plants that can be located out in the areas of production.
We have, you might want to discuss with some of your colleagues in Florida and other parts of the country that have a tendency to have difficulty attracting adequate supplies of milk, even under the current system. And as you well know, down in parts of the Southeast, we have the highest difference between the class I price and the manufacturing milk prices, and even they find it difficult to get milk. I have trouble understanding how the Southeast would get an adequate supply of fluid milk if they are only a single price.
Mr. KOZAK. Let me add on to that, staff has reminded me that—and we can provide some further information, because we are clearly interested in looking or answering any issues, and somebody said earlier, exploring outside the box. I suppose if the milk price was set at $20, everybody may agree, but that is a noneconomist talking.
The UK has gone to one price, and it is our understanding it is—forgetting all of their own problems, but that one price is devastating their industry for the lack of premiums. So there is other issues going on.
Let me also add that I didn't want to indicate that we were not interested in looking at the possibility, for instance, of subsidizing, for instance, even casein production here, which is what a number of the countries do. So we have explored. We have explored that with our board.
We have some data. There was a report done for us by Randy Torgenson's group at USDA. We would be happy to share all of that. It could be a possibility, but we were not looking at it as just creating another price.
Page 550 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. POMBO. Thank you.
The CHAIRMAN. Mr. Peterson.
Mr. PETERSON. Yes. Kind of following up on that, why are not we building MPC plants?
Mr. KOZAK. Well, we do have MPC, I think there is a misnomer here.
Mr. PETERSON. We have MPC plants in this country?
Mr. KOZAK. We have farms who take their milk and will concentrate that milk using ultrafiltration methods, and we are shipping everyday what I would call liquid milk protein concentrate directly using our milk. That is a growing area.
It requires a lot of capital investment. So a number of farmers, for instance, in Congressman Kind's region singularly probably could not do it, but larger farms are beginning to do it and that is happening.
Where the problem is, is again going back to what we call milk protein concentrate, taking dried blends of whey, casein and skim milk powder and calling it protein concentrate, which is subsidized, we cannot economically produce or be competitive here at this point.
Mr. PETERSON. So the reason plants are not being built is because the Europeans are subsidizing or is coming in from New Zealand and the price that people are paying for it does not make it economic?
Mr. KOZAK. Exactly.
Mr. PETERSON. And is that the same thing with casein, basically that is why we are not in the casein business?
Mr. KOZAK. Right, basically that is correct.
Mr. PETERSON. The discussion we had earlier about the inventory management idea. I would like to have you consider or give me some feedback, not now, necessarily, but maybe in writing or however.
Page 551 PREV PAGE TOP OF DOC Segment 4 Of 5
I have some dairymen from different parts of the country come in and talk to me about the possibility of establishing a temporary authority within USDA that would be triggered by, say, some level of CCC purchases, that when we hit that level, the Secretary would put on an assessment, say, of a dollar a hundredweight, and as long as you did not increase your production more than 1 or 2 percent of what it was a year before, you would get that money back every 3 months, so that people that did not increase their production would not cost them any money, but if you increased production, there would be a dollar a hundredweight penalty.
And then when the production—when we cut back so that the CCC purchases were no longer necessary, it would click off. So it would only be in place when we are producing more milk in the country than we can deal with.
Now, I understand all of your arguments about MPC and all of that, but I think that there is a certain kind of limitation on how much is going to come in around, I think this stuff is coming in around what we agreed to in the GATT agreement, but I think there is a limit on how much it is going to be. So if we put in a system like they are suggesting, we would protect the rest of the domestic market from overproduction, and hopefully we would not get a year-long period of $10 milk.
So it might be a way that we can do this without having the Government have to pay for it. This would not cost the Government any money at all, and it would be kind of a self-policing deal within the industry.
Mr. KOZAK. Well, clearly, we would be happy to, obviously follow-up with you on it. I have to indicate, though, that at the present time, we don't believe that assessments we would be in favor of. So it may not cost the Government any money, but it would certainly cost the dairy farmers money.
Mr. PETERSON. No, it would not, because if they did not increase production, it would not cost them anything.
Page 552 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. Well, I think it has the potential to create even more regional divide, because those areas that are increasing production versus those, I think, would not necessarily find that acceptable.
Mr. PETERSON. Well, I understand that. The proposal that you have put together, I think it is easy to sell, because what you are doing is basically taking your problem area, which is the class III area, where this last order change has caused an effect that nobody really expected, and that was a class III milk was going to be less than class IV milk, nobody expected that, I do not think, out of that change.
So now to solve that problem you are going to basically to have the Government pick up the price, and, sure, it is easy to get everybody to agree if the Federal Government is going to pay for it. If we said, OK, we are going to do this, we are going to floor class III at $11.08, but we are going to have the dairy farmers pay for it, I bet you would not get support for that, would you?
Mr. KOZAK. Well, no, I do not think that is correct.
Mr. PETERSON. So——
Mr. KOZAK. I agree, but we feel again, going back to what I talked about earlier, that what we are asking for in terms of dairy commodity versus other agriculture commodities is still far less, and so imposing assessments on dairy producers at a time when milk prices are low, I just don't think is acceptable.
I would be happy to pursue that with you. We have discussed assessments with our board at our last board meeting; conversely, we had a unanimous no.
Mr. PETERSON. Well, Mr. Chairman, if I could just say, I think part of the reason is that when the past when you had these assessments, they have been not big enough to really make any difference, and they were completely ineffective. And so there is a negative feeling out there amongst people, but I would urge you to look at this, because if it was a dollar hundredweight, people would be paying attention, I think. And that was one of the problems we had with assessments before is that they weren't enough to make any difference.
Page 553 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. We will look at it. I also would hope that as open-minded as we can be about that particular area—again, I caution us that if we start imposing any sort of production control here without dealing with the imports, we are really creating even more of a problem.
So I think if we are going to go back to the National Milk Board and discuss some of your ideas, we have got to have some commitment of how we are going to try to restrict imports, because we seem to be restricting ourselves but nobody else. And that is not going to help us.
The CHAIRMAN. Mr. Kennedy.
Mr. KENNEDY. Thank you.
In terms of going through your appendix and your plan for the future, I see that you have a reduction in the number of cows over the course of the next 10 years. Obviously, with the increase in herd size progression that we have seen, that would mean a fairly dramatic continued decrease in the number of farmers.
What kind of effect do you have on that and what types of concerns should we have with that continuing trend?
Mr. VITALINO. Yes, Congressman Kennedy, as you probably well know, because you referred to it in your question, we have seen a decline in the number of dairy farms for many years, I think we had in the millions; it is 50 years ago and we are down now to about 83,000. And you are correct to view the statistics that we put together as predicting a further decline.
We are fairly confident that our overall program recommendation will not accelerate the reduction in numbers of producers, but we are not proposing any specific measures at this point that would try to preserve farm numbers.
It has been talked about today, why don't we just let our Dairy Price Support Program terminate and eventually market prices will reestablish themselves. We think that would be an approach that would artificially accelerate the reduction in producer numbers much more than what we see in our proposal.
Page 554 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KENNEDY. When you say artificially, what do you mean by that?
Mr. VITALINO. Well, we see that if market prices are maintained with a certain level of stability over this program, as we propose in our program, Mr. Kozak mentioned earlier that we were not proposing to raise any support prices but simply to maintain the current basic policy mechanisms, that even with that level of stability in prices, we would see a continued reduction in number of producers.
That is really something that is going to continue to happen. If you were to undertake the serious income erosion that termination of the Price Support Program would bring, that is what I mention by sort of artificial, you would drive those producer numbers down much faster than we would see with a continual level of stability in prices such as we are proposing.
Mr. KENNEDY. And without any kind of a change in the milk marketing orders, would it not also be logical looking at this chart and seeing the fact that your class III milk price in 2008 predicted is no higher than it is today, but still 50 or 60 percent below the class I price, that that would disproportionately be borne in those areas that substantially produce for class III milk?
Mr. VITALINO. In sort of our baseline, what we see happening in any case is that with the continued reduction, and it is an assumption, continued reduction in the costs of producing milk, particularly in the western areas where they are larger in size, more and more the class III milk is being produced in those areas. So we see the reduction in class III prices as essentially part of our baseline.
We don't see that as being caused by anything in the Federal Order Program.
Mr. KENNEDY. I would just have you think about the answer between not having milk marketing orders and having them, and its impact on a number of dairy farms is probably a different answer whether you are thinking that as the Midwest or the country as a whole. And I think it is important that we really look at the regional differences that we have here in the dairy programs.
Page 555 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. Yes. Let me comment on that, our overall view, and I know there has been some discussion in the upper Midwest of not having the Federal order, but our overall view—that is not, by the way, the view of the majority of our National Milk Producer members in the upper Midwest.
Our view that if you were to pull out the Federal orders in the upper Midwest that the dairy producers there would get much lower prices than what they get now, and I think that although there is some frustration, that from an economic standpoint when put to a vote, I think they would agree that Federal orders—they are better under Federal orders than they would be without that.
Mr. KENNEDY. You mentioned that if the Midwest pulled out, I am talking about if we did not have milk marketing orders, period, versus and that that would maybe balance out the regional disparities that we had.
Mr. KOZAK. Well, it would certainly reduce producer income, first of all, as an immediate impact. I would say that nationally that I do not believe that that would be the way to go.
Mr. KENNEDY. When you say reduce producer income, if we still maintain a price support along a one class milk, along a consistent price across the country, how would that have a significant reduction in producer income? Granted it will change some regional balances, but how would that change the overall production income for dairy farmers taken as a whole in the country?
Mr. KOZAK. I apologize, I may have misunderstood your question. Peter will address it.
Mr. VITALINO. Congressman Kennedy, I am not sure I fully understand the question either, but one of the components of it is clearly the question of what would be the impact.
Page 556 PREV PAGE TOP OF DOC Segment 4 Of 5
As I understand it, you are asking a little more specifically what the impact of terminating the Federal orders would be across the country?
Mr. KENNEDY. I mean if you had a national pooling of milk, a national concept of pricing, one class of pricing, still continued to have some form of a price support similar to what we have today, how would that really change overall income for dairy farmers taken as a whole in the country, recognizing that there might be disparities and rebalancing amongst regions?
Mr. VITALINO. Basically national pooling, as the term indicates, would be simply a way of redistributing the money amongst producers. The basic concept of the Federal orders as they are currently structured and the consolidation in order numbers moved us more towards larger regions—is that the class I revenues in a particular Federal order, which are a function of the class I differential there as well as the utilization level, that those are—primarily the higher class I is designed primarily to bring additional money towards those producers who are actually supplying the class I market.
Now, there is milk that moves for class I uses great distances, but the majority of milk for class I is used within particular orders. So the disagreements for going to national pooling have generally been that even with our nationally-based dairy industry, that class I production continues to be based on local orders.
With the consolidation we have moved to sort of a larger geographic area, but with national pooling, you would be basically sharing class I revenues throughout the country, far beyond that level needed to reward those producers who are supplying the individual markets.
Mr. KENNEDY. Well, thank you, my time is up.
The CHAIRMAN. Mr. Kind.
Mr. KIND. Thank you, Mr. Chairman. We have had a lot of discussion already this morning in regard to price and especially the impact of supply on price. Let us shift a little bit on the demand side, and I, for one, was happy to see your support for the food assistance programs, the Public Law 480, the 416, Food for Progress, for instance.
Page 557 PREV PAGE TOP OF DOC Segment 4 Of 5
What about the domestic nutritional programs? Can that play a role in trying to restore a little bit of the profitability in the dairy industry, perhaps an expansion of that, perhaps even looking at a school breakfast program or where we are getting a lot of good studies now showing student performance directly linked to get a nutritional meal as they start off the day?
Mr. KOZAK. Thank you for addressing that issue. We are looking at this very seriously. In fact, over the past couple of weeks, National Milk Producers Federation and the International Dairy Foods Association, along with Dairy Management, Inc., our promotion group, has formed a task force to take a look at this particular issue.
We are starting to look at the School Lunch Program, Congressman Kind, because we think there is some real issues there where we can increase demand. We think the breakfast area is one that we have not taken full advantage of, and that is an issue.
We do overall believe that if we can increase demand that many of the problems that dairy farmers experience go away, and so we are heavily committed. The 15-cent checkoff money is going a long way in doing that, and we would like to work with you, specifically in the feeding programs, because we have a highly nutritious program product, and the cost of that product is minimal compared to its value nutritionally.
I think it is clear that that is an area that we should be spending some time on, and we are delighted to be working with IDFA and DMI on that particular area.
Mr. KIND. Perhaps a few more dairy vending machines in schools as opposed to the soft drink dominance right now may be helpful.
Since I have got limited time, let me shift focus a little bit. Land conservation, obviously very supportive of EQIP, the technical assistance through NRCS, asking for plus-ups in all of those areas. What about the 75/25 cost share; is that something that is workable with our producers?
Page 558 PREV PAGE TOP OF DOC Segment 4 Of 5
Because I hear from many of my folks that the incentive is not great enough for them to get into it with that type of cost share, especially with all the other kinds of requirements that come in and working through EQIP on conservation programs on their individual lands.
Mr. KOZAK. Yes, that is a good point. We think it is too restrictive, and I think that there is a backlog now of applications from dairy producers in these particular arenas, and that is why we were testifying, saying that not only do we need sufficient funding, but we need to look at some of the restrictions.
I think 75/25 is pretty high. When we had the dairy producer conclave, we talked about this in great detail, because dairy farmers are concerned. I mean, we sometimes talk about milk policy and arguing about 50 cents hundredweight, which is very important to a dairy farmer, and then a regulation comes along, especially in the EPA area, and it costs the farmer $3 hundredweight to comply, yet we don't spend enough attention on it.
So I know the American Farm Bureau's testimony, they provided in their testimony an environmental incentive payment-type of plan which is more direct. Dairy farmers don't need any more loans, that is for sure. It is like asking a college student about financial assistance, saying you are going to give them another loan. So dairy farmers fall in that category.
We think there should be some reduction in those restrictions, and it should be expanded.
Mr. KIND. I would be happy to work further with you, because I think there is a great opportunity here. Hopefully this committee and this Congress will take seriously a lot of the land conservation things we can do on this farm bill on voluntary and incentive-based way, because this, if we do it right, can be the great conservation bill of the 21st century as well, and can provide obviously a lot of income assistance to our producers at the same time. I see a lot of win-win opportunities.
Page 559 PREV PAGE TOP OF DOC Segment 4 Of 5
Finally, in the area of trade. Now the Dutch Canadians are going to be challenging the Federal order system as a WTO violation. Do you have any concerns about that? And more importantly, the U.S. giving up things in the trade arena in order to protect this Federal order system against these type of challenges abroad?
Mr. KOZAK. Peter may want to elaborate, but let me just say unequivocally, our analysis and I believe USDA and USTR agrees with us that our Federal milk marketing order system doesn't violate any WTO agreements.
And, in fact, Peter may want to add where we see the Federal milk marketing order falling into one of those boxes, or it doesn't fall into a box, but we feel fairly confident that any challenge towards that would be in our favor.
Peter, do you want to add anything?
Mr. VITALINO. Yes. The whole question of where Federal orders come into the Federal regime arose during the Uruguay Round, and the OEDC that did a lot of analytic work on that, not very friendly to farm programs, concluded that the Federal orders were basically nontrade distorting, that the cost was justified entirely by what the orders accomplished in the market, and in the end there was no—the Federal orders are not even part of our commitments. They are not in any of the boxes, and I think the rhetoric you are seeing from Canada and the Netherlands is a little bit defensive in nature as opposed to really substantive.
We have had private discussions with New Zealanders, for example, who are really sort of the bulldogs on free trade and dairy issues, and they have indicated to us privately that they see no problems with Federal orders.
Mr. KIND. Obviously, there is a major stumbling block in our trade negotiations. They continuously throw that in our face, saying that we have problems domestically so don't come after our monopolies or export subsidies. It is a difficult issue but one we have to resolve to have some good trade agreements for our industry.
Page 560 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. Yes. And Jaime Castenada on our staff, who spent a lot of time with this, would be happy to provide you with some additional information that we developed that makes our comfort level pretty high on that. I do think it is a scare tactic, because we believe that—as I said, we have the most liberal tariffs and quotas of any trading nation and some of our things like Federal milk market orders don't present a problem for us in that area.
Mr. KIND. Thank you.
Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Pickering.
Mr. PICKERING. Thank you, Mr. Chairman.
Let me quickly ask several questions. One, what is the NMPF's position on compacts, specifically the Southern Dairy Compact, which was authored by Mr. Hutchinson in the 106th, and it allows for the reauthorization of the Northeast Dairy Compact, but it grants consent for a Southern Dairy Compact.
I was a sponsor of this last year, and I wanted to know your position on that piece of legislation.
Mr. KOZAK. I knew I would not survive this hearing without that question. Let me be clear, National Milk does not have a position on compacts. National Milk will not take a position on compacts.
Our efforts have been focused, as you can tell in 63 pages of testimony, on all the areas that I can possibly work on in an environment that brings dairy producers together. And so we have decided within National Milk very clearly that our efforts as a national organization must be directed to the issues that we have presented before you.
We believe that compacts are individual issues within regions and States and must be addressed in that way, so National Milk will not and does not have a position on compacts.
Page 561 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. PICKERING. Thank you for that unequivocal statement.
Mr. KOZAK. I rehearsed it.
Mr. PICKERING. Yes. What steps is National Milk taking to avoid and to ensure that we do not see in our country the problems in the EU now with hoof and mouth disease? What do we need to do legislatively to make sure that we do not have that situation, or administratively, that we do not see that occur in our own country?
Mr. KOZAK. I think the first thing we ought to do is thank Secretary Veneman. I could not think of a more difficult time to become Secretary of Agriculture with the kinds of issues that she has had to deal with.
We have been critical at times about decision-making in the Government, not necessarily just at USDA, but I think she has, and her staff, very quickly and decisively made the kinds of decisions that were necessary to prevent it from coming in to our country.
Now, we have been working very closely with the USDA and FDA on a number of these issues, but particularly with foot and mouth disease. We have been working with them to try to look at bolstering up what we think are some protections that are necessary, especially in the product area.
We believe that most of the products coming in are being thoroughly reviewed, and our confidence level is fairly good, but we do believe that rather than look at some of these products on a product-by-product basis that we ought to take a look at a processing-type of parameter, meaning what type of treatment is being provided to the product and whether or not that is destructive in terms of its effect on the virus.
So we have been working with them, and they have been completely receptive to our comments. We have dairy expertise obviously at National Milk. The vets working on this program have expertise in terms of the virus of foot and mouth, and this is the case where the Government cannot do it alone. Industry has to help support that.
Page 562 PREV PAGE TOP OF DOC Segment 4 Of 5
We also have a number of provisions in our testimony, Congressman, that says we cannot wait until these crises occur to put in place some of these mechanisms. I think that we need to seriously look at the animal health emergency management system that is in the USDA budget. It is my understanding that it is a line item budget that has often been removed.
I cannot think of any more serious problem that we have in anything that we presented than to make sure that USDA and all the other agencies have the right funding and the proper tools to do their job. They know what to do. They need the resources to do it, and we are entirely supportive of them.
Mr. PICKERING. In your view, do they have the resources they need today?
Mr. KOZAK. I think they need additional resources. I think that they are stretched. I think it is unfortunate that only through coincidence is foot and mouth disease occurring at a time when BSE is also occurring. They are two separate and distinct diseases, not related, and that has put tremendous pressure on the Department, and having been in that situation once in my career, I can tell you that when people work long hours, become stressed when there is not enough people to do the job, that is when mistakes can happen.
So I think they are doing a great job with what they have, but I think they need more resources, and I think they need all of our help.
Mr. PICKERING. One final question. Could you please comment on your view on environmental regulations, that TMDL program and K-Phos and what do we need to do on a going-forward basis to bring balance or to prevent economic harm without the sound science to the practice that we see on our dairy farms?
Mr. KOZAK. Well, this is an area that we have spent a lot of time this past 2 years. As I mentioned Carissa is here with us. We have repositioned her job within National Milk to specifically deal with the environmental area, because you are absolutely correct, this is a critical feature for us.
Page 563 PREV PAGE TOP OF DOC Segment 4 Of 5
We have been working with EPA and trying to make them understand that one size doesn't fit all, that the dairy industry and the problems they have are somewhat unique to the swine industry and the hog industry.
We have a lot of concerns that a lot of regulations have been put forth that don't necessarily have sound science, and I hope that the Congress here will help us take a better oversight as to what is being foisted upon us.
As I mentioned earlier, every dairy farm in the country will say they understand their obligation to be an environmental steward, but they cannot go out of business complying with all of these regs. And we think that there is a reason to pull back on some of these issues and to ensure that when we are being asked to comply that it is a reasonable compliance based on science.
So we would like to work with you in any way that we can to try to mitigate that for dairy producers.
Mr. PICKERING. Thank you. I appreciate your testimonies today.
The CHAIRMAN. Mr. Stenholm.
Mr. STENHOLM. In your testimony, you recommend that no change be made in the relationship between the purchase price for butter and powder under the price support program. Right now we are making large powder purchases and virtually no butter.
I remember not too many years ago that we were accumulating butter, we were filling caves, and, if I remember correctly, your testimony back in those days earlier was no change in the price support price, but then we changed it. We lowered the price of butter. Butter dropped and then all of a sudden we started selling butter.
I am curious as to why you would recommend no change in the level of prices when apparently we are not able to sell powder at the price that we are fixed in the market order system.
Page 564 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. Again, I will ask Peter to comment, but, first, let me again come back to my favorite subject this morning, and that is the milk protein concentrate. I really think we have to take a serious look as to what impact that is having in the CC purchase prices of powder.
I think that that in itself is eroding some of what we felt that the price of the pork program was going to accomplish. One of the major reasons why we said there should be no butter-powder tilt is that when the Federal order reform took place, USDA—and I think they did this for the producer community—I think they advocated this on behalf of, benefit of producers—placed the higher, III or IV, to calculate both the class I price mover.
As I indicated earlier, now that Federal order reform is heavily tied into the class IV price, and when you do something to effectuate that, you have only one consequence and that is to cause total producer revenue to drop. So we find ourselves in the untenable position of saying that we don't want to see the class IV price drop because it is going to drop class II and I.
And as our examples show, it is a fairly significant piece for us at the moment. Perhaps Peter can elaborate on that.
Mr. VITALINO. Yes, Congressman Stenholm, Mr. Kozak mentioned probably the most important reason the game has changed now with the Federal order reform, where effectively the powder price has become the support price for 60 percent of the industry at least, and our discussions on that really are reassembling. You remember earlier discussions when the issue was the price support level as a whole back when the price support was setting the price of milk.
Prior to the Federal order reform, the butter-powder tilt was much more of a fine-tuning affair. If I can just venture a small correction, back when USDA was aggressively dropping the butter price, we had advocated an even tilt when the price support level was reduced. We were not advocating that the butter price be kept where it was, but we think that USDA probably was very aggressive in dropping that butter price. It went from about $1.30 to 65 cents.
Page 565 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. What happened when it went from $1.30 to 65 cents, what happened in the marketplace?
Mr. VITALINO. What happened was that the butter surplus that we suffered from 10 years ago has gone now, but the question is whether USDA's aggressive reduction of the butter price accomplished that or whether it was accomplished by a change in consumer tastes. After 10 years of stressing low fat eating, there has been a major shift in consumer preferences.
And I think that demand changes may have as much, if not more effect on that turnaround than just prices. If you look where butter prices are now, they are tending to be above the $1.30. So you can argue that we would now have just as tight a market in butter fat if USDA had never done that tilting back then. We have an awful lot more surplus butter over the last 10 years.
Mr. STENHOLM. Why would we even think about arguing that when the desired result was accomplished? We were able to get consumer utilization of butter went up. So, my only point there, it seems to me that the most solid argument was that we reduce the price to where we entice someone to start selling it precisely at the same time that our research and promotion program, our checkoff dollars were beginning to work with educating the consumer, seeing that that was the kind of combination that you would need.
As we heard from the grain people, the cotton people, right now the market is telling us, we have got too much, and yet not you today, but here with the prices where we are at that we complain about, production continues to go up.
If we are producing more nonfat dry milk, powder, looks to me like whatever we can do to move that quicker and send a market signal to our producers would be better.
Mr. KOZAK. With all due respect, I don't believe that we are producing too much powder. I come back again to the problem I think we are experiencing, and that is the displacement of our own domestic milk supply and our nonfat solids through the milk protein concentrate issue. If you take again a look at the numbers that we have provided, and I think they will be corroborated by a number of people, I don't believe we have a surplus of nonfat milk solids here. I think we have got a problem of lack of import restrictions, which in essence the way it is structured is causing us to buy more powder in the CCC purchase price while we, if you will, are in a pseudo-sense subsidizing products from coming in. Our dairy safety net was supposed to be the Milk Price Support Program. I think it is working, but I think there are other elements that are eroding what the intent of it was.
Page 566 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. How soon might we have an answer to the MPC from the appropriate authorities to answer the question as to whether you are right or wrong? There is some evidence that points that you are right. There are some suggestions that one of the best ways to handle that is to put us up an MPC plant somewhere and let us put up a casein plant while we are at it and start providing that market here locally.
Mr. KOZAK. Are you talking about some subsidization of those plants?
Mr. STENHOLM. Whatever it takes is what I am talking about. My first question to you today was the most serious one of the ones that we will be submitting to you in writing as well. We have got to get more of the consumer dollar into the producer's pocket. And to those people that seem to be able to circumvent our trade laws, which is what you say, which we have got in the sugar industry, which we have got in the peanut cases in which consumers and processors and corporate America in the United States continue to circumvent the law in order—at least that is the allegation you make today.
I am just saying that is the allegation. It seems to me that that is a message that we have got to get some folks to begin to either confirm you are right, and that is the administration's job today and the new trade folks, ITC, all of the above, to confirm it; and, if it is true, then stop it. But if it turns out that it is not true or it is not stoppable, then we have got to fight fire with fire.
Mr. KOZAK. I couldn't agree with you more. Probably Monday or Tuesday we will have our report complete. We have some Customs attorneys who are working for us right now, putting together a definitive program and some actions that we think can be taken. As soon as that is ready, we will be back up here, hopefully with your help, to have this reviewed. But we think that it is a critical feature of what is impacting the surplus of skim milk powder right now.
Page 567 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. You have answered my question. Thank you.
The CHAIRMAN. Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman. First of all, let me say that this really is the political tar baby of all tar babies. This is the hardest thing to sort out. I appreciate what you have done, trying to bring together the regions and have meetings. I also appreciate what you had to say about the environment. I do agree with my colleague, Mr. Kind. I think particularly traditional dairy farmers using grazing methods can really represent a big part of the solution to the environmental problem. I want to work with you on EQIP and some of the other programs.
I also agree on trade. I think in many respects our trade negotiators over the last number of years have in effect not really taken into consideration the concerns we have in terms of dairy and other issues. I will have to say, though, long term, I think that the idea that, at least in the next 36 months—we met with members of the German Bundestag about a month ago and they are in the process of killing 400,000 cows. I think that the fact that they are going to be importing much in terms of dairy products over the next 36 months, I think we are going to see that decline dramatically. I am not sure that is as big a problem right now.
But I have to come back to this. Again, from your own testimony, you say, and I quote, ''Dairy farmers in regions where a high proportion of their milk is used for class III products, primarily cheese, are at risk of substantial income erosion.''
Let me just go on and say that currently class III milk represents about 47 percent of all milk produced. It seems to me that what is happening in America today, fluid milk consumption is going down, cheese consumption is going up. Within a very short period of time, that class III producer is going to represent the majority of milk produced in the United States, and they are the ones that are going to be disadvantaged even under your own system.
The difficult thing I have is taking this program back to the people in my area, and I think it is going to be a tough sell all over the country. The class III milk in 2000, looking at appendix 16 on your own charts, in the year 2000 the average class III price was $9.74. The class I average price was $14.43. As you take that chart on out to the year 2008, the class I price goes up by just about a dollar a hundred, to $15.40, but my producer back in southeastern Minnesota is right back where he started at $9.74.
Page 568 PREV PAGE TOP OF DOC Segment 4 Of 5
Which I think ultimately leads to the conclusion that Mr. Kennedy raised. If you go up to the top of that chart, it says cow numbers, you are going to continue to see the number of cows go down. But my concern is it is going to be disproportionately large in areas that we represent, because you are going to see they are already at a disadvantage.
I believe it is the whole nub of the problem we have with the milk marketing order system. That cow does not know how close she lives to Eau Claire, WI and she doesn't know and doesn't really care what her milk is going to go into. It seems to me the more that you tinker with the system—and ultimately, I think Mr. Dooley's numbers are correct—we are going to end up with a significant amount of Federal subsidy in this thing. And at the end of a 6- or 7-year period, producers in my region are going to be about where they were last year. That is not where they want to be. We are going to have fewer dairy farmers.
I think that somehow we have got to come up with a system, and I am not sure whether it is inventory management or what, but at the very least we ought to have a system that doesn't really care where the milk comes from or ultimately what it goes into.
I am not certain that I buy your argument, Dr. Vitaliano, that bottlers would have a hard time getting milk. Ultimately, the market would sort that out. Let me just use as an example, we don't grow any oranges in southeastern Minnesota. I suppose if we got a large enough subsidy, we probably could. But we have never run out of orange juice. We don't run out of fresh orange juice, we don't run out of oranges. I suspect there may be days when they are a little short in the supermarkets, but the idea that somehow you have to have these wide differentials which by your own charts get worse over the next 6 years, not better, somehow I don't see how that makes any economic sense. Ultimately it does, I am convinced, it really does lead to the arguments that we have with pitting region against region.
Any comment?
Mr. VITALIANO. Congressman Gutknecht, I think I have mentioned a couple of times in our testimony we take the Federal order system as it is currently constituted as a given, and we support maintaining that system.
Page 569 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. GUTKNECHT. That is not a view that I hold. I don't think it is a good idea.
Mr. VITALIANO. I understand. But under that system, basically the price of milk in all classes is computed now directly for market prices. So our milk price projections are driven off what we think is going to happen in the market for cheese, butter, nonfat dry milk, et cetera. As you will see, looking at our projections of class I, class II, and class IV milk, those are going to be basically stable over the period because they would be driven by our recommendation on continuing the Price Support Program and maintaining the current dollar purchase price for powder. We don't see those changing.
What we see is that class III is going to continue to be somewhat independent and it is going to be declining even on our baseline by our assumption, because we see that the cost of producing milk, particularly the cost of producing milk in the class III regions, is going to be going down. That may not turn out to be the case. It is going to be heavily driven by feed prices. If feed prices go back up, all of this analysis is going to need to be changed. We are recognizing that under this system, class III prices are going to tend to be lower. Of all the suggestions, as Mr. Kozak mentioned, we have not seen any that we think really address the class III problem as directly as our proposal for class III supplemental payments.
Mr. KOZAK. Let me add that, again, we are not interested as an organization in redistributing the present money. What we are interested in is increasing dairy farmer income. So far, as Peter has said, our proposal, at least on the class III side, does exactly that without taking money away from other dairy farmers. If somebody can come up with a better proposal that creates higher producer equity without reducing dairy farmer income in all the other areas, we obviously would be happy to look at it. But nobody has. And so what we have provided this Congress, or this hearing with, is an attempt to try to address the equity issue without dropping total dairy farmer income and without putting the Congress in another situation where we have got regional divisions.
Page 570 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. GUTKNECHT. Hold it right there. How will you not have even greater regional divisions under this plan? Because if we keep the status quo, it seems to me it makes a bad situation worse for dairy farmers in the upper Midwest.
Mr. KOZAK. I don't think so. I don't agree.
Mr. GUTKNECHT. If in the same time period we go from
$9.74 to $9.74 and the guys that are producing class I milk go from $14.43 to $15.40, how does that not make matters worse?
Mr. KOZAK. Is that taking into account our class III Supplemental Payment Program?
Mr. GUTKNECHT. It does not take that into account.
Mr. KOZAK. That is what I am addressing here. It is $11.08 for class III. That is why we are advocating our supplemental program, to address the particular issue that you are, I think, discussing.
Mr. GUTKNECHT. I know my time is up but it really does strike me that the $11.08, which supposedly is going to be a floor by your own computations, really ultimately will become a ceiling. Isn't that correct?
Mr. KOZAK. Some will argue that it is, but a number of our members who are in your particular area who are also manufacturing products do not believe that it would be a ceiling. We think the market price would be.
Mr. GUTKNECHT. But looking at your charts, it would be the ceiling.
Mr. KOZAK. Perhaps.
Mr. GUTKNECHT. Just by your analysis. I am not saying what people may believe.
Mr. KOZAK. Perhaps. Do you want to add to that?
Page 571 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. VITALIANO. I guess I could draw your attention, Congressman Gutknecht, to appendix 2 which is sort of our look at the most radical deregulation approach of all of these presented, because I hear you suggesting that deregulation may be the best way to go in terms of addressing the class III issue. We do show indeed that under termination of the Price Support Program and the resultant tightening of the market that class III prices would be higher. But we show them by our analysis still averaging only about $10.65 over that period, which is below the $11.08.
So I think a case could be made, if you accept our analysis, and again economists can be challenged on a number of things, that we don't see in our baseline, even with complete deregulation, that class III is going to average above the $11.08. We don't see a deregulation strategy, even if you want to talk about that, that is going to benefit the class I regions to the extent that our $11.08 is. We can get into discussions whether that is going to be a ceiling or a floor, and it depends on what your basic economic assumptions are in doing your analysis. But again we see $11.08 as a reasonable level of providing support to class III areas that is greater than under any of the other scenarios without the payments, including fairly radical deregulation.
Mr. GUTKNECHT. But in only one year by your own charts do you go above $11.08. In every other year, you are below $11.08.
Mr. VITALIANO. And that is an assumption through the analysis. If that turns out to be too bearish on that side of things, then the conclusions would obviously change.
The CHAIRMAN. Mr. Stenholm.
Mr. STENHOLM. What assumptions did you use for the price of grain during the period of time that your appendixes are showing? What assumptions did you use for the price of grain?
Page 572 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. VITALIANO. We basically assumed that current grain prices would continue.
Mr. STENHOLM. At current levels?
Mr. VITALIANO. Yes. We did not project any major changes in grain prices as would affect the cost of producing milk. We looked at FAPRI's and other analyses showing that market prices for grain are going to continue to be at their current levels. Obviously any major changes in the commodity programs that affect grains, increasing the loan rates and so on and so forth, would change that. But we did not attempt to make any forecasts of grain program changes that would have a major impact on grain prices.
Mr. STENHOLM. Can you, off the top of your head, say what would happen if grain prices increased 20 percent?
Mr. VITALIANO. You would see an increase in the milk prices, particularly class III, in our analysis.
Mr. STENHOLM. Production would go down or up?
Mr. VITALIANO. It would go up.
Mr. STENHOLM. Go up?
Mr. VITALIANO. If grain prices went up, the cost of producing milk would go up. Over the long term when we are looking at baselines, et cetera, even with Government programs, the best key to making a long-term ballpark estimate of what milk prices are going to be is to get an estimate of feed prices, what cost of production is going to be; and that means feed prices because that is the main variable element. So if you tell me that grain prices are going to go up, I would tell you in response that the price of milk is going to go up. Not necessarily right away. And you would have some reduction of production.
Mr. STENHOLM. What is the current percent of dairy product consumption in America today that is imported?
Page 573 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. VITALIANO. About 5 percent.
Mr. STENHOLM. Five percent import?
Mr. VITALIANO. We import about 5 percent of our consumption.
Mr. STENHOLM. Under the worst case scenario of MPC, how much will it rise to?
Mr. VITALIANO. I don't have that in percentage, but under our various scenarios, we did assume that MPC and casein imports would continue to increase. We would have to get back to you with a particular number.
Mr. STENHOLM. Probably 6 percent, 7 percent?
Mr. VITALIANO. Maybe rising to, yes, somewhere in that range, 7, 8 percent.
Mr. STENHOLM. What percent of our total production today are we exporting?
Mr. VITALIANO. Just about 5 percent, too. We are fairly closely balanced. We actually exported more the last couple of years than we imported. That gets to the arcane business of how you measure milk equivalent which is another whole topic.
Mr. STENHOLM. In all due respect, my friends, I think you better go back to the drawing board a little bit. The future for our producers is in the world market. Period. If we are exporting more than we are importing, we have a hard time building a case that we ought to limit imports.
Mr. KOZAK. As Peter mentioned, I think compositionally we would like to provide you with some data. Because I think that we are, on a milk solids equivalent, which Peter has mentioned, that we are importing more than we are exporting.
Mr. VITALIANO. If you measure the dollar value of imports and exports, we are importing a lot more than we are exporting. It is the milk equivalent—we are exporting a lot of whey and lactose, the nonprice-supported commodities. Some people would claim that that is almost a by-product and that doesn't count. We disagree. But what we are importing is cheese and milk proteins which are major dairy products that displace U.S. milk production. And we are exporting whey, lactose and high value cheeses. So there are some that would argue that the import balance is definitely skewed when you are looking at the milk protein products. Our milk protein exports are limited to what we can do under the DEIP, and we import far more MPC, casein and a lot of other different products with casein in it, than we export.
Page 574 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. Maybe I didn't ask the question right. I asked what percent of our consumption of dairy product in the United States is imported, and you said 5 percent.
Mr. VITALIANO. On an overall milk equivalent.
Mr. STENHOLM. That is cheese. That is——
Mr. VITALIANO. Everything.
Mr. STENHOLM. Five percent.
Mr. VITALIANO. That is correct.
Mr. STENHOLM. When I asked you how much we are exporting, you also said 5 percent.
Mr. VITALIANO. Just about.
Mr. STENHOLM. We are going to discuss that one a little more, because that goes back with my previous question, also, regarding this. Once we have trade laws and people agree to them, cheaters—down in Texas a good rope and a tree takes care of folks that don't follow the law. That is the insinuation that is coming in, not only in the area of dairy products, MPC, but it is also coming in in other areas. That is the message that I hope that we would have of all of our food producing industry, is once we agree to rules, let's live by them; and if you are going to circumvent them, be prepared to pay the price. And if we don't have a high enough price, then that is something that we can look at legislatively. I don't know how we legislate a rope and a tree, but that is what it would take.
There again, I really think a good old casein plant or figuring out a way to make biodiesel or ethanol or something else out of this extra product that seems to drive our price down might not be a pretty good little tool to put in our quiver down the line some way. We look forward to working with you on that. Thank you.
The CHAIRMAN. I don't know whether this is good news or bad news, but this has been one of the most spirited hearings we have had out of the 10. Time will tell, I suppose.
Page 575 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KOZAK. It is healthy, because I have lost 10 pounds now since we started this meeting.
The CHAIRMAN. It is a great diet program. Now you can go out and eat some ice cream.
Mr. KOZAK. A lot of it today.
The CHAIRMAN. Thank you very much for your testimony. Any additional material you wish to submit, we would be glad to have. There will be questions that come from the committee.
Thank you for your time. The hearing is adjourned.
[Whereupon, at 11:50 p.m., the committee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
[By Alan Elsner, national correspondent, Reuters]
ANIMAL RIGHTS LEADER HOPES DISEASE COMES TO THE U.S.
While U.S.. authorities take precautions to prevent foot-and-mouth from entering the country, the president of People for the Ethical Treatment of Animals, possibly the world's most influential animal rights organization, openly hopes the disease crosses the Atlantic.
''If that hideousness came here, it wouldn't be any more hideous for the animals—they are all bound for a ghastly death anyway. But it would wake up consumers,'' said PETA co-founder and president Ingrid Newkirk.
Interviewed on Friday in the office she shares with four cats, Newkirk said: ''I openly hope that it comes here. It will bring economic harm only for those who profit from giving people heart attacks and giving animals a concentration camp-like existence. It would be good for animals, good for human health and good for the environment.''
Page 576 PREV PAGE TOP OF DOC Segment 4 Of 5
Border officials, zoos and theme parks have been taking precautions to prevent the disease, which is raging in Britain and has spread to several other European countries, from entering the United States, which has not seen an outbreak since 1929. Last week, pigs suspected of carrying the disease on a North Carolina hog farm tested negative.
Meanwhile PETA workers report vastly increased demand for its ''vegetarian starter kits'' , from worried meat eaters. That number would no doubt rocket higher if either foot-and-mouth or ''Mad Cow'' disease reached American shores.
Since its founding in 1980, PETA has emerged as a powerful force, campaigning on the principle that animals should not be eaten, worn, experimented on or used for entertainment.
The organization, founded in Newkirk's basement in a suburb of Washington DC, now occupies several stories of a headquarters in Norfolk, VA. It employs 130 people, has 700,000 members, revenues of $17 million and has opened small branch offices in Britain, Germany, Italy and India.
DOGS WANDER THE WORKPLACE
The PETA building looks and feels much like any corporate
headquarters except for the dozens of dogs wandering around and sitting on special mattresses. Employees are encouraged to bring their pets to work. Many also take part in civil disobedience campaigns and boast long arrest records.
For example, Kristie Phelps, who runs a campaign against circus animals, occasionally strips naked, paints her body with tiger stripes, and crouches in a cage outside the Big Top for an hour to dramatize the plight of caged circus beasts.
''Nothing promotes discussion and dialogue better than a naked woman in a cage. It gives me perspective on the lifetime of suffering these animals endure'' she said.
PETA can call on a cadre of film stars, entertainers and supermodels to publicize its campaigns. Businesses, from McDonald's to L'Oreal and Gillette to General Motors to Calvin Klein—all of which have altered some of their practices in response to PETA campaigns—have learned not to take the organization lightly.
Page 577 PREV PAGE TOP OF DOC Segment 4 Of 5
Avon, Revlon, Estee Lauder and L'Oreal ended animal testing to develop cosmetics as did Gillette; Calvin Klein stopped producing fur for its clothes; General Motors ended crash tests on animals while The Gap stopped using leather from animals in India and China.
PETA's latest target is Burger King, with its 11,330 restaurants in 58 countries selling 2.6 billion hamburgers a year. PETA wants Burger King to fall into line with McDonald's, which last year, after an 11- month campaign, agreed to unannounced inspections of its slaughter houses. It said it would halt the practice of starving chickens to encourage egg production, increase the space given to battery hens and stop slicing off hens' beaks.
SLAUGHTERHOUSE SCENES
Last week, a dozen PETA supporters showed up outside a Burger King in Washington, set up a video screen on the sidewalk showing horrific slaughterhouse scenes and started handing out leaflets to passersby.
One protester, Sarah Clifton, walked into the restaurant and joined the line. When she reached the front, she sprang onto the counter and began shouting: ''This restaurant is shut down for cruelty to
animals. Everyone please leave.'' A police officer wrestled her to the ground but she continued shouting for another 20 minutes until two more officers arrived to drag her away.
No sooner was she out the door when Nick Potch jumped up and started yelling anti-meat slogans. He too was manhandled away but by the time the demonstration was done, it had tied up business for about half an hour and required six police squad cars to be summoned.
Both protesters were charged with unlawful entry and released several hours later. They face April 12 court appearances. Typically, such cases are often dismissed or end with fines, which the protesters pay out of their own pockets.
Burger King spokeswoman Kim Miller said the chain had seen around 30 such demonstrations in the past month but no direct impact on sales. She said Burger King took issues of safety and animal welfare very seriously and was forming an advisory council on animal well-being.
Page 578 PREV PAGE TOP OF DOC Segment 4 Of 5
Newkirk said PETA chose its targets carefully and never backed away from a campaign once it was launched. ''Our opponents know we never let up. They have to concede to some degree. They have to alleviate some of the misery they are causing before we back down'' she said.
The organization has its enemies. It has been accused of extremism in some of its methods and in arguing that all animal experimentation is morally wrong and could be replaced by human epidemiological studies and other techniques.
Right now, PETA is targeting the March of Dimes charity which gives a small percentage of its resources to organizations that do animal experimentation. Already, several corporate contributors to the March of Dimes have earmarked their contributions for non-animal uses.
THE FUTURE OF FEDERAL FARM COMMODITY PROGRAMS (CORN)
WEDNESDAY, APRIL 25, 2001
House of Representatives,
Committee on Agriculture,
Washington, DC.
The committee met, pursuant to call, at 10:02 a.m., in room 1300 of the Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
Present: Representatives: Goodlatte, Smith, Lucas of Kentucky, Chambliss, Moran, Thune, Gutknecht, Simpson, Fletcher, Johnson, Osborne, Pence, Rehberg, Graves, Putnam, Kennedy, Stenholm, Peterson, Dooley, Berry, Etheridge, Boswell, Phelps, Lucas of Kentucky, Kind, and Shows.
Page 579 PREV PAGE TOP OF DOC Segment 4 Of 5
Staff present: William E. O'Conner, Jr., staff director; Tom Sell, Callista Gingrich, Alan Mackey, Jeff Harrison, Craig Jagger, Christy Cromley, Anne Simmons, and Howard Conley.
OPENING STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
The CHAIRMAN. This meeting of the Committee on Agriculture to review Federal farm commodity programs on the corn industry will come to order.
Good morning and welcome to the eleventh in our series of hearings dedicated to the future of farm policy in America. I thank the members of this committee for their participation through the course of these hearings and their commitment.
After today, we will have heard from 11 of 14 groups selected to represent the various commodities and major farm interest groups. At this point, we are still working toward reporting legislation out of this committee this summer, consistent with the deadline set in our House budget resolution. That means we have much work to do, and we will have to start refining this collective wisdom that we have all gathered to develop a vehicle to move through the process.
The witnesses appearing before us today and previously were given guidelines to follow in writing their testimony. Foremost, they were given the opportunity and obligation to tell us exactly what they want in farm policy for the future. Specifically, their testimony should include expected impacts on related industries, as well as our ability as a country to move the product in an export market. Also, the effect of their proposal on farm program expenditures and our WTO obligations should be addressed.
This process has proven challenging for all those involved, but by giving each witness the chance to specifically convey their recommendations for farm policy, we have been able to study each and every aspect of various farm policies and their consequences on the American producer. I trust that this careful process we have undertaken will reap rewards in a better farm program for the future.
Page 580 PREV PAGE TOP OF DOC Segment 4 Of 5
Today's testimony will be presented on behalf of the corn industry by Lee Klein, president of the National Corn Growers' Association and a corn farmer from Battle Creek, NE. Mr. Klein is accompanied by Mr. Dee Vaughan, who happens to be from the premier corn producing region of the country, the 19th district of Texas, and Brent Porteus, who also represents NCGA.
Thank you all very much for coming. I would recognize my good friend, Mr. Stenholm.
Mr. STENHOLM. No questions. No comment at this time, Mr. Chairman. I welcome the witnesses and look forward to hearing from them. I may have one question. Who represents the premier 19th Congressional District of Texas?
The CHAIRMAN. You could ask Mr. Vaughan who does that. Yours truly. Thank you for that leading question, Me did. I can tell you that.
Any statements for the record will be taken at this time.
[The prepared statement of Mr. Hilliard follows:]
PREPARED STATEMENT OF HON. EARL F. HILLIARD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA
Mr. Chairman, fellow members and guests, I am glad we are meeting today to discuss the needs of our corn growers in America. We grow a good deal of corn in Alabama and it is an increasingly important crop for us.
I have spoken with corn growers in Alabama and they have discussed the counter-cyclical proposal with me. I am interested and look forward to understanding it better.
Access to capital is essential for all farmers, but especially to poor and minority farmers in the Black Belt of the South, who have historically felt double the weight of poverty and discrimination. I will listen intently as you discuss this matter and I hope you will relate to the increased difficulties these farmers have in accessing capital.
Ethanol is good for everybody. It is good for farmers, for the environment, for drivers and for workers. I hope that your testimony supports this view, and I believe that it will.
Page 581 PREV PAGE TOP OF DOC Segment 4 Of 5
Again, I welcome you and look forward to working with you during this Congress.
The CHAIRMAN. Gentlemen, thank you very much. Mr. Klein, please proceed.
STATEMENT OF LEE KLEIN, PRESIDENT, NATIONAL CORN GROWERS ASSOCIATION, BATTLE CREEK, NE
Mr. KLEIN. Thank you, Mr. Chairman, for the opportunity to testify here today about the farm economy and the future of farm policy. My name is Lee Klein and I serve as president of the National Corn Growers' Association, representing more than 31,000 direct members and the 300,000 corn farmers throughout the Nation who make check-off payments each year.
I am joined today by Dee Vaughan from Dumas, TX, and Brent Porteus from Coshocton, OH. I never do say that one right. Mr. Vaughan serves on NCGA's Board of Directors and is liaison between the Board and our Public Policy Action Team. He grows corn, wheat, sorghum, and soybeans in Moore County, located in the northern panhandle. Mr. Porteus is serving as the chairman of our Public Policy Action Team, which is our internal committee working on farm programs. He farms with his father and brother growing corn, soybeans, wheat, and alfalfa in central Ohio. I farm near Battle Creek, NE in northeast Nebraska. My wife and I raise corn, seed corn, soybeans, rye, and alfalfa and hay and we manage a cow/calf operation.
We are proud to represent three very different corn growing regions of this country, yet speak with one voice. What does NCGA want from the next farm bill? Simply, our growers want a farm program that ensures America's farmers are globally competitive, market-responsive, and environmentally responsible. This program must provide producers with access to world markets, access to capital, access to advances in technology and risk management in a sustainable and environmentally sound manner.
Page 582 PREV PAGE TOP OF DOC Segment 4 Of 5
We need a complete package that provides farmers opportunities in the market place with minimal interference and production decisions that includes a safety net against those economic forces that are beyond producers' control. We believe that we have developed a program that will do just that.
In hindsight, the 1996 FAIR Act provided farmers with many of the tools we are looking for, but it was shortsighted in its ability to provide a safety net that would be sufficient in times of sustained low prices. It does not include a provision to allow producers to weather, for example, the Asian flu that seemed to infect many of our international customers.
After 3 years of low prices and needed bailouts by the U.S. Congress, totaling over $19 billion, we now know that an additional component is vitally needed. Improving that safety net for future farm policy, while maintaining the best of freedom-to-farm is at the core of our presentation today.
After weighing all of the needs and concerns of growers outlined in our full testimony, NCGA has surfaced and is committed to a comprehensive counter-cyclical income support proposal. This proposal addresses the inequities in the current marketing assistance loan program, puts U.S. agricultural supports in a more favorable green box, and is fiduciary appropriate and responsible. The counter-cyclical program that we have developed replaces the current marketing assistance loan program. We have worked with economists to flesh out the total impact of this type of program on the corn industry, as well as other commodities, and are very confident and pleased with the results.
Our proposal establishes an annual target income for corn and other loan-eligible commodities. The target income, which is outlined on page 12 of our testimony, is based on the average crop value during the base period and incorporates producer benefits from the marketing loan program and the market loss assistance payments over that same time frame. This base period average income is adjusted for each year of the farm bill by a factor that reflects projected production increases. This adjustment is necessary to ensure that producers have adequate income protection as crop yields increase.
Page 583 PREV PAGE TOP OF DOC Segment 4 Of 5
In addition to a counter-cyclical program, our proposal assumes the continuation of Production Flexibility Contract payments at the 2002 levels for the life of the new farm bill. Consequently, PFC payments are not included in target income. A grower portion of the corn counter-cyclical payment would then be based on their eligible units from a 5-year average acreage and yields average. This would allow one to update bases and yields for the counter-cyclical program to a more recent, practice-reflective, and yield and planting level.
Each year, crop income would be calculated using USDA production estimates and the average price during the first 3 months of each commodity marketing year. For corn and other commodities with a marketing year that begins on September 1, the third-month price will be the preliminary estimate as determined by the National Agricultural Statistics Service. A 3-month price allows payments to be calculated and made when they are most needed by farmers. We would anticipate that this would allow farmers an option of receiving these payments either prior to or after December 1 for each year as cash flow and optimal tax management. Whenever the national crop income is less than the target income, producers will receive a payment based on their eligible bushels.
If the target income were to be triggered, a payment would be made to producers by taking the total counter-cyclical income shortfall, dividing it by the sum of all producers' base units, and multiplying that times an individual's base unit.
We think a farm program with this structure has many benefits. It eliminates the 30-year problem of inequity within loan rates. It is non-production distorting, non-trade distorting, and it provides payments when needed to those who need it, and pulls valuable and needed funds from the amber box into one considered much more favorable.
Chart B on page 15 demonstrates how our proposal would fare compared to a CBO-like baseline. As the chart demonstrates, this program will provide $31 billion more in assistance over that 7-year period than the current CBO-like baseline estimates. That is an average of $5.2 billion more per year without the necessitation of ad hoc disaster assistance. We clearly demonstrate a need for an increase in the agricultural budget baseline. This need is justified and, when you look at this program, it may be a better use of taxpayer dollars in the long run.
Page 584 PREV PAGE TOP OF DOC Segment 4 Of 5
We believe that our counter-cyclical proposal is the safety net that eluded us in 1996. We asked AgriLogic to run this counter-cyclical program on both a CBO-like baseline and their own baseline, which allows for more volatility and fluctuation in the market and in production. This has allowed us to analyze this proposal under alternative conditions and to test the sensitivity of our proposal to ensure that we have not developed a farm policy proposal that is unresponsive to changing conditions and weather, production, macroeconomic policy, and foreign trade policies.
We ran many scenarios under both the CBO-like and AgriLogic baseline. Under all of the options run, the economic models demonstrate that this program will provide assistance when needed without further congressional action.
While counter-cyclical proposal will ensure grower income in times of low prices in amounts comparable to current marketing loan benefits, it will not address our goal of a policy that provides access to capital, which is why we propose recourse loans as a part of this program. Recourse loans will provide producers access to capital without impacting production decisions. Since a producer will be required to repay the loan plus interest at the end of the 9-month loan period, we view this as only assisting with access to capital for short-term cash flow.
A counter-cyclical program strengthens the farm safety net by providing a more predictable level of income. This program has two roles. It serves as the safety net with crop insurance that facilitates the ability of farmers to effectively manage their individual annual production risks in the private sector, and it provides a safety net to the equity base of U.S. farm production at a cost-effective private/public partnership that maintains the soundness of the agricultural production system for the benefit of U.S. consumers and the national economy.
We believe that we have identified very real problems with today's farm policy and proposed a policy that we believe addresses them. We also contend that this policy is both less production and trade-distorting than current policy, and offers this country's farmers a real safety net when needed most.
Page 585 PREV PAGE TOP OF DOC Segment 4 Of 5
In conclusion, we must all recognize, and I hope you agree, there is significant and important public benefit in the food security, wholesomeness, and integrity of production resulting from the tremendously efficient food and fiber production machine of America's production agriculture sector. Of equal value and importance to our Nation, is the economic viability and activity of rural communities and the work ethic, integrity, and commitment to community fostered in the domestic food production sector of our economy.
In a global market and economy distorted at its best by world political issues and non-production-related economic factors like exchange rates, there is significant public interest and need to protect the viability of agricultural producers in a manner that is market-oriented, WTO-compliant, environmentally responsible, and responsive to the vast geographical and economical differences faced by our rural farm families and corn grower members.
I thank you for the opportunity to share NCGA's vision in this important effort. And I also want to say to Mr. Osborne, who represents the largest corn-producing district in the United States, which is not my district, if I do end up in your district, Mr. Osborne, I would be honored. So, thank you.
[The prepared statement of Mr. Klein appears at the conclusion of the hearing.]
The CHAIRMAN. I want the record to note that I said premier. I didn't say largest.
Mr. KLEIN. Well, Mr. Osborne is used to winning.
The CHAIRMAN. Yes. He is.
Mr. KLEIN. Thank you, again.
The CHAIRMAN. Well, we are glad Mr. Osborne is on this committee. Thank you very much for your testimony.
In your testimony, you are proposing to do away with the non-recourse marketing loan and Loan Deficiency Payments, LDP, and replace it with a 9-month recourse loan and counter-cyclical program. Of course, under this proposal, a producer would have to take out a recourse loan and have to repay the loan at the principal level with interest. What impact do you believe there would be on cash market prices for the AMTA crops if the marketing loan, as we know it today, is replaced with a 9-month recourse loan?
Page 586 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. PORTEUS. In many respects, replacing the marketing loan with this type of program should have minimal or less market-distorting impacts than the current marketing loan situation. The recourse loan would be utilized as a cash-flow situation, but it wouldn't be available to hold grain off the market because, obviously, it would have to be repaid. The cash flow opportunities for producers that currently come to the LDP situation would be available through the counter-cyclical program-type payment. So there wouldn't be anything to hold grain off the market or force grain onto the market at a certain point in time. So it should be equal to or less market-disrupting than the current marketing loan situation.
The CHAIRMAN. How do you feel that the LDPs have worked in regard to their effect on daily cash prices?
Mr. PORTEUS. We feel, as an organization, very positively about the marketing loan program and the LDP process. Obviously, it has been a market-clearing function. Obviously, there is a lot of debate in terms of especially false situations whether it can act to drive prices a little bit lower in specific localities and specific locations. But for the most part, that program has worked very well. We just see this other program as an evolution of that marketing loan concept to utilize many of the market-related functions of the marketing loan, but address some of the inequities and some of the problems out in the country that do exist with PCPs and LDPs in the marketing loan concept.
The CHAIRMAN. In your proposal, counter-cyclical program, you state any limitation on payments would effectively kill this option from being seriously considered. And I made it very clear my own personal feelings and opposition to payment limitations. But in terms of there being a limitation, does your membership believe that agriculture producers can withstand the public scrutiny and criticism and not be associated with the size of payments to individual producers?
Mr. VAUGHAN. We debated this issue for a long time, because we have both camps in our organization as well, those that support payment limitations and those that would like to see it unlimited. We felt like, on this proposal, because we are combining basically the marketing loan, the emergency spending that we have received, the market-loss assistance payments, the LDP, and all three of those—and one of those, the marketing loan gains, actually does not have a limit because it has a certificate program. We felt like when you combine all of those, you would have to have such a high payment limit that would look worse than having no limit at all. In order to have this program work, it would have to have a very large payment limit.
Page 587 PREV PAGE TOP OF DOC Segment 4 Of 5
The CHAIRMAN. Have you, as an association, taken a look at the crop insurance as it has been reformed for the coming year and, if so, what are your general thoughts in regard to that?
Mr. PORTEUS. We feel very positive about the crop insurance reforms that have been put in place. And that is why I think Mr. Klein's testimony emphasized that we see this as a program that works in balance and in conjunction with crop insurance. Obviously, this is an income safety net. There is that production risk component that needs to be addressed through a Government crop insurance program, which this committee has worked very extensively on in recent times, or through each individual producer's risk management ability through some other method, whether that be center pivots or whatever. But the crop insurance reforms that have been enacted are a very vital component of that total package.
The CHAIRMAN. Mr. Stenholm.
Mr. STENHOLM. Go a little further. First, I commend you for your proposal. You are thinking outside the box, which is something this committee has been asking you to do. And the proposal that you have suggested regarding recourse and non-recourse loans is intriguing, as well as controversial. You state that under your proposed counter-cyclical program, over $3 billion in grower support would be transferred into the more favorable green box, from the amber box that is limited by WTO commitments. Would you go a little further in elaborating on why you believe that? And is it $3 billion per year and how is this transfer accomplished? Can you go a little further on that?
Mr. PORTEUS. The $3 billion provided in the testimony is the difference between the CBO-like baseline and the AgriLogic information regarding the NCGA-proposed situation. And that would be $3 billion in those first years. I think that number may decline over time as that CBO baseline moves. But that $3 billion is an annual number. And this would be because we are moving those payments from something that is clearly amber box, or arguably amber box, at this point in time, into a non-market and trade-distorting type of mechanism that very arguably would not be amber box. It would be green box.
Page 588 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. Well, if I understand your counter-cyclical program, you propose a new base period of 1996 to the year 2000. And I assume that you choose that because that is a period of time in which farmers have had the flexibility to plant that which they believe the market would best reward them for.
Now, let us assume you have been planting corn during the base period, but as an individual producer, you believe that in 2003, soybeans should be the crop that you plant, so you plant your entire—let us assume a thousand acres—you go to soybeans. Now, let us assume that you make a wrong decision, that not only you, but others make that decision. They shift out of corn into soybeans and you produce a few more soybeans than the market will bear and the price goes down. Now, there will be no supplemental payment made to you on soybeans, because you have a corn base.
And let us assume that by shifting out of corn, that you have now done what needed to be done. You have managed your inventory and corn supplies are in shorter supply and the corn market is up. Therefore, you have made one heck of a bad decision and you will pay for that in the market, and there will be no supplemental income payment made to you on your soybean acres. Is that correct?
Mr. PORTEUS. As proposed, that is definitely correct. This truly is a decoupled concept. Producers would move one step further through the evolution into a true freedom-to-farm situation where they would have that opportunity and be responsible for those decisions. And that is a very good analogy.
Mr. STENHOLM. Again, that is very intriguing. I commend you for that and I hope that this causes more people to think about this because we do have to get better market signals to our producers if this whole concept is going to work. Can you further elaborate on how we might make payments to producers and keep it from getting capitalized into the value of land? Because everyone admits that when we have Government payments in the amount in which we have had, the price of land goes up, rent goes up. We have no intention of that occurring. That is not good policy, but it is a fact of life. Do you got any ideas of how we can separate this?
Page 589 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. VAUGHAN. Well, that is one of the keystones of our proposal. If you notice that on the PFC or the AMTA portion of the payment, we left that at the 2002 level, rather than raising it back up to the higher levels that were experienced in the 1996 farm bill in the early years. And one reason why we did that is we wanted more of the baseline to go into the counter-cyclical portion of the program. We feel like the counter-cyclical, because it is at risk—there is no guarantee that it will be there at the end of the year, based on an individual producer's planning intentions—it won't be capitalized quite as quickly. We realize that all Government payments eventually are capitalized in land.
But because it is at risk and it is not guaranteed to occur on an annual basis, that it will happen more slowly than it will be on a direct payment like the AMTA payment. The AMTA payment or the PFC payment, we left it small.
The CHAIRMAN. Mr. Chambliss.
Mr. CHAMBLISS. Thank you, Mr. Chairman. Gentlemen, there has been some conversation about the possible movement away from LDPs, and obviously that is an integral part of your program. What is your main justification for the continuation of the present LDP program?
Mr. PORTEUS. As I mentioned earlier, as an organization, we have been very supportive and positive about the marketing loan program and the concept of LDPs and its ability to provide producers with that income situation and also provide market-clearing functions for the market. However, there are a number of concerns and individual problems with LDPs in regard to disparities between individual counties and rates and producers. I am sure this committee is very well aware of that, as is our national office, as they field those calls in the fall.
This concept that we are proposing would evolve us to the next step past the current marketing loan program and move that money to producers in a different mechanism that would step us past all the regional differences with county loan rates and PCPs and all the changing basis situations that have happened over the last 30 years since many of those numbers were put in place, to try and help us get through that quagmire of problems into a similarly responsive type of market program that was more simplistic and straightforward for producers.
Page 590 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. CHAMBLISS. Well, you answered the question the way I really expected you would. And that is that what you are talking about doing is moving towards more equalization of the LDP program from an equity standpoint. We have got one problem that has been alluded to a couple of different times by you gentlemen with respect to an outside factor that really we can't control in the farm bill, nor have you been able to control it, and that is the GMO issue.
And I am just wondering if there is anything—and I don't expect you really to be able to give a detailed answer on this, this morning—but while we are thinking outside the box on the program itself and the monetary side of it, the long-term answer to the viability of agriculture in this country is ensuring that we are able to export our products. Obviously the GMO issue is a critical issue in that respect, corn probably more so than in any other product on the market right now.
If there are ways that you think we might approach that issue in the farm bill, I wish you would think about that and see if there is any language, even if it is report language, that we ought to consider putting in there. I think that is going to continue to be a very critical issue.
With respect to your marketing loan concept, you are proposing a pretty significant change there. And do you feel that the marketing loan no longer serves as a basic marketing tool and is just simply another Government payment that farmers can cash in on?
Mr. PORTEUS. Excuse me. Clearly, we feel very positive about the marketing loan and see it as a very functional and important part of current policy. But this counter-cyclical proposal that we have surfaced and are proposing would—and I like to use the word evolve farm policy to another level, which maintains many of the positive aspects of the marketing loan, would still allow the market to have many of those positive contributions, but also simplify and improve the mechanism of moving that to producers, No. 1, and evolving it into a much more comprehensive safety net, No. 2, to currently, if you are in an area that experiences significant downfalls in production, even though your price opportunity for the LDP situation is there, if you don't produce the bushels, you don't have the LDP opportunity.
Page 591 PREV PAGE TOP OF DOC Segment 4 Of 5
So a producer in a dry area or a significantly wet area that has a production shortfall, is disadvantaged not only because of his production shortfall, but also his inability to collect LDP payments on those bushels he did not produce. So that is one of the ways this addresses that situation. But we feel very positive about the marketing loan, feel that the positives it has brought into this system are very important. And we think this proposal will continue those positive aspects.
Mr. CHAMBLISS. Thank you.
The CHAIRMAN. Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman. And try to maybe help me understand this new concept a little bit better. It looks to me like what you are doing here is you are taking what your production has been or the amount of income that you would have had on an annual basis in the last 5 years and you are locking that in. We are going to guarantee that corn is always going to get this much money per year. Is that what we are doing?
Mr. KLEIN. That would be for the entire crop, sir.
Mr. PETERSON. Right.
Mr. KLEIN. The value of the crop would be——
Mr. PETERSON. And if you used to grow corn and now you don't grow corn, you wouldn't get this, whatever the payment is. The only way you can continue to get this is if you continue to grow corn.
Mr. KLEIN. No. The base would be what—you could grown kumquats someone said yesterday.
So once you had a corn base and there was a payment on corn, you would receive that payment. But if you did like Mr. Stenholm said and you planted soybeans, then you would not collect on the soybean.
Mr. PETERSON. Well, right. But so if you had a thousand-acre corn base and you planted a thousand acres of soybeans instead, you would participate in the corn deal even though you didn't grow corn.
Page 592 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KLEIN. Right. But you would have no protection on those soybeans. So we see very little distortion in planting.
Mr. PETERSON. Well, what I am trying to figure out what the effect of this. I mean, it looks to me like what you are doing is guaranteeing that you are always going to grow this much corn.
Mr. KLEIN. No. I don't believe so.
Mr. PETERSON. I mean, that is basically you are protecting the crop more than you are farmers.
Mr. KLEIN. I think what we are guaranteeing is that this is what the market is worth. If the market shows you that you can lock in a price for soybeans at the beginning of the year, instead of the corn, you will do so based on the market. But you won't plant just to collect the AMTA payment or the LDP.
Mr. PORTEUS. If I could expand on that, I think it is important to look at this as a whole farm income protection program because each, for example, farmer would have a thousand-acre corn base—or if you figure a thousand-acre farm, you might have 500 acres that he has got corn, 400 acres that he plants in soybeans, 100 acres that he plants in wheat. There is going to be a component for each of those crops in this type of situation. But his payment for the 2003 crop year is going to be based on how those crops fare over that year based on his earlier—on his 1999 through 2000 bushel base. But he has the flexibility to plant whatever the market tells him to plant that year if——
Mr. PETERSON. I understand. But I think your basic concept of this is that the amount of corn we are planting now is the right amount of corn that we should be planting. I mean, that is kind of what it looks like because you are locking in what we planted the last 5 years as the base income and the Government is going to guarantee it. Maybe we have been planting too much corn. Maybe we have been planting too little corn. It just seems this is, in some way, making sure that we are going to grow this much corn.
Page 593 PREV PAGE TOP OF DOC Segment 4 Of 5
And the other thing I have a question about is if you are in an area that happens to get wiped out, if you don't have irrigation and your corn crop gets completely wiped out in a huge area, I mean, apparently you are proposing getting rid of all disaster and all other kinds of special payments. Do you really think the Congress is going to not go in there and help an area if a whole State gets wiped out or two States? I mean, historically that has not been what we do.
Mr. PORTEUS. Well, I think, obviously it is Congress's ability and responsibility to handle those decisions as they come up. I think it is our responsibility to try and craft policy that, as much as possible, reduces the need for Congress to have to look at those situations. And I mean, that is our intent to help put together sound policy that would reduce the need for that.
Mr. PETERSON. I understand that. But one of the problems I have with the current program is by giving these double AMTAs, is if you have got the 200 bushel of corn crop, you are going to get the same amount of money as somebody that has no crop. And what you are doing here, you are changing it a little bit, but you are going to get the same amount per bushel whether you have 200 bushels or you have no bushels. The only difference is going to be crop insurance, whatever that is. Otherwise, it is kind of the same situation we have now—it is just done a little different way. Isn't it?
Mr. PORTEUS. I apologize. I probably didn't answer that earlier question clear enough and maybe that is what is contributing to that at this point. But it is a whole-farm income type of approach. So because we are involving all the different loan-eligible commodities, you are creating a farm safety net through the whole sector. And within any one individual commodity, you would have the opportunity to make that plain decision and that exposure would be there if you would choose wrong. But the safety net is going to be there across those commodities for the whole farm. So it would provide some safety net even for that producer that was in a drought or a loss of crop situation.
Page 594 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. VAUGHAN. The reason that producer would get a payment on his 200-bushel yield would be because there was a shortfall in income and it would be on the price side. And that is what our counter-cyclical program addresses, is a shortfall in income largely due to price. We look at the crop insurance program as taking care of those weather-related risks.
The CHAIRMAN. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman. And, gentlemen, I appreciate very much your testimony and I want to especially thank you for your mentioned support for value-added agriculture and ethanol. Those are issues that I think are very important in the future of agriculture, as well as your reference to the Conservation Security Act, which I am sponsoring here in the House, and changes to the Small Ethanol Producer Tax Credit. Those are all things that, in my mind, are very, very important in looking at alternative markets, ways that we can provide incentives. I have got a piece of legislation which doesn't fall under the jurisdiction of this committee that would provide a tax credit for those producers who invest in value-added operations. Which, again, we have got to be thinking in an innovative way about how we create more profitability for agriculture.
But I credit you with some very innovative thinking and I really like a lot of what you are talking about. I have to digest some of it. But coming up with a counter-cyclical program that is income-based and not price-based and that continues, at least, to respond to market signals, seems to me to make a lot of sense. If you had a counter-cyclical program that were based on income, would market prices never be able to exceed a national target income? In other words, I guess what I am asking is, does the target income create an income cap? I mean, is there any way that that ends up distorting prices?
Mr. PORTEUS. We would suggest that this proposal needs to be continued and studied much further. But to this point in time, all the analysis done and the economists that we have talked to, and AgriLogic's model and all the scenarios they run, would not suggest it impacting that price discovery scenario either way.
Page 595 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. THUNE. OK. I have been trying to figure out what some of these words mean, like AgriLogic and stochastic and deterministic. They didn't teach that at Myrtle High School. So you guys are going to have to help me walk me through some of this. But if you did away with the marketing loans and the loan deficiency payments and created a recourse loan, do you expect that that would impact, in any way, agricultural lending practices? How will that affect capital? A lot of it is based on—today, I think, in terms of having some predictability for lenders. Do you see any distortion capital markets for agriculture?
Mr. PORTEUS. In many respects, that is one of the important components of this program, is a more stable opportunity for lenders to look at each of their individual farmer portfolios to help with the risk management they have, addressing each individual farmer and, consequently, that banker's portfolio, to make those sounder loans. And we see the recourse loan as just another tool in that box from a cash flow standpoint for producers. So we see the recourse loan working with an individual farmer's commercial credit situation and we see this safety net as helping positive from the banking community as a way to make the farmer portfolios more substantial and a better investment.
Mr. THUNE. And just coming back for a minute to the area again of conservation. And I noticed you mentioned that maintaining the current CRP cap, but doing away with the continuous sign-up program, but not raising the cap as—and I am on Mr. Peterson's legislation that we do that. But and just with respect to the Conservation Security Act, let me ask you, do you see that sort of a proposal, which is a voluntary incentive-based type proposal, working in conjunction with some of the other current programs like CRP and WRP? And does this sort of a comprehensive approach make sense? I am just curious to what your reaction and I know that you referenced it in your testimony.
Mr. KLEIN. We think they fit together well and we like the proposal, like you are talking about, because the incentive goes to the producer as opposed to the land. And I think that really brings it back home.
Page 596 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. THUNE. OK. Well, I appreciate, again, your testimony. It has given us a lot of food for thought and I will look forward to discussing some of these concepts further with you in the future. So, thank you, and, thank you, Mr. Chairman.
The CHAIRMAN. Mr. Boswell.
Mr. BOSWELL. Thank you, Mr. Chairman. I just appreciate the presentation you made this morning. Good to see you here, Mr. Klein versus at the Air Force. But it is good to see you again and also remember that you are a neighbor just across the river to the west, along with Mr. Osborne. I appreciate that you have suggested some things worth to consider here. I know, or I assume, that you have contacts with the administration as well as other entities. And do you see any movement—I know I hear expressed from farmers across my district, as they read and come up to speed, is there going to be adequate resources there for the base and so on and—do you have any feeling for what you are picking up as an association? It is a little off the subject, but it is on people's minds.
Mr. KLEIN. Well, it is. Obviously we are wanting as big a base as we can get because we feel that we need it. I mean, but we look at the world food producers and we see that in the United States we spend the least amount of disposable income for food.
And we have a wholesome safe product, which isn't true all around the world today. That is very obvious. So with that, no, we haven't really been hearing a lot recently. We are just waiting to see what comes down.
Mr. BOSWELL. Well, some of our growers are starting to be a little antsy about that and I thought I would just bring it up. The other thing is, I noticed here, as I looked through my packet this morning, that there is testimony here presented by the American Corn Growers and I think they claim—I just leafed through it—14,000 people. Have you talked with them about some of these ideas? Because although you are a very large organization, maybe more than twice their size. Have you talked together about some of this?
Page 597 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KLEIN. We sent a letter to the American Corn Growers. They said that we were the invited people here. The president of the American Corn Growers is my neighbor. We asked them to submit through us what they wanted because we would try and incorporate things. They did reply once by saying they wanted a meeting, but we didn't have time for a meeting. We told them to send it to us and they did not do so. So I, sir, picked up a copy of that this morning, but I have not looked at it.
Mr. BOSWELL. OK. I was just hoping that you might comment on some of the things there that you are in agreement on, but that is premature.
Mr. KLEIN. I would if I had read it, but I have not read it yet.
Mr. BOSWELL. I haven't either, but I will. OK.
Mr. KLEIN. Thank you.
Mr. BOSWELL. Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from the largest corn-growing district in the Nation, Mr. Osborne.
Mr. OSBORNE. Thank you, Mr. Chairman. Nice to see you, Lee, and I appreciate your testimony and all the hard work that your group has gone to and very innovative thinking, as far as I can tell. One thing I wanted to ask you about was I see there is an adjustment factor in your formula for the counter-cyclical payment. And I wondered if somebody could explain it a little bit better to me. I have a vague grasp, but I don't have a good grasp of how you come up with that.
Mr. KLEIN. We had to put an adjustment factor in because our baseline yield is moving up. It wasn't very many years ago, we had a 7 billion bushel crop and now we are dealing with 10 year in and year out. Of course, demand has went up to.
Mr. OSBORNE. Yes.
Page 598 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KLEIN. And that is one other part of our testimony is that we want more money into research so that we can continue to come up with new uses. But the fact is that we keep raising more bushels every year, so that is the adjustment factor. And we factored that in on all the commodities that have that type of history.
Mr. OSBORNE. Yes. OK. Well, it seems to me like what you are talking about is somewhat of a modified revenue insurance program. I like that idea. The one thing I would like to have you review again for me—and I know we have been asked about this previously. But let us say you have a thousand acres of corn that you have grown for 5 years and that is an established basis. And then you decide that you are only 500 in corn and put 500 in soybeans. Would you go over it again for me what is going to happen in that 500 acres of soybeans? I understand that you are talking about total farm income—some type of revenue. And how does the 500 acres of soybeans figure into the thing, in terms of any counter-cyclical payment or eligibility for it?
Mr. PORTEUS. If I understand your question, the example we would consider is a farm that has been growing a thousand acres of corn through this 5-year baseline period of 1996 through 2000. So that farm, in this total farm income concept, through all the commodities—and assume they did not have any soybeans, so there wouldn't be a soybean component of that. So his counter-cyclical payment would be based on what happened in the corn production sector for that—if this was for the 2003 crop year or whatever—on the 500 acres of soybeans he would produce, he would produce those at his risk at the market. Obviously, he could have a crop insurance proponent of his risk management that would help with production risk and whether he did CRC or whatever, but his counter-cyclical payment would not include any soybean component. It would be based on this 5-year base and what happened in the corn sector in 2003.
Mr. OSBORNE. Yes.
Page 599 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. PORTEUS. So it would be totally decoupled.
Mr. OSBORNE. Right. The thing that would concern me is that you may make it rather unattractive for people to move out of established bases. I would think it would be a risk. And I realize it may happen. And I wonder if there isn't some way we could figure this out where we would have a farm-wide counter-cyclical program that would allow for fluctuation of commodities planted. One of the things you like about Freedom to Farm is flexibility to plant. And yet it seems like built into this program is a little bit of a tendency not to choose alternative or rotating crops.
Mr. PORTEUS. If I could comment on that, I think that is a very worthy goal and one that we share and still, I think, is our longer term, broader goal. Addressing the WTO compliance issues of this and the legalistic issue there is the real crux. The other thing I would mention is, in our AgriLogic analysis of this proposal, it seems like a lot of the pent-up demand to switch between crops has occurred through this freedom-to-farm period in 1995 through 2000. We saw minimal switching between—as they have run those different models, we did—they saw very minimal switching between acres, a more long-term trend situation rather than individual type crop year situation. And I think that is reflective of agronomic concerns and the fact that the market brings these situations into control very quickly if they do get out of whack.
Mr. OSBORNE. And then one last question is, there are economies of scale and I think everybody recognizes this. And have you thought about young farmers, beginning farmers, and small farmers? And is there anything that you can see that can be devised that might, in some way, address that problem?
Mr. VAUGHAN. Well, this proposal, we feel like, provides a lot of price protection, income protection. And when a farmer is starting out, a young farmer, he has a tremendous amount of risk. He has got a lot of borrowed capital out there. If he can manage that risk with a good income protection and a good crop insurance plan, we feel like he can go to his banker and justify to the lender that he is well-secured and help him get started and establish credit that way.
Page 600 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. OSBORNE. OK. Thank you. My time is expired. Thank you.
Mr. KLEIN. Mr. Osborne, I would like to go one step further on when you talked about people switching. We actually see some benefit to this in that some specialty crops, like maybe a specialty corn, usually has a yield drag. And with this type of a program, people will tend to plant those crops that the market demands because they don't have to produce the 200-bushel corn in order to collect the LDP payment because it will be based on the total bushels. So we think in some ways you can find the better part of that people shift. Thank you.
Mr. OSBORNE. OK. Thank you.
Mr. PORTEUS. And also, I think if I could follow with that just a moment. This is evidenced in our traditional crop switches, but it is very uncommon for a farm to do those kind of large switches. Most of the switches are on incremental bases, as you try new crops, as you try new opportunities. So those are gradual trends that happen over time. And the situation for a traditional corn producer to strongly switch, those are limited situations and would not probably be addressed as fully in this as the more traditional shift, which is incremental and as people try new things and work to better products.
Mr. OSBORNE. Thank you.
The CHAIRMAN. Mr. Phelps.
Mr. PHELPS. Thank you, Mr. Chairman. Gentlemen, thank you for your presentation. I noticed in the comments, both in the American Corn Grower's Association remarks and yours, that planting flexibility is emphasized as important. What is different within the present farm mechanism about planting flexibility and flex-year proposing as a key difference or differences? What was overlooked in the previous bill versus what you are highlighting?
Mr. PORTEUS. I don't think we would suggest that there was anything overlooked in the previous bill. I think we just feel that this program would further enhance and be a continued evolution of those positive aspects of planting flexibility that occurred in the 1996 act. Many economists would argue that there is a small incentive to produce bushels to gain LDP and low-price situations. We are moving a step further removed from that and would reduce those kind of incentives. But we think this builds upon and continues the strong and important policy initiatives that allow farmers to choose what they plant—the freedom to farm and the planting flexibility.
Page 601 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. PHELPS. On the ethanol value-added, which is very important to my area of the world, what are the contributing factors to the increased price of ethanol right now, as we are looking at fuel costs? What contributes to the increased cost of ethanol right now?
Mr. KLEIN. One would assume someone is making a lot of making it apparently, but I have watched the price of ADM, which makes 40 percent of the ethanol, and the stock is down from $15 a few months ago to $11.40 yesterday. So it must not all be going into the pocket there.
Mr. PHELPS. ADM is in my district is the reason I wondered if you had some input other than what I already know. Thank you very much, gentlemen.
The CHAIRMAN. Mr. Pence.
Mr. PENCE. Thank you, Mr. Chairman. And I appreciate very much Mr. Klein's presentation. I don't have any questions, but I did want to thank you for such a thorough presentation. I represent the State of Indiana, which I would offer respectfully to the chairman. We may have been willing, Mr. Chairman, to yield Bobby Knight to Texas Tech, but we will not yield our corn crown to this chairman. But thank you, Mr. Klein.
The CHAIRMAN. Touché. Mr. Dooley.
Mr. DOOLEY. Thank you, Mr. Chairman. And I want to compliment you on your proposal that you have offered. I think it is intriguing and it is something that appears to have a lot of merit. I guess one of my concerns though is that, and one of the critical issues here, is the baseline that you are establishing for all the various commodities. And in all the information that you provided us, there is not the information in terms of what was the effective price or income per bushel when you calculated price plus market loss assistance plus LDP payments. And the reason why that is so important is, if you look across all the various commodities, we need to be understanding what is going to be our effective baseline moving forward so that we can basically make a judgment whether there is equity in this approach across all commodities? Do you understand what I am asking for?
Page 602 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. PORTEUS. I think that is a very important point and I would emphasize that for that reason we stepped back and looked at what has been available to those different commodities over a 5-year price period utilizing freedom to farm when at least more than in the past the market has had the opportunity to move us to the crop mixes more effective to what the market demands. And that is why we have looked at that period to capture the income available to producers and then try and capitalize that as the baseline for this farm income protection number.
And I also need to emphasize that we are trying to do it on an income standpoint, not on a price-per-bushel standpoint, because of the obvious distortions that can occur there. So by capturing that income-type of approach, rather than a price approach, we are trying to be broader-based in that respect.
Mr. DOOLEY. Yes. I guess, and I understand that. I guess my only concern, from a public policy standpoint, we want to make sure that the various commodities—we are not advantaging one or another because there might have been a distortion in terms of some of the AMTA payments or whatever else that were based on an 1986 baseline that we are trying to update, plus the loan deficiency payment. So just looking forward, I guess, that if you could provide that information, it would be helpful just so we could do a further evaluation.
The other thing I was trying to understand a little bit in terms of the projections on the net outlays by commodities. When we get out to the year 2004, on the soybeans, why is there such a significant drop-off in the projections in terms of the actual Government outlays? And how do you explain that?
Mr. PORTEUS. It is directly relating to the CBO projections and to those price projections of an increase in soybean prices. Those outlays are reflective of Government——
Mr. DOOLEY. Of the actual market price.
Page 603 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. PORTEUS. Yes.
Mr. DOOLEY. And the other information that—and I think you have it, but that is not in the same tabular form as you have it, is what your actual market price projections would be for the various commodities. I know you had to have that in your construct. If you could provide us that information, I would find that to be helpful also.
And the last thing that I would state is that I very much appreciate your request for a doubling of the research funding over the next 5 years. I hope every commodity group maintains their very strong support for that, because that is an investment that I contend keeps on giving far after the direct payments. So I just want to compliment you on that and really do appreciate this thoughtful approach that you have provided.
The CHAIRMAN. Mr. Kennedy.
Mr. KENNEDY. Yes. Thank you for your very excellent presentation. And I am really struck by how it simplifies the program versus where we are today, and the equity in it is really well understood. I know you talked a little bit about it, but do you see the baseline income that we are having our program go against every year adjusting over that 5-year period of time, if there is a major shift nationwide in acreage between one commodity or another?
Mr. PORTEUS. We would see that baseline being part of the legislation being written into law, either through a formula basis or by setting that specific number, at least for the life of this current legislation.
Mr. KENNEDY. OK. And do you guys think at all about a State-level income to have as your baseline, or a county level as opposed to a national level and what the differences between those would be?
Mr. PORTEUS. Obviously, as we went through this process, that was a very important component of our discussion. The closer you move it to individual farm, the more reflective it is to the concerns that each individual farmer has. But we stepped back and also tried to take very seriously the need to design a program that could be much more WTO-compliant. And this program is a result of that concern as well, trying to establish a set of parameters that would allow us to have a program that we can move out of amber box from the WTO standpoint.
Page 604 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KENNEDY. As someone who is mainly focused, or very heavily focused, on how do we grow demand for our products, I always appreciate the good things that the corn growers have done to try to find new uses for the protein or the oil or the starch or the fiber in corn and look for how we can do that. And I know you guys are doing a lot too, and I also concur that we need to continue to look at that research as to how we do it.
But speaking of ethanol and the great energy needs we have, what kind of an impact would it be if we didn't grant California the waiver on the oxygenate requirement? How would that affect the demand for ethanol and conversely the price of corn and consequently the amount of subsidies we would have to have under this program?
Mr. KLEIN. Well, if we didn't grant the waiver, and we pray that we don't, that is increasing the demand for ethanol and we think the California market will be 600 million gallons a year. Our production is growing in ethanol plants across the United States, however, it has been somewhat on the nervous order, because through the last administration, and now this one, the possibility of a waiver makes it a little difficult to invest funds into the expensive plants.
We would like to see, and we are testifying in another committee hearing this afternoon, that part of the energy policy of this country contains renewable fuels of which ethanol, we believe, is the premier one. That we would like to grow that market times three. This will help and it will save the Government money because we will put the demand higher. But there are, like you said, out of the research things, a lot of other things that are happening in the corn industry and uses. And we have to be quite optimistic, but obviously that is a requirement to farm.
Mr. KENNEDY. Right. And I think when you talk about multiplying ethanol times three, if we can just keep an oxygenate requirement—phase out the MTBE, we get to three times ethanol production right there, and I think that would be a big benefit for the demand for corn and is something that I encourage you to keep pushing for, as I know you are. I would just end by saying that you are well represented in Minnesota by a very strong and innovative group that we enjoy working with. And if we are not No. 1 in corn, I don't see much other areas of the country that could have more red on their maps that we have than we do. So, thank you.
Page 605 PREV PAGE TOP OF DOC Segment 4 Of 5
The CHAIRMAN. The Chair would apologize to Mr. Rehberg, who inadvertently was overlooked. Mr. Rehberg.
Mr. REHBERG. No questions.
The CHAIRMAN. Mr. Gutknecht.
Mr. GUTKNECHT. Well, thank you, Mr. Chairman. I don't have many questions.
Basically, I just want to thank you and congratulate you because I think all the commodity groups that have testified have done a good job, but I must say that yours is the most innovative. And really, from my perspective, looks a lot like the direction we need to go in terms of the commodity programs. So I want to thank you for your creativity. And in some respects, I guess, following on the line of my colleague, Mr. Kennedy, from Minnesota, we have a pretty innovative group out in Minnesota. So it really doesn't surprise me that the program that you are talking about seems to be the kind of program I think we ought to go with.
And I also want to follow up on this whole issue of renewable fuels. And, Mr. Chairman, if I might, I don't know if this committee should be doing this or what. But I don't know how many letters and phone calls I have made, both to this administration and the previous administration, on this whole issue of whether or not there is going to be a waiver for the State of California. But I really do believe it is time for the administration to issue a very clear, simple statement that that is not going to happen. And I don't know what this committee can do to make certain that it doesn't happen.
But I think we need to be very clear from the Agriculture Committee, and, frankly, from an environmental perspective, that that would be a terrible mistake. And somehow the whole notion that ethanol is part of the problem, it seems to me, is a crazy notion. And I would like to see a straightforward response from the administration that says this is not going to happen, so stop talking about it. That ethanol is not part of the problem, particularly when oil is over $25 a barrel—ethanol is a big part of the solution.
Page 606 PREV PAGE TOP OF DOC Segment 4 Of 5
And so it seems to me, and I guess I am imploring you, Mr. Chairman, to do whatever you can to get a very clear and final statement from the White House that we are not going to see a waiver for the State of California. And I think if we could do that, it would lend an awful lot of strength to the markets out there because I think there is some uncertainty right now of what may happen. And ultimately, it is my understanding, that this represents about a billion dollar potential market over the next several years. So we are talking about real opportunity and we can't afford to lose that opportunity.
And I do agree that. One other point that you are not as clear on as I hope we will be finally when we begin to put this together, in terms of rural development—value-added agriculture, it seems to me, is the real direction that we have to go in. Again, following on my colleague, Mr. Kennedy, we can't guarantee everybody a profit. But it seems to me, at the Federal level, we do have a real responsibility to try and find new markets for what we can grow, whether that is domestically, by finding new things that we can convert this into, or internationally, finding new markets around the world for our agriculture producers.
So the research component is extremely important, it seems to me, as we go forward. And, secondly, that ties to this whole issue of rural development. An ethanol plant is not just about converting what we grow in Minnesota or Illinois or Indiana. It really is about rural development. And it seems to me that we can do more to leverage some of the rural development dollars we have to encourage farmers to participate in some of that downstream profit. Because if we are purely in the commodity business, long term, I don't think that is a very viable or profitable way for agriculture to go.
So I don't so much have a question as a comment, Mr. Chairman. I do hope that we can work with you and perhaps you have some influence over some of the people down at the White House to issue a final declarative statement that there is not going to be a waiver for the State of California. And with that, I yield back the balance of my time. And, Mr. Chairman, if you would care to respond to that, we would be delighted to hear it.
Page 607 PREV PAGE TOP OF DOC Segment 4 Of 5
The CHAIRMAN. I keep looking for those people who we might have influence over. And when I find them, I am going to share it with Mr. Gutknecht. Mr. Stenholm.
Mr. STENHOLM. Mr. Dooley's comment regarding research, I share, and your testimony plainly states the importance of transportation infrastructure as well as research. You recommend continued investment and infrastructure to restore and improve its quality. You also recommend an additional 500 million per year increase, as has already been discussed. Now, these very concerns are about to be jeopardized by the budget resolution in the House and the Senate that they will begin to write today.
Your $500 million per year increase for research is equal to the increase in fiscal year 2002 discretionary spending that the administration has proposed for the entire USDA budget. It is about a 2.9 percent increase over 2001 level, exclusive of emergency spending.
You go all through this recommendation, and this is mainly for my colleagues on this committee. We keep bragging about everything that the farm groups are doing, but we are not putting our money where our mouth is when it comes to the budget resolution that we are considering. And certainly, when you look at the administration's recommendation, it is nowhere near adequate to do that which you are asking for and most of this committee admit need to be done.
Now, regarding the last set of questions regarding ethanol—and it is an interesting question. In regard to the State of California's request for a waiver, no single action could be more devastating to the ethanol industry than action by the administration to grant the waiver, you state. Now, my question is, why is the State of California asking for a complete exemption from the requirement rather than turning to ethanol and ETBE as a substitute for MTBE? Do you all got any idea why California is asking? Why are you not?
And I think part of the answer will come that we do not have a distribution system to get the required amount of ethanol to California to satisfy their needs, I think. Because most of the folks in the gasoline business are expressing this concern that if you require it, in spite of all the rhetoric, as you now know, I support ethanol, period. But I think we have got to be realistic in what we are asking for and look long term as well as short term—or am I missing something?
Page 608 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. VAUGHAN. I can back up exactly what you are—or maybe I can't answer your question exactly. But I can maybe share a little bit of information that we have accumulated from working an ethanol plant for Dumas. There is a McKee refinery, Ultramar Diamond Shamrock. And they are looking at an ethanol plant. And one of the incentives for building an ethanol plant adjacent to that refinery is the fact that they can ship ethanol straight to California through a pipeline that originates at that location. They can also ship it by rail. So I can't say definitely, yes, that we can get the ethanol to California. I don't have those facts. But I can say that that is what they are looking at there at Dumas.
Mr. STENHOLM. I think it would be very helpful for you, as an organization, to check on those entities that might be able to answer that question. I do agree with you that there are pipelines. If you build the ethanol plant in that particular area, you will address that concern that is being expressed by some in the distribution business of gasoline, and that is what we have got to do.
Also, I would ask for your response to this statement regarding ethanol and corn. I would hope that you, as corn producers, would start looking at the value of corn in ethanol as compared to its competitive features with oil and gas and, perhaps, shift from believing that every bushel of corn going into ethanol should be priced at the same price that we get for it in feed value. I think we need to think in terms of being competitive with oil. And I think there is a great opportunity there, because, as you point out in your testimony, you talk about increasing usage.
It has occurred to me that if we are going to get the price up, which is exactly what everyone is talking about doing, we have to get a higher price to our producers for the corn that they are producing from the market. Any bushel that you can shift into an alternative use manages the inventory in such a way that the market will respond by increasing the price on every other bushel.
Page 609 PREV PAGE TOP OF DOC Segment 4 Of 5
In other words, every bushel we shift into ethanol competitively provides a market incentive to enhance price on all of the bushels. But I keep hearing too much of your testimony in thinking of terms of pricing the corn for ethanol at the same price. That gets into problems of requiring subsidization that creates a problem for the domestic oil and gas industry. I think it can be done, but I would ask for your comment regarding that, because I observe that our foreign competitors in other areas use this type of a market-enhancing incentive or market-enhancing activity to satisfactorily accomplish their purpose. I think the same can work and must work for corn and other agricultural products that can be converted into energy, which our country needs so dramatically.
But any comment regarding my statement, as some have suggested, that you must price your corn at what it takes to make ethanol that is competitive with the price of other fuels?
Mr. PORTEUS. Congressman, I think that is a very valid point and I think that is being displayed in some of the transitions, some evolution of the ethanol industry—the ethanol co-ops that have been developed and springing up in Minnesota and in South Dakota and Nebraska and many of those states. In effect, as those farmers invest in those plants and put their money in those plants, they are doing that. They are contributing and participating in that chain that prices ethanol at the competitive price for gasoline and they are stepping out of just the commodity market from corn into the type of concept that you are talking about. And I think it is something that is already happening. And as we continue to develop this ethanol market and look to the positives that can be gained from the renewable component of a national energy process, that that situation will continue and grow.
Mr. STENHOLM. Well, I hope you will do that because I think it is important, as you develop an industry, that as producers you recognize the market of the fuel you compete with and the necessity of not requiring subsidization. And also regarding the environmental question, if I might ask one other, Mr. Chairman? I was in a meeting recently where a representative of the environmental community was questioning the use of ethanol as to whether it was actually more helpful than harmful to the environment. Have you heard this and, if so what basis are they using?
Page 610 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KLEIN. I have heard it, but I have heard a lot of things I didn't believe, and that was one of them. There is no scientific basis to say that. Ethanol has proved itself in the air quality and the other things that we have proved time and time again. The scientific evidence is there. I want to reflect back, if it is OK with you, Mr. Stenholm, we also can barge ethanol down the Mississippi River through the Panama Canal. That is the direction that they have been bringing their MTBE in, which has been shipped in from the Gulf Coast and from Saudi Arabia. So I don't follow that line of saying there is no way that they can import or get the ethanol there.
The CHAIRMAN. Mr. Johnson.
Mr. JOHNSON. Thank you, Mr. Chairman, and, members of the committee. Gentlemen, I appreciate your testimony. And I am sure with the other members of the committee, you continue to enlighten us. I just have a couple of questions here I would like to ask you. I actually have close to 100 acres of, I think it is in corn this year, in my own district. A lot of people, I assume, throughout the country, certainly in central Illinois, were thinking about it—growing specialty grains, high oil, food grade, waxy corn. And, as you know, there is a yield drag that is associated with growing those specialty items. Would I be correct if I said that under your plan, as you have unveiled it to us here, that this—I guess you call it a disincentive, would be eliminated as a result of your elimination of those marketing loans and LDPs? Would that be a correct statement?
Mr. PORTEUS. Yes. I think it would be, because your income protection opportunity is going to be fixed and you have the opportunity to move into a crop that might have a yield drag. And then you do not have the direct incentive to need to produce bushels to gain the maximum LDP payment.
Mr. JOHNSON. I am sure that all my colleagues here—FSA offices in our district and pretty much universally tell us that they are understaffed. Given that premise or program with respect to marketing loans, is it your assumption or your projection that some of the workload that causes that understaffing would be reduced?
Page 611 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. VAUGHAN. Well, we believe that the program will be very simple to implement. The USDA is doing a lot of the computations now. They figure a monthly price. They figure the size of the crop. It is relatively a straightforward and very simple program to administer.
Mr. JOHNSON. So the answer is yes.
Mr. VAUGHAN. Yes.
Mr. JOHNSON. I think all of you know that we have seen a huge increase in soybean acres in the last 3, 4, 5 years. What do you envision would be the impact on future soybean plantings if your plan were to become law?
Mr. PORTEUS. We feel very strongly this proposal definitely diminishes the market distortions and the opportunities to have these rebalancing debates between the loan rates. Obviously, if you are in your county in Illinois versus a certain county in Kansas or a certain county in Texas versus a certain county in Nebraska, that proper rebalancing number is going to be different. And this type of approach steps us past those concerns into a more decoupled, market-sensitive situation where people will produce for the marketplace and not for loan rates or relative loan rates.
Mr. JOHNSON. Well, let me tell you, with the gentleman to my left and the two gentlemen behind me, I care a whole lot about Texas and Nebraska too. Let me just echo finally my colleagues' comments with respect—and I know this is not a question, just simply a statement, not for purposes of CNN, but just simply a statement—that the waiver prospect is something that is really chilling. And I say that not euphemistically either—to people in our area, and, for that matter, more than corn producers in our area, I think it would be absolutely devastating. And your voice, along with ours and others to the administration, I think would be extraordinarily helpful and something that would serve us all very well. I really appreciate your testimony today.
Page 612 PREV PAGE TOP OF DOC Segment 4 Of 5
The CHAIRMAN. Mr. Smith.
Mr. SMITH. Thank you, Mr. Chairman. I also appreciate your testimony. I think it is creative in terms of recognizing the unfairness of the loan program across the country and how those rates are set. Part of the question though is how do we—as the loan program and the LDPs have sort of evolved into a subsidized corn program payment, how do we separate out corn growers in the United States to, if you will, continue to get their fair share of that—of Government support?
Mr. VAUGHAN. Their share would be determined what they have grown through that base period time, 1996 through 2000. It would be a simple computation—total production during those 5 years, divided by five. And that would be their share of the target national income.
Mr. SMITH. And let me follow up, Congressman Stenholm, on your thought. It seems to be me that it would be very difficult to have a 2-tier pricing system for ethanol. But just thinking out loud, what we could do is make it much more attractive for corn growers to develop their own co-ops, their farmer co-ops, where the farmer participants can realize the increased value of that corn as it has turned into ethanol and other products. So I think it is worth considering looking at the special subsidies that we give to some of the large corporations that are developing ethanol. Because, in effect, what we are exactly doing is we are subsidizing the price that they pay for corn with our farm programs. Yes.
Mr. STENHOLM. If the gentleman would yield, I concur. I would just add not only co-ops, but joint ventures with others producing it in which there is a joint venture between the refiner of ethanol and the producer that will help provide our energy needs and will be profitable.
Mr. SMITH. And to do this, though, it needs some facilitation on the part of the Federal Government because corporations like ADM aren't going to reduce their profits simply by saying, yes, we will go into a joint venture. So it seems to me, it is worth exploring and we need to move in that direction. And the fact is the tendency is for us to continue a lot of the current programs that we have because that is an easy way.
Page 613 PREV PAGE TOP OF DOC Segment 4 Of 5
As we have listened to testimony from all of the commodity groups and the farm groups, their ideas and suggestions tend to boil down to just give us more money and we can survive. But I think we need to be more creative and I compliment the corn growers on at least coming up with some ideas that might be a better way to direct program support to American agriculture in such a way that we help assure that it is sustainable. We haven't done a very good job. If we think we are going to out-compete in subsidies with other countries, such as Japan and Europe, we are just never going to do that. So we need to be more creative.
Congressman Stenholm, were you seeking—I yield if you had a final question.
Mr. STENHOLM. Yes. I was just going to clarify my own thoughts on this. I like to use dairy for an example. But we have constantly and consistently allowed a 2 percent inventory blessing, of which some call a surplus, to lower the price on 100 percent of the dairy production.
Now, I use that analogy with corn and ethanol. I think there is not only a wonderful opportunity, which the corn growers are testifying to, but there is also a national need. But to do that, we have got to do it in the recognition of a market. And to a corn grower, it would seem to me that if you can convert 10 percent of your corn to an ethanol use that is competitively priced that does not require subsidization, and by that, and then manage your inventory so that the market does reflect the value of the other 90 percent of your crop, you are ahead. That will require cooperative effort, as you talk about. But I also am promoting joint ventures with corporate America to stop this tendency that they have got that we have got to get cheaper. Everything we do, we have got to produce it cheaper. We can't produce it any cheaper and stay in business.
Mr. SMITH. Yes. I agree.
Mr. STENHOLM. We have got to get a price——
Page 614 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. SMITH. Let me just conclude by saying, as Chairman of the Research Subcommittee in the Science Committee, in our authorization bill, we are directing a special effort of research investment to—specifically for expanding the alternative uses of renewable products. And a lot of that potential is in the corn produced in this country. So I would ask the corn growers for their support in this effort to expand additional markets. I just left Science Committee and, as we look to push for additional research to develop ethanol even more efficiently and effectively, other uses of agricultural products, especially corn, has tremendous potential. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Dooley.
Mr. DOOLEY. I just have a couple of other questions. And that gets to the adjustment factor that you have in your equation. If you are trying to move to a system that is going to be a little bit more market-based, what is the rationale for having an adjustment factor that is based on projections? I don't fully understand why you need to have that factor in the proposal.
Mr. VAUGHAN. Well, built into the CBO baseline is an increase, a factor, to account for increases in the yield, increases in the use of the marketing loan. And we felt like we had to capture that because our yields are going to continue to increase. At the end of the 5 years, we could be looking at an 11-billion bushel crop and the income target would not reflect the size of the crop we were growing.
Mr. DOOLEY. My concern is that you are already capturing the double AMTA payments that have been provided in the last few years. You are already capturing some of the increased loan deficiency payments because of the low commodity prices in the last 5 years, that were not necessarily projected in the baseline. So you are benefiting on what has happened in the past 5 years, and then you are also trying to benefit by projections on what was included in the baseline with this adjustment factor. And I guess I am a little bit concerned that this could actually distort the amount of money that should be flowing from the Government, actually.
Page 615 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. PORTEUS. Because we are doing this across all commodities, our analyses has not shown that it distorts between commodities. We have tried to capture the baseline based on that past 5-year period versus what was necessary to sustain the industry. And then, as part of the concept to make this WTO-compliant and because of the legalistic issues involved there, you need to anticipate in the initial legislation what is going to be necessary for the life of the legislation. And that is why that factor is in there, because from a WTO standpoint, we can't come back and change it on an annual basis. So there is a need to anticipate that need and those change and it is reflected off of that CBO baseline.
Mr. DOOLEY. I am struggling on this a little bit because you on the one hand, you are saying that the payments are going to be entirely based on a baseline from 1996 to 2000. And so any change in production doesn't trigger a payment. It is just simply what that baseline is. And yet we are, at the same time, saying we need to have an adjustment because we might increase production as CBO is requesting or is anticipating.
Again, this gets back to I think what is one of the fundamental issues that we need to fully understand is, with your projections with this adjustment, what is going to be that effective price or payment that is going to be—well, you are basically sending an expected price per bushel. And, again, making sure that we are not overcommitting the Federal treasury, which, I guess, at this point, I am not convinced that there is a need for this adjustment. And I think almost we need to have this, again, broken out in terms of just how many cents per bushel will this anticipated adjustment add to the payment for the various commodities, because whether or not we can make an interpretation or a decision whether or not if we adopted this proposal—whether or not, in fact, you need that adjustment at all.
The CHAIRMAN. In your testimony, you state that the growers have been able to capitalize on the benefits of the marketing assistance loan program more and more. They have become familiar with mechanics of the program and have learned to capture their maximum LDPs. Now, producers have been able to capture significant LDPs and market their crops when prices rise. Thus the LDP plus the cash price exceeds the loan by 10 to 20 cents a bushel. Do you believe that after several years of LDPs that producers have a tendency to view the LDP more like a program payment than a loan benefit?
Page 616 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. VAUGHAN. Yes. In some ways they do. There isn't a real effort to try to capitalize—as you said, play the market, play the LDP, try to lock in both at the highest price and capitalize on it.
The CHAIRMAN. I mean, certainly which is a part of the function of the LDP. You believe that merely rebalancing the loan rate levels will not address the underlying dissatisfaction with loan rates across county and State lines. In the event that Congress chooses to maintain a marketing loan program, based on your comments about loan rates across county and State lines, am I correct that NCGA does not favor rebalancing the loan rates for all commodities at the national level in relation to the historical price relationship with the soybean loan rate? That is correct? Thank you. Mr. Chambliss. Thank you.
Mr. CHAMBLISS. Thank you, Mr. Chairman. And I would say to my good friend, Mr. Stenholm, I saw these guys' eyes light up when you were talking about equalizing the payment for a bushel of corn to the payment for a barrel of oil, with oil at $25 a barrel. We thought you had an idea to get corn to $25 a bushel, which we all would be excited about.
I just have one other question and that is with respect to your counter-cyclical payment versus your decoupled payment. As I understand, you want to use the 1991–95 base period for your decoupled payment and the 1996–2001 for your counter-cyclical payment. And I am not sure how we can justify that, and I would appreciate your comment on that.
Mr. PORTEUS. We had quite extensive discussion on this issue amongst our group. Please understand that we represent a very wide and varied group of producers from people who own all their own acreage to people who are very much tenant situations and rely on renting ground from landlords.
And as an organization, it is our feeling that we should maintain that Production Flexibility Contract payment, for example, as a 2002 level, as in the 1996 legislation, to prevent any additional distortion to land values. As that changes, as history tells us that supplemental AMTAs—usually those things are changed. There is an adjustment in rental rates and land values associated with that. And trying to be consistent with our earlier statements and earlier philosophy, we like to minimize that distortion and feel that a continuation of the PFC at that current level would minimize any other disruptions or distortions.
Page 617 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. CHAMBLISS. OK. Thank you.
The CHAIRMAN. Mr. Osborne.
Mr. OSBORNE. Thank you, Mr. Chairman. Just one thought that I would like to run by you for your consideration, and it is going to take a little time, a little study. But one of the things I would like to have you consider is to apply your plan, which I think is very good. Not to revenue break or per commodity, but just gross farm income per acre revenue over 5 years. And that way, no matter what crop you have planted it in—maybe 2 years it was corn and 3 years soybeans and then sorghum or whatever.
If it was simply revenue per acre over a 5-year period, it might meet some of the criticism you are going to get that has to do with maybe locking people into specific commodities. And I kind of like that idea personally. Whether it would fly or not, I don't know, but you might think about it a little bit. Do you have any reaction to that right now, or is it something you need to think about?
Mr. PORTEUS. I think that is a very intriguing concept and definitely an idea that warrants as an industry and as an Agriculture Committee for us to continue to look at. That was a part of our discussion. We have not identified, as an organization, a viable mechanism to do that. This was an approach that we were able to develop that helped us evolutionary in that next step. We haven't been able to develop the right mechanism to accomplish as you mentioned.
Mr. OSBORNE. Well, one of the problems will be that if you are going to rotate crops in there, then you say, well, what is your history, but you could go with the Posted County Price for corn if it was for 2 years and so on. So I think there is some ways it might—maybe could be done. Another question—you are basing it on a 5-year production history. Does that follow the land or the farmer? So, in other words, if a farmer owns a piece of land for 2 years and buys a new farm, how do you address that issue?
Page 618 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. VAUGHAN. We have had quite a bit of discussion in that area. Right now, we anticipate that it will probably follow the land, but we are still fleshing that out.
Mr. OSBORNE. Yes. OK. All right. And then the last thing I would mention and we have talked a lot about ethanol. And I think that probably as a committee and maybe as commodity groups, we haven't attacked the problem really very well because the concerns are, well, is there going to be enough ethanol to meet the demand if MTBE goes up, particularly in California, which is, what, 100 days or is very quick. And I think the answer is, yes. Isn't that right, Lee? I mean, we feel we have got it. And the second issue is transportation, and we have talked about that. But I think we need to be very specific with the administration, yes, we can deliver it.
And third, I think on pricing, we talk about oil at $25, $30 a barrel. I think we could come up with some figures that would—when you figure the cost of the fleet in the Gulf and getting supplies from OPEC, the actual cost of petroleum is obviously much higher than $25 per barrel. Therefore, ethanol becomes very cheap. And I think that the other thing is, is that there is sound science. It shows a reduction of about 30 percent in harmful emissions. And so I think we need to have a very carefully thought-out position paper that we can take to the administration and say, look, here is our answers to all the concerns. Now, give us an answer.
Because we cannot continue to ask people—and cooperatives are a big deal in Nebraska and other parts. I mean, we have talked about how important it is for the farmer to participate. We can't get people to invest in cooperatives and put their shirt on the line if they don't know for sure whether that waiver is going to come through. And it just doesn't make sense that we keep going on and on here and wasting time, and it is counterproductive. So I think maybe you can help us and maybe we can help ourselves by being a little bit more proactive in what we are trying to do here.
Page 619 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KLEIN. We have remained active and I talked to the Governor of Nebraska, who is also the chairman of the Governor's Ethanol Coalition, this morning. He is in town meeting with the administration today. We have been steadfast in our communication in wanting the waiver denied. We have spoke to the EPA, told Ms. Whitman that they make talk about ethanol being an energy in California; in the Midwest it is religion. And we will stick with that. But we appreciate all the help we can get from your committee. I don't know if the rest of the committee knows it, but the first official act that Mr. Osborne did after he was sworn in, was write a letter to the previous administration requesting them to deny the waiver.
The CHAIRMAN. Mr. Gutknecht. Mr. Smith.
Mr. SMITH. One question, Mr. Chairman. I am from Michigan and a lot of our Michigan farmers are concerned about the unfairness of the loan rate as it affects the LDPs, not only from the standpoint of different cross-county lines makes some huge differences, but also in the timeliness of when the corn is harvested and the relating opportunities to designate when the LDP is going to be calculated. They are suggesting that we allow farmers the flexibility of designating the particular time for a reasonable amount of acres and bushels as program history might record. By the nods, I see that you have at least discussed this.
Mr. KLEIN. That is in our full testimony on page 10 that we asked for the allowing a grower to determine their LDP rate on any or all eligible commodities after harvest or beginning September 1. We have a number of things that if we continue with the program that we have today that we address on that page. So, yes, sir.
Mr. SMITH. And how would you calculate the amount—the allowable amount for designation?
Mr. KLEIN. Well, it would end up being on production, but you could pick the day.
Mr. SMITH. So could you——
Page 620 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KLEIN. Pick the amount, but you would——
Mr. SMITH. Would you have flexibility between—for 25 percent of your production on one day and——
Mr. KLEIN. I would assume that that could be done however if this committee would like it to be done.
Mr. SMITH. Thank you. Thank you, again, for your testimony. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Stenholm.
Mr. STENHOLM. Page 2 of your testimony you talk about the demand for U.S. corn has increased from almost 7 billion bushels to 7.75, an increase of almost 11 percent. You say that is a remarkable domestic demand, comes from increases in feed use, field use, new food, industrial uses, et cetera. On that very page, though, you show this remarkable demand has come with a decreased price. The corn prices have gone below $2, according to your chart. Now, we all know that that chart is not totally accurate because there were considerable amounts of Government payments that were involved that kept the actual price, the effective price of corn much higher. Do you know what that effective price of corn was for 1999 and the year 2000? Why wouldn't you put that in your testimony? Why would you not include the effective price? Why would you just show a chart that shows that it is not a very pleasant picture? You don't have to answer that if you don't want to. I just leave that for the record.
The effective price of corn in the year 1999 was $2.68, which compares very favorably with the 1996 price. And I only bring that up by showing that—I don't apologize for the subsidization that we have put into our farmers. Without it, we would have had a train wreck. Because if we were actually talking in terms of the prices you show in the market that has come from this remarkable growth in demand, we won't be doing too good. And that is why I think we do have to think outside the box and that is why I end by saying to you, I thank you for thinking outside the box and giving this committee some innovative new ways to think about doing something about this. Because if we don't get the subsidization, and that is one of the questions we have got in the budget baseline coming up now—if we don't get that which you have asked for, then we got a different game plan that we have got to look at—at least this committee does.
Page 621 PREV PAGE TOP OF DOC Segment 4 Of 5
And that is something I know we are thinking about a whole lot. And then with that, Mr. Chairman, I would like to ask a question for my own edification and I am not sure if there is an administration person in the room or not. But it seems to me that if, as you have stated in your opening statement, Mr. Chairman, that we are still on track to writing a farm bill by the July 11 deadline. If we are, it seems to me that we must expect to have the administration sitting at that table giving their specific recommendations for this farm bill some time between now and then. Having remembered what happened with the 1995–96 farm bill, in which it kind of got taken out of the hands of this committee—and then when we even got to a conference, the administration was not even welcome in the conference, to speak of, was never asked very many questions, was not asked for input, and we kind of paid dearly for some of that. I don't anticipate that happening this year because we have an administration and the Congress all in the control of one party. Therefore, I assume everybody will be welcome in the committee and I have no doubt that the minority on the Agriculture Committee will be welcomed.
But, Mr. Chairman, do you have any indication from the administration when they might be prepared to come and give us their specific recommendations for where we go with this agricultural policy?
The CHAIRMAN. And I appreciate the gentleman's bringing that up, and we both still bear some wounds of the 1996 endeavor. And, as I think the gentleman knows, we want this to be an open policy in which we are pursuing every opportunity to have input from members and the administration. I have had some informal discussions. There have been private and public comments by the Secretary and the fact that they are watching carefully. As you know, they early on stated that they do not have pride of authorship rights to the 1996 farm program and want to see where we do go from here, watching carefully the activities and the testimony that this committee—that is coming before this committee.
The Chair has not made a specific request of what time the administration would like to appear. Certainly, we will have them. And as we do move forward and certainly looking at—as you gentlemen know, we are in the process now of hearing from groups about their proposals. It would be something we expect to have from the administration certainly as we begin looking at crafting a bill and will provide an opportunity for them to do so. I have not spoken with them in specificity about a time. But I will say from the intent of the Chair would be to have—certainly have the administration make a presentation and come before the committee for questionings about what they, in fact, would propose.
Page 622 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. Well, I look forward to working with the Chairman on that and I acknowledge—and I withheld even asking this question until the administration had had ample time to get their team on board. They still do not have it and that is unfortunate. And not—that is part of the side benefit of the dividends of the manner in which we go about making requirements on folks that we ask to serve in an administration, and it has gotten plumb out of hand. And that is a bipartisan comment that I make there in what is happening. But it is creating some problems and it is really creating some problems for us and for the administration, not being able to get your team in place.
But we are getting precariously close, that if we are going—and depending on how the budget works out in this whole area, once the budget tells us what we got, then we got to—if it is a lemon, we got to make lemonade out of it. And if it is not, then et cetera. But I do think, and I say this, I guess, for the administration's ears to hear, that it is time for us to begin hearing some specificity from them, as, Mr. Chairman, you have required of all of the farm groups and when they come before here. Because without that guidance, where there is some, then it will be up to us to do it. I would assume, if, Mr. Chairman, if the administration doesn't come forward with their specific recommendations, then this committee might write it and they will just automatically back anything we do.
The CHAIRMAN. Well, they may. The gentleman raises a good point. And from past experience with past administrations that provided absolutely no guidance at all, except criticism, I would not anticipate, nor would I welcome that from this one. I think the gentleman makes a good point and I appreciate the gentleman's contribution.
As we have with others, I am sure there will be additional questions. If you have some additional information, it would be welcomed. We appreciate your taking the time to come before this committee. The committee hearing is adjourned.
[Whereupon, at 11:48 a.m., the committee was adjourned, subject to the call of the chair.]
Page 623 PREV PAGE TOP OF DOC Segment 4 Of 5
[Material submitted for inclusion in the record follows:]
Answers to Submitted Questions
1. What affect do you believe currency values have on our country's ability to export our domestic agriculture products?
The relative value of currencies against the dollar essentially determines local prices in foreign markets for U.S. agricultural products. For example, currency devaluations in many Asian countries in 1998 made corn prices denominated in local currency increase dramatically. Moreover, the Asian financial crisis had a serious wealth effect in many countries. Asset values in Asian countries were eroded including savings in local currency accounts. The decline in wealth negatively affected the demand for superior goods like meat and other livestock products weather imported or produced using imported feed ingredients. Therefore, significant erosion in the value of foreign currencies, especially those consuming large quantities of U.S. agricultural products can have a significant effect on exports of these products.
2. Are currency exchange rates the single largest factor that impacts our ability to competitively export out agriculture products? If not, what is?
Since our largest competitor, Argentina, pegs its currency to the U.S. dollar
3. What domestic or world factors have the most impact on the profitability on the group of producers you represent?
Market access and market demand play very important roles in the profitability of the growers we represent. Both here and abroad, losing a market or, in many cases, not fully developing a market, impacts our members' bottom line.
NCGA strongly supports additional resources being dedicated to market expansion in our domestic and foreign markets. It is through new corn markets, new corn uses, and ethanol development (to name a few), that corn growers will see increased profitability and a decreased need for government assistance in the future.
Page 624 PREV PAGE TOP OF DOC Segment 4 Of 5
Also important is the ability of our growers to transport their commodities domestically and abroad. The inefficiencies of train and barge transportation has a big impact on a grower's bottom line, and frankly negates any benefits we achieve by opening or expanding markets or increasing demand.
4. What position has your industry taken with respect to entitlements of disaster benefits for producers who don't buy crop insurance?
See next question
5. Since the Agriculture Risk Protection Act of 2000 provided substantial improvements to crop insurance, do you believe that no ad hoc disaster legislation should be authorized for crops currently covered by insurance? If not, how can we continue to justify duplicate benefits for the same loss?
Current NCGA policy reads as follows:
''Support contract provisions for full refund of farmer-paid premiums in the event Congress provides ad hoc crop loss assistance for the insured crop year.
This position incorporates the NCGA philosophy that producers should take responsibility for risk management. Farmers who purchase crop insurance and who are fortunate enough to avoid losses still have to pay crop insurance premiums while ad hoc assistance seems to mock their decision to take prudent risk management steps. The NCGA position would assure that if Congress decides to provide ad hoc disaster assistance those who chose crop insurance will be compensated. Since premium forgiveness would significantly increase the cost of ad hoc assistance, the available assistance would be minimal.
6. Do you believe that there should be a reformulation of the AMTA historical reference period for bases and if so, what years would be included in the reference period? How would you propose the corresponding payment yields be determined? Has your industry done any analysis on what would happen to crop yields if producers were allowed to reformulate yields?
Page 625 PREV PAGE TOP OF DOC Segment 4 Of 5
We do not believe that the calculation for AMTA payments should be reformulated. Our proposal allows a producer to use more recent production information for the counter-cyclical income support program. NCGA believes the AMTA payments should remain on the same formula.
7. Do you believe it is important that any counter cyclical program benefits are targeted towards those producers actually sharing in the risk of the production of major crops (cotton, corn, wheat, rice, grain sorghum, barley, oats and oilseeds)?
Yes this is fundamental to our proposal. A more risk-based trigger to assistance will minimize distortion in land costs.
8. What is the appropriate level of Federal financial assistance that should be devoted to a counter cyclical program?
To establish an adequate funding level for the counter-cyclical program, Congress should review the funding resources needed and expended 1996–2000. This is the mechanism NCGA used to determine the national income target for its counter-cyclical program.
9. Other than becoming a part of permanent law, why is your proposed counter cyclical safety net program better than the Market Loss Assistance program Congress authorized the prior three years?
By allowing producers to update their operation's bases and yields, this counter-cyclical program will get necessary funds to those who really need it, when they need it. This has been a criticism of the way the funds from the market loss assistance program have been distributed in the past.
Page 626 PREV PAGE TOP OF DOC Segment 4 Of 5
By using the three-month price, you establish the target income level early in the marketing year which will provide income protection to producers near the end of the calendar year for cash flow and tax purposes.
Congress can avoid the annual discussion of how much assistance to provide during times of low prices—assistance that is much needed, but often comes too late.
10. If Congress were to include a counter cyclical program as a part of permanent farm legislation, what justification is there to continue AMTA payments?
AMTA payments—also referred to as production flexibility contract payments—provide a good and needed base of farmer support. We seek and support policy options that minimize the distortion of land costs because we represent both landlords and tenants. Ending these payments would have an adverse impact on land values.
We urge Congress to continue production flexibility contract (PFC) payments at the level that will help both landowners and those renting the majority of their farmland. We believe that the appropriate level is the scheduled 2002 payment.
11. Do you believe producers are willing to give up their AMTA contracts before the end of the contract period if offered the opportunity to participate in a program that has a counter cyclical safety net component?
NCGA's farm program proposal advocates for continuation of production flexibility contract payments (PFC) at the 2002 level for the life of the new farm program in conjunction with the counter-cyclical program.
We have not had discussions internally about the possibility of giving up AMTA for a counter-cyclical proposal—our farm bill vision includes both. We are unable to give a definitive answer to this question without a thorough analysis of the counter-cyclical program you would be advocating.
Page 627 PREV PAGE TOP OF DOC Segment 4 Of 5
12. Do you believe your counter cyclical program distorts market signals and causes producers to grow crops that they might not otherwise grow in the absence of the program? If no, please explain. No. NCGA's program payments are totally decoupled from planting decisions and therefore will not distort market signals.
This program will, however, give producers the opportunity to grow non-conventional types of corn, for example, a higher value corn with a yield drag, without concern for chasing yield numbers as they would under the marketing assistance loan program.
13. At the time a borrower is arranging financing for the upcoming crop, do you believe that with some reasonable degree of certainty a lender could determine what a producer might expect to receive in counter-cyclical payments on a per unit basis assuming the aggregate gross revenue concept for the major commodities was enacted into law?
Yes we do. We will be meeting with the banking and credit industry in the coming weeks to solicit their thoughts and ideas. We would be happy to pass along any information from that meeting to agriculture committee members and their staff.
14. If applicable, what percent of producers in your organization purchase a ''buy-up'' crop insurance policy?
We do not have this type of data available on our membership. However, preliminary data from the FCIC, Summary of Business Report (for all crops) shows sales of ''buy-up'' policies about 15 percent ahead of a year ago.
Insured acres are up about 10% for all commodities, but the coverage is up 23%. One can infer that not only are there more ''buy-up'' policies being purchased, but that producers are purchasing higher levels of ''buy-up'' coverage.
15. Do you believe the marketing loan program in conjunction with AMTA payments provides an adequate counter cyclical safety net?
Yes, we believe it provides an adequate counter-cyclical safety net to most. However, as mentioned in our testimony (page 9–10), implementation of the program has caused serious problems in many of NCGA's member-states during harvest.
Page 628 PREV PAGE TOP OF DOC Segment 4 Of 5
Last fall, we received repeated questions from growers who were unable to get their local loan rate because the posted county price was consistently above the local cash price. For a variety of reasons, storage was not an option for these growers and their return per bushel was as much as 40 cents below their county loan rate in Texas, 20 cents in Missouri, 18 cents in Virginia, and 15 cents in North Dakota.
There are also problems with the program and its inequity of LDP rates across county lines. This problem leads growers to consider delivering their commodities to counties outside their normal marketing channels just to get higher government payments rather than maximizing returns from the market. This disparity in rates results from a system where county loan rates are fixed for an entire year's crop, but loan repayment rates are subject to change, based on dynamic market price relationships as reflected in the daily (or weekly) Posted County Price (PCPs).
Our grower-leaders struggled to find ''fixes'' to these challenges, but could not identify options that would not alter the intent of the marketing loan.
Finally, the loan program is not available on lost production, so those producers who arguably have the greatest need for assistance receive the least.
16. Do you believe that the marketing loan program keeps prices at a level lower than they would otherwise climb in the absence of the program?
We believe, that in the case of soybeans, some producers do plant for the high loan rate, driving bean prices down even further. We do not believe the same situation exists as dramatically for corn or other loan eligible commodities.
17. If the Congressional Budget Office determined your cost estimates for the proposed counter cyclical program are underestimated, how could your counter cyclical program be modified to insure the costs don't exceed the amount you proposed?
We cannot insure that program costs will not exceed estimates. If the program has to be modified to fit available budget authority and CBO cost estimates, the target income could be adjusted in minor ways either by lowering the initial income number or the adjustment factor can be modified. However, if the cuts are extensive, then the program will not work for U.S. producers.
Page 629 PREV PAGE TOP OF DOC Segment 4 Of 5
We would be happy to work with Committee on a program that meets the needs of both the farming community and the Federal budget. However, our intent was to provide a ''true'' safety net to producers without the intervention of Congress through ad hoc assistance. Any dramatic decrease in the target income may perpetuate today's income shortfall.
18. If permanent legislation containing your proposal was enacted as a part of a 5-year bill and assuming your counter-cyclical program was determined to fit in the ''amber'' box, what do you propose should happen if government expenditures exceed the WTO ''amber'' box ceiling at any time during the 5-year period?
First, we believe that the counter-cyclical income program proposed by NCGA fits within the exemptions defined by paragraph 6 of Annex 2 of the Agreement on Agriculture. ''Decoupled Income Support.'' We would anticipate that any payments to producers under such a program would be reported by the United States as exempt support.
However, if the payments were challenged by a member country of the World Trade Organization and found to not fit within the exemptions, and if the total non-exempt payments exceeded the U.S. commitments, then we would recommend a review of all non-exempt expenditures and modification to fit within U.S. spending commitments.
19. Do you believe the elimination of payment limits would encourage producers to expand their farming operation, encourage overproduction, cause a shift from one crop to another, et cetera.
We have embraced a $150,000 payment limit on the current marketing assistance loan program, with the continuation of the commodity certificate program; however, we are largely opposed to payment limits. They are both counterproductive and discriminatory. Limiting farm program benefits on the basis of size tends to disadvantage more efficient farming units which tend to be larger.
We would urge Congress to end all forms of payment limits and benefit targeting. If not, we would urge Congress to establish a reasonable and practical limit consistent with the real needs to today's real farmers.
Page 630 PREV PAGE TOP OF DOC Segment 4 Of 5
20. From a practical standpoint, when is the earliest date you believe any changes in permanent farm law should become effective?
In order to properly educate the grower community to the changes in farm policy, we believe the new law should not become effective earlier than the 2002 crop year.
21. The FAIR Act covered 7 crop years. How many years do you think the next farm bill should cover?
The industry is changing dramatically from year to year with the advent of new technology and better farming methods. In order to respond to these changes, we believe the next farm bill should be five crop years.
22. What are some examples of the more onerous regulations that you have to contend with in your industry?
Regulations that increase the cost, delay, and availability of modern modes of transportation, new products, and other new technologies (ex. FQPA, ESA). Regulations that are subject to alternate interpretations between counties, states and other arbitrary regional boundaries (ex. CRP, WRP, LDP).
In the near future, our industry is concerned about the new and costly regulations concerning EPA's Confined Animal Feeding Operation (CAFOs) and Total Maximum Daily Load (TMDL) decisions.
The U.S. Environmental Protection Agency (EPA) final rule on TMDLs is problematic on a number of levels. It dramatically expands EPA's authority to regulate nonpoint source runoff by intervening in state water quality decisions, yet it fails to give states sufficient flexibility in determining their water quality priorities and strategies. The rule sets a rigid time frame for states to meet these new requirements, yet fails to provide financial assistance to states or technical assistance to growers to help them meet new requirements that may be placed on them. Most importantly, EPA has failed to provide a sound scientific basis for its requirements.
Page 631 PREV PAGE TOP OF DOC Segment 4 Of 5
In late August 2000, NCGA and the National Chicken Council filed a lawsuit against the EPA regarding the TMDL rule. NCGA believes that EPA overstepped its authority under the Clean Water Act with the provisions of the TMDL rule. Several other agriculture, utility and municipal treatment organizations also filed suit against the EPA.
Earlier this year, the EPA issued the proposed rule entitled ''Proposed Revisions to the NPDES Permit Regulation and Effluent Guidelines and Standards for CAFOs. The proposed rule would expand the number of animal agriculture operations under water quality regulation as Concentrated Animal Feeding Operations from approximately 3,000 to 39,000. It would also impose additional requirements on all CAFOs, present and future, which will impose added burdens and liabilities on animal agriculture.
Implementing this rule as proposed would greatly increase the costs to farms newly included along with those already in the regulatory program. There are also ongoing concerns about the quality and completeness of the data EPA has used to show water quality impacts from animal agriculture and the need for this proposed rule.
THE FUTURE OF FEDERAL FARM COMMODITY PROGRAMS (SUGAR)
THURSDAY, APRIL 26, 2001
House of Representatives,
Committee on Agriculture,
Washington, DC.
The committee met, pursuant to call, at 9:30 a.m., in room 1300, Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
Present: Representatives Boehner, Smith, Everett, Chambliss, Moran, Thune, Gutknecht, Johnson, Pence, Rehberg, Graves, Putnam, Kennedy, Stenholm, Condit, Peterson, Dooley, Holden, McIntyre, Etheridge, Boswell, Phelps, Lucas of Kentucky, Baca, Larsen, Kind, and Shows.
Page 632 PREV PAGE TOP OF DOC Segment 4 Of 5
Staff present: William E. O'Conner, Jr., staff director; Tom Sell, Callista Gingrich, clerk; Jeff Harrrison, Pelham Straughn, Howard Conley, and Walter Vinson.
OPENING STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
The CHAIRMAN. Good morning. Welcome to our 12th in a series of hearings on the House Committee on Agriculture committed to the future of farm policy. I thank the members for their continued participation and commitment throughout the process.
Commodity and farm groups who have appeared before the committees have been faced with a tough job and have not taken it lightly. They have been given a chance to tell us exactly what they want in the policies that affect them and have responded with some very intricate and thoughtful proposals.
In addition, they were given guidelines to help develop their testimony. In their statement, witnesses were asked to include expected impacts on related industries, the ability to move product in the export market, the effect of their recommendations on farm program expenditures and how their proposal impacts our WTO obligations. By following these guidelines, the groups have provided us with very valuable and specific information to consider as we move forward to rewrite Federal farm policy.
As we near the end of these hearings, we are now faced with a difficult task. We must use all of the knowledge and information we have collected to shape legislation to report out of this committee by summer. This process has not been easy, but I am confident that it has provided us with the tools we need to improve farm programs for American farmers and ranchers.
Today we will hear from the sugar industry, which has a distinctive program and its own distinctive set of challenges facing the industry today and in coming years. I want to say that I appreciate the sugar growers from different regions coming together to present a unified strategy in light of these challenges. To present this testimony today, we have Ray VanDriessche, president of American Sugarbeet Growers Association and a farmer from Bay City, MI; Jack Nelson, Jim Horvath, Jack Lay and Jack Roney who are also representing the sugar industry accompanying Mr. VanDriessche.
Page 633 PREV PAGE TOP OF DOC Segment 4 Of 5
I thank you for appearing before the committee today and would recognize my friend, Mr. Stenholm, for any comments he might wish to make.
Mr. STENHOLM. Thank you, Mr. Chairman. I have no opening statement. I join you in welcoming the panel. I look forward to hearing from you and working with you.
The CHAIRMAN. Thank you. As always, all Members' opening statements will included as part of the record.
Mr. VanDriessche, please begin.
STATEMENT OF RAY VanDRIESSCHE, PRESIDENT, AMERICAN SUGARBEET GROWERS ASSOCIATION; ACCOMPANIED BY: JACK NELSON, PRESIDENT, RIO GRANDE VALLEY SUGAR GROWERS, JACK RONEY, DIRECTOR, ECONOMICS AND POLICY ANALYSIS, AMERICAN SUGAR ALLIANCE; JACK LAY, PRESIDENT, REFINED SUGAR, INC.; AND JAMES J. HORVATH, PRESIDENT AND CEO, AMERICAN CRYSTAL SUGAR COMPANY
Mr. VANDRIESSCHE. Mr. Chairman, Mr. Stenholm, and members of the committee, on behalf of industry representatives gathered here today and for the thousands of family farmers, factory workers, employees, and small businesses that depends on this industry for their livelihood, we thank you for this opportunity to testify before you today.
The distinguished leaders joining me today represent beet and cane growers, processors, sugarcane refiners, and their employees. We are a uniquely structured, extremely diverse, and fiercely competitive industry. From two completely different crops, a perishable vegetable and a perishable grass, we produce the same end product: sugar.
There is no other commodity whose industry structure or domestic and foreign markets are like ours. We are two distinctly different crops with distinctly different markets, and yet we share one policy. Therefore, the policy that will guide us successfully into the future must be designed for the unique needs of our industry.
Page 634 PREV PAGE TOP OF DOC Segment 4 Of 5
Even though we are a diverse industry, we come to you today with a unified message and a unified position on U.S. sugar policy. During the past year and a half, our industry suffered immensely when prices collapsed as a result of an oversupply of sugar in the market. The reasons for this include our large import obligations under the WTO; import quota circumvention by stuffed molasses and cane syrups; an increase in sugar-containing products; the uncertainty of imports from Mexico; excellent crop yields and the lack of other profitable cropping alternatives; and the need to increase our efficiencies in response to rising costs.
We estimate that revenues to producers under the current farm bill have been reduced by $2.2 billion since 1996. This has led to the permanent closure of 17 beet and cane mills and is forcing many producers to either buy their processing factories or exit the business. We were just informed last week that yet another beat factory will not process a crop this year. The largest refined sugar marketer in the United States is in bankruptcy.
Today, the U.S. sugar industry is in the worst economic condition in decades, and without prompt action by our Government on several fronts, the Nation's sugar industry will be devastated. It is clear that our current sugar policy is being undermined by severe breaches in our trade agreements. Mexico wishes to ignore its NAFTA commitments, and international trade houses employ what amounts to smuggling or laundering schemes to circumvent our import tariffs and undermine our domestic policy. As a result, the current sugar policy is failing our farmers.At a time when the President and Congress want to forge ahead with new trade initiatives, our producers are reeling from the unresolved problems of current agreements. Until these trade problems are resolved, no sugar program can work effectively.
As we discuss our proposed policy today, we would like the committee to keep five basic points in mind:
First, sugar is an essential ingredient in the Nation's food chain. The U.S. market requires 45 different high-quality sugars and syrups delivered just in time for customized packages. In order to meet these needs, we are the fourth largest producer and the fourth largest importer of sugar in the world, and the vast majority of imports enter the United States duty free. Historically, we provide sugar to consumers at prices 20 to 30 percent below the average prices consumers pay for comparable products in other developed countries.
Page 635 PREV PAGE TOP OF DOC Segment 4 Of 5
Second, our sugar is produced by industrial users for food manufacturing or distributed by retailers. The evidence overwhelmingly shows that low sugar prices for producers do not translate to savings for the individual consumers but, rather, to the profitability of the industrial users.
Third, we are in an efficient and globally competitive industry with costs of production below the world average. Our industry is ready, willing, and able to compete with foreign industries on a genuinely level playing field free of Government programs that distort the terms of trade. However, we face a multitude of unfair foreign trade practices. The U.S. sugar policy must respond to these predatory foreign trade practices. Every country that produces sugar intervenes in its domestic sugar market or industry in some manner. Those countries that produce sugar surplus of domestic needs use export subsidies or simply dump their surpluses onto the world market, thereby shifting the threat of the surplus from their domestic market to a foreign market. As a result, the world dump market price has averaged only half the world average cost of producing sugar for nearly 2 decades. The WTO has been unable to come to grips with this basic problem. These predatory trade practices of less efficient producers pose a continual threat to those of us who are more efficient producers.
Fourth, the U.S. sweetener industry is critically important to our Nation's struggling rural economy. Sweetener production provides 420,000 jobs in 42 States and contributes $26.2 billion to the U.S. economy.
Fifth, the structure of our industry requires long-term stability in the marketplace.
The current Freedom to Farm policy for other major commodities has two fundamental elements. The first is to provide farmers with the flexibility to make planting decisions based on short-term market signals. This does not work for sugar, because all of our production is tied to a specific processor who must have sufficient beets and cane every year to survive. The processor is often a farmer-owned cooperative which would require the sale or purchase of shares in that cooperative. Additionally, we use highly specialized farm equipment that cannot be used for other crops. Our investment return is a minimum of 2 years, which does not allow for flexibility.Sugar cane is usually a monoculture, with several annual crops harvested from a single planting, therefore the flexibility element for producers under the Freedom to Farm bill simply does not work in sugar production.
Page 636 PREV PAGE TOP OF DOC Segment 4 Of 5
The second element of the Freedom to Farm policy is for farmers to generate a substantial portion of their income from the marketplace. While AMTA, loan deficiencies, and other payments totaled a badly needed $74 billion to other farmers during the 1996 through 2000 period, sugar producers received no income support payments and, in fact, paid $178 million into marketing assessments to the Treasury during that period. Historically, our producers received all of their income from the marketplace. This past year, however, for the first time in 15 years, there was significant forfeitures of sugar to the Government because of deplorable market conditions. Additionally, substantial imports required of our trade agreements, the failure of the Government to address the blatant circumvention of our import quota, and a lack of administrative tools to balance domestic production led to these forfeitures.
It has always been and continues to be the desire and intent of this industry to get all of its income from the marketplace. As we look to the future, the basic challenge before our industry and this committee is to write a policy that will achieve the following objectives: provide reliable supplies and price stability for producers and consumers; provide an adequate price safety net for producers; protect taxpayers by generating all producer income from the marketplace; respond to unfair foreign trade practices; comply with multiple international trade obligations; create important negotiating leverage for future trade agreements, and eliminate those policies that reduce our efficiency.
Our industry has worked very hard to review many options to achieve these objectives. Six issues that need to be addressed immediately are:
Congress must close the import quota circumvention loopholes.
The administration must successfully resolve the Mexican import access issues.
The administration must drawdown CCC sugar inventory in a non-price depressing manner.
Page 637 PREV PAGE TOP OF DOC Segment 4 Of 5
The sugar marketing assessment must be eliminated for fiscal years 2002 and 2003.
The sugar loan forfeiture penalty must be eliminated.
Sugar should receive a portion of the budget baseline until the import access problems are resolved.
We strongly support the following basic elements in the new farm bill:
Continue the nonrecourse loan program.
Retain the Secretary's authority to limit imports under the tariff rate quote system.
Operate the program at little or preferably no cost to the Government.
Resume the Government-administered inventory management mechanism similar to that contained in the 1990 farm bill, and only implement once our import-quota circumvention and Mexican import-access problems are solved.
Inventory management is a key component in our proposal to seek to balance supply and demand in the marketplace. While it is a policy that may not work for other commodities, it has successfully worked for sugar. To achieve a proper supply and demand balance in the market, the Government must not oversupply the market by granting access beyond our needs, either through annual import allocations or commitments in future negotiated trade agreements. As long as the Government delays in addressing the import circumvention schemes and trade dispute with Mexico, it must bear the economic exposure to future domestic forfeitures.
We want to emphasize the industry's support for inventory management. However, it must not be implemented as long as our market is being ravaged by those who evade our trade commitments and import rules. Our producers' trust in trade agreements has been shaken by the problems that have also undermined confidence in and the integrity of future trade agreements. When these trade issues are resolved, our industry strongly believes that the Government must have inventory management tools to balance domestic production and imports with consumption.
Page 638 PREV PAGE TOP OF DOC Segment 4 Of 5
Related recommendations are:
Rebalance the loan rate.
Make loans available on in-process sugar beet syrups.
Clarify producers' ability to forfeit sugar loans made in September.
Restore processor bankruptcy protection for growers.
Make sugar eligible for a storage facility loan program.
We understand that there is some uncertainty whether this proposal could be implemented administratively or whether it requires legislative action. We look forward to working with the committee and USDA to clarify on how to best proceed on this measure.
Eliminate the 100-point surcharge on sugar loans.
Mr. Chairman, we look forward to working with you and the committee to address our immediate problems and incorporate these recommendations into the next farm bill. Again we thank you for this opportunity to appear before you and we look forward to answering your questions.
The CHAIRMAN. Thank you very much.
[The statement of Mr. VanDriessche appears at the conclusion of the hearing.]
The CHAIRMAN. Can you see this map over here? Members have that map, I think. Do you know approximately the percentage of corn produced in the United States on an average basis that goes into corn sweetener?
Mr. RONEY. Mr. Chairman, I believe that figure is 15 percent.
The CHAIRMAN. About 15 percent.
Mr. RONEY. It is the largest industrial use of corn.
The CHAIRMAN. On this map in the yellow areas, or gold, it is yellow on our map, those represent the large corn producing areas, 2 million bushels a county. Is that pretty much business dispersed across the entire corn growing region or are there certain areas that go above the percentage? Is it concentrated in one area or is it pretty much spread out among the region?
Page 639 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. RONEY. What we have tried to capture with this is at least the minimal amount of corn in each county, but certainly there are areas where it is more concentrated than others, particularly in the heart of the corn belt, Iowa, Indiana, Illinois.
The CHAIRMAN. The amount of corn that would go into sweetener would be concentrated in the heavier producing areas.
Mr. RONEY. Yes, I believe it would be, Mr. Chairman. I think that map also supplies the detail where corn sweetener facilities are located.
The CHAIRMAN. Yes.
Mr. RONEY. That would reflect the concentration in those central States.
The CHAIRMAN. All right. Thank you.
According to USDA, total sugar imports from 1997 to 2000 actually dropped from about 2.2 million short tons to 1.6 million short tons, while domestic production increased from about 8 million to 9 million short tons. The sugar industry proposes that the marketing allotments of the 1998 farm bill reestablished in law in order to control domestic production but implemented only in litigation, was passed to stop quota circumvention, stuffed molasses, et cetera, et cetera. In your testimony, you state that sugar prices began falling in 1997 and 1998, plummeted in 1999 and 2000. Since imports actually dropped, the domestic sugar increased. Is your industry united in its proposal to reinstitute a domestic marketing allotment program to control domestic production?
Mr. VANDRIESSCHE. Mr. Chairman, I would have to say that yes, our industry is united in that respect and we realize that we need to tap on the brakes a little bit to slow down production. And with the effect of the stuffed molasses problem we have and the problem we have with Mexico, we also realize as a producer we need to tap on the brakes on production.
Page 640 PREV PAGE TOP OF DOC Segment 4 Of 5
There are a lot of things that affected that oversupply in the market. It has been some very good years for production and some of the other trade problems that we are having. So as an industry, we are in agreement that we do need to do something, and we feel that we are willing to go ahead and put these mechanisms in place. But we need to emphasize that, first, we feel we need to have stuffed molasses and our imports problems with Mexico resolved.
The CHAIRMAN. Right. But you would support reestablishing an allotment program?
Mr. VANDRIESSCHE. Correct. What we are really talking here is not to set aside, not an acreage restriction, but a marketing allotment that would only take into or go into effect when we have a severe oversupply in the market, and it would be our marketing.
The CHAIRMAN. In your testimony you state that the domestic marketing allotments, like those in the 1995 farm bill, should be implemented but, as I mentioned, not until legislation is approved to stop the stuffed molasses problem and the Mexico problem. Then, is it your testimony that this committee should do nothing relevant to the sugar problems until the outside issues of jurisdiction are resolved?
Mr. VANDRIESSCHE. Well, I think that as a committee we need to look at and start to work on all issues, but we feel that getting stuffed molasses fixed and working to resolve our problems with Mexico are definitely the number one priority. But we know we definitely need to work on our farm policy issues at the same time, with those being the priority issues.
The CHAIRMAN. The challenge we are confronted with is that I don't presume by the time we start looking at programs, that those two issues will be resolved, and I understand what you are saying, but recognizing as well, that I don't know when we are going to have another bite at that apple following the process that we are going through now and will for some time. And I just want to make sure that you did not want us to just do nothing.
Page 641 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. VANDRIESSCHE. No, Mr. Chairman. As a matter of fact, it is suggested that maybe the allotments could be established, but not implemented until our other problems are resolved.
The CHAIRMAN. Mr. Stenholm.
Mr. STENHOLM. Mr. VanDriessche, in your testimony you talk about lower producer prices, and they are real, and you demonstrate that in figures 12 and 13 of your testimony. You state that the American consumer and the food manufacturers have benefited from these lower prices, yet the grocery chains and the food manufacturers have passed none of the lower producer prices for sugar along to consumers, you state.
Please explain to the committee in detail what benefits of those lower prices of producers, if any, are being passed on to the consumer.
Mr. VANDRIESSCHE. Well, from what we can see, very little to none. And Mr. Roney has some charts and facts and figures he might want to expand on.
Mr. RONEY. We have been tracking this very closely, Mr. Stenholm. And what we have noted is that consistently, while producer prices for sugar have been dropping, that there has been absolutely no pass-through to consumers. And in fact, for example, since 1996, as this chart indicates, which is also in your testimony, figure 12, the wholesale refined sugar price has dropped 29 percent from 1996 to the year 2000. Now one would expect some of that to be passed through to consumers, but absolutely none has. About 40 percent of sugar we consume is directly as bags of sugar purchased off the grocery store shelf, and that price has actually risen over that period. Meanwhile, sugar-containing product prices have continued to go up with at least the rate of inflation, in the range of 4 to 14 percent.
Another way we have of looking at that is to look at a comparison, and we have another chart on that, it is also in the testimony as figure 15, where we look at attempting to quantify in terms of millions or billions of dollars the extent of the loss to producers. And we find that over this 4-year period, relative to producer income, had 1996 prices continued, that producers have lost over $3.6 billion. Again, one would expect consumers to reap some benefit from that but instead, because retail sugar prices and product prices have gone up, consumers have been paying more since 1996 for sugar and products rather than less, an additional cost to consumers of about $1.6 billion, taking into account all of the sugar we have consumed during that 4-year period. Now, add that up and where is that money going? It is going to the bottom-line profits of the grocers and the food manufacturers for a total additional profit over this 4-year period of over $5 billion.
Page 642 PREV PAGE TOP OF DOC Segment 4 Of 5
And, Mr. Stenholm, I am glad that you have raised this question because these are the groups that argue in Congress that we need to reduce producer prices for sugar so that consumers will benefit. Clearly, their efforts to reduce sugar prices are aimed at increasing their profits and not passing along any benefit to consumers.
Mr. STENHOLM. I am sure we will get into this again when we finally get into the farm bill writing. I predict we will. We certainly will face it when we get to the House floor. I am sure there will be a contention that the prices would be higher were it not for the lower sugar prices.
But I want to go further on that right now. I guess one thing that troubles me about this contention and the lower prices—and we found this with the corn growers, with the grain sorghum, with the wheat, with the cotton in which we are being asked to consider higher loans. In each of the previous testimonies, we have pointed out that we are producing more than we will consume and sell at the current price. With these devastating prices to producers, how have we managed to increase production as much as we have during this same period of time in which we are devastating the industry if the prices are that low? And I think I would like to hear your response.
Mr. VANDRIESSCHE. Mr. Stenholm, I would have to say there has been a number of reasons, but one of them, except to become more efficient, as we all know, as our margins in our returns drop back, we try to increase our efficiency to try to make up those losses in price. And with that efficiency, many of the companies—and in the production areas, efficiency comes through output. And I know that that is probably one of the basic elements of why production has increased, along with some very good weather. Also the fact that as other commodity prices have dropped, and rightfully so, the other commodities have received some AMTA loan deficiency payments, those growers were able to take some of those monies received and invest into yet another alternative crop.
Page 643 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. Sugar.
Mr. VANDRIESSCHE. Yes, increased sugar production.
Mr. STENHOLM. So they took the AMTA payments and converted to sugar, which suggests to me that sugar was more profitable than the wheat or corn or whatever else.
Mr. VANDRIESSCHE. I would have to say I do grow sugar beets, I grow corn, I grow soybeans, and I am willing to look to diversify as much as I can so that as markets fluctuate, if I have an opportunity to go in and diversify, I am going to do that even at lower levels, because our hope is that as any market cycles, that that market will return; and if I can spread my risk out over alternative crops more than be specific to a number of crops, I will have less risk by spreading that out. So yes, there has been some expansion even in the lower markets with that respect in mind.
Mr. STENHOLM. I have some other questions, but I will wait my turn. Thank you.
Mr. EVERETT. [presiding.] I want to pick up a little bit where Mr. Stenholm was talking about when we get on the floor, some of the things that we can look forward to happening. Every time we get there and debate sugar policy, Members say that we are supporting our domestic sugar industry at twice the rate of the world market. Would you kindly explain to the committee what the world market or the dump market price is and why it is so low?
Mr. RONEY. Thank you, Mr. Everett. Sugar is grown in more than 120 countries worldwide, and every country that grows sugar has some type of program in place to help its domestic producers or its consumers, and in some cases both. The prevalent practice is to support local production at prices sufficient to cover the cost of production. In many countries, though, that generates surpluses of sugar which are then dumped on the world market for whatever price they would bring.
Page 644 PREV PAGE TOP OF DOC Segment 4 Of 5
Prime example is the European Union. They support prices about 40 percent higher than ours. Where we have a 22.9-cent refined sugar loan rate. The European Union has a 31-cent, what they call intervention price for refined sugar. When you look at the export subsidies that they pay out to dump their surpluses on the market, some years their export subsidies are as high as 26 cents per pound. The result of practices like that is that the world price—and there is a chart and a figure in the testimony, we also have a poster of it here—the world price, figure No. 9, has averaged only about half the world average cost of producing sugar over the past 16 years. This is not a 1-year anomaly. This has been the way that this market has functioned.
What we hope to achieve in multilateral trade negotiations is the type of free trade in sugar that would do away with all these subsidies worldwide and would enable that world dump market price to rise to reflect the cost of producing sugar. But until we achieve that goal, we need some measure of insulation in our market from that world dump market sugar.
Mr. EVERETT. You talk about the European Union. Could not the same thing be said about Mexico? Was not Mexico, prior to NAFTA, the importer of sugar and now it is an exporter?
Mr. RONEY. Yes, sir absolutely. Mexico, since the start of NAFTA, has increased its production by a third. And the nature of the help that they have received from their Government is essentially free loans. The factories were virtually given by the Government to the industry with loans that they have never even paid interest on. They did that with the expectation that their increased production would be dumped on the U.S. market. So where we have our problem with Mexico is that they are subsidizing increased production but their goal is far more than their market can handle. You were absolutely right. They have gone from a net importer of sugar to a surplus producer. And what they hope to do is dump that surplus on the U.S. market and we have absolutely no room for that Mexican sugar in this market.
Page 645 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. EVERETT. Could you go into a little detail about the stuffed molasses program problem? For instance you state in your testimony that if this problem is not resolved, there is no domestic policies that we can come up with that will fix sugar.
Mr. VANDRIESSCHE. Mr. Chairman, we have several problems with stuffed molasses. And Heartland is a small company in Michigan, and many portray it as a small company that is producing about 125,000 tons of sugar every year—it happens to be in the State that I grow beets in, and it is displacing a lot of my market for the sugar that is produced in my area—when in fact Heartland is a company that is owned by ED&F Man which is a worldwide food conglomerate. And they essentially came up with a scheme to circumvent the quota system or create a loophole, you might say, by concocting a heavily laden molasses syrup that is full of sugar, and all they do it bring it from across the border to Canada; bring it in and spin the sugar out of it and sell it in our market. The big problem is not only that Heartland is doing it, but a lot of areas are thinking about doing the same thing.
It is kind of like going to the doctor and he says, I'm sorry, we just found a little bit of cancer. We know the little spot of cancer is not life-threatening and it can't kill you, but if you do not treat it, it will kill you. The same thing could be with the stuffed molasses problem. We have border States that are now looking at facilities to put in to try to take sugar in from Brazil or Cuba, wherever they can get cheap sugar, to try to do the same type of operation. In a delicately balanced operation we have in an already oversupplied market, if we do not stop it, it will be very devastating to this industry.
Mr. EVERETT. I would like to pursue that further, but I will wait my time or submit questions for the record.
Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman. I want to follow up a little on that line of questioning. The marketing allotments, am I to understand that unless we fix the stuffed molasses and the Mexican situation, you are not in favor of marketing allotments. Is that the position?
Page 646 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. VANDRIESSCHE. Well, we think that marketing allotments are very important to help bring some production controls on our own side. We do feel that Mexico and stuffed molasses needs to be fixed, because if we cut back here domestically in the United States and we do not fix those problems, what are we doing but creating a hole for more imports to come in here and fill our own domestic needs at the cost of our domestic farmers and producers?
Mr. PETERSON. I guess that is a yes. As I would hope it says, as someone who opposed NAFTA and GATT, I would hope that you are not in favor of this unless we fix these things. The stuffed molasses is only 1 percent of the domestic market that is that—do you have a strategy that you think is going to be successful? I think we have got kind of the same problem in the area with MPC, where they concocted this product and they are coming around the 1996 agreement because it was a different product and it was not negotiated at that time. I assume this is the same thing that is going on with stuffed molasses. We have not figured out a way that we are going to be able to fix this either through trade, going through the trade dispute panel, or legislatively. Have you figured out a way to solve this stuffed molasses problem? How are we going to do that?
Mr. VANDRIESSCHE. I would ask Mr. Horvath as a processor to comment on that.
Mr. HORVATH. Thank you. Yes, Congressman, I think that we have legislation that has been proposed on the Senate side by Senator Craig and Senator Breaux, that from our perspective would fix that problem should it be enacted as legislation, so we certainly encourage that to occur.
Mr. PETERSON. You don't think it would be challenged by other countries in trade court if we pass it?
Mr. HORVATH. From my perspective I believe that this case would be challenged by Canada, if I had to guess, and I think there is good justification there from the perspective that this is a clear violation of any kind of reasonable trade. This product is being concocted solely to get around our customs regulation and to bring sugar into this country, around our sugar legislation.
Page 647 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. RONEY. If I may add to that just very briefly. Many countries that are quota holders, in fact most of them, support the stuffed molasses legislation, which our trade counsel thinks is completely WTO-compliant because the stuffed molasses is replacing the sugar they could have otherwise sent us.
Mr. PETERSON. Last week I had the opportunity to go to South America and there is all this free trade with the Americas stuff going on. I was in Brazil. Are you folks concerned about the potential of the United States entering into a free trade agreement with Brazil, which as I understand it, produces as much sugar or is willing to import as much sugar into this country as we produce. And it looks to me like they have got a low-cost production situation there like Australia does. So what is your position on that and are you concerned about it?
Mr. VANDRIESSCHE. Congressman, we are definitely concerned. We are looking at the effect of our past trade agreements such as NAFTA and the fact that we have to guarantee a minimum under the WTO, whether our market needs it or not. And we have definitely realized that future trade agreements are very important to this country, not only to agriculture but to other—whatever commodity or other area there might be. We are very much aware that there needs to be trade agreements. But as we work through these trade agreements we feel it is very important that we protect our domestic producers first and foremost, and then allow imports to come in only when it is based off of—well, in our case we feel it needs to be needs-based if we are going to allow any imports to come in here.
Mr. RONEY. If I could add two quick thoughts to that, Congressman. One is we are very supportive of statements made by the administration that agricultural subsidies need to be addressed in a multilateral context and not just in bilateral and regional negotiations. We are making ourselves vulnerable to the European Union if in an agreement with the Western Hemisphere we bring down our supports.
Page 648 PREV PAGE TOP OF DOC Segment 4 Of 5
Second, you are absolutely right about the concern about Brazil. And I think it is important to note that while they appear to be low cost, that their industry has been subsidized for the last 25 years by an alcohol program. More than half the sugarcane that Brazil produces goes into alcohol. And their whole cane milling infrastructure was built up on the basis of alcohol subsidies to reduce Brazil's need for foreign oil. So that is again subsidized foreign sugar that we should not open our market to.
Mr. NELSON. Mr. Chairman, I would like to add one other thing to that, and that is on foreign trade agreements. That is, I believe currency valuation between the dollar and the currency of those countries needs to be taken into consideration, the exchange rates. Most of these countries are able to compete by lowering the value of their currency against the dollar, and as long as they are able to do that, it is very difficult for American producers of any kind, whether it be sugar or other commodities, to compete against those types of agreements.
Mr. EVERETT. Mr. Rehberg.
Mr. REHBERG. Thank you, Mr. Chairman. Let me begin by saying, as a freshman I have read all the testimony from all the various groups that have come in here and I want to thank you for having one most of the more complete ones. I found it to be very educational. The one thing I did not find in the testimony is what is stuffed. Is there a difference between stuffed molasses and molasses?
Mr. VANDRIESSCHE. Yes, sir, definitely. Jim, do you want to cover that?
Mr. HORVATH. Yes, there definitely is, Congressman. The regular molasses is brought into this country for various uses as far as the production of yeast, as far as cattle feed is concerned. Those are the major uses for it. This product is something that has been creatively concocted where they—say, sugar from a foreign country that has been subsidized, sugar from Brazil or Mexico, bring it into Canada, mix it with molasses in small quantities as well as with water, bring that product across the border, spin out the molasses and the water, and sell the sugar.
Page 649 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. REHBERG. Does Heartland have its own spinning process, its own refining? This is a one-stop shop, they are not going to anybody else?
Mr. HORVATH. That is correct.
Mr. REHBERG. I noticed in your testimony you talked about the fact that it was not Canada doing this. It was the other countries bringing sugar into Canada and doing it and then bringing it across. So why does Canada care whether you do it or not? Are they making a profit?
Mr. HORVATH. The reason it is coming into Canada is that Canada is an open market to world sugar, and in that situation ED&F Man is able to bring sugar in from countries that produce it such as Brazil, Mexico, Guatemala, for example, and bring it through Canada. So Canada is merely a conduit to get it to this country. So I think the only reason that Canada would have a concern here is to protect ED&F Man and other domestic companies that are involved in this process and making a profit on it.
Mr. REHBERG. We are going to be asked by the President to agree or disagree with fast track legislation, and as I understand it that is a no-amend operation or opportunity. So I guess the question I have to ask is, on the guaranteed minimum when you are doing business with foreign countries, is it a percentage or is it based upon anything that we could control aside from an agreement that we either have to agree in whole or not agree to?
Mr. HORVATH. Are you asking whether we feel that we could support a fast-track amendment?
Mr. REHBERG. If I understand international trade negotiating authority in your industry, is it based upon a percentage or volume, a number of tons total to the U.S. market? What is the concern, that Brazil just displaces some of Mexico's, or it would be a separate agreement and it would be an add-on? Mexico is bringing in X amount, Canada is cheating from the north, and Brazil is going to displace more American domestic production?
Page 650 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. HORVATH. Yes, that is the concern. Under WTO there is currently a limit of 1.25 million tons of sugar that can be brought into this country from 40 different countries, and that has been based upon old traditional export or import quantities. And any kind of change that would take place would be in that total quantity most likely, and then it would be allocated among those 40 countries. That could be different, in fact, if Cuba were to be included; that we would certainly think that Cuba was initially when they were exporting sugar into this country, and they would be included in that 1.25 million tons again later.
Mr. RONEY. Let me just add, what we have here is this absolute minimum that has to be brought in regardless of how much sugar we need. I wish it were a percentage factor, as you suggest it might have been, but it is not; it is an absolute amount. The last couple of years where we had an upward movement in U.S. production, if we could reduce our imports to compensate for the increased production, as we traditionally were able to do, we wouldn't be in the terrible price and loan forfeiture situation that we are in. But instead, because we have to bring that sugar in whether we need it or not, it is a tremendous burden on our producers.
Mr. REHBERG. The marketing assessment fee, I understand the issue that it should not be in place. Could the opposite be said, that maybe under any new trade negotiating authority, that it should be applied—maybe you would call that a tariff maybe not—but if excess product is coming into the United States and you are paying a fine or a penalty, shouldn't the foreign countries that are also bringing product in at a time when we have an excess pay the same fee? And couldn't that be done under world trade authority?
Mr. RONEY. Certainly it gives the foreign sugar a competitive advantage in this country, that we are paying the marketing fee and they are not. Certainly there could be another way found to apply that fee to the imported sugar as well. But what we are much more focused on is eliminating that fee altogether, because it was put in place to help reduce a sugar Federal budget deficit that this country was facing back in 1991. With the country now in a budget surplus situation, there is really no longer any need to collect that marketing assessment.
Page 651 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. REHBERG. Thank you, Mr. Chairman.
Mr. VANDRIESSCHE. If I may, could I comment briefly? As a grower in my area—I am an average-size grower of about 250 acres—and that market assessment fee costs me about $3,300 a year. I have about 650 to 700 growers for our local grower group, it is costing us about $800,000 a year in costs. So in our already depressed market, it is only adding to our financial stree. And as Jack said, it is definitely an advantage to a foreign producer to bring sugar in here.
Mr. EVERETT. Mr. Kind.
Mr. KIND. Thank you, Mr. Chairman. Just to follow up on the line of questioning we just had here, we have had a lot of conversations so far with Trade Representative Bob Zoellick in regard to future trade negotiations and that obviously the administration would like to move forward with fast track authority and looking at FTAA in the coming months, if not the next couple of years. What would your advice be for us Members of Congress who are dealing with the administration right now, trying to elevate the agriculture issue in regard to priority issues and trade negotiations and what we need to go in and negotiate hard on? Because from my personal perspective, our trade reps in the past have not done a gargantuan task for the agriculture industry in these trades. Albeit there is a lot of difficulty in it. It has always been kind of the death knell of moving forward in some multilateral trade negotiations, and we have seen that in the past, but what would your recommendations be to Bob Zoellick or to us Members who are trying to elevate this as an issue?
Mr. RONEY. Mr. Kind, we are competitive by world standards, and as we have mentioned, we favor genuine multilateral free trade in sugar. Certainly the way to achieve that is through multilateral negotiations, not necessarily through bilateral or regional. But to move the trade agenda forward in this country, I think the thing that the administration and Congress need to look at the most is compliance with past agreements. There is an enormous amount of distrust in American agriculture about past agreements. It seems as though there is a tremendous focus on negotiating the agreements with little follow-through on compliance afterwards. It seems as though we hold ourselves up proudly as complying with the letter of every agreement that we go into, but we find other countries lag far behind in complying.
Page 652 PREV PAGE TOP OF DOC Segment 4 Of 5
In order to restore some trust in American agriculture trade agreements, I think we have got to go back and make sure that we comply with past agreements, and certainly the U.S. sugar case with NAFTA in particular is a great case in point.
Mr. KIND. I believe I read in your testimony you are below world cost production here domestically, and if we do have the infrastructure to get it to market, if we are able to negotiate some fair trade agreements, we should fare pretty well competitively in the international marketplace; is that correct?
Mr. RONEY. Yes, sir.
Mr. KIND. There has been some suggestion early on again with Representative Zoellick with regard to a different form of sanctions regime for trade agreements; a lot of talk about instead of having the economic sanctions, possibly a system of fines that apply. Or an issue that some of us are raising is having a tool box of possible repercussions for failure to comply with trade agreements. What are your thoughts, if any, on those proposals right now?
Mr. RONEY. We have not had the opportunity to study those in detail yet, but we certainly would look at them with great interest because that would get right at the compliance problem, the enforcement problem that we see with past agreements.
Mr. KIND. Mr. VanDriessche, have you any thoughts on some of these preliminary discussions about moving to fines as opposed to economic sanctions with violations of trade agreements?
Mr. VANDRIESSCHE. I think, as Jack has said, we are definitely looking at all the options that would work for us to help make these agreements more palatable to the growers at home. As a matter of fact, one of the things that many of the growers at home talk about as we go through these things, especially if they happen to hear that our trade ambassador is negotiating with other countries, whether it be on the FTAA or whatever, and they are still trying to spit out of their mouth a bad taste from past agreements, I am doing my best to convince my producers back home that trade agreements are an important part of what this Nation needs to do. It is just hard to explain to them that after what has happened in the past, we do have the people in place now that can make things happen. It is just a matter of coming up with the right question to solve these problems.
Page 653 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KIND. Someone earlier testified about the problem of devaluing of other currencies and that obviously in this country we have been pursuing a strong dollar policy. We have had weak international markets and that has obviously had an impact on the commodity producers in this country and our export potential in that. But, just generally, what do you think has been the major weakness in past trade agreements? Has it been lack of will of our own negotiators or the importance of the politics of agriculture with some of these other countries that we have been negotiating? What is the major hurdle in order to achieve what many of us think is necessary with fair agriculture agreements being reached in these trade negotiations?
Mr. RONEY. I think what you have in other countries is a very serious food security issue; that these countries take their food supply very seriously. They take it less for granted than we do in this country. We do have the disadvantage of not finding a way yet, as Mr. Nelson alluded to, to address the big disparities in the exchange rates. We are suffering from the strong value of the dollar. We are penalized by our strong economy.
Another factor that we think is key in these negotiations and difficult to address is that our farmers face some of the highest labor and environmental standards in the world. In sugar in particular, world sugar production is dominated by developing countries. Three quarters of world sugar production is by developing countries with labor and environmental standards just a fraction of ours. And what we are loath to do is essentially race to the bottom in world labor and environmental standards. What we would prefer to do is find a way through trade negotiations to provide incentives for foreign countries to raise their standards to our levels rather than forcing us to have to lower ours to theirs. Meanwhile, we are supportive of the trade remedies that we do have on hand now, our antidumping, countervailing, section 301 trade remedies. We support the use of those while we look at new trade remedies.
Mr. KIND. Thank you, gentlemen. Thank you, Mr. Chairman.
Page 654 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. EVERETT. Mr. Kennedy.
Mr. KENNEDY. Yes. Thank you very much for your testimony, and I am happy to have Mr. Horvath here from Crystal Sugar. My father-in-law spent a lot of time in his younger years driving trucks for Crystal Sugar, so we have a good attachment there; and I am also happy to have Southern Minnesota Beet Growers in my district.
We talked somewhat about Mexico. My question is, what is our solution for Mexico? If you were to put forth a solution, and here is what we would like the agreement for Mexico to look like, what would that be?
Mr. RONEY. We have studied that hard, Mr. Kennedy, and what we need to do with an agreement with Mexico is restore balance to both the United States and the Mexican markets. Both markets are oversupplied at this time, and we need to address both simultaneously. We need to clarify that we will take Mexican sugar only when we need it; that we should not be forced to take Mexican sugar when we are oversupplied, particularly given that Mexican sugar production is subsidized and produced at a price that is essentially similar to ours. They are not lower cost producers than we are.
One of the things that we have looked at in great detail and we think looks very encouraging for Mexico for a number of reasons is that they might divert much of their sugar to ethanol production. Mexico has some enormous air and water pollution problems. They have a surplus of sugarcane. They have many rural areas that are highly dependent on the cane industry. Mexico estimates that about 1 million workers are directly involved in producing sugar in Mexico. It is one of the reasons they are less efficient than we are, because they have so many workers involved.
When we look at the potential for Mexico to implement a sugar-to-ethanol program, we can see them addressing their air and water pollution problems, keeping these cane workers occupied in the rural areas and restoring some balance to the market without a major job loss.
Page 655 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. KENNEDY. Is there an issue with a lot of imports coming into Mexico that are ultimately coming to us, or are we largely dealing with the Mexico production?
Mr. RONEY. We are very concerned about verifying the amount of Mexican sugar production that is domestically produced rather than brought in across their borders. They have acknowledged that they have problems with their southern borders, the Central American countries. We are deeply concerned that other sugar could be leaking into Mexico and being called Mexican sugar production to make it eligible to be shipped to the United States, because that is a very difficult matter to verify.
Mr. KENNEDY. Have you had any dialogs with the Mexican growers at all to try to see if there is a common ground in this area or not?
Mr. RONEY. Sir, we see this as a government-to-government negotiation. We certainly have been happy to work with our Government. Our Government, the administration, has continually asked for our input. But a matter as sensitive as this we see as largely being something that needs to be negotiated between the governments because we are talking about a government-to-government trade agreement here.
Mr. KENNEDY. And I appreciate your comment, and clearly with the commodity prices as low as we have throughout our other commodities right now, I am very concerned and interested in keeping our groups in Minnesota like Crystal Sugar and Southern Minnesota Beet alive and productive and healthy in the future, so I look forward to working with you.
Mr. RONEY. Thank you.
Mr. EVERETT. Mr. Condit.
Mr. CONDIT. Thank you, Mr. Chairman. I thank the gentlemen for being here this morning. I have a couple of comments. Your industry supported fast track to NAFTA, and you did that with the clear understanding that there was a large amount of money in the agreement for market access programs for Mexico. What was your rationale in support of NAFTA and would you do that again?
Page 656 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. RONEY. Mr. Condit, our support for the NAFTA agreement, you are correct it was genuine, but it was reluctant. We did it with a lot of concern about enforcement of that agreement. As it turns out, because Mexico is now challenging the NAFTA sugar provisions, we are wishing that the NAFTA had never occurred. This is again this compliance and enforcement issue that has made us very reticent about the NAFTA and future agreements.
Mr. CONDIT. And I appreciate that. I understand your comments earlier about—and I think they are good recommendations for us to take under consideration and recommendation in dealing with future trade agreements, and I appreciate that. A couple days ago, the administration—we have heard a couple of stories that in the new negotiations for fast track agreement, that agriculture is not going to be traded off. We have heard that from several administrations and it doesn't always work out that way. It seems that we always get traded off. But then lately I have heard from the administration the comments that we can take care of these problems and side agreements. And you were talking about the multilateral agreement. Do the side agreements fit in with what your concept of a trade agreement should be, or should all those things be worked out before we sign the agreement?
Mr. RONEY. Sir, our bitter experience with the side letter to the NAFTA I think would suggest our answer has to be that you have got to do a comprehensive approach from the outset. And it is dangerous at best to say that you will address other key central issues critical to the survival of the American agriculture in side letters. That type of approach has just proven not to be workable.
Mr. CONDIT. Are you aware of any side letter side agreements that actually have been honored?
Mr. RONEY. I am not.
Mr. CONDIT. Neither am I. I was just trying to find somebody that knows that.
Page 657 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. RONEY. Well, obviously theirs haven't.
Mr. CONDIT.Thank you, Mr. Chairman.
Mr. EVERETT. Mr. Chambliss.
Mr. CHAMBLISS. Thank you, Mr. Chairman. Gentlemen, virtually every commodities group that has come in here has asked for decoupled payment in the new farm bill to their producer in the form of the AMTA pavements. Sugar growers have not been entitled to AMTA payments. I don't see a request in here for an AMTA payment. Am I to understand that you were not asking for a decoupled payment from the Government?
Mr. RONEY. Yes, sir.
Mr. CHAMBLISS. You talked a little bit earlier about the marketing assessment that your growers pay. Now, as I recall, the purpose of that marketing assessment was to make a contribution to balance the budget; is that right?
Mr. RONEY. That is right.
Mr. CHAMBLISS. Very similar to what we did in the peanut program. There was several hundred million dollars contributed by sugar growers to achieve the balanced budget.
Mr. RONEY. Yes.
Mr. CHAMBLISS. What has been the cost to the American taxpayer for the sugar program over the last 10 years?
Mr. RONEY. There has been a net revenue—from 1991 to 1999, net revenues to the sugar program were close to $300 million. That was as a result of the marketing assessment revenues and no payments whatsoever being made to sugar producers, nor were there any loan forfeitures throughout that period.
Mr. CHAMBLISS. We were talking a little bit earlier, somebody was asking the question based on what we are going to hear on the floor, and the basic argument that we hear every time we have a fight over a quota program is that this program costs the American housewife, or whoever does the shopping in the family, when they go to the retail level to buy that particular product. I have never understand why they contend that to be the case, but that is the argument that we will hear on the floor when we take the argument to the floor.
Page 658 PREV PAGE TOP OF DOC Segment 4 Of 5
I was reviewing a chart that you have in here that shows the retail price of sugar in various countries around the world, various developed countries, and it looks like the United States is significantly below, way below just about every other country that is considered a developed country in the world. Now, is this a chart that you all produced just to come up here and make it look good, or—tell me about this.
Mr. RONEY. Sir, that is a comprehensive study that covered all developed countries. The only two countries lower than us in the world that we found are these two countries, Canada and Australia, that claim to be totally free trade, that their consumers have access to this world dump market sugar that is running about 8 cents a pound, and even their retail prices are just a couple of pennies below ours.
So we are very proud of the fact that our prices are running 20 percent below the developed country average. We have noted that the retail sugar price in the year 2000 is lower than the retail sugar price in the year 1990, over a 10-year period. Not many products have seen price declines during that time. And, of course, we have noted that when our producer price drops that consumers see no benefit.
Another way of looking at this too, Mr. Chambliss, is when you take the strength of our economy into account and you look at the affordability of sugar if you compare the United States to the rest of the world—one way that a firm in London did this was to look minutes worked to buy a pound of sugar—we are about the most affordable in the world, even more than Canada and Australia, the two countries that came in lower than us in the actual price.
Mr. CHAMBLISS. And thinking about where the sugar program has been for the last 10 years and what you are proposing here, I can't help but be reminded of a debate that we frequently have on the floor with respect to any number of other domestic programs or other appropriation bills that we issue that we debate when my good friend from Ohio, Jim Traficant, always comes in with his amendment, Buy America. And that amendment passes without a negative vote. It is usually 100 percent of the Members of the House voting for the Buy America amendment.
Page 659 PREV PAGE TOP OF DOC Segment 4 Of 5
As I look at your proposal and the proposal really that others, specialty crops make, it is basically a Buy America proposal; that if you buy sugar grown in the United States, we will take care of our farmers and at the same time we obviously are going to take care of our consumers. Am I missing something in there or is that a correct statement?
Mr. VANDRIESSCHE. That is correct.
Mr. RONEY. We wish it could be entirely Buy America, but our market is one of the world's most open markets to foreign sugar. We are the world's fourth leading importer of sugar, virtually all that duty free. And essentially what it amounts to about 15 percent of our market has been reserved for foreign producers. What we would like to do is hang on to that remaining 85 percent to buy American.
Mr. CHAMBLISS. Thank you, Mr. Chairman.
The CHAIRMAN. [presiding]. Mr. Dooley.
Mr. DOOLEY. I don't have any questions.
The CHAIRMAN. Mr. Putnam.
Mr. PUTNAM. Thank you, Mr. Chairman. I welcome the panel that is here and hearing about all of this stuffed molasses. I was fortunate enough to join the chairman in Quebec City this past weekend, and we had an opportunity to meet with one of the Canadian trade ministers. And doing my part for the great State of Florida and our fine farmers there, I very politely mentioned to the minister there, Sir, could you please make a few observations about this stuffed molasses issue? To which he replied, Sir, on our side of the border it is not the stuffed molasses issue, it is the sugar syrups issue. So as a freshman, I had my first diplomatic faux pas, and it was your fault.
So tell me, if you would, the current section 301 provisions or antidumping and countervailing duties and those particular enforcement provisions that are in the law today, what are their inadequacies as it relates to your problem with Canada and potentially your problem with Mexico, if that is even applicable?
Page 660 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. RONEY. I think the key aspect of that is that it is an after-the-fact remedy, that we have to have sustained a large amount of imports and substantial injury and go through a lengthy process before those remedies can kick in.
And the other problem we have is that they tend to be very country specific. And what we are facing in the world sugar market, as I mentioned earlier, is 120 countries subsidizing their sugar in one way or another. So there are very specific types of remedies that can be applied to a certain product, certain country, take a long time to be put in place. We have to be bleeding badly before they would take hold and they tend to be so narrow that they don't really provide us the broader form of remedy that we need.
Mr. PUTNAM. Where is the sugar originating from that is being transported through Canada?
Mr. RONEY. Mostly Brazil and Colombia. There is no Canadian sugar involved, no Canadian product involved. Canada would not have a standing in a WTO setting for access to the U.S. market for their sugar syrups, because it is not Canadian sugar.
Mr. PUTNAM. We have a leaky border to the north and to the south—we are unable to ascertain what Mexican production really is; is that correct?
We have this fantastic research and development and intelligence community out there and we do not know how many acres of sugar they are growing? It is kind of a double-edged squeeze. And so how do you recommend that we proceed with this Latin American or this hemispheric agreement as it relates to open census or open statistics about what production volumes really are?
Mr. RONEY. The verifiability is a huge aspect of that problem. And when we look at the FTAA, we look at Brazil which is the world's largest producer and exporter of sugar in an industry that has been built up on alcohol subsidies. We have documented, the U.S. Department of Labor has documented that there are tens of thousands of children employed, essentially unpaid labor, in the Brazilian sugar industry and throughout Brazilian agriculture as well; low labor and environmental standards overall; the use of strategic currency devaluations to keep their product exportable.
Page 661 PREV PAGE TOP OF DOC Segment 4 Of 5
In the Mercosur Agreement between Brazil, Argentina, Paraguay and Uruguay, sugar has been excluded because none of those other three countries can bear to be swamped with Brazilian sugar. When we look at FTAA and the potential for Brazilian sugar swamping the rest of this hemisphere, I think what you are going to see as talks continue on this is a number of countries being opposed to sugar even being included.
And this then comes back to the administration's recent remarks, with which we concur, that bilateral and regional agreements are not the path to take to address the multilateral trade problems that we have in agriculture and sugar in particular.
Mr. PUTNAM. In your packet, you have indicated that there have been 17 mill closures since 1996. What has been the net effect and what percentage of refinery capacity is now off-line and how many problems have been lost as a result of that? And give us your thoughts and the facts and figures on the impact that has had on rural America.
Mr. RONEY. We would be happy to supply you those figures, Mr. Putnam. We do not have actual job figures available at this moment. We would be happy to look into that and get back to you. But I can tell that in most of these cases that these are areas that have gone out of sugar beets or sugarcane completely; that in Mr. Combest's district, for example, a sugar beet factory had been operating there for some 80 years, and it closed down and all of the beet growers in that area had to stop growing beets. In cane areas where cane is a monoculture, like it is in Florida, when mills close down—and this has been the case in Hawaii—that that area goes out of agriculture altogether. When you look on a national scope, that job loss may not be that significant, but in these rural areas that have been dependent on a stable sugar industry for generations, the job loss impact is devastating.
Mr. VANDRIESSCHE. Mr. Putnam, I would like to comment on a local level as to how it has affected us. In our particular area we have a company that is trying to sell their factories to the growers in that area. And it has been very tough for them because as they go to their financial institutions to try to put this deal together, they are looking at the economic crisis that the sugar industry is in, and the financial people are looking for—it takes about 12 years to pay for one of these factories. And they are looking at it long term, and they are saying what do we have coming up in the next farm bill farm policy that will assure us that if we invest in this facility for you growers that we will be able to get our returns back?
Page 662 PREV PAGE TOP OF DOC Segment 4 Of 5
So it is definitely affecting the producers in that area, but it is also affecting even the implement dealers. A lot of implement dealers have said since this has been taking place with the buyout of those five particular factories in all of those regions, most of those implement dealers have seen nothing happening.
I just happened to be talking to one of guys that work with an implement dealer the other day, and what they have finally done is they are trying to buy this—they worked out a lease agreement for this coming year to lease that particular factory through a lease agreement, to be able to process beets while they try to put this deal together. And he said until that lease agreement went into place, he said there was nothing happening and he said once there was a lease agreement in place, then we started to move equipment again.
So you can see what an economic impact this has not only on the sugar industry, but it has a ripple-down effect around the country. And as I said, this particular group is trying to buy their facilities to become a co-op. Right now about 64 percent of the sugar beet industry is already a co-op to try and deal with becoming more efficient, to try and deal with lower prices, to try and stay in business to get a better return back to the growers. And there is about another 20 percent that is in the process of trying to buy their facilities also.
Mr. PUTNAM. Thank you. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Shows.
Mr. SHOWS. Thank you, Mr. Chairman.
I apologize for missing your opening remarks and your statement, but I have been reading some material here. But it just seems to me that if you look across the country—and I will take Mississippi, for example—that rural America is in trouble. Rural Mississippi is in trouble. And the reason it is in trouble is because I think our leadership in both parties have just written rural America off. And NAFTA and PNTR have not come up with one program to come back in these rural communities to help them with economic development, to help them with their infrastructure. We do not help the market. We do not help recruit industries for them. We say, Rural America, fend for yourself.
Page 663 PREV PAGE TOP OF DOC Segment 4 Of 5
And that is what is wrong with these bills that have been passed. I wasn't here when the NAFTA bill passed, and I probably would not have voted for it. I can tell what it has done to my farming industry, agriculture; it is putting them out of business. Imported timber, Canada is putting us out of business. Imported sugar is putting you guys out of business. Now, how has this been a good deal for us?
I think anything that ought to be done now ought to be going back and restructuring and redefining what are we going to do for communities that are losing jobs because of these trade agreements. I don't have anything against trading with them, but I think it should be fair trade.
I guess I am making more of a statement than anything else. But when you live in a county that has 11 percent unemployment and it is a very rural county and your farmers are going out of business, your dairy farmers have gone out, your poultry people are going up in price because of the high energy prices, it is a ripple effect; and we wonder why in Mississippi in the last legislative session a year and a half ago we had a budget surplus. This year we do not have a budget surplus, and we have to cut programs because our rural economy is in trouble.
It seems to me that we ought to get back in and try to help support rural areas with programs that is going to offset—it is just like the stuffed molasses—and I don't know a thing about stuffed molasses, just what I have been hearing—but why can't Canada be held accountable for letting the stuffed molasses come through there? I mean, they may be denying it all day, but they know what's going on.
Another thing the consumer has a hard problem with, if the farmers are going out of business and they are not getting enough money for the crop or the end product, why is it going up in the grocery store? And then a lot of people who don't represent rural areas, it is hard for the people in urban areas to understand that. They go home and say, well, we voted to help the farmer. Yes, but you are causing the prices in the retail area to go up. As your prices decrease, the retail prices go up. As your prices have decreased, the retail prices have gone up. Maybe we should have some of those folks come in here and say why.
Page 664 PREV PAGE TOP OF DOC Segment 4 Of 5
Thank you, Mr. Chairman. I appreciate it.
Mr. VANDRIESSCHE. Those are some very good and very much accurate statements. I guess that is why, when we talk about it on the local level with the farmers back home and when I sit down at the coffee store or whatever or the fertilizer plants or wherever I am at, it is kind of frustrating for the farmers out there who are heavily subsidizing their growers such as EU to a tune of about 40 percent higher than we are here. I know they went through a couple of world wars over there where they didn't have all the food they wanted and they seemed to really appreciate agriculture over there.
I am not saying there is not an appreciation for agriculture in the United States, but I do believe when we look at forming policies—and I agree with you. We need to look at what it takes to sustain our agriculture here in the United States. We want to be free traders, and we want to get our market price from the market. We do not want to have to be subsidized to survive. But as long as we're competing against countries that are subsidizing their growers, what choice do we have? We can compete against another farmer in their country, but we can't compete against their Government.
Mr. SHOWS. That is the truth. There is nothing wrong with trade, but it needs to be fair trade. And it is easy to say and hard to negotiate. But we certainly hope things turn around.
Mr. VANDRIESSCHE. Thank you.
The CHAIRMAN. Mr. Smith.
Mr. SMITH. Thank you, Mr. Chairman.
Gentlemen, thank you for giving your time to be here.
I understand that there is 700,000 metric short tons of sugar that the Government owns and is storing. What is your estimate that there is no change on the Canadian sweetener, stuffed molasses problem, no change in Mexico? How long is it going to take to get rid of that sugar and what are you suggesting?
Page 665 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. RONEY. Mr. Smith, what we are looking at is, without the resolutions to those problems, that those CCC inventories would most likely increase. We have a chart that shows wholesale refined sugar prices relative to forfeiture levels, and what that shows is we are in danger of further forfeitures this year. In our testimony, that would be figure No. 5. The raw cane price just barely above the break even or forfeiture level. The wholesale refined sugar price is still well below that level. And what we fear, in the absence of resolution of those problems, is that there will be no opportunity to draw those inventories down; and, more likely, they would increase.
Mr. SMITH. In relation to the mills that have gone out of business, how many—do you have the figures on how many farmers have gone out of business and is there fewer acres in beet and cane than there was 10 years ago?
Mr. RONEY. Ours is an extremely competitive dynamic industry, Mr. Smith; and we have had the same support price since 1985. Our prices were essentially flat until 2 years ago when they plummeted.
What we have seen is survival of the fittest. We have had causalities. The least competitive, the most vulnerable, mills have gone out; and the companies that have managed to survive have done so by investing in technology to improve their yields, and they have tried to increase and maximize the use of their machinery and the processing equipment.
Mr. SMITH. But still, back to the question, the number of farmers that have gone out of business and has the actual sugar acreage decreased?
Mr. RONEY. The actual sugar acreage has trended up modestly. We can get you the figures on the number of farmers that have gone out of business. We do not have that at the moment.
But what we have seen is the upturn in production has been related to acreage to a large extent coming in from other crops that faced problems, price problems before the sugar price began to plummet. USDA has verified that during 1997 and 1998, before the sugar price began to plummet, that wheat, corn, cotton, rice, soybean prices were already dropping. So we have seen some shift in acreage from those crops into beet and cane which contributed.
Page 666 PREV PAGE TOP OF DOC Segment 4 Of 5
In addition, we have had some usually excellent weather in the last couple of years which also contributed to increased production. So there has been a myriad of factors that led to the production increase.
Mr. SMITH. I am somewhat familiar with the alternative crops that might be grown on beet acreage in Minnesota, Michigan and North Dakota. What is the alternative for cane? If they quit growing cane on those acres, what is the alternative crop?
Mr. NELSON. In Florida, maybe rice. There is really not that much in Florida is my understanding. In Louisiana, it is rice in some areas; in some other areas it may be soybeans. In Texas, it is cotton, grain sorghum, corn. The sugar that has been increased there really has come out of the cotton, from cotton basically and grain sorghum.
Mr. SMITH. One of the arguments on the floor when we debate this, and year before last it was a relatively close vote I thought, was that very few producers receive most of the benefit of the tariff rate quota in the sugar program.
Mr. RONEY. Mr. Smith, the way that this industry has survived flat prices since 1985 and sharply lower prices in the last 2 years is efficiency; and we are competing against countries who have wage rates that are a 10th and in some cases a 100th of ours, environmental standards that we do not face. So what we have had to do to survive is become more efficient, maximize our efficiencies of scale. So what that has meant is that the larger producers have tended to be the most competitive and those are the ones who have survived. For that reason, you have some concentration in sugar production that you might not have in other crops.
In particular, cane lends itself because it is a monoculture. You can do the cane on the same fields in some cases in Louisiana, for 200 years. You have very specialized equipment that lends itself to larger operations.
In terms of the benefits to producers, let us not be swayed by the opposition rhetoric. There have been no payments to sugar producers since the 1970's.
Page 667 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. SMITH. Well, it is the tariff rate quota. That is the advantage to the sugar program, is limiting the imports of sugar.
Mr. RONEY. You are absolutely right. The tariff rate quota had supported prices. But because that tariff rate quota cannot be reduced below international trade agreement limitations, it has no longer been effective. So we have not even had the price support that we had hoped to have in the past, which is why prices in the last 2 years dropped below support levels. The tariff rate quota as a mechanism to support prices is no longer effective. That is why we are proposing what we were.
The CHAIRMAN. The gentleman's time has expired for this round.
Mr. Dooley.
Mr. DOOLEY. Yes. I am just looking at some of the information you provided. If I understand the figures in terms of what has happened with actual production in the United States from the 1995–96 crop to the 1999–2000 crop, I see it has almost been an increase in domestic production of almost 25 percent in just a 4-year period. You also have some figures that there has been 17 sugar mills that have closed in that period of time. We are obviously processing more sugar so why are we building more mills, or what's happening out there?
Mr. RONEY. I was mentioning the shift in acreage from other crops that got into price trouble before sugar did. We are not seeing that shift anymore now that the sugar prices, like other crops, have dropped to 20-year lows.
We have the efficiency gains that kick in from years and years of investment in technology. For example, in Louisiana they have—after years of research, they have come up with a cane variety that is so much higher yielding that they had to scrap all their old harvesting equipment and invest in new equipment to take advantage of this thicker, higher-yielding cane.
Mr. DOOLEY. In some ways, the fact that we are processing more sugar in fewer mills, that is not necessarily a bad thing, is it?
Page 668 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. RONEY. It is the reflection of the highly competitive, dynamic nature of our industry, our increased efficiency. We have been managing to reduce our costs of production and improve our standing relative to the rest of the world year after year.
Mr. Dooley, what we were concerned about at this point is we cannot sustain the lower prices of the last couple years much longer. We have got the largest sugar selling company in the country in bankruptcy. Just this past week we have had a major beet operation in Washington announce it is ceasing operations this year. I believe we are on the brink of losing significant amounts of beet and cane processing capacity.
Mr. DOOLEY. In terms of other domestic sweetener production, what has happened to a competitor such as corn sweetener in terms of its increased production over the past 4 or 5 years? Do you have figures on that?
Mr. RONEY. We can certainly supply those to you, Mr. Dooley. The USDA data are very accurate on that.
We have seen continued growth in the corn sweetener industry, to a large extent commensurate with the growth in soft drink consumption and so on, although the corn sweetener folks have had some overexpansion that has caused some underutilization of their facility.
Mr. DOOLEY. Is the increase in corn sweetener, even the domestic production, displacing some of the cane and beet sugar?
Mr. RONEY. No, sir. We have what we call now a mature market. Everywhere that, economically, corn sweetener can replace sugar, it has. We are up against biological constraints now that there are certain uses that you just have to have crystalline sugar, and corn sweetener will not——
Mr. DOOLEY. So in the last 5 years we have not seen, really, the encroachment of corn sweetener on the sugar?
Page 669 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. RONEY. No, we have actually had increases in sugar consumption and very modest increases in per capita sugar consumption.
Mr. DOOLEY. From a public policy perspective, when we are looking at a 25 percent increase in production with existing loan rates, how do we make a compelling argument that we need to increase the loan rates when we have seen an increase in production with existing loan rates and basic income protection?
Mr. RONEY. What we saw there, which I would really contend is a major factor in the increased production, was the shift from other crops to sugar. Wheat, corn, soybeans in beet areas. Soybeans, cotton and rice in cane areas, particularly Louisiana. Because what you had there was sharply lower prices for those crops while the sugar price remained steady until it plummeted in 1999 and 2000, with the soybean, cotton and rice producers income supplemented by AMTA and LDP payments. So that enabled these growers to stay afloat and have the ability, because they could grow sugar on AMTA land, to shift into other crops while still receiving their AMTA payments for wheat, corn, soybeans, cotton and rice.
I would contend that was really a major shift, but I would also argue, because sugar prices are down so much now, that that shift is no longer going to continue and we are on the brink of losing a number of processing facilities.
Mr. VANDRIESSCHE. Mr. Dooley, if I could comment briefly on the statements that, even though we are down to less processing facilities and we are actually manufacturing or processing about the same amount of sugar, that is not necessarily all bad. From a purely business standpoint you could say that, but when you realize that every time a facility goes out that affects those growers in that area, and it affects not only those growers but that whole local economy. It does effect things considerably.
And we are now in this industry at a level of prices where it does not take much of a shift in the market to get growers to decide I don't know if I am going to put as much production in as I did last year. And beets and cane are different than other industries, I should say, are tied to a processor. We cannot flex in and out of our crops like you can with corn, wheat and soybeans. One year we can plant, and the next year if we decide not to we won't. But we have to keep a processor also with the supply of sugar so that he can stay viable. So when we see any drop in production we are essentially cutting the legs off from underneath our processor. When he is gone, we are out of business. So it is very important that we do keep all areas in production as long as we can.
Page 670 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. DOOLEY. I am sensitive to that. My only concern is, from public policy perspective, when you look at the plant closings in Hawaii, that was inevitable. We don't need to be advancing a public policy that is predicated on trying to keep mills in operation in every place that are in existence today.
The only question I have is that trying to create a perception that we are seeing a lot of these mills close simply because of low prices is not necessarily being as entirely accurate as what is happening with some of these regions in the country that have a greater relative advantage, that are increasing production, where we are seeing increased mill production and processing in those areas.
Mr. RONEY. Just a quick comment, if I may, Mr. Dooley.
This year, our production forecast is down a half million tons from a year ago. That largely reflects the closure of facilities. For example, in California we have had three beet factories close, I believe, in this past year in California.
And just one quick note. I used to represent Hawaii. You hit a sensitive note for me there. I would just note that the Hawaiian sugar producers achieve the highest yields of sugar per acre in the world and per worker. What they are really disadvantaged by to a large extent is unusually high labor, environmental and transportation costs. And the industry there does achieve really some of the best yields in the world, and those are areas that have been thoroughly dependent on sugar for generations. So I think the surviving industry in Hawaii deserves to continue to survive, and I think it has a good chance to if we can get the kind of resolutions that we need here.
The CHAIRMAN. Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman.
Unfortunately, some of the questions I was going to ask have already been dealt with. But I do want to point out a couple of things.
Page 671 PREV PAGE TOP OF DOC Segment 4 Of 5
I had a college professor once who said you could learn more by learning less. And I don't understand the molasses issue exactly myself. There are a number of things I don't understand about the sugar title. There are some things you can help us with as we proceed, and I want to thank you for the presentation you have made here today.
I especially want to thank you for not calling for some kind of an AMTA payment. In my opinion, that make our lives more complicated. In the long run I think it would make yours as well. So I want to thank you for your presentation today.
You could help us a great deal if you would give us more specifics relative to Canada where—I don't know what—the term you used or what term they used—they essentially have an open market, and ultimately their consumers don't benefit to the extent that some people would suggest that they do. If you could give us those figures, it would be very helpful to me.
For the benefit of those members not on the Budget Committee, I have been a big defender, even though we do not grow a single beet in my district—at least not that goes into sugar, as far as I know. They start about 10 miles west of my district. The sugar beets do grow. But I do know how important the sugar industry is to Minnesota, so I have been a student of the sugar title.
Let me share for the benefit of some of the members, because I think sometimes we hear from some of our other colleagues who are perhaps detractors to the sugar title. It actually came into place during Gramm-Rudman. During the roughly 20 years that we have had the sugar title in place, the average assessment has equalled roughly $40 million. If you take 40 times 20, that is about $800 million that ultimately the Federal Treasury has benefitted from the sugar program as it has existed.
Up until last year, it has been a real money-maker for the Federal Treasury. Last year, because of some conditions which were uncontrollable by the producers, we had to dip into the Treasury, so to speak, to provide a little bit of help. But I do hope that members once in a while remind——
Page 672 PREV PAGE TOP OF DOC Segment 4 Of 5
And it was mentioned here the difference between, for example, the European Union and the United States in terms of subsidies. Because one of the numbers I think we need to share with our colleagues here in Congress is that the average subsidy in Europe works out to be about $342 an acre. The average subsidy in the United States is $43 an acre. It is a huge difference. I am a supporter of more free and perhaps I have should said fair trade, but clearly that is not exactly a level playing field for our producers, whether we are talking about sugar or soybeans or whatever.
One other point that I think is important, and this is where ultimately we have got to do a better job at the Federal level, that is the export subsidies. If you take what they are subsidizing their exports in Europe, it works out to about 6.4 billion American dollars a year. We have authorized $250 million, and that is I think what we were compelled to agree to in the Uruguay round of trade talks.
$6.4 billion versus $250 million is not a level playing field. Worse than that, I don't think in the last several years we have even spent that $250 million. So there is a lot of work to do in terms of trade and trying to create a level playing field.
I am delighted that some of our colleagues were up in Canada over the weekend. I hope you have didn't get any tear gas.
But I think we on this committee have to do a better job of sharing with our colleagues here in Congress what the sugar title has meant over the last 20 years, not just the last year. I think there is a tendency to look at it that way. You can help us. And if you could—and maybe Luther could send it up to us, what those numbers are in Canada in terms of what consumers have actually paid over the last 4 or 5 years versus consumers here in the United States.
Mr. GUTKNECHT. Finally, and this is not really so much a question, but I do think we have to be aware. It is not just about bulk sugar.
Page 673 PREV PAGE TOP OF DOC Segment 4 Of 5
For example, I have a plant in Winona, MN. It is the Brach Candy Company, and every week they manufacture a million pounds of gummi bears. That is a lot of sugar, and much of it comes from Fargo and southwestern Minnesota. But the concern I have is that Brach Candy Company in Chicago is moving more of its manufacturing to places like Mexico.
I think we have to be aware it is not just about bulk sugar. It is about other processing. So I think we can't address this from one dimension.
But I can tell you, as one Member, I am more than prepared to work with you to try to come up with something to level this playing field so we do keep a sugar industry in the United States and, secondly, so we have some predictability relative to the Federal Treasury and the budget.
I yield back my time. If you want to respond, you can.
Mr. RONEY. Mr. Gutknecht, if I can comment on your observation about Brach Candy moving operations to Mexico. I think what is really in play here is not sugar prices as Brach and some of the detractors of U.S. sugar policy have claimed. Mexican sugar prices are actually higher than U.S. prices. When Brach talks about moving to Mexico, clearly what is in play is, looking at the wage structure, that it is one-tenth of the U.S. average wages and the environmental standards that are a fraction of ours.
I am very glad you brought that up, because it is something we will hear in our hearing from our detractors, and it is an argument that is completely false.
Mr. GUTKNECHT. Let me say, if you have never tasted fresh gummi bears while they are still warm, they are fabulous.
Let me also say, you are correct. Another reason that Brach is leaving Chicago is the high cost of property taxes. They did indicate that in some of the statements they made when they made that announcement. But, again, from my perspective, we certainly don't want to lose the facility that we have in Winona.
Page 674 PREV PAGE TOP OF DOC Segment 4 Of 5
The CHAIRMAN. Gummi bears and Spam.
Mr. STENHOLM. I want to make sure that I understand the stuffed molasses question. It is a small amount. It is a circumvention of our trade laws. Circumvention suggests to me that, it is if not illegal, it is bending the law. It is being done by somebody in Canada, but it is being sold to somebody in the United States. Now do I understand it correctly that we have American companies that are bending the laws of the United States of America or assisting somebody to bends the laws of the United States? Is that reasonably accurate?
Mr. VANDRIESSCHE. Yes, sir.
Mr. RONEY. It is a British-based international firm, E, D&F Man, operating in Canada where they are, essentially, a platform for Brazilian and Colombian sugar, dump market sugar artificially blended with molasses, sent to Heartland, which is essentially British owned, and ship molasses back to Canada for restuffing.
Mr. STENHOLM. Mr. Chairman, I would hope that our committee would draw attention to the Ways and Means Committee as we pursue the cutting of taxes, the reform of our tax system, that if there are companies residing in America that are not following our law or are choosing through legal means to circumvent our law, that is pretty serious.
Mr. VANDRIESSCHE. Yes, sir.
Mr. STENHOLM. From the standpoint in Texas, we normally would use a rope and a tree and take care of it; and I would suspect the other 49 States would be more than inclined to do the same thing.
The questioning has been on trade, and the concern we all have—and I appreciate the fact that you continue to say you support continuing to attempt to get a level playing field. Because I think anything else other than that is going to be very shortsighted for American agriculture, including sugar. But until we get to that elusive ground, I wish that somehow American business and we will have their chance—they will have their chance, I should say, before we finally get to the floor to explain their side of the question.
Page 675 PREV PAGE TOP OF DOC Segment 4 Of 5
I wish somehow, some way, we could begin to recognize that it is not helpful to anyone to circumvent the law. Whether you chose to do it you believe legally is based on your lawyers, but it is certainly not helpful when we continue to pursue the kind of trade policy that the world needs.
I happen to be one of those that believes in fair trade and have supported NAFTA and continue to support WTO. But it gets more difficult to do when you have companies, businesses that were the leading proponents of this that continue to use loopholes.
I want to go a little further with Mr. Dooley's line of questioning a moment ago.
Mr. Nelson, I have had the privilege of visiting your cooperative. To me, it is the example of what most of the rest of agriculture is going to have to do if we are going to survive. I was very impressed with the manner in which you pool equipment. If there is a more efficient operation in the world than what you have there, I would love to see it. I am sure there may be one, there may be two, there may be several that are more efficient, but not much. What kind of year are you having?
Mr. NELSON. This year, we are having a very good year. Because when we had the hurricaine—it went up the river about 2 years ago and hit Del Rio—why it replenished the water in the reservoirs. So when we replenished the water in the reservoirs, our farmers had sufficient water to grow sugarcane. Sugarcane is a large user of water, and so they planted the sugarcane. So last year, plus the rain we had last May and June, we have had a very good crop.
Mr. STENHOLM. Good crop, the prices are up a little.
Mr. NELSON. The prices are up slightly over the year, but the main thing is the production per acre is the highest we have had in the history of the sugar——
Page 676 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. So you have increased production times a slightly higher price, which is equalling a more profitable year for your producers.
Mr. NELSON. That is correct.
I would like to clarify, over the last 4 years our cooperative lost $8 million during those 4 years. Part of that was because of the lack of water in the reservoirs, which got help to some extent by the water that went into Del Rio and then the rainfall that occurred last year.
But the main thing is the increase in production, the throughput of the factory. In fact, we are still grinding cane right now, which is about 6 weeks longer than we should actually produce, because of the risk you take with freezes and rainy weather and that sort of thing. So from a production standpoint it has been the best we have ever been, but from a price standpoint it has been a below average year from a price standpoint.
Mr. STENHOLM. What is the anticipated production for this year then?
Mr. NELSON. We are probably going to reach about 200,000 tons of sugar, raw value.
Mr. STENHOLM. That is a record.
Mr. NELSON. Yes, sir. The most we have ever produced.
Mr. STENHOLM. Most by far you have ever produced in Texas.
Mr. NELSON. That is correct. Our best prior to that was 147,000 raw tons in raw value in 1992, 1993—I don't remember the year.
Mr. STENHOLM. That is dramatically over the last 5 years. You have not produced 100,000 tons in any year prior to this year.
Mr. NELSON. That is correct. 1996 through 1999, 2000, we had an average less than 100,000 tons per year for those 4 years.
Page 677 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. I have got another round, but I will yield to other members.
Mr. LAY. May I make a comment, Mr. Stenholm?
I am a sugar refiner. And although the price of raw cane sugar has held up this year and the co-op may come up ahead of what it did last year, we as refiners and beet processors are finding that we cannot get the price out of the marketplace because of the excess sugar that has been generated during the last several years. We are actually paying for our raw material as a refiner what the refined price of beet is in the Midwest and on the east coast. So we are suffering.
Mr. STENHOLM. How have you done the last 5 years? Have you suffered in each of the last 5?
Mr. LAY. Just about, yes.
Mr. STENHOLM. You have?
Mr. LAY. Yes. As a matter of fact, it has been mentioned here that the largest marketer of sugar, Imperial, is in bankruptcy. It hasn't all been because of the price of sugar.
The next largest, Domino Sugar, is, I understand, not a very profitable organization, if it is profitable at all.
Our organization, Refined Sugars, which is a single refinery—it is vertically integrated with the Florida Crystals people—and the Florida sugar growers cannot get out of the marketplace any more than our raw material costs.
Refined sugars are selling somewhere in the neighborhood of 23 cents. Raw sugars that we are buying now are roughly 21.5 cents, and we have to use 107 pounds of sugar, so we have to add 7 percent to that 21 cents. So we are over 23 cents. That is just the cost of raw material.
Page 678 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. You can't make any money out of it, so why are you buying it?
Mr. LAY. We keep hoping that something will happen with the next farm bill, that will get the supply situation under control.
The CHAIRMAN. Mr. Lucas.
Mr. LUCAS of Kentucky. Thank you, Mr. Chairman.
I want to apologize for being late. The ox was in the ditch this morning, and I did not get here like I should.
This is very informative to me, and I am glad to hear your issues and your concerns, and I am just listening. Thank you.
The CHAIRMAN. Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman.
Mr. Stenholm, I have no doubt they have an efficient operation there, but you ought to come up to the Red River Valley, I think they have something you would like to see, where the farmers own the processing. We think we are the most efficient in the world, and so I invite you and the chairman.
Mr. STENHOLM. I have been up to see yours, and you are pretty efficient, but I will stand by my previous statement.
Mr. PETERSON. We are being parochial here today.
The CHAIRMAN. I haven't seen either one, but I am voting with Stenholm.
Mr. PETERSON. I have work to do here, I see.
We kind of talked the trade thing to death. We still—we have a significant amount of sugar in storage. What plans are there for—do you have any plans on how we can get that sugar that is in storage into the marketplace?
Page 679 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. HORVATH. Yes, if I could comment on that, I would appreciate it.
There is currently, as you suggest, Congressman Peterson, about 800,000 tons of sugar that the Government currently owns and obviously is incurring costs of storing it to about $1,400,000 a month. We feel strongly that, in addition to having a negative impact on the taxpayers, there is also a negative impact on the sugar industry from the standpoint that that inventory is overhanging on the market and depressing the prices that we have. So we feel very strongly that there is a strong need here to resolve this issue and move that sugar into some use as quickly as possible and eliminate that overhang.
We have see a couple of alternatives. Number one is there have been a couple of proposals that have indicated that there has been an opportunity to enhance the throughput of ethanol mills by adding some sugar to that blend. It causes the fermentation process to occur more rapidly, and therefore the throughput increases. Given our current situation where fuel prices are going, I think it might be a very good investment for us to help that out. That could take a piece of that Government-owned sugar.
Secondly, we believe that the payment-in-kind program that was implemented last summer was extremely successful. It removed about 300,000 tons of sugar from the Government's ownership, and we would suggest that we believe it would be in the industry's best interest to do a payment-in-kind program again this summer.
As an industry, we do not have complete unanimity on that. We have some differences of opinion as to how that might work, and we are trying to work those through as a group. But as far as the beet side of the industry, we feel strongly that that would be a good direction to take.
If we could, I would appreciate a moment of your time to go back and readdress Congressman Stenholm's comments and question.
Page 680 PREV PAGE TOP OF DOC Segment 4 Of 5
In the Red River Valley of North Dakota and Minnesota we have a situation, as Congressman Peterson points out, that our shareholders—our owners are not making any money in the sugar business anymore. This situation is really serious. Prices are at depths right now where, even with outstanding crops which they have gotten for the last 2 or 3 years, usually good crops, approximately 15 to 20 percent higher than historical norms, at those levels as far as ton per acre are concerned and today's prices, we are in a situation where our average shareholder is just breaking even, which means that half of our 3,000 farmers losing money on sugar beets this year. This is very serious problem that we are facing right now.
Mr. PETERSON. If I could just add on to that, I can attest in southern Minnesota where they have had some problems they had to haul out I think 300,000 of beets because they were spoiling. I have heard cases where they are—the beet acreage where you generally have to pay so much an acre to grow beets, you have got guys that are going to their neighbors and saying we will give you our beet acreage for zero dollars if you will just grow the beets for us. That is how serious it has gotten.
In southern Minnesota I think they have made $18 a ton this year or maybe less than that, and maybe 3 or 4 years ago it was $42 a ton up in the valley. This is a serious situation. So we have to do something to turn this around.
Mr. RONEY. Mr. Peterson, we have noted on a national level, too, not only is sugar production down a half million tons this year from last year, but USDA data on sugar beet plantings for the coming year are down 8 percent. The cane planting figures will come out later. I think that is an indication again that some of the facilities that have gone out are out permanently, and there is a major lack of confidence in being able to stay in sugar throughout the country.
Mr. HORVATH. If I may add to that, in your example, Congressman Peterson, about southern Minnesota, the payment they will make this year is going to cover just about one half of their input cost on the farm. That is how serious it is. Those guys are in real deep trouble. It is sad situation.
Page 681 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. If the gentleman would yield on that. Is this because of low yields as well as the low price? With Mr. Nelson we—I thought we clearly stated the reason it is profitable is they have doubled their yields. It is a tremendous yield. And if you got a double yield of whatever you are producing, would you not have the same economic position that Mr. Nelson is talking about?
Mr. HORVATH. Yes, sir, absolutely.
Mr. STENHOLM. But in this case we have got other—and I understand that, and I appreciate you clarifying that for the record.
Mr. HORVATH. Yes.
Mr. PETERSON. In our areas, we have pretty good yields, and we are still losing money, and the contracts have really gone down in value quite a bit.
Mr. STENHOLM. Let me follow up briefly, Mr. Chairman.
Mr. Nelson, if your members were getting an average yield, what would the profit position be?
Mr. NELSON. If we had an average yield at these prices, we would lose money.
The CHAIRMAN. Mr. Gutknecht.
Mr. GUTKNECHT. No further questions.
The CHAIRMAN. Mr. Stenholm.
Mr. Peterson.
Mr. STENHOLM. For my information, how much sugar does Canada produce?
Mr. RONEY. About 110,000 tons per year.
Mr. STENHOLM. Beets?
Mr. RONEY. That is beet sugar. That is about a tenth of what they consume.
Page 682 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. PETERSON. If the gentleman would yield. I go to the Canadian-American Interparliamentary every year, and I will go again in May. We raise this issue with the Canadian Parliament and Senate, and they are a tough bunch to deal with. Basically, they are free traders and they just are not sympathetic. They are not sympathetic at all to our concerns here. But they are a very small market or growing area. They are a little bit north of Michigan and a little bit north of Montana, I believe. But, other than that, they really don't produce sugar. They ship through Canada a lot.
Mr. STENHOLM. That is the figures that have been given to me. Canada is a very large exporter. They do not grow.
Mr. PETERSON. That is free trade.
Mr. STENHOLM. Yes, sir.
Why do we have to buy any sugar from the European Union?
Mr. RONEY. We don't, Mr. Chairman. That is one of the few countries in the world that we do have countervailing duty protection against, and they do not have a share of our import quota. We would fear, though, as our opposition has often suggested, is abolishing U.S. sugar policy. If we did that, I would suggest that we would be swamped with European sugar.
Mr. STENHOLM. Quantitywise, the latest numbers show that there has been a substantial increase in sugarcane and beet metric tons, 391 in 1999 to 627 metric tons in the year 2000, a rather substantial increase of sugar from the European Union.
Mr. RONEY. That must be sugar product?
Mr. STENHOLM. Foreign agriculture trade of the United States, United States agricultural import by commodity, sugarcane and beet.
Let's check that for the record.
Mr. RONEY. We will have to get that for you. I understand specialty sugars and products. But I will check that for you, Mr. Stenholm.
Page 683 PREV PAGE TOP OF DOC Segment 4 Of 5
Mr. STENHOLM. I believe that is all, Mr. Chairman. Thank you.
The CHAIRMAN. Gentlemen, thank you very much. You said there would be some additional information that you will provide. There may be some additional questions. If you come up with other information you did not have particularly in mind, we would like to see it and will be glad to get it.
We appreciate your being here.
The hearing is adjourned.
[Whereupon, at 11:29 a.m., the committee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Comments Submitted by the Embassy of Canada
This correspondence is to clarify and elaborate on comments made by witnesses before the committee on April 26, 2001 with regard to the issue of imports of sugar syrups (stuffed molasses) from Canada.
Heartland By-Products Inc. has been in full operation since 1997, importing a legitimate sugar syrup product in full conformity with U.S. law. The U.S. Customs Modernization Act, which was enacted in 1993 as title VI of the North American Free Trade Implementation Act, strongly encourages prospective importers to seek advance classification rulings. Before undertaking its business operations with respect to the sugar syrups, Heartland sought such an advance ruling from the U.S. Customs Service (Customs) pursuant to the provisions of 19 C.F.R. 177.1 (1995). Heartland's submission to Customs clearly outlined the composition of the syrup and the process by which it proposed to produce it. On May 15, 1995, Customs issued a ruling which classified the sugar syrups under a tariff line that was not subject to the U.S. sugar tariff rate quotas (TRQs). Based on the above ruling, Heartland invested $7 million in plant equipment and entered into a contract with Canadian Blending and Processing to supply it with the sugar syrup. In August 1997, a U.S. Customs inspection of Heartland's Michigan facility confirmed that Heartland was in compliance with the advance ruling.
Page 684 PREV PAGE TOP OF DOC Segment 4 Of 5
On September 8, 1999, Customs published a notice to reclassify the product which would have taken effect in November 1999. This reclassification would have had the effect of eliminating access for this product. Canada objected to the proposed reclassification on the grounds that a unilateral revision of tariff bindings in this manner would run contrary to U.S. international trade obligations. Canada held WTO consultations with the United States on October 20, 1999.
On October 19, 1999, the U.S. Court of International Trade reviewed the proposed Customs reclassification and overturned it on the grounds that Customs' actions in reclassifying the sugar syrups was ''. . . arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law.'' 1\ The U.S. then filed a motion for reconsideration with the U.S. Court of International Trade which was rejected. Canada is of the opinion that the Court ruled correctly both in its decision and rejection of the motion for reconsideration.
Canada will be monitoring any actions that the U.S. may contemplate in regard to sugar syrups to ensure that they taken are in accordance with U.S. trade obligations.
1\ United States Court of International Trade, Heartland By-Products Inc. v. United States of America and United States Beet Sugar Association, Court No. 99–09–00590, page 38.
Statement of Gregory Kozak, Heartland By-Products, Inc.
These comments are submitted on behalf of Heartland By-Products, Inc. for inclusion in the official record of the committee's hearing on ''The Future of U.S. Sugar Policy,'' held in Washington, DC on April 26, 2001. The testimony of the principal witness at the hearing, Ray Van Driessche, current president of the American Sugarbeet Growers Association, on behalf of the U.S. sugar industry 1\, is replete with misstatements concerning the causes for the current oversupply of domestically grown sugar in the U.S. We appreciate this opportunity to correct the record.
Page 685 PREV PAGE TOP OF DOC Segment 4 Of 5
1\Note that Heartland By-Products, Inc., as a domestic refiner, is part of the ''U.S. sugar industry.'' Mr. Van Driessche certainly does not speak for Heartland.
The core of the complaints of the sugar industry is that the industry has suffered a loss of profits in the years from 1997–2000. The sugar industry blames imports. The industry fails to disclose that, between 1996 and 2000, U.S. sugar production increased by 11,500,000 short tons, or approximately 20 percent, while U.S. sugar consumption increased by only 4 percent (USDA Sugar and Sweetener Outlook Report, September 2000).
The sugar industry testimony attributes much of its current woes to alleged circumvention of the tariff rate quota (TRQ) by so-called ''stuffed molasses,'' that is actually a sugar syrup legally imported from Canada by a domestic refiner under HTSUS classification 1702.90.40, a non-TRQ classification. The sugar industry urges Congress to act favorably on legislation to give the Secretary of the Treasury authority to impose TRQ on any import, regardless of whether its proper HTSUS classification is subject to TRQ. This legislation would violate U.S. obligations under GATT and subject U.S. agricultural exports to retaliation.
HEARTLAND BY-PRODUCTS, INC. IS NOT CIRCUMVENTING THE TRQ
The immediate target of the U.S. sugar industry is Heartland By-Products, Inc., a sugar refiner in Taylor, Michigan with 60 employees. Five years ago, Heartland asked the U.S. Customs Service for an advance classification ruling on the sugar syrup that it was planning to import from Canada and refine in Taylor, Michigan. Customs issued a ruling to Heartland, stating that the sugar syrup was classified under HTSUS 1702.90.40, a sugar syrup classification that is not subject to a tariff-rate quota. In reliance on that official determination by the responsible agency of the U.S. Government, Heartland invested millions of dollars over the next two years to build and equip its plant in Michigan, to hire and train its workforce, and to launch its refining business. Contrary to testimony of the sugar industry, Heartland produces only about 60,000 short tons of liquid sucrose per year, about one-half of one percent of domestic consumption.
Page 686 PREV PAGE TOP OF DOC Segment 4 Of 5
Almost immediately after Heartland began commercial operations in 1997, its large competitors in the sugar industry alleged to Customs that Heartland was circumventing the tariff-rate quota, even though the quota did not apply, by Customs's own ruling. Customs made an unannounced inspection of the Taylor, Michigan plant in mid–1997, but closed its investigation after concluding that there was no evidence of any circumvention. Not satisfied, the sugar industry next pressed Customs to reclassify the sugar syrup so that it would fall within the tariff rate quota and be subject to prohibitively high duty rates that would put Heartland out of business. Against the written advice of its own sugar classification specialist, Customs finally bowed to the sugar industry's pressure in mid–1999, revoking the 1995 classification on which Heartland had relied to start and build its business.
To save its business and the jobs of its workers, Heartland sued Customs in the U.S. Court of International Trade, arguing that the reclassification was a violation of law. In October 1999, and again in February 2000, the Court ruled in favor of Heartland, holding that Customs had violated the ''plain meaning'' of the tariff schedule and had contradicted over 100 years of Supreme Court precedents in altering the classification of the sugar syrup. The Court expressly rejected the contention that Heartland failed to provide ''essential information'' to Customs in 1995. The Court expressly held that Heartland's importation of the sugar syrup was not a circumvention or evasion of the tariff laws. Customs has appealed these decisions to the U.S. Court of Appeals for the Federal Circuit, which heard oral argument in the case in February 2001.
THE PRODUCT HEARTLAND IMPORTS HAS HISTORICALLY BEEN OUTSIDE QUOTA
Under both the current and the predecessor tariff schedules, sugar syrups with more than six percent soluble non-sugar solids have been outside the quota system. In Treasury Decision (TD) 67–243 (September 14, 1967), Customs differentiated these imported products on the basis of the total content of naturally occurring non-sugar solids. Imports of these products that contained at most 6 percent non-sugar solids were classified under item 155.30, Tariff Schedules of the United States (TSUS) (the predecessor to subheading 1702.90.20, HTSUS) and were declared subject to quota. Conversely, those products containing more than 6 percent non-true solids were classified under item 155.35, TSUS (the predecessor to subheadings 1702.90.40 and 1702.90.35, HTSUS) and were not subject to quota. This differentiation was reaffirmed by a Customs Service letter ruling, NYLR 830539 (July 7, 1988).
Page 687 PREV PAGE TOP OF DOC Segment 4 Of 5
Subsequently, in the Omnibus Trade and Competitiveness Act of 1988 (19 USC 3004), Congress erroneously applied quota status to subheading 1702.90.40, HTSUS, when it ratified the Harmonized Tariff Schedule. However, in the Technical Amendment to the Harmonized Tariff Schedule of the U.S. of 1990, Congress reinstated this subheading to non-quota status. Except for this promptly corrected error, HTSUS 1702.90.40 has never been subject to the TRQ.
S.753 WOULD VIOLATE U.S. TRADE OBLIGATIONS AND HURT U.S. EXPORTS
Apparently not optimistic about the prospects on appeal of the Court of International Trade's two decisions upholding the lawfulness of Heartland's imports (attached hereto for inclusion in the official committee record), the sugar industry is hoping to preempt the course of the litigation by a legislative fix. S.753 would impose a tariff-rate quota on Heartland's sugar syrup, but it doesn't stop there. The proposed language issues a blank check for future protectionist trade barriers by authorizing the imposition of tariff-rate quotas on any products imported for the commercial extraction of sugar and on any products that Customs deems to be circumventing any sugar tariff-rate quota. Many U.S. companies that market refined sugar products would be vulnerable to such an expansive manipulation of the tariff laws.
Even if limited to Heartland, however, S.753 would do damage well beyond Heartland, jeopardizing broader American trade interests. The tariff rate on Heartland's sugar syrup, which the bill seeks to increase by 10,000 percent, is part of the bound tariff structure to which the United States agreed as part of the Uruguay Round. The United States has long emphasized, in challenges to other countries' trade barriers, the fundamental importance of tariff bindings to the integrity of the global trading system. This principle constitutes a central obligation of WTO members: once a tariff rate has been agreed to, it cannot be altered without agreement of our trading partners. Each bound tariff is inextricably tied to every other bound tariff, in a network of interlocking, reciprocal tariff obligations that no WTO member can unilaterally modify.
Page 688 PREV PAGE TOP OF DOC Segment 4 Of 5
Under the GATT/WTO trade rules, any manipulation of bound tariffs, such as S.753, requires the United States to compensate our trading partners for the loss in potential trade. Because the legislation would effectively bar Heartland's sugar syrup from importation, the United States would have to compensate foreign suppliers year after year for the entire value of that trade, and the foreign suppliers could decide that the compensation take the form of increased barriers to U.S. exports. The sugar industry argues that Customs could cut off trade in any ''circumventing'' product so quickly that no compensation would be due to our trading partners. This is a remarkable interpretation of our trade obligations: the more preemptive of trade we are, the less compensation we owe to our trading partners! This is not what the WTO provides, nor is it what Canada and other affected countries will settle for. Canada has already informed members of the Senate Finance Committee that enactment of the legislation will trigger a WTO case. Furthermore, because the legislation extends the tariff-rate quota not only to subheading 1702.90.40 but also to any articles imported ''for the commercial extraction or production of sugar'' as well as to any articles ''used in any manner that circumvents any quota,'' the United States could be found to violate the GATT/WTO on a wide range of tariff bindings of concern to many trading partners. The end result could be not only to drive Heartland out of business but also to jeopardize the export markets that the United States has fought long and hard to open and that American farmers well beyond Taylor, Michigan, need for their own livelihoods.
The sugar industry argues that NAFTA does not apply to Heartland's imports because the country of origin of the sugar used to produce the syrup is not Canada. It is correct that NAFTA does not apply, but it is also irrelevant since the WTO provides Canada and other affected countries ample remedies.
Finally, the sugar industry claims that American consumers ''will not benefit'' from non-TRQ sugar syrup imports. The committee should take note that the Consumer Federation of America is on record in opposition to the proposed legislation.
Page 689 PREV PAGE TOP OF DOC Segment 4 Of 5
The minimal imports of sugar syrups under HTSUS 1702.90.40 or molasses under HTSUS 1703.10.30 and 1703.90.30 are of negligible effect compared with the effect of the gross overproduction of sugar by domestic growers. Morever, the imports complained of have been held to be completely lawful, and are in accordance with bound tariffs to which the U.S. is obligated to adhere. Any legislative attempt to subject these imports to a TRQ would spark a dispute with our trading partners that ultimately would harm the broader interests of the American farmer.
Thank you for your attention to these views and for including them in the official committee record.
Statement of Margaret Blamberg, Tate & Lyle North American Sugars
INTRODUCTION AND BACKGROUND
This statement is submitted on behalf of Tate & Lyle North American Sugars Inc. and its three Domino refineries in Baltimore, Brooklyn, and Chalmette. Domino operates three of the remaining seven independent sugar refineries in the United States, employing approximately 1,400 American workers in well-paying industrial jobs in areas where alternative employment is largely unavailable.
We deeply regret that our industry was not invited to participate in the sugar portion of the House Agriculture Committee hearings, scheduled for April 26. The only sugar refinery represented, located in Yonkers, NY, does not speak with an independent voice since it is owned by two large raw sugar producers based in Florida and is basically vertically integrated.
Independent cane sugar refineries, that is, refineries at seaports that refine both domestic and imported raws, have been under severe pressure as a result of the U.S. sugar program and this pressure has only become more direct and oppressive in recent years. In 1981, there were 22 independent refineries in existence. Despite tens of millions invested to make plants as efficient as possible, only seven remain. Three are operating under chapter 11 and the viability of some of the remaining plants is seriously threatened.
Page 690 PREV PAGE TOP OF DOC Segment 4 Of 5
THE U.S. SUGAR PROGRAM HAS CREATED AN INTOLERABLE SQUEEZE ON INDEPENDENT REFINERS
Independent refiners need two things in order to survive:
a sufficient and reliable source of raw cane sugar;
a margin between the cost of raws and the selling price of refined sugar that provides for a sustainable operation. The current difference between national raw and refined loan rates is an appropriate measure.
Neither of these factors is present in the current domestic sugar market.
Regarding the availability of raws: Now that the tariff rate quota for raws has been lowered to its irreducible WTO minimum of 1,250,000 short tons, raw value, cane refiners suffer from idle capacity throughout the year. A major domestic producer of raw sugar has built a new refinery onto one of its raw mills, further reducing raw supply. Although the NAFTA situation has not yet been resolved, we are fearful that Mexico's quota may be defined as raw or refined sugar. Under this scenario Mexico may choose the value-added option of refined sugar, thereby depriving refiners of the additional raws that the NAFTA might have provided.
Regarding the margin squeeze: For the past 9 months, the price of raw cane sugar and refined beet sugar has been essentially the same, between 21 and 22 cents per pound. To repeat: the raw material price and the finished product price are the same. The refining industry will be extinct if this situation continues for much longer.
THE SUGAR PROGRAM MUST CHANGE IF IT IS RETAINED
On the refined side, the rapid expansion of beet sugar production under the current sugar program has created a surplus and has had a profoundly depressing effect on refined sugar prices. Clearly the incentives to produce beet sugar that the program provides are far more than what is necessary to ensure a critical level of domestic production. A way must be found in the next farm bill to prevent overproduction.
Page 691 PREV PAGE TOP OF DOC Segment 4 Of 5
On the refined side, the reduction in available raw cane sugar supply, the guarantee of non-recourse loans and huge storage facilities all contribute to raw sugar pricing well above the loan rate. The No. 14 market is thinly traded by fewer and fewer participants due to the shrinking size of the TRQ and the vertical integration of cane producers. It is easy for raw producers (or the CCC through forfeitures) to withhold supplies and drive up No. 14 prices—the price paid by refiners.
Indeed, at various times over the past several years, No. 14 prices have risen as high as 23 and 24 cents per pound, again creating an intolerable margin squeeze for refiners. In other words, it has cost more to buy our raw material than the finished product! A way must be found in the next farm bill to link raw and refined sugar prices so that independent refiners are protected from either a raw price-driven or a refined price-driven margin squeeze.
AN ALTERNATIVE TO THE PROGRAM IS FREE AND FAIR TRADE IN SUGAR
Refineries have made significant investment in their facilities in recent years. They are competitive on a global basis and have no fear of, indeed would welcome, the opportunity to operate in a deregulated market. We would support complete multilateral free trade. But unless there are appropriate changes to the sugar program to eliminate the artificial distortions to supply and pricing, they will not survive to see that day.
U.S. domestic producers continually maintain that they too would support free trade, if there were an international level playing field. Unfortunately, they say, this does not currently exist due, primarily, to EU sugar subsidies. In order to address this situation, we suggest that the U.S. Government follow the Canadian model for sugar. Canada permits basically free trade, but provides protection in specific cases only (such as against the EU and U.S. sugar regimes) by means of countervailing and anti-dumping duties. The adoption of a similar program by the United States also would ease transition to trade liberalization in the FTAA.
Page 692 PREV PAGE TOP OF DOC Segment 4 Of 5
Independent cane refiners are a necessary component of the U.S. sugar industry. We provide a guaranteed source of refined sugar during those years of poor domestic crops. Furthermore, our raw imports enable the United States to fulfill its international trade obligations. Finally, we are significant source of good industrial jobs in inner city neighborhoods.
To sum up, the needs of independent refiners must be recognized in the next farm bill. To survive as an industry, we need a sufficient and reliable source of raws and an adequate margin between raw and refined prices.
Thank you for your attention to our concerns. Please let us know if we can supply any additional information.
Next Hearing Segment(5)